- By Amy Castor and David Gerard
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The Celsius Network bankruptcy held two hearings on Monday, December 5. The first was to establish ownership of Earn accounts and see if Celsius can sell $18 million in stablecoins. The second was an omnibus hearing, dealing with multiple motions. Amy sat through six tedious hours of this, so you wouldn’t have to. [Agenda, PDF; Agenda, PDF]
A Chapter 11 bankruptcy generally has two outcomes: a bankruptcy sale (known as a “363 sale”) and the confirmation of a plan of reorganization. Celsius wants to find a buyer for this ransacked corpse. But first, they have to decide who owns what. They can only sell what’s theirs to sell. The morning hearing was bitter arguments about the spare change in the stiff’s pockets.
Celsius is burning cash at a furious rate. They have no idea how to even coherently propose an ongoing business. So they need to keep finding new ways to keep up the farce and pay tens of millions in advisor and professional fees per month.
The word “liquidation” came up a few times in the first hearing. This ice cube is melting fast.
Whose are the stablecoins?
Celsius wants permission to sell $18 million in stablecoins to pay for ongoing business operations. The stablecoins are held in Earn accounts — Celsius’ main product. You would deposit cryptos and be paid interest on them.
But do the stablecoins belong to the bankruptcy estate or do they belong to the individual Earn account holders? This is what Judge Martin Glenn needs to decide.
Celsius will be out of cash to pay ongoing bills — payroll, vendors, and expensive professionals for the bankruptcy — by late February or early March. The burn rate for Chapter 11 legal costs and professional fees is $15 million to $20 million per month. Celsius needs a cash injection by January or March 2023 the latest. [Doc 1328, PDF]
Interim CEO Chris Ferraro says that right now, the bitcoin mining business is cash positive (which surprises us) — but that too will need a cash infusion by March 2023.
Celsius (the debtors) and the Unsecured Creditors’ Committee (UCC) think the stablecoins belong to the bankruptcy estate, which would give them the right to sell the coins for cash. But the account holders want their personal money back.
The stablecoins that Celsius wants to sell add up to $18,111,551. That’s 16,549,259 USDT, 1,119,089 NCDAI, 360,743 BUSD, and some shrapnel. Alvarez & Marsal’s Robert Campagna, Celsius’ restructuring advisor, admitted that the stablecoins buy them just a month of continued operations.
“If we sell $18 million now and have access to cash, we can always buy stablecoins again later,” said Campagna. LOL, like Celsius is going to have cash later. But anyway.
If Celsius is allowed to sell the stablecoins, the funds will not be used to cover the bitcoin mining operations. [Doc 1325, PDF]
So what happens after they burn through their stablecoins? Other sources of money include the settlement with Prime Trust, worth around $17 million — but Prime Trust will refund in crypto, not cash. Celsius also hopes for $44 million from the potential sale of Celsius’ custody solution GK8 to Galaxy Digital. GK8 is an Israeli firm that Celsius bought in November 2021 for $115 million. So they’ll take a 60% loss.
Other options to keep the business afloat include intercompany loans and debtor-in-possession financing — but those carry their own risks, Ferraro said. “They require us to post collateral and risk that coins would not be returned if the coins drop in value.”
What company is going to lend money to Celsius? What collateral? What bank? What?
What did I just sign?
The terms of service for the Earn product changed a lot — in ways that contradicted what Celsius founder Alex Mashinsky had told customers.
Celsius updated its terms eight times between 2018 and September 2022, asking customers to accept changes each time by clicking a box. If they didn’t click on the box, they couldn’t access their coins.
Later versions of the terms, such as version six, more clearly asserted that Celsius owned the deposited cryptos — as is normal with any bank or investment firm, who then have a liability to the depositors. Even as Mashinsky said things that sounded like the investors owned their deposits.
Many small creditors objected that they weren’t aware of the important changes, or that they didn’t even agree to the changed terms.
More than 90% of Earn account holders signed off on version six of the terms of service, per court filings. These customers held the majority of the coins in the Earn program.
Blonstein spent his time at Celsius administering the company’s compliance with the Bank Secrecy Act — money laundering law.
The state attorneys — Layla Milligan for Texas and Karen Cordry for multiple other states — went in hard on Blonstein.
This is an amazing interchange between Milligan and Blonstein (as quickly noted by Amy, please excuse errors):
Milligan: To your knowledge, was the business ever in compliance with money transmission laws?
Blonstein: My understanding is based on a discussion with money transmission laws.
Milligan: But you are not aware if the company was in compliance with state or federal securities laws?
Blonstein: Yes, correct.
Cordry closely questioned Blonstein on how they flagged the change of terms — if the changes were ever called out to the customers. Judge Glenn asked Blonstein if the change of ownership in particular was brought to the customers’ attention.
Blonstein admits they didn’t flag the changes, but the customers had to tick the box and agree before they could proceed. Nor was the prior version of the terms available for a customer to compare them.
But Blonstein didn’t think any of this was a substantive issue: “I viewed the wording on the Earn program as you are giving coins to the company to use.”
