In re Celsius Network LLC

647 B.R. 631

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

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

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

Signed January 4, 2023

¹ KIRKLAND & ELLIS LLP, Attorneys for the Debtors, 601 Lexington Avenue, New York, NY 10022, By: Joshua Sussberg, Esq., Patrick J. Nash, Jr., Esq., Ross M. Kwasteniet, Esq., Christopher S. Koenig, Esq., Dan Latona, Esq.

WHITE & CASE LLP, Attorneys for the Official Committee of Unsecured Creditors, 111 South Wacker Drive, Suite 5100, Chicago, IL 60606, By: Gregory Pesce, Esq., Andrea Amulic, Esq., Michael Andolina, Esq., Aaron Colodny, Esq., Samuel P. Hershey, Esq., David Turetsky, Esq., Keith Wofford, 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., Brian Masumoto, Esq., Mark Bruh, Esq.

MILBANK LLP, Attorneys for Community First Partners, LLC, Celsius SPV Investors, LP, and Celsius New SPV Investors, LP, 55 Hudson Yards, New York, NY 10001, By: Dennis F. Dunne, Esq., Nelly Almeida, Esq., 1850 K Street, NW, Suite 1100, Washington, DC 20006, By: Andrew M. Leblanc, Esq., Melanie Westover Yanez, Esq.

JONES DAY, Attorneys for CDP Investissements, Inc., 555 South Flower Street, 50^th Fl., Los Angeles, CA 90071, By: Joshua M. Mester, Esq., TEXAS STATE SECURITIES BOARD AND THE TEXAS DEPARTMENT OF BANKING, P. O. Box 12548, Austin, Texas 78711, By: Layla D. Milligan, Esq., Abigail R. Ryan, Esq., Roma N. Desai, Esq.

VERMONT DEPARTMENT OF FINANCIAL REGULATION, Attorneys for the State of Vermont, 89 Main Street, Montpelier, VT 05620, By: Jennifer Rood, Esq.

MCELROY, DEUTSCH, MULVANEY & CARPENTER LLP, Attorneys for the New Jersey Bureau of Securities, 570 Broad Street, Newark, NJ 07102, By: Jeffrey Bernstein, Esq., 225 Liberty Street, 36^th Fl., New York, NY 10281, By: Nicole Leonard, Esq., THE STATE OF WASHINGTON, P.O. Box 40100, Olympia, WA 98504, By: Robert Ferguson, Esq., Stephen Manning, Esq.

NATIONAL ASSIOCIATION OF ATTORNEYS GENERAL, Attorneys for the States of Alabama, Arkansas, California, District Of Columbia, Hawaii, Idaho, Maine, North Dakota, Oklahoma, and South Carolina, 1850 M St., NW, 12^th Fl., Washington, DC 20036, By: Karen Cordry, Esq.,

COAN, PAYTON & PAYNE, LLC, Attorneys for Joe Breher, 999 18^th Street, Suite S3100, Denver, CO 80202, By: Steven T. Mulligan, Esq.

BERNSTEIN-BURKLEY, P.C., Attorneys for Stuart McLean, Keith Ryals, Jennifer Ryals, Kim David Flora, Brett Flora, and Courtney Burks Steadman, 601 Grant Street, 9^th Fl., Pittsburgh, PA 15219, By: Mark A. Lindsay, Esq.

FOX ROTHSCHILD LLP, Attorneys for Nuno Saraiva, 49 Market Street, Morristown, NJ 07960, By: Michael R. Herz, Esq.

WEIR GREENBLATT PIERCE LLC, Attorneys for Matthew Pinto, 1339 Chestnut Street, Suite 500, Philadelphia, PA 19107, By: Bonnie R. Golub, Esq., Jeffrey S. Ciancuilli, Esq., Michael P. Broadhurst, Esq.

MILES & STOCKBRIDGE P.C., Attorneys for Josh Tornetta, 100 Light Street, 10^th Fl., Baltimore, MD 21202, By: Joel L. Perrell Jr., Esq.

VENABLE LLC, Attorneys for Ignat Tuganov, 1270 Avenue of the Americas, 24^th Fl., New York, NY 10020, By: Jeffrey S. Sabin, Esq., Carol Weiner Levy, Esq., Arie Peled, Esq., 600 Massachusetts Avenue, NW, Washington, DC 20001, By: Andrew J. Currie, Esq.

MEMORANDUM OPINION AND ORDER REGARDING OWNERSHIP OF EARN ACCOUNT ASSETS

MARTIN GLENN, CHIEF UNITED STATES BANKRUPTCY JUDGE

Who owns the cryptocurrency assets deposited in Earn Accounts (defined below) by Celsius's account holders before the July 15, 2022 petition date (the "Petition Date")? This is a gating issue at the center of many disputes in this case. As explained below, the Court concludes, based on Celsius's unambiguous Terms of Use, and subject to any reserved defenses, that when the cryptocurrency assets (including stablecoins, discussed in detail below) were deposited in Earn Accounts, the cryptocurrency assets became Celsius's property; and the cryptocurrency assets remaining in the Earn Accounts on the Petition Date became property of the Debtors’ bankruptcy estates (the "Estates").

