Partners Ken Aulet and Shari Dwoskin penned an article for the New York Law Journal exploring BlockFi's bankruptcy case and how the issues raised in that case may impact similar cases.
Despite the fact that BlockFi successfully confirmed its plan faster than other competitors, such as Celsius, Voyager and Genesis, the proceedings make it clear that the courts need to take a page from existing specialized financial bankruptcy proceedings, such as FDIC receiverships or other specialized forms of liquidation they wrote, particularly with respect to public outreach and education.
The key asset BlockFi brought into Chapter 11 that a potential acquirer would be interested in was its customer relationships, they wrote. Every day that passed diminished the value of those customer relationships: the customers became angrier at BlockFi and their finances were damaged by lack of access to their money.
"As a result, by the time the sale process was in full swing, months had passed in bankruptcy — when the state of the art is a sale before most customers even know the company is in trouble," they wrote. "The value of the customer relationships had been severely damaged, leaving the company with limited marketability. The value of a sale to customers (a rapid return of at least part of their funds) diminished with each passing day. Both quickly converged to the point where — in the shadow of the SEC's opposition to Voyager's sale — a sale could not generate enough value to be worth the regulatory risks and operational costs. Nonetheless, pursuit of a sale cost the estate millions of dollars and lost time, to the detriment of creditors."
"Further, the ambiguous nature of the Chapter 11 proceeding has led to novel issues involving the intersection between criminal law and bankruptcy law, when a seizure warrant for the contents of specified accounts was served after BlockFi had become insolvent," they wrote.
In particular, there is a dispute between the estate and the Department of Justice over whether a criminal defendant's deposit is subject to forfeiture, or whether the funds deposited are "property of the estate" and merely provide that defendant with an unsecured claim is currently being litigated, along with whether the bankruptcy court or the criminal court has jurisdiction over these assets, they wrote.
"This apparently unaddressed area of law remains under litigation following the confirmation of BlockFi's Chapter 11 plan," they wrote.
BlockFi paused withdrawals on Nov. 11, 2022, filed for Chapter 11 on Nov. 28, 2022, and ultimately emerged from Chapter 11 with a liquidating plan on Oct. 24, 2023.
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