The bankruptcy case of cryptocurrency lender Celsius Network is entering a new phase where shareholders will be pitted against the firm's beleaguered customers, with customers seemingly facing a major disadvantage as the company parcels out its assets in an auction.
A recent motion to appoint a preferred equity committee seeks to put shareholders at the front of the queue when it comes to the sale of the custody firm GK8 that Celsius owns and Celsius' mining operations. (Celsius' assets are due to be auctioned off later this month.) A point of interest will likely be changes made to Celsius’ corporate structure in the midst of last year’s Series B funding round that raised $750 million just months before the company collapsed.
That transaction put customers behind equity holders in terms of getting repaid if Celsius went bankrupt and its valuable crypto-mining assets got sold, said Vincent Indelicato, a partner at law firm Proskauer Rose. And that’s something the independent examiner who was appointed to sort out why Celsius fell apart will want to look at, he added.
“The equity [holders] have a direct claim against any value derived from a sale or monetization of the mining assets, to the exclusion of all the customer claims,” Indelicato said in an interview with CoinDesk. “And I certainly think that the examiner and other parties, such as the committee, will highly scrutinize that transaction to determine, among other things, how and why Celsius moved the customer accounts in the manner it did.”
The fate of customers and their deposits is one of the biggest unanswered questions in the Celsius case. And amateurs being last in line to get repaid, behind pros backed by an army of lawyers and bankers, is not exactly an unfamiliar story in bankruptcies.
Raising money and reshuffling
Celsius' Series B fundraising began in early 2021 and was completed at the end of November. The consumer business was moved under a U.S. entity, as indicated in a change to the firm’s terms of service that users had to agree to last year. Meanwhile, Celsius’ mining operations were placed under the Celsius U.K. entity, as was GK8, the custody tech firm Celsius purchased for $115 million last November.
Whether the Celsius mid-fundraising ownership reshuffle might be linked to a fraudulent transfer, a pre-bankruptcy transaction that essentially defrauds creditors, is one of the areas the external examiner will look into.
“Somewhere in the middle of the Series B due diligence, Celsius finds out that the consumer business has regulatory problems, or maybe it’s insolvent – who knows what they find?” said Thomas Braziel, founder of bankruptcy investment specialist 507 Capital. “So they have to move things around: Investors will give the firm money at a high valuation, but they have to be first in line for the mining operations and custody firm GK8.”
At the very least, the committee of unsecured creditors will play a large role in reviewing the preferred equity investments and identify whether proceeds of customer assets were also used to fund the mining operations, said Gregory Plotko, a partner with Crowell & Moring’s bankruptcy and creditors rights practice in New York.
“The characterization of that customer funding (as either an intercompany loan or equity investment) will be a major factor in determining the relative rights of each group to the allocation of value,” Plotko said via email.
All in one pool
An extreme measure would be to invoke so-called “substantive consolidation,” a term familiar to bankruptcy insiders, when a court allows the consolidation of all of the debtors’ assets into one large pool, rather than under separate entities.
A bankruptcy judge in New York won't grant substantive consolidation unless it becomes clear that it’s impossible to unravel the individual transaction. (The bankruptcy of Augie/Restivo Baking Co.is a case where consolidation was granted and later appealed against. Substantive consolidation was later invoked in the 2003 WorldCom scandal.)
“Sometimes, like with fraudulent transfer in bankruptcy court, just the threat and the inherent uncertainty and attendant expense and delay of litigation is enough to induce the parties to settle,” said Proskauer’s Indelicato. “So a lot of these claims and theories in practice never get adjudicated to finality. Instead they get used as quivers in the arsenal to try to apply pressure.”
Lawyers from White & Case also advised equity firm WestCap on its part in leading the Celsius Series B round. This potentially leads to an awkward situation where White & Case could end up having to investigate due diligence its own firm performed during the fundraising.
White & Case declined to comment. Celsius didn't respond to requests for comment by press time.
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