In re Celsius Network LLC

1

In re: CELSIUS NETWORK LLC, et al., Debtors.

No. 22-10964 MG

United States Bankruptcy Court, S.D. New York

March 9, 2023

Chapter 11

MILBANK LLP Attorneys for Community First Partners, LLC Celsius SPV Investors, LP, and Celsius New SPV Investors, LP

Dennis F. Dunne, Esq.

Nelly Almeida, Esq.

Andrew M. Leblanc, Esq.

Melanie Westover Yanez, Esq.

JONES DAY Attorneys to CDP Investissements Inc.

Joshua M. Mester, Esq.

KIRKLAND & ELLIS LLP Attorneys for the Debtor

-+Joshua A. Sussberg, Esq.

Patrick J. Nash, Jr., Esq.

Ross M. Kwasteniet, Esq.

Christopher S. Koenig, Esq.

Dan Latona, Esq. WHITE & CASE LLP Attorneys for the Creditor Committee

Michael Andolina, Esq.

Aaron Colodny, Esq.

Kimberly A. Halvin, Esq.

Samuel P. Hershey, Esq.

Gregory F. Pesce, Esq.

David M. Turetsky, Esq.

Keith H. Wofford, Esq. SELENDY GAY ELSBERG PLLC Proposed Co-Counsel for the Creditor Committee

Jennifer M. Selendy, Esq.

Faith E. Gay, Esq.

Claire O'Brien, Esq

MEMORANDUM OPINION REGARDING WHICH DEBTOR ENTITIES HAVE LIABILITY FOR CUSTOMER CLAIMS UNDER THE TERMS OF USE

MARTIN GLENN CHIEF UNITED STATES BANKRUPTCY JUDGE

Do Customers (as defined below) have claims against the debtors and all of their affiliates or only against Celsius Network, LLC ("LLC") under the terms of use? This is a difficult gating question. Careless drafting of the terms of use leaves the answer unclear. On one side, the Debtors (the eleven entities that filed chapter 11 petitions in this Court) and the Official Committee of Unsecured Creditors (the "Committee") urge the Court to find that Customers have claims against each of the Debtors and each of their non-debtor affiliates (together, the Debtors and their non-Debtor affiliates, the "Company"). On the other side, Community First Partners, LLC, Celsius SPV Investors, LP, Celsius New SPV Investors, LP, and CDP Investissements Inc. (collectively, the "Series B Preferred Holders") urge the Court to find that Customers only have claims against LLC. The Series B Preferred Holders are not parties to the terms of use. However, because they made significant investments in Celsius Network Limited ("CNL"), the top-level parent company, and their investment contracts did not prohibit CNL and its affiliates (other than LLC) from incurring customer liability, the only way the Series B Preferred Holders can limit their exposure to customer contract claims is to argue for a construction of the terms of use (a contract to which they are not a party) that limits Customers' contract liability claims to LLC. LLC is hopelessly insolvent. The net equity value of CNL, to the extent any exists in the global enterprise, arises from Debtor and non-Debtor entities other than LLC whose net equity value will flow up to CNL. Because unsecured Customers recover ahead of equity holders under the absolute priority rule, the Series B Preferred Holders have some chance of recovery if Customers hold claims only against LLC and not against CNL or other Debtor and non-Debtor affiliates.^[1]

Both interpretations have undesirable practical consequences. A ruling that Customers have contract claims against all debtors and affiliates could expose non-Debtor affiliates to customer liability because the terms of use do not distinguish between Debtor and non-Debtor affiliates. On the other hand, a ruling that Customers have claims solely against LLC could deprive the Customers of whatever value would flow up to CNL from Debtor and non-Debtor affiliates.

Notwithstanding the difficult consequences on both sides, the law provides the Court with a clear process for interpreting contracts. First, the Court is to determine whether the contract is ambiguous. Next, if the Court determines the contract is ambiguous, the Court can look to extrinsic evidence to determine the parties' intent and, by extension, the proper interpretation of the contract. If, and only if, the extrinsic evidence does not provide the answer can the Court invoke the tiebreaker rule of contra proferentem: that the contract be construed against the drafter. In setting the briefing schedule for this matter, the Court required the parties to provide the Court with any extrinsic evidence they believe supports their respective interpretations of the terms of use. Therefore, the Court concludes that the record is complete.

As explained below, the Court concludes based on the record that the contract is ambiguous. Considering the extrinsic evidence, the Court finds, based on a preponderance of the evidence, that the parties to the terms of use intended that only LLC, and not any other Debtor or non-Debtor affiliates, are liable to Customers on contract claims under the terms of use. Because extrinsic evidence answers the question of the proper interpretation, the Court need not, and cannot, invoke the doctrine of contra proferentem.