At the Petition Date, Celsius had approximately 600,000 accounts in its Earn program ("Earn Program," and such assets, including any proceeds thereof, the "Earn Assets" and such accounts, the "Earn Accounts"). These Earn Accounts held cryptocurrency assets with a market value of approximately $4.2 billion as of July 10, 2022. (Declaration of Alex Mashinsky, Chief Executive Officer of Celsius Network LLC, In Support of Chapter 11 Petitions and First Day Motion s, "Mashinsky Declaration," ECF Doc. 23, ¶ 49.) Included in the Earn Accounts at the Petition Date were a type of cryptocurrency known as stablecoins, valued at $23 million as of September 2022. (Debtors’ Motion Seeking Entry of an Order (I) Permitting the Sale of Stablecoin in the Ordinary Course and (II) Granting Related Relief , "Original Motion," ECF Doc. # 832, ¶ 9.)

The issue of ownership of the assets in the Earn Accounts is a contract law issue. The Debtors and Committee argue that the cryptocurrency assets deposited in Earn Accounts were owned by the Debtors and are now property of the Estates. Many Earn account holders ("Account Holders") argue that the Account Holders, rather than Celsius, own the cryptocurrency assets in the Earn Accounts and that cryptocurrency assets should promptly be returned to them.

Celsius adopted eight versions of the Terms of Use (collectively, the "Terms of Use" and each a version (e.g., "Terms Version 8"), which are detailed as exhibits A-1 through A-8 to the Declaration of Alexander Mashinsky, Chief Executive Officer of Celsius Network LLC, Providing Terms Dating Back to February 18, 2018 ("Terms Affidavit," ECF Doc. # 393). For the avoidance of doubt this opinion refers to the "Terms of Use" identified in the Amended Motion as "Terms Version 8," and Terms Version 8 (effective April 15, 2022) is the controlling document for this memorandum opinion.

The Debtors and the Official Committee of Unsecured Creditors ("Committee") contend that under unambiguous provisions in Terms Version 8, a clickwrap contract governed by New York law, Celsius held "all right and title to such Eligible Digital Assets, including ownership rights " in the cryptocurrency assets (including stablecoins) in the Earn Accounts. (See ECF Doc. # 1325 ¶ 39 (citing Terms Version 8 § 13) (emphasis added)). The Debtors’ uncontroverted evidence shows that 99.86% of the Earn Account holders accepted Terms Version 6 or a later version. ("Original Blonstein Declaration," ECF Doc. # 1327, ¶ 20.) Earlier Terms Versions 1–5 of the Terms of Use, in effect beginning on February 1, 2018, and updated at various dates by new versions, were also clickwrap contracts accepted by the overwhelming percentage of Earn Account holders.

If the cryptocurrency assets in the Earn Accounts are owned by the Debtors, the Account Holders are unsecured creditors and their recovery depends on the distributions to unsecured creditors under a confirmed chapter 11 plan, or under the Bankruptcy Code's priority rules in the event of liquidation. A fundamental principle of the Bankruptcy Code is equality of distribution. There simply will not be enough value available to repay all Account Holders in full. If only some Account Holders prevail with their arguments that they own the cryptocurrency assets in their accounts, they hope to recover 100% of their claims, while most of the Account Holders are left as unsecured creditors and may recover only a small percentage of their claims.

The Debtors and the Committee argue that under settled legal precedent the unambiguous language of the Terms of Use controls the ownership issue, making extrinsic evidence inadmissible, and, therefore, the cryptocurrency assets in the Earn Accounts are property of the estate. The objecting Account Holders argue that the Terms of Use are either clear that the Account Holders own the assets in the Earn Accounts, or the Terms of Use are ambiguous, preventing the Court from resolving the issue of ownership without considering extrinsic evidence. The objectors say that numerous statements by Celsius's former Chief Executive Officer ("CEO"), Alex Mashinsky, and possibly other extrinsic evidence, demonstrate that the Account Holders have always owned the assets in the Earn Accounts.

The Debtors filed an amended motion² that "only seeks two broadly applicable rulings: (i) that the plain language of the Terms of Use unambiguously provides that the cryptocurrency assets in the Earn Program are the property of the Debtors’ estates and (ii) that the Terms of Use are an enforceable contract (subject to certain individualized contract formation defenses). In other words, the Amended Motion seeks a presumption that each Account Holder is party to a binding contract with the Debtors, which presumption is rebuttable to the extent an Account Holder succeeds on an individual contract formation defense in the future." (Debtors’ Reply in Support of Debtors’ Amended Motion for Entry of an Order (I) Establishing Ownership of Assets in the Debtors’ Earn Program, (II) Permitting the Sale of Stablecoin in the Ordinary Course and (III) Granting Related Relief ("Debtors’ Reply," ECF Doc. # 1578, ¶ 3.))

The Amended Motion also seeks authority for the Debtors to sell approximately $18 million (in value) of stablecoins in the Earn Accounts, arguing that such stablecoins are property of the Estates and that a sale by the Debtors is permissible under section 363(c)(1) of the Bankruptcy Code in the ordinary course of business, or alternatively, under section 363(b)(1) other than in the ordinary course of business. The United States Trustee ("U.S. Trustee") and multiple state securities regulators argue that a sale of stablecoins should not be approved at the present time because the Debtors have sufficient liquidity at least over the next few months. The Committee argues that the proposed sale would not be in the ordinary course of...