In a recent decision by Chief Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York presiding over cryptocurrency Chapter 11 megacase, In re Celsius Network, LLC, et al., Case No. 22-10964 (MG), Judge Glenn held that crypto customers of Celsius who deposited their cryptocurrency in interest-bearing accounts under Celsius’ “Earn Program” have lost all right and title to those assets. The ruling, which affects approximately 600,000 accounts with assets valued at $4.2 billion, clears the way for Celsius to liquidate certain of those assets to fund its administrative expenses, and leaves the depositors holding unsecured claims.
On January 4, 2023, the Bankruptcy Court entered an order approving Celsius’ hotly contested motion establishing that Celsius Network’s bankruptcy estate held legal title to its customers’ crypto-related assets deposited into “Earn Accounts” through Celsius’ Earn Program and granting Celsius the authority to liquidate certain variations of the cryptocurrency Stablecoin held in customer Earn Accounts.
As of the date of the chapter 11 filing in July 2022, customers held cryptocurrency assets in Celsius’ Earn Accounts worth approximately $4.2 billion, including an estimated $18 million in Stablecoin. As a precondition to depositing crypto assets into the Earn Program, customers were required to agree to “Terms of Use”, which included specific language that customers were assenting to all future revised versions of the Terms of Use. Various versions of the Terms of Use included language that customers granted Celsius Networks “all right and title to such Eligible Digital Assets, including ownership rights.” The operative version of Celsius Terms of Use (version 8), which was analyzed by Judge Glenn, state in pertinent part:
In consideration for the Rewards payable to you on the Eligible Digital Assets using the Earn Service . . . and the use of our Services, you grant Celsius . . . all right and title to such Eligible Digital Assets, including ownership rights, and the right, without further notice to you, to hold such Digital Assets in Celsius’ own Virtual Wallet or elsewhere, and to pledge, re-pledge, hypothecate, rehypothecate, sell, lend, or otherwise transfer or use any amount of such Digital Assets, separately or together with other property, with all attendant rights of ownership, and for any period of time, and without retaining in Celsius’ possession and/or control a like amount of Digital Assets or any other monies or assets, and to use or invest such Digital Assets in Celsius’ full discretion. You acknowledge that with respect to Digital Assets used by Celsius pursuant to this paragraph:
1. You will not be able to exercise rights of ownership;
2. Celsius may receive compensation in connection with lending or otherwise using Digital Assets in its business to which you have no claim or entitlement; and
3. In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable, and you may not have any legal remedies or rights in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under any applicable laws.
In re Celsius Network LLC, Case No 22-10964(MG), 2023 WL 34106, at *4 (Bankr. S.D.N.Y. Jan. 4, 2022).
Judge Glenn relied heavily on New York contract law, and ultimately held that a valid and enforceable contract was formed between Celsius and its customers through customer acceptance of the Terms of Use, and that the provisions of the Terms of Use vesting title and ownership of deposited crypto assets to Celsius were valid. Judge Glenn rejected arguments made by various states that it was unclear whether customers understood the Terms of Use, and that Celsius was under investigation in several states for violating regulations that could prevent the company from relying on those Terms of Use.
While the order was unfavorable to Celsius’ customers using the Earn Program, Judge Glenn did not extend its ruling to determine ownership of assets in Celsius’ non-interest-bearing accounts including the Custody Program, Withhold Accounts, or Borrow Program. Judge Glenn also refused to determine whether individual account holders might have valid defenses to the contract between those account holders and Celsius. Customers will also not be precluded from bringing claims for breach of contract, fraud, or other theories of liability, and will retain unsecured claims against Celsius.
As crypto-related bankruptcy filings increase nationwide, customers should be sure to read the fine print of their terms of use to better protect themselves from seemingly predatory provisions that may result in customers unwittingly ceding title to cryptocurrency worth billions of dollars to companies that hold these accounts. Recent crypto bankruptcy cases suggest that the terms of use vary broadly and can impact a bankruptcy court’s analysis of whether crypto currency is or is not property of the bankruptcy estate under section 541 of the Bankruptcy Code. While the Celsius ruling is not binding on other bankruptcy courts, Judge Glenn’s decision creates a framework that may be used by other courts presiding over similar crypto bankruptcy cases to determine whether customer deposits are property of the estate.
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