Read Before You Click “Accept”: Judge Glenn Rules That Earn Account Crypto Assets are Property of Celsius’ Bankruptcy Estates and Not Customer Property
The “crypto winter” has caused several high-profile crypto bankruptcies. Among the many novel issues that arise in these bankruptcy cases, one in particular has been front and center: are crypto assets deposited into customer accounts property of the customer or property of the bankrupt crypto company’s estate?
The answer to this question has significant implications for a crypto company, its account holders/customers, as well as its other stakeholders.
In arriving at this conclusion, Judge Glenn noted the following:
- Ownership of the crypto assets in the Earn Account is a contract law issue;
- A valid, enforceable contract requires (i) mutual assent, (ii) consideration and (iii) intent to be bound;
- Terms Version 8 states (with emphasis added):
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:
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;
- Of the approximately 600,000 Earn Account Holders, 89% created accounts by first accepting Terms Version 5 or later, and 99.86% of the Earn Account holders accepted Terms Version 6 or a later version.
The consequence of the ruling on the Earn Account Holders, which the Court noted it did not take lightly, is that the Earn Account Holders are unsecured creditors of Celsius’ bankruptcy estates. To put the result into context, if the cryptocurrency assets were property of the Earn Account Holders, such Holders would be entitled to the return of those cryptocurrency assets. As unsecured creditors, the Earn Account Holders will have to share in the pool of assets available to unsecured creditors. If there ultimately is not enough value to repay all unsecured creditors (a likely result), the Earn Account Holders will likely recover less than 100%.
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.