In a decision of first impression regarding whether certain digital assets are property of a bankrupt debtor's estate (attached here), Chief Judge
The Celsius Network decision is the first in a likely series of rulings in Celsius's bankruptcy cases on the issue of who owns digital assets deposited by customers that will help guide, but not bind, how the courts in the
Key Takeaways
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The Terms of Use that customers enter into with cryptocurrency platforms are critical to the analysis; courts are likely to apply principles of applicable contract law to determine ownership and property of the estate issues.
- Unless the Terms of Use expressly provide for digital assets to be held in trust for the customer, digital assets held in yield-earning or other accounts, where property is hypothecated by the cryptocurrency platform, are likely to be deemed property of the bankruptcy estate.
- Because the digital assets held in the Earn Accounts are considered property of the estate under section 541 of the Bankruptcy Code, Celsius is permitted to sell the digital assets to underwrite the administrative costs of its bankruptcy cases and, ultimately, to distribute any consideration received or remaining assets pursuant to a chapter 11 plan.
Celsius's Earn Program
In
Importantly, from its inception, the Terms of Use for the Earn program always stated that title of the digital assets deposited by the Earn Account holders were held by Celsius and not the customer - although this language became increasingly more specific over time.
Legal Framework
When Celsius filed bankruptcy in
Under the Bankruptcy Code, a debtor's bankruptcy estate consists of "all legal or equitable interests of the debtor in property as of the commencement of the case."4 Section 541(a)(1) of the Bankruptcy Code "is not intended to expand the debtor's rights against others more than they existed at the commencement of the case."5 Thus, if a debtor holds no legal or equitable interest in property as of the commencement of the case, such property does not become property of the debtor's estate.6 It has long been held that property held in express trust for another person is not property of the estate.7
If Earn Account assets are deemed property of Celsius's estate, the Earn Account holders cannot access the assets during the pendency of the bankruptcy and the assets must be administered pursuant to a chapter 11 plan, which likely results in the Earn Account holders receiving a pro rata distribution pursuant to the Bankruptcy Code's priority scheme, and may take years and result in fractional recovery. Celsius would also be able to sell such assets during the pendency of the case pursuant to section 363 of the Bankruptcy Code. In contrast, if the Earn Account assets were determined not to be property of the estate, then Celsius would not have any legal or equitable right to the digital assets and such assets must be returned to the Earn Account holder.
In
Positions of the Parties
Celsius contended that based on general principals of contract law, the Terms of Use constituted an agreement that included all the elements of a contract: (i) mutual consent; (ii) intent to be bound; and (iii) that the account holders received "consideration" in the form of yield that was earned. Relying on the enforceability of "clickwrap" agreements under
Additionally, Celsius contended that even if the
Certain Earn Account holders and other stakeholders took the contrary position, contending that the Earn Account assets were owned by account holders and were not property of the estate, and that such property must be returned to account holders. According to these account holders, the Terms of Use were unclear and account holders should not be bound by those terms. Other holders argued that the Terms of Use used the terms "loan" and "lending" to describe the transaction whereby Earn Account holders deposit assets into Earn Accounts.Therefore, a layperson would understand the Terms of Use to provide for title and ownership of Earn Assets to be retained by the Earn Account holders while providing Celsius with use of the assets.9
Terms of Use Command Ownership
In his
The Court held that Celsius convincingly demonstrated that the three elements required to form a valid, enforceable contract (mutual assent, consideration, and an intent to be bound by the contract) were satisfied by the Earn Account holders' acceptance of the Terms of Use via the clickwrap agreement. Moreover, the Court found that each modification of the Terms of Use constituted a valid contract modification.
Having established that a valid contract was formed between Celsius and the Earn Account holders, Chief
The Court also rejected the argument that the use of the term "loan," or variations of that term in the Terms of Use, contradicted the conclusion that ownership of the digital assets transferred to Celsius. Notably, Chief
The Court, however, expressly stated that creditors' rights with respect to claims and allegations of fraudulent inducement, fraudulent conveyance, breach of contract, or that the contract was unconscionable, are reserved for the claims resolution process, and were not at issue in this decision.
As a practical consideration, the Court acknowledged in a footnote that even if the Terms of Use expressly provided that the digital assets were property of the customers, "customers would still not get back 100% of their coins," because Celsius "do[es] not have enough coin to give everybody their coin back in kind." (
Consequently, the Court ultimately held that stablecoins, like other Earn Account assets, are property of Celsius's bankruptcy estates and that Celsius may sell the stablecoins to provide liquidity to fund the administration of their bankruptcy cases.
Ramifications and Next Steps
Chief
As future courts decide these issues, the Celsius Network decision will serve as an initial framework by which future jurisprudence on the issue will develop.
Footnotes
1.Over time, the Earn program's Terms of Use evolved, with newer versions replacing prior versions. In total, eight different versions of the Terms of Use governed the Earn Account holder's relationships with Celsius (collectively referenced to herein as the "Terms of Use" and each a "Terms Version"). Celsius's summary of the evolution of their Terms of Use can be found here: (attached here, as Exhibit B, pdf page 53).
2. Herein, "digital assets" refers to crypto currencies, tokens, and non-fungible digital tokens and other digital assets, but excludes fiat currency.
3. The Court's decision does not determine the ownership of digital assets in the Debtors' Custody program (which were non-yield earning accounts in which users executed separate Terms of Use), Withhold Accounts (which were non-yield earning accounts transferred from the Earn program, but users did not execute separate Terms of Use), or Borrow program (which was Celsius's lending platform).
4. In re Lehman Bros. Holdings. Inc., 422 B.R. 407, 418 (Bankr. S.D.N.Y. 2010) (citing 11 U.S.C. § 541(a)(1)).
5. H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 367-68 (1977); see also Moody v.
6. See Pearlman v. Reliance Ins. Co.,
7. Begier v. I.R.S.,
8. "Clickwrap" agreements require a party to a contract to manifest assent to a particular contract by clicking a button confirming that they accept the terms or a button that implies that they have accepted the terms, but do not necessarily require a party to actually view the terms of the contract. Clickwrap agreements are routinely enforced under
9. State financial regulators from
10. Section 14 of the Terms Version 6 provided: "[i]n consideration for the rewards earned on your
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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