Read Before You Click “Accept”: Judge Glenn’s Rules That Crypto Assets in Account Are Property of Celsius’ Bankruptcy Assets, Not Property of Client – Financial Services

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January 09, 2023

Arnold & Porter

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The crypto winter has caused several high-profile crypto bankruptcies. Among the many new issues that arise in these bankruptcy cases, one in particular has taken center stage: are the crypto assets deposited in client accounts the property of the client or the property of the estate of the crypto company? bankrupt ?

The answer to this question has significant implications for a crypto business, its account holders/customers, as well as its other stakeholders.

In In re Celsius Network LLC, et al., Judge Martin Glenn was asked to decide this question even in the context of determining whether Celsius could sell stablecoins held in Celsius’ Earn Accounts, and framed the question as follows : Is the Terms of Service a contract by which full title and ownership of the Earned Assets transferred from Earned Account Holders to Celsius when Account Holders deposited cryptocurrency into their Earned Accounts?

In his opinion dated January 4, 2023, Judge Glenn determined that the Celsius Terms of Service constituted a valid and enforceable contract between [Celsius] and Account Holders, and that the Terms unambiguously transfer title and ownership of Earned Assets deposited in Account Holders’ Earned Accounts to
[Celsius]. Thus, the Earned Assets (cryptocurrency assets, including stablecoins) in the Earned Accounts became the property of Celsius’ Bankruptcy Assets upon filing for bankruptcy.

In coming to this conclusion, Justice Glenn noted the following:

Ownership of Earn Account crypto assets is a matter of contract law; A valid and enforceable contract requires (i) mutual consent, (ii) consideration and (iii) intent to be bound; The Celsius Terms of Service is a click-through agreement that the New York courts have overwhelmingly accepted as sufficient to constitute mutual consent; The terms of use clearly state the benefit of the bargain; and Although the Account Holders may not have intended the effects of the contract, there was no evidence to suggest that the Account Holders did not intend to enter into a contract governed by the Terms of Service. Updates to the Terms of Service were valid changes to the contract entered into by an account holder when they created an account with Celsius; Each version of the Celsius Terms of Service, beginning with Version 5 of the Terms, includes a clause that Account Holders grant to Celsius. . . all right and title to such digital assets, including ownership rights; and Terms Version 8 states (with added emphasis):

In return for Rewards due to you on eligible Digital Assets using the Earn Service. . . and use of our services, you grant Celsius. . . all right and title to such Qualifying Digital Assets, including ownership rights, and the right, without further notice, to hold such Digital Assets in Celsius’ own virtual wallet or elsewhere, and to pledge, re-pledge pledge, mortgage, remortgage, sell, lend, or otherwise transfer or use any amount of such Digital Assets, separately or together with other property, with all ownership rights therein, and for any period of time, and without retaining possession and/or control of Celsius a similar amount of Digital Assets or any other sum of money or asset, and to use or invest such Digital Assets in Celsius’ sole discretion. You acknowledge that with respect to Digital Assets used by Celsius pursuant to this paragraph:

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3. In the event that Celsius goes bankrupt, goes into liquidation or is unable to repay its obligations, any Eligible Digital Assets used under the Earn service or as collateral under the Borrow service may not be recoverable , and you may have no legal recourse. or rights in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under any applicable law;

Of the approximately 600,000 Earn account holders, 89% created accounts by first accepting terms version 5 or later, and 99.86% of Earn account holders accepted terms version 6 or later.

The implication of the Earn Account Holders decision, which the Court noted it did not take lightly, is that the Earn Account Holders are unsecured creditors of Celsius’ bankruptcy assets. To put the result into context, if the cryptocurrency assets were owned by Earn account holders, those holders would be entitled to the return of those cryptocurrency assets. As unsecured creditors, Earn account holders will have to share the pool of assets available to unsecured creditors. If there is ultimately not enough value to repay all unsecured creditors (a likely outcome), account holders will likely earn less than 100%.

The decision has some nuances, however. Justice Glenn did not rule on the defenses that individual account holders may have against the Terms of Use, nor did he determine ownership of assets in the Debtor Custody Program, Accounts of holdback or borrowing program. Finally, the decision also did not address the rights of a state or state agency as to whether Celsius violated state securities laws by marketing unregistered securities.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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