Celsius Network LLC case continues in New York Bankruptcy Court

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As Celsius Network LLC, et al., File Number: 22-10964 (MG), proceeds in the Bankruptcy Court for the Southern District of New York (the “Court”), on October 24, the court issued two decisions relating to questions mentioned in our October 14, 2022, update:

Approval of tender procedures:

As noted in a previous update, on September 29, 2022, the Debtors filed a motion to establish bidding procedures for the auction and sale of substantially all of the Debtors’ assets, including the Debtors retail platform, account holders, loan portfolio and technology, custodial and exchange services, and staking and mining operations (the “Sell Motion”). On October 24, 2022, the Court approved the Sale Motion over the objection of the US Trustee and several other parties (the “Sale Order”).

One of the main objections of the American trustee and a number of states is that the tender procedures proposed by the debtors (and now approved by the court) are premature since the court has not yet determined whether the Earn, Custody and Withhold accounts will be part of the bankruptcy estate and therefore included in the sale of the asset. The objecting parties argue that “attempting to proceed with an auction before determining what should be sold would be no more realistic than seeking to sell a car dealership without being able to tell buyers whether a party, all or none of the cars on the lot would be part of the Purchased Assets. Although the court-appointed Chapter 11 examiner’s initial report is due before the bidding deadline, that report will not resolve the ultimate treatment of Earn accounts, which represent the vast majority of creditors.

Although the Sale Motion and Order of Sale do not directly address how or in what manner the “Winning” creditors will be paid, they provide insight into how the court and debtors understand and analyze this bankruptcy case. . For example, while the Court agreed that determining the treatment of Earn, Custody and Withhold accounts would take time, it held that these matters “involve only a fraction of the potential real estate assets that debtors are offering to sell”, can be subject to “months or years” of appeals and therefore the bankruptcy court process should not be delayed. The Court said in its ruling that a winning bid could deal with the contingency of how these accounts will be handled. In any event, debtors also noted that they “will not sell or purport to sell any assets absent a finding from the Court that they have title and authority to sell the assets.”

In the Order of Sale, the Court appears to accept the view of the debtors that time is of the essence in this case and accord great deference to the debtors’ business judgment. (For those less familiar with the U.S. Chapter 11 system, this deference to the management of a bankrupt entity is likely to come as a surprise.) According to the Court, bidding procedures are designed to “to maximize the value of debtors’ assets. In the sale order, Justice Glenn likened debtors’ activities to a melting ice cube in that if debtors wait too long to act, liquidity issues are likely to impact debtors’ operations in 2023 as assets available for sale decrease. This view that “time is not on the side of maximizing recovery by all stakeholders” contrasts with those “bullish” on crypto prices who would prefer that debtors wait for a price recovery before to sell assets.

Key points on bidding procedures, as approved by the sales order:

  • Debtors intend to attempt to sell their entire retail platform, including customer earning accounts and coin balances, retail and institutional loan portfolio, services exchange, the staking platform, Celpay and CelsiusX. The Debtors have also requested the option of selling their staking and mining operations and any other assets;

  • Sale schedule: initial offers for the assets of the retail platform are due on November 21, 2022, an auction, if required, is scheduled for December 15, 2022 and a sale hearing is set for December 22, 2022 ;

  • The debtors have a list of more than 30 parties that they think might be interested in bidding;

  • As the question of whether certain accounts are part of the bankruptcy estate remains open, it is unclear whether bidders will be interested in bidding on the accounts given this uncertainty;

  • Obligors intend to allow the winning bidder to purchase assets free of potential liabilities;

  • The debtors have made it clear that they plan, or at least hope, to sell all accounts. However, as seen in another bankruptcy case, bidders may only wish to acquire account information and not accept active liabilities in the accounts;

  • The sale proceedings do not appear to contemplate debtors making a distribution of crypto assets to creditors; however, nothing in these bidding procedures is the final word on how any distribution will be made; and

  • The bidding procedures provide that any sale under these procedures will be made pursuant to a plan of reorganization which will be approved by the court and the creditors.

Equity committee rejection:

On October 24, the Court also denied a motion to appoint a formal Preferred Share Equity Committee (the “Committee Motion”). The stockholders in question have been active participants in the Debtors’ bankruptcy case from the beginning, often filing objections to the Debtors’ filings. The debtors and the official committee of unsecured creditors filed objections to the committee’s motion. Generally, under the rules of a Chapter 11 bankruptcy case, equity holders are not entitled to any proceeds from the bankruptcy estate unless all impaired creditors are paid in full with interest, which should not occur in this case.

Ultimately, the Court accepted the objections, finding that the appointment of a formal preferred shares committee is inappropriate for three reasons: (1) shareholders are adequately represented by already existing stakeholders and do not have no need for additional representation; (2) the shareholders have failed to meet their obligation to demonstrate that there is a substantial likelihood of collection of the shares; (3) other factors, such as the balance of costs and benefits to the bankruptcy estate, as well as the complexity of the bankruptcy, do not weigh in favor of appointing a formal preferred share committee .

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume XII, Number 300

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