Crypto throws Celsius defendants potential lifeline in clawback lawsuits, lawyer says (2024)

In an attempt to claw back money it can use to repay its creditors, failed crypto lender Celsius is suing thousands of former customers who pulled their assets from the platform within 90 days before it filed for bankruptcy.

It’s a standard but little-known play in bankruptcy proceedings. Still, the asset in question is crypto, a fact that could be a potential lifeline for defendants, many of whom are being sued for small fortunes.

“There are a couple issues that are unique in crypto cases,” Noah Weingarten, a bankruptcy attorney at Loeb & Loeb, told DL News.

For example, were customer deposits the property of Celsius, or the customers?

“If it’s not property of the [Celsius bankruptcy] estate, then people should be able to have a potentially good defence,” he said.

The lawsuits are the latest development for the beleaguered lender, which boasted $25 billion in assets at the height of its power.

Now, its founder and former CEO Alex Mashinsky faces criminal and civil charges for alleged market manipulation and the violation of federal securities laws.

His trial is slotted for this autumn.

Celsius declined to comment on the record for this story.

‘Unwitting investors’

Celsius was one of the most prominent crypto companies to fail during a spate of bankruptcies that rocked the industry in 2022.

According to a 46-page indictment filed last July, Mashinsky promoted Celsius as a “modern day bank,” where customers could safely deposit crypto assets and earn interest.

In reality, Mashinsky managed the venture as a “risky investment fund” and turned customers into “unwitting investors,” prosecutors said.

Last year, thousands of onetime Celsius customers voted for a business plan designed to redistribute $2 billion in crypto assets left in the bankrupt lender — between 67% and 85% of the money trapped on the platform.

Included in that plan were instructions to pursue other avenues of recouping money that Celsius could then distribute among its creditors.

‘Equalise the playing field’

In January, it began pursuing so-called preferential claims — any transfers from Celsius made within 90 days prior to bankruptcy that were worth a combined $100,000.

“The intention is to potentially equalise the playing field amongst unsecured creditors,” Weingarten said.

In US law, companies are assumed to be insolvent well before they officially file for bankruptcy.

As such, any withdrawals that are made just before a bankruptcy filing effectively lets some creditors dodge the bankruptcy process at others’ expense.

“These preference claims are brought in almost every single bankruptcy. They’re very common,” Weingarten said. “In some ways, they make sense, but then in other ways, they’re somewhat unfair.”

Customers who pulled their crypto just before Celsius filed for bankruptcy were initially offered the opportunity to settle: first, for 27.5% of the value of the crypto they withdrew during the 90-day lookback window, then for 13.75%. Those values were to be determined at the price of customers’ crypto on the 2022 transfer dates.

Celsius has settled with some 1,500 customers who withdrew more than $100,000 in crypto 90 days before the company’s bankruptcy filing, it said in a press release.

‘Scare tactic’?

Since July 1, however, it has sued thousands more who ignored, missed, or baulked at the proposed settlement.

In those lawsuits, Celsius is now demanding customers repay the full value of any crypto withdrawn in the 90 days before July 13, 2022 — at June 14, 2024 prices.

The market capitalisation of crypto has increased 164% to more than $2.5 trillion between Celsius’ bankruptcy filing and June 14, according to CoinGecko.

In that span, Bitcoin and Ether have increased about 226% and 212%, to more than $66,000 and $3,400, respectively.

This is a very different approach than the one adopted by the bankruptcy team at FTX, the collapsed crypto exchange once spearheaded by convicted fraudster Sam Bankman-Fried.

When it detailed its plan to repay creditors earlier this year, FTX insisted that returning the value of crypto as of the time of the bankruptcy filing was a “bedrock of bankruptcy law” and the only fair way to share recoveries.

In a video shared on X, FTX creditor Louis Origny said he thought Celsius’ demand was a “scare tactic.”

Defences

Sued Celsius customers have a couple avenues of defence to pursue — apart from quibbling about who really owned the assets.

For example, they can argue the withdrawals were made in the ordinary course of business.

A landlord who receives a rent payment from a tenant who filed for bankruptcy less than 90 days later could assert a so-called objective ordinary course defence, Weingarten said.

Whether that will protect former Celsius customers will depend on a couple factors.

Those factors include the “language of the customer agreement, the length of the relationship the customer had with the debtor, and the nature and number of withdrawal transactions made by the customer,” Weingarten wrote in an article in the New York Law Journal.

Another alternative is to rely on the bankruptcy code’s protection of certain transactions involving securities — ironic, given the industry’s vehement opposition to that classification.

“While certain regulators have suggested that some crypto assets are, in fact, securities, no court has weighed in on the issue in this context,” Weingarten wrote. “Accordingly, and for other reasons, application of this defence is unsure.”

Aleks Gilbert is DL News’ New York-based DeFi correspondent. You can contact him at [email protected].