Importantly, the Court finds and concludes that the terms of use do not limit Customers (or the Committee) from asserting non-contract claims against CNL, or against other Debtor or non-Debtor affiliates, such as claims for fraud, negligent misrepresentation, or other statutory or common law claims.^[2]

In short, while the Series B Preferred Holders prevail here, they may very well end up recovering nothing. Nevertheless, the Court appreciates that this decision may deprive Customers of the full value of the Company. But the Court's obligation is to interpret the contract and evidence before it, and the evidence commands the Court to accept the Series B Preferred Holders' argument that only LLC is liable to Customers on contract claims.

I. BACKGROUND

A. The Issue and Briefing

The Court is asked to resolve "the issue [the "Issue"] of 'which Debtors are liable to the account holders ("Customers") under the global contract (the "Terms of Use") between Celsius Network LLC and its account holders . . . ."^[3] See Order (I) Setting a Briefing Schedule and (II) Granting Related Relief (the "Scheduling Order," ECF Doc. # 1747, ¶ 3). At a hearing on December 8, 2022, the Court described the Issue as a "gating issue [that] should be decided sooner rather than later."^[4]

Three parties (the "Parties") filed briefs regarding the Issue: (1) the Series B Preferred Holders (the "Series B Brief," ECF Doc. # 1795); (2) the Debtors (the "Debtor Brief," ECF Doc. # 1799); and (3) the Committee (the "the Committee Brief," ECF Doc. # 1797). The Series B Preferred Holders also filed the declaration of Melanie Westover Yanez (the "Yanez Decl.," ECF Doc. # 1796), which attached exhibits. The Committee filed the declaration of Aaron Colodny (the "Colodny Declaration," ECF Doc. # 1798), which attached exhibits. The Parties also stipulated to certain facts (the "Fact Stipulation," ECF Doc. # 1955).

The Parties also filed response briefs: The Series B Preferred holders filed a response (the "Series B Response," ECF Doc. # 1960) and a supplemental declaration of Melanie Westover Yanez (the "Supplemental Yanez Decl.," ECF Doc. # 1961). The Committee filed a response (the "Committee Response," ECF Doc. # 1965), as did the Debtors (the "Debtor Response," ECF Doc. # 1962.)

The Court held a hearing on the Issue on February 6, 2023. None of the parties called any witnesses to testify at the hearing.

B. The Parties' Positions

The heart of the Issue is as follows: the Debtors and Committee contend that the Terms of Use unambiguously provide that Customers have claims against all Debtor entities, while the Series B Preferred Holders contend that the Terms of Use unequivocally provide that only LLC is liable to Customers.

The Terms of Use form a contract between account holders and "Celsius." "Celsius" is defined in section 1 of the Terms of Use as "Celsius Network LLC and its Affiliates." "Affiliate" is defined as:

an entity that owns or controls, is owned or controlled by, or is or under common control or ownership with a party, where control is defined as the direct or indirect power to direct or cause the direction of the management and policies of such party, whether through ownership of voting securities, by contract, or otherwise.

Terms of Use §§ 1-2.

Accordingly, the Debtors contend that the Terms of Use provide that Customers have claims against all Debtor and non-Debtor entities, since all Debtor and non-Debtor entities are Affiliates, as defined in the Terms of Use. (Debtor Brief ¶ 6.) The Committee agrees with the Debtors' position. (See Committee Brief ¶ 1.)

The Series B Preferred Holders, on the other hand, point to the language in the Terms of Use which indicates that "in no event shall [the Customer] have any recourse, whether by setoff or otherwise, with respect to our obligations, to or against any assets of any person or entity other than Celsius, including . . . any member, shareholder, Affiliate, investor, employee, officer, director, agent, or advisor of Celsius." (See Series B Brief ¶ 2; Terms of Use § 25 (emphasis added).) Because "Affiliate[s]" are carved out of liability, the Series B Preferred Holders argue that this language must be interpreted to mean that Customers only have recourse against LLC. (Series B Brief ¶ 28.) Specifically, they argue that "Celsius" in this sentence must be read to mean LLC, and not "LLC and its Affiliates," to effectuate the meaning of the clause. (Id.)

While all Parties claim that the contract is unambiguously in their favor, they further contend that extrinsic evidence supports their respective positions should the Court conclude it is proper to consider such evidence.^[5] The Debtors and the Committee also argue that to the extent there is any ambiguity in the contract, it must be construed in favor of Customers and against the drafter.^[6] Finally, all Parties agree that...