Measuring Damages in Avoidance Actions That Target Cryptocurrency Transfers

Celsius Network, LLC operated as a cryptocurrency lending and yield platform. At its peak, Celsius had roughly 1.7 million customers and nearly $12 billion in assets under management. In June 2022, however, Celsius froze withdrawals, and by July 2022, Celsius and its affiliates filed voluntary petitions for relief in the Bankruptcy Court for the Southern District of New York (the Court) under Chapter 11 of the Bankruptcy Code. After the Court confirmed the Celsius Chapter 11 plan, Mohsin Y. Meghji, as the litigation administrator for the Celsius post-confirmation estate (the Litigation Administrator), commenced thousands of avoidance actions against former Celsius customers to recover preferential transfers made in the 90 days before the bankruptcy petition date.

These customer preference cases raised certain threshold legal questions, including: (1) if the Litigation Administrator avoids a transfer as preferential under the Bankruptcy Code, whether he may recover the transferred cryptocurrency itself or, alternatively, its cash value; and (2) if the Litigation Administrator is entitled to recover the cash value of the transferred cryptocurrency, what value should be ascribed to those digital assets if they have appreciated or depreciated since the transfer date. The answers to those questions matter enormously. Crypto markets are volatile, and many customers withdrew digital assets from Celsius, including Bitcoin, Ethereum, and Celsius’ own CEL Token, in the 90 days before the company’s collapse in 2022. Some of those coins are worth dramatically more today; others, like CEL Token, are worth a small fraction of their original value. Depending on which valuation date and which asset (the coin itself, its sale proceeds, or its cash value) courts select, the amount potentially owed by an individual defendant could swing dramatically from a nominal figure to significant multiples of what the defendant actually withdrew.

In In re Celsius Customer Preference Actions,¹ the Court addressed these open questions and held that:

• For depreciating assets, whether or not a defendant is still in possession of the asset, the Litigation Administrator may recover the transfer-date value.
• For appreciating assets that are in a defendant’s possession, the Litigation Administrator may recover the asset itself.
• For appreciating assets that a defendant has sold, the Litigation Administrator may recover the sale price; provided, that defendants must sufficiently establish that the assets were sold and the price at which they were sold and if they are unable to do so, the Litigation Administrator may recover the current (judgment-date) value of the digital assets.

This decision is significant because it is among the first rulings anywhere to squarely address how bankruptcy avoidance action damages should be calculated for volatile digital assets.

Background

Section 547(b) of the Bankruptcy Code governs preferential transfers and, subject to certain statutory defenses, allows trustees or the debtor-in-possession to avoid transfers made by a debtor to a creditor shortly before a bankruptcy filing. To avoid a transfer as preferential, the trustee must show: (1) the transfer was made to or for the benefit of a creditor; (2) it was made on account of an antecedent debt owed before the transfer; (3) the debtor was insolvent at the time of the transfer (insolvency is presumed for the 90 days before the bankruptcy filing); (4) the transfer was made within 90 days of the bankruptcy petition date (or within one year if the recipient was an insider); and (5) the transfer allowed the creditor to receive more than it would have received in a hypothetical Chapter 7 liquidation had the transfer not occurred. The policy rationale behind section 547(b) is twofold: to prevent a race by creditors to grab assets from a financially distressed debtor; and to promote equal treatment of similarly situated creditors by unwinding transfers that would otherwise let one creditor jump ahead of others.

Section 550 of the Bankruptcy Code then supplies the remedy once a transfer has been avoided under Section 547. Section 550 provides that the trustee may recover from the transferee either the property that was transferred or, if the court orders it, the value of that property. The Bankruptcy Code, however, does not specify when a court should order the return of property or elect to award the value of the property instead, nor does it specify exactly when value should be measured or how to handle property that has appreciated, depreciated, or been disposed of since the transfer at issue occurred. 

The Court’s Decision and Reasoning

The Court grounded its decision in the restorative purpose of Section 550; that is, to return the estate to the position it would have occupied had the transfer at issue never occurred. Against that backdrop, the Court adopted an asset-specific framework for recovery under Section 550:

For depreciating cryptocurrency, regardless of whether defendants still possess them, the Court held that the Litigation Administrator may recover the transfer-date value of the digital asset. In so holding, the Court noted the broad and largely uniform case support for applying a transfer-date valuation floor to assets that have depreciated since their transfer date. In adopting this body of case law, the Court held that using any lower value measure would unfairly force the estate alone to bear the loss.

For assets that have appreciated since the transfer date, however, the Court adopted a more nuanced approach. The Court acknowledged a split in case law with respect to appreciating assets: some courts apply a strict transfer-date rule, while others hold that the appropriate valuation date depends on the circumstances of each case. Rather than blanketly award the Litigation Administrator the full benefit of appreciation regardless of a defendant’s actions after withdrawing digital assets, the Court distinguished between digital assets a defendant still holds (recoverable in kind, so the estate captures appreciation) and digital assets a defendant has already sold. For sold assets, the Court limited recovery to the actual sale proceeds, reasoning that requiring a defendant to disgorge current market value long after disposing of a volatile asset could unfairly expose defendants to open-ended, effectively limitless liability untethered from any benefit they actually received, and would risk a windfall to the estate instead of providing the restorative remedy contemplated by Section 550. The Court placed the burden of proving both the fact and the price of any sale on the defendant, reflecting that defendants are best positioned to access their own transaction records.

Conclusion

Celsius CPA’s valuation framework creates a meaningful planning consideration for recipients of cryptocurrency from distressed crypto platforms. Recipients of cryptocurrency from a platform that files bankruptcy may choose to sell their cryptocurrency in order to fix and cap their liability for a potential preference claim and thereby gain some certainty on their ultimate exposure and risk. At the same time, they can choose to repurchase an equivalent position and thereby resume capturing any further appreciation (and losses) on the repurchased asset going forward. Whether such a strategy would survive scrutiny remains untested, as a court might consider such sales and repurchases as relevant to the potential remedy. This approach also has tax consequences that will need to be evaluated. The holders of assets who wish to sell should take care to properly document any such sale because under this Court’s ruling a defendant bears the burden of proving both the occurrence and the price of any sale; absent such proof, exposure defaults to the higher judgment-date value. 

© Arnold & Porter Kaye Scholer LLP 2026 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.