- By Amy Castor and David Gerard
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Celsius is bankrupt, with liabilities that are hugely greater than its assets. So they’re selling what can be sold — such as subsidiaries that are solvent going concerns.
Celsius bought Israeli crypto custody company GK8 in October 2021 for $115 million — $100 million in cash, and the rest in their own CEL tokens.
Now Celsius wants to sell GK8 to Mike Novogratz’s Galaxy Digital for $44 million, plus $100,000 assumed liabilities (debts that Galaxy will be responsible for). This is a huge loss — but Galaxy was the only qualified bidder. [Notice of successful bidder, PDF]
Galaxy wants GK8’s assets free and clear. The tricky bit is whether creditors in the bankruptcy have any claims against Celsius subsidiaries and affiliates. So the December 8 hearing was about this sale. [Amended agenda, PDF]
Judge Martin Glenn, who is overseeing the bankruptcy, was inclined to approve the sale — if the tricky details can be resolved.
This was a “hybrid hearing,” taking place both in the Southern District of New York courtroom and over Zoom. This hearing was on Thursday after a long, exhausting week of hours of hearings on Monday on Earn accounts and more hours of hearings on Wednesday on Custody and Withhold accounts.
Lawyers were dumping GK8 documents on Judge Glenn at the last minute on Wednesday, so he was up late the night before reading them — much to his displeasure. Everyone knows Celsius is running out of money. The holidays are coming up, and the mood was tense. The judge blew up at the lawyers more than once.
Why does Galaxy Digital want GK8?
Galaxy Digital is Mike Novogratz’s crypto hedge fund. Galaxy is publicly traded on the Toronto Stock Exchange (GLXY.TO). Its stock is down 83% in the last year.
GK8 was founded in 2018 by two former Israeli government cybersecurity experts, Lior Lamesh and Shahar Shamai, the CEO and CTO of the company. Even though the firm has forty employees, these two pretty much are the company.
Celsius had planned to integrate GK8’s custody product into its own platform. But alas, Celsius filed for bankruptcy in July. So it started shopping for a buyer for GK8.
GK8 is a going concern — but it doesn’t seem ever to have made money. In fact, it needs funds to keep going.
We don’t understand what Galaxy wants GK8 for. This sale doesn’t make sense.
This could be an acquihire — Galaxy wants the founders, and the founders insist on bringing the company.
Or the sale could be Galaxy attempting to plug a hole in its books by buying a custody firm — if they account for assets in custody US-style, as company money with a liability, and not as customer money. (Now, you might think that resolving this would mean eventually stiffing the customers.)
But we’re speculating here. Maybe Novogratz will get a GK8 tattoo to go with his Terra-Luna tattoo?
We just know that Celsius needs to sell GK8 as soon as possible — and Galaxy Digital are a keen buyer, and GK8 would be very happy to go to Galaxy.
Do Celsius customers have a claim against GK8?
Do creditors have claims against just particular Celsius entities, or do they also have claims against Celsius subsidiaries and close affiliates? Such as ones the company wants to sell?
Celsius and the Unsecured Creditors’ Committee (UCC) both feel that Celsius’ terms of use — in all eight versions — made it clear that depositors were contracting with Celsius Network LLC and its affiliates.
But Andrew LeBlanc from Milbank, for the preferred equity holders in Celsius, had a different interpretation of the terms of service: “there are limitations in the documents that exclude claims against affiliates.”
Celsius, the UCC, and the preferred equity holders want the court to approve a briefing schedule that would allow them to clear a path for Celsius to come up with a reorganization plan. Here’s the briefing schedule. [Doc 1338, PDF]
Judge Martin Glenn said this is a gating issue — a blocker on a reorganization plan — and he wants it resolved sooner rather than later. He told the lawyers to gather their extrinsic evidence — evidence of contractual intent that isn’t written in the contract — so they can work out everything in a single hearing.
“I don’t want this being prolonged. I think this is an important issue,” said the judge. He told Patrick Nash (Kirkland & Ellis), Andrew Zatz (White & Case), and LeBlanc to revise the briefing schedule accordingly.
Why the sale of GK8 assets is messy
Celsius will run out of cash by early 2023. It needs this GK8 sale to go through soon. Here’s the sale motion. [Doc 1615, PDF]
Dan Latona from Kirkland, for Celsius, told the court that the GK8 sale was a result of “hard-fought and arms-length negotiations between the debtors and potential bidders and their respective advisors.”
Judge Glenn cut him off immediately to point out that this wasn’t just Celsius and the advisors negotiating — GK8 insiders also heavily negotiated, insisting on employment contracts and transfer of all potential avoidance claims, so that Galaxy could buy GK8 assets clear of any reclamation rights. “I have real questions on whether this is an arms-length transaction,” he said.
An avoidance action is an action to undo (avoid) certain transactions that the debtor engaged in before the bankruptcy. These include clawbacks.
Centerview, an investment banking advisor, managed the marketing and bidding. The GK8 sale started as an equity sale but morphed into an asset sale. In his declaration, Centerview’s Ryan Keilty said: “During the second round, all prospective bidders indicated an asset sale was the only structure in which bidders were willing to bid.” [Doc 1622, PDF]
Keilty explained that Celsius would have preferred an equity sale, as “a path of least resistance” — but the bidders insisted on an asset sale, given the backdrop of potentially billions of dollars of exposure in customer-related claims.
