In a recent decision of interest to cryptocurrency investors, Judge Martin Glenn, Chief Bankruptcy Judge for the United States Bankruptcy Court, Southern District of New York, issued a decision in the In re Celsius Network LLC bankruptcy case relating to customer "Earn Accounts." See Memorandum Opinion and Order Regarding Ownership of Earn Account Assets, In re Celsius Network LLC, No. 22-10964 (MG) (Bankr. S.D.N.Y. Jan. 4, 2023), ECF No. 1822.
The Court held that under the Celsius terms of use, customers transferred ownership of the coin deposits in their "Earn Accounts" to Celsius, rendering the assets presumptively property of the Celsius bankruptcy estate. In reaching his decision, Judge Glenn applied "ordinary contract rules," stating that the account holders' passive acceptance of the electronic terms of use satisfied the necessary elements required to form an enforceable contract, thus transferring ownership of the crypto assets to Celsius. Notably, however, Judge Glenn remarked that customers may seek to rebut that presumption during the claims allowance process.
Unfortunately for crypto customers, Judge Glenn's ruling means they hold nothing more than unsecured claims in the Celsius chapter 11 cases and will likely recover pennies on the dollar if that.
Significantly, this decision only relates to assets in the "Earn Accounts," and does not determine ownership in the Celsius Custody Program, Withhold Accounts, Borrow Program, or whether any individual account holder has valid defenses to the contract between account holders and the Celsius debtors. In addition, this decision makes clear the determination of ownership of customer accounts is a fact-sensitive inquiry and depends on the precise terms and conditions set forth in account holder contracts.
How Can We Help?
In light of the Celsius ruling, all services with custody of client funds should review their terms of service. FRB will continue to follow industry developments in bankruptcy and blockchain to keep our clients well-informed and ahead of the curve.
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