In re Celsius Network LLC

642 B.R. 497

IN RE: CELSIUS NETWORK LLC, et al., Debtors.

Case No. 22-10964 (MG) (Jointly Administered)

United States Bankruptcy Court, S.D. New York.

Signed September 1, 2022

DANIEL ANATOLY FRISHBERG, Pro Se Creditor

KIRKLAND & ELLIS LLP, Attorneys for the Debtor, 601 Lexington Avenue, New York, NY 10022, By: Joshua Sussberg, Esq.

WHITE & CASE LLP, Attorneys for the Creditor Committee, 111 S. Wacker Dr Suite 5100, Chicago, IL 60606-5055, By: Michael Andolina, Esq., Aaron Colodny, Esq., Samuel P. Hershey, Esq., Gregory F. Pesce, Esq., David Turetsky, Esq.

OFFICE OF THE UNITED STATES TRUSTEE, U.S. Federal Office Building, 201 Varick Street, Room 1006, New York, NY 10014, By: Shara Cornell, Esq.

MEMORANDUM OPINION AND ORDER SUSTAINING OBJECTIONS TO LIFT STAY MOTION FILED BY DANIEL A. FRISHBERG

MARTIN GLENN, CHIEF UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is a lift stay motion ("Motion," ECF Doc. # 342) filed by Daniel Anatoly Frishberg ("Mr. Frishberg"). On August 25, 2022, the Debtors¹ filed an objection to the Motion ("Debtors’ Objection," ECF Doc. # 609). On August 26, 2022, Mr. Frishberg filed a reply to the Debtors’ Objection ("Reply to Debtors’ Objection," ECF Doc. # 618). On the same day, the official committee of unsecured creditors (the "Committee") filed an objection ("Committee's Objection," ECF Doc. # 620, and together with the Debtors’ Objection, the "Objections"). On August 29, 2022, Mr. Frishberg filed a response to the Committee's Objection ("Response to Committee's Objection," ECF Doc. # 625). On August 31, 2022, Mr. Frishberg filed an amended Response to the Committee's Objection. ("Amended Response to Committee's Objection," ECF Doc. # 655.)²

A fundamental tenet of the Bankruptcy Code is equality of distribution. Chapter 11 cases are collective proceedings designed to assure that all prepetition creditors of the same class are entitled to equal treatment consistent with the absolute priority rule. Mr. Frishberg and other "Earn Account" holders appear to be unsecured creditors of Celsius, whether or not they demanded a return of the balance of their earn account before the chapter 11 petitions were filed but did not receive repayment because of the "pause on repayments" imposed by the Debtors. If some unsecured creditors of an insolvent debtor receive distributions of the full amount of their prepetition claims ahead of other creditors, as Mr. Frishberg seeks here, it is less likely that other unsecured creditors will receive equal treatment—money to pay their unsecured claims will run out before each unsecured creditor receives equal treatment. Assuming that Mr. Frishberg files a timely proof of claim, or if the Debtors’ schedule his claim as undisputed, or, if disputed, his claim is allowed in the claims allowance process, Mr. Frishberg will receive a pro rata distribution.

To receive a distribution, Mr. Frishberg and other prepetition creditors must await the confirmation of a chapter 11 plan. The delay in receiving payment may be unfortunate but it is a necessary result for an orderly bankruptcy process. The automatic stay arising from section 362(a)(1) is intended to prevent precisely what Mr. Frishberg wants to do here—the commencement or continuation of a judicial proceeding against the debtor to recover a claim against the debtor that arose before the commencement of the case. 11 U.S.C. § 362(a)(1). Mr. Frishberg and other Earn Account holders that have reached out to the Court seeking immediate repayment of their claims have sympathetic arguments supporting repayment, but fair treatment of all creditors demands that the Bankruptcy Code be followed.

For the reasons explained below, Mr. Frishberg's Motion is DENIED.

I. BACKGROUND

A. The Motion

Mr. Frishberg would like to lift the automatic stay to be able to litigate a lawsuit filed on July 11, 2022, due to an alleged breach of contract, which occurred when Celsius refused to close his Earn Account, as is specifically allowed under their terms of service. (Motion at 1.) Mr. Frishberg asserts Celsius suddenly limited withdrawals and transfers on June 13, 2022 and did not announce any form of a limitation on account closures. (Id .)

On July 5, 2022, Mr. Frishberg told Celsius to close his Earn Account and to not pay any more interest from that date forward. (Id .) Instead, he alleges they ignored him, and emailed a copy of a pasted script about limiting withdrawals. (Id .) He provided emails with Celsius which, he argues, indicate a pattern of intentional delay. (Id .)