Galaxy’s bid was conditioned on retaining GK8 founders Lamesh and Shamai. In turn, Lamesh and Shamai were unwilling to continue with Galaxy without certainty as to their future. On December 2, the parties struck an agreement: Galaxy would pay $44 million in cash, plus $100,000 of assumed liabilities for GK8.
To complete the sale, Celsius filed Chapter 11 for the GK8 corporate entity. They want approval to appoint Celsius CEO Chris Ferraro as a foreign representative and to file recognition proceedings in Israel to seek enforcement of the sale order. Later in the hearing, Judge Glenn approved first-day motions for GK8.
The asset purchase agreement contemplates assuming all operational liabilities. “The purpose of the sale is to insulate the GK8 assets from the hang of potential Celsius account-related claims,” said Latona.
Avoidance claims
GK8 has forty employees. Judge Glenn was concerned that if any of them had crypto on Celsius and withdrew those assets within 90 days (if retail buyers), a year (if insiders), or even up to two years (in the case of fraudulent conveyance) before Celsius filed bankruptcy, it might raise so-called “avoidance issues.”
Judge Glenn wanted to know if anyone had looked into potential avoidance claims. “If that analysis showed there were $50 million in claims for the individuals, the $44 million price tag just disappeared. You’re getting nothing.”
Latona for Celsius said was unlikely it would be $50 million in avoidance actions, but the judge pushed on this topic. “How do you know?”
The judge, who had only just read some of the GK8 filings — because they were all sprung on him the day before — went ballistic. “You’ve provided the court with zero analysis of the potential avoidance claims against any of these people. Maybe there aren’t any. But I don’t know whether you are proposing to transfer a valuable asset of the estate to Galaxy. And I am not approving a sale until I understand that, with evidence.”
Latona stressed that the legal claims would have little if any value. Zatz for the UCC said that avoidance claims, if any, would remain property of the bankruptcy estate, and are not being transferred.
The judge was somewhat mollified by Latona and Zatz. But he still wanted one or more declarations along with a memorandum of law summarizing the analysis that Zatz provided about specific provisions of the purchase agreement — i.e., what potential claims are being transferred to Galaxy and what claims remain with Celsius.
Shara Cornell for the US Trustee thought GK8 should have its own creditors’ committee. Cornell also noted that GK8 hadn’t filed schedules yet. Judge Glenn said he couldn’t imagine there being a separate creditors’ committee for GK8, and overruled her objections.
Ron D’Aversa from Orrick, for Galaxy Digital, worried that Judge Glenn’s additional request for memorandums of law and declarations would delay the GK8 sale: “The timeline, the sequence, along with everything else in this agreement was painstakingly negotiated for months,” he told the court.
Judge Glenn, who had already been doing double time reading Celsius bankruptcy filings all week, didn’t like being told he had to move faster. He ripped into D’Aversa: “You are not going to cram down unreasonable deadlines for me to act. So go back to your client and tell them that you can either negotiate now for a revised schedule or you can just blow up the deal. And that is too bad, as far as I am concerned, but don’t tell me that I have to act today or tomorrow or Monday, because it isn’t going to happen.”
Pro se creditor Simon Dixon asked if the GK8 deal could be settled in bitcoin, rather than dollars. Galaxy has an OTC (over-the-counter) trading desk, so in his mind, this made sense. “Any sale in bitcoin would be very beneficial to the estate” — that is, creditors could get their bitcoins back. The judge told Dixon that was not going to happen.
Judge Glenn said he would withhold a ruling on the GK8 asset sale until he got memoranda of law and one or more declarations specifically addressing the issues regarding the avoidance claims. But he was “tentatively inclined to approve the sale of the GK8 assets.”
Latona and Zatz said they would both do a filing in support of the sale by Monday at 5 p.m.
First-day motions and uncontested matters
Judge Glenn granted several administrative motions, including the motion allowing Celsius CEO Chris Ferarro to represent GK8 as a foreign entity in Israel. [Doc 1626, PDF; Doc 1628, PDF; Doc 1637, PDF)
Celsius wants to repay a DeFi loan of $3.26 million loan in USDC and get back collateral (wrapped BTC and USDC) worth $7.5 million. The revised order just says that the judge has to rule that Earn is a property of the estate. [Doc 1360, PDF; Doc 1636, PDF]
The judge said that Celsius could go ahead and pay back the loans — but the collateral would have to be held in a separate wallet subject to the court’s determination on whether Earn assets are property of the estate, which he hadn’t ruled on yet.
What’s next?
An omnibus hearing in the Celsius bankruptcy is scheduled for December 20. We expect that issues in the sale of GK8 will be in that somewhere. Further omnibus hearings are scheduled for January 24, 2023, and February 15, 2023. [Doc 1393, PDF]
It’s important to keep in mind that this week’s hearings have been furious arguments over the alignment of the deck chairs on the Titanic. But the iceberg is still there. Celsius is flat broke. There’s no business. There are pennies left for creditors at best. Celsius is a shambling zombie. It should have been liquidated in July.
There’s also the much-anticipated final version of the Examiner’s Report, including the question of whether Celsius was operating a Ponzi. And there are still multiple state regulators looking to issue charges against Celsius, and possibly against founder Alex Mashinsky personally. The fun stuff should really get going in 2023.
Amy Castor 