The stablecoins will likely go to the estate
Despite the arguments over ownership of the stablecoins, Judge Glenn was leaning toward putting them into the bankruptcy estate — because that’s what the terms said, and that’s what you’d expect of an investment product.
Judge Glenn seemed skeptical of the terms meaning anything other than that Celsius owned the coins and had a liability to the depositor. “It was a lending platform, so they had to deploy the assets. There wasn’t a commitment to pay back specific assets.”
It wasn’t like Celsius would use the money to gamble in a “slot machine in Monte Carlo” — they’d use it to pay the bills, noted the judge.
He was also more comfortable if the stablecoins were converted to actual dollars anyway, given how crazy crypto is right now: “The dollars will frankly be safer than crypto.”
Shara Cornell for the US Trustee and Layla Milligan for Texas were not happy. Celsius had not complied with state regulations. The terms of service may have been an illegal contract, and thus void, Milligan argued.
Judge Glenn responded that ownership of Earn cryptos had been a “gating issue” (an obstacle to recovery) ever since Celsius filed for bankruptcy in July 2022. “They didn’t only just spring this on anyone.”
Celsius had failed hard at compliance, but any buyer would have to comply with regulations — and if Celsius had broken securities laws, “you’ll get your pound of flesh against them,” he told Milligan.
Judge Glenn said that he wouldn’t rule on the stablecoins this week. But we think he’s going to let Celsius sell the coins. Matt Levine at Bloomberg concurred — because not having the money to pay back a liability is what “bankruptcy” means. [Bloomberg]
Celsius employees have been running away screaming. In early 2022, the company had over 900 employees. They are now down to 167 employees. Attrition is a real problem.
In the afternoon omnibus hearing, Judge Glenn approved Celsius’ Key Employee Retention Plan (KERP) to give out up to $2.8 million in bonuses to 59 key employees, so they don’t quit. Previously, he had denied the motion because Celsius and their lawyers had blacked everything pertinent out. [Doc 1426, PDF; Bloomberg]
You can’t really say no to a KERP if a company is trying to stay a going concern. We know very well that Celsius is a shambling zombie — but while it’s in Chapter 11, the judge probably has to treat it otherwise.
Celsius lawyers also need to look into who transferred crypto within 90 days of the bankruptcy filing. Those employees will not get bonuses.
Most of the KERP payments will be no more than $75,000. Salaries for the KERP employees range from $25,000 to $425,000.
Celsius will totally come up with a plan, honest
Next, Judge Glenn agreed to grant Celsius’ motion to extend exclusivity — the exclusive right to come up with a new business plan — until February 15.
After a Chapter 11 filing, you normally have 120 days to come up with a bankruptcy plan. Celsius still doesn’t have a plan. Judge Glenn said that this is not unusual for large companies. The court can extend the period of exclusivity, though the total period with extensions cannot exceed 18 months.
Once that exclusivity period is up, any party in the bankruptcy can introduce their own reorganization plan. There are already some plans being floated by Celsius creditors. More court time — and bankruptcy estate money — will then be spent discussing all the plans.
Kirkland’s Patrick Nash, appearing for Celsius, wanted to avoid such a free-for-all. Celsius is working to sell the GK8 custody business, and they are working with the UCC on a reorganization they can both agree on. The US Trustee also agreed on extending exclusivity.
Judge Glenn concurred that lifting exclusivity now would lead to a free-for-all. He worried that a pile of new plans would be “a crushing load on my chambers.” Remember, he has to actually read all these hundreds of pages of legal filings.
The judge can see that Celsius is a melting ice cube and it’s just consuming money. But Celsius has to come up with something. He granted the motion.
For Celsius, this is just a game that they have to play to keep shambling forward and paying themselves from creditor funds.
Celsius v. Stone et al.
Jason Stone of KeyFi was Celsius’ DeFi trading guy. Stone is suing Celsius for non-payment. Celsius has countersued, calling Stone incompetent and a thief.
Later in the hearing, Judge Glenn denied a motion by KeyFi and Stone to dismiss Celsius’ counterclaims. [Doc 17, PDF].
Stone is being represented by Kyle Roche, formerly of Roche Freedman. He is now in his own practice. Roche is not an eloquent courtroom speaker. He rambles interminably, and Judge Glenn was getting noticeably annoyed at him.
Roche said that Celsius’s claim should be dismissed because the issue is a contractual dispute, and Stone was authorized to transfer the assets in dispute to KeyFi under an asset purchase agreement. Celsius argued that Stone was not a party to the cited APA.
Judge Glenn said he would be denying the motion for now. He told the parties to complete discovery before a scheduled January hearing on Celsius’ motion for a preliminary injunction in the dispute — and he didn’t want them dragging their feet.
Roche said he had collected 150,000 documents as part of discovery. Glenn asked when Roche would produce the documents. Roche said that he had been busy because his grandmother died.
Celsius gets cryptos, not the actual dollars it needs to pay the bankruptcy professionals — hence why they want to sell the stablecoins to pay the bills.