B. Mr. Frishberg Invested in an Earn Account

This case is in an early stage. The Debtors hope to develop a restructuring plan that will maximize value for all stakeholders. (Debtors’ Objection ¶ 2.) The majority of the Debtors’ creditors have unsecured claims exactly like Mr. Frishberg's—they are customers of Celsius who have been unable to access transferred cryptocurrency due to Celsius’ June 12, 2022, decision to pause all withdrawals (the "Pause"). (Id .) The Debtors have been working with the recently appointed Committee to develop a path forward to a fair recovery for the claimants. (Id .)

Mr. Frishberg alleges that he invested assets into a Celsius Earn Account. (Id . ¶ 5.) Mr. Frishberg alleges that following the Pause, he asked Celsius to close his Earn Account but that Celsius refused to do so, and it also prevented him from withdrawing assets. (Id .) Mr. Frishberg filed a complaint in small claims court in Hillsborough County, Florida on July 11, 2022. (Id .) His complaint asserts a claim for breach of contract under Celsius’ Terms of Use.³

Mr. Frishberg's allegations are similar to nearly 30 other prepetition, small claims complaints that have been filed against the Debtors in state courts around the country. (Id .) Like Mr. Frishberg's, these complaints allege claims based on customers’ inability to withdraw their investments following the Pause. (Id . ¶ 6.)

C. The Debtors’ Objection

The Debtors’ Objection states that Mr. Frishberg failed to demonstrate cause for relief from the automatic stay. (Debtors’ Objection at 7.) The Debtors further argue that Mr. Frishberg does not establish extraordinary circumstances, nor has he carried the initial burden of demonstrating a prima facie showing of cause to lift the stay. (Id . ¶ 9.) The Debtors argue that litigating Mr. Frishberg's claims in other forums would interfere with the Chapter 11 cases; lifting the stay would prejudice other creditors; the Debtors’ estates would bear financial responsibility for defending Mr. Frishberg's claims; this Court is capable of adjudicating state law breach of contract disputes; there are no third parties involved; lifting the stay will not promote judicial economy; and lastly, the harm to the Debtors’ reorganization by lifting the stay outweighs any harm the stay imposes on Mr. Frishberg. (Id .) The Debtors also underscore that if Mr. Frishberg's litigation is permitted to move forward, it would open the floodgates to hundreds (or thousands) of identical motions, which would impair the Debtors’ efforts to maximize value and distribute that value fairly and efficiently to their stakeholders. (Id . ¶ 2.) Additionally, the Debtors assert they are exploring restructuring alternatives and the terms of a potential Chapter 11 plan with counsel for the Committee and the Ad Hoc Groups to navigate a consensual path forward in these Chapter 11 cases. (Id . ¶ 9.)

D. The Response to the Debtors’ Objection

Mr. Frishberg argues the Debtors have not presented any clear restructuring plan.

(Id .) He asserts his Motion requesting an exemption to automatic stay would not "open the floodgates" because he specifically instructed Celsius to close his account and terminate his relationship with them as was allowed in the contract. (Id . at 2) Mr. Frishberg also details the impact on his physical and mental health and financial stability. (Id .)

E. The Committee's Objection

The Committee objects to the Motion because it fails to demonstrate cause to justify allowing Mr. Frishberg's lawsuit to proceed, and because granting the Motion would prejudice efforts to maximize value for the benefit of all account holders and unsecured creditors. (Committee Objection ¶ 2.) The Committee argues the lawsuit and Mr. Frishberg's claims raise allegations against Celsius that are similar (if not identical) to those raised by other account holders who have asserted (or will assert) claims against the Debtors. (Id .)

Mr. Frishberg's claims raise serious allegations against Celsius, which the Committee is currently investigating and are the subject of formal requests to produce documents under Bankruptcy Rule 2004 that were served by the Committee on the Debtors and Alex Mashinsky on August 19, 2022. (Id . ¶ 3.) The Debtors have promised to cooperate in the Committee's investigation and have been working with the Committee to promptly produce the documents and information the Committee seeks. (Id .)

F. The Amended Response to the Committee's Objections

Mr. Frishberg believes the Committee's Objection should be overruled because of (a) their mistaken inclusion of him into the bankruptcy proceedings; (b) violations of Celsius’ fiduciary duty to him as a client; (c) unnecessary waste of administrative resources that are enormous in comparison to Celsius’ debt to him; (d) and exempting him from bankruptcy would not cause a flood of people suing Celsius because no creditor is in the same position as him. (Amended Response to Committee's Objection at 1.) He further argues he is not an unsecured creditor, and he should not be considered a creditor at all. (Id .)

II. LEGAL STANDARD

Section 362(a)(1) of the Bankruptcy Code imposes an automatic stay of the commencement or continuation of all litigation against a debtor upon the debtor's filing of a bankruptcy petition. See 11 U.S.C. § 362(a)(1) ; In re Project Orange Assocs., LLC , 432 B.R. 89, 101 (Bankr. S.D.N.Y. 2010).

Under section 362(d), a party in interest can seek relief from...