The concept of “property of the estate” is important in bankruptcy because it determines what property can be used or distributed for the benefit of the debtor’s creditors. Defined by section 541 of the Bankruptcy Code, “property of the estate” broadly encompasses the debtor’s interests in property, with certain additions and exceptions provided for in the Code. See 11 U.S.C. § 541. Difficult questions can arise in a contractual relationship between a debtor and a counterparty about whether an entity actually owns a particular asset or merely has some contractual right. The question has high stakes in bankruptcy because a contractual right may simply entitle a counterparty to a general unsecured claim, with a recovery that may be only a fraction of the claim’s face value.
A recent decision from the United States Bankruptcy Court of the Southern District of New York illustrates such a situation. In re Celsius Network LLC, Case No. 22-10964 (MG), 2023 Bankr. LEXIS 2 (Bankr. S.D.N.Y. Jan. 4, 2023). Celsius Network LLC and its affiliates (“the Debtors”) provided certain financial services involving cryptocurrency, including offering deposit accounts for cryptocurrency assets (“Earn Accounts”). The Debtors filed for bankruptcy in July 2022, at which point there were approximately 60,000 such Earn Accounts. Initially, in September 2022, the Debtors sought authority to sell certain stablecoins (a kind of cryptocurrency) to fund operating expenses. Numerous objectors raised questions about the ownership of the stablecoins, so the Debtors filed an amended motion also seeking an order establishing that the Debtors owned the assets in the Earn Accounts (the “Earn Assets”).
The Debtors argued that the ownership of the Earn Assets was a matter of contract interpretation, and that the latest operative Terms of Use unambiguously provided that “all right and title” to the assets was granted to the Debtors. They further argued that sale of the stablecoins would fund the Debtors’ administration while the Debtors’ income was reduced, extending the Debtors’ liquidity. Responses to the Debtors’ motion contested the Debtors’ ownership claim on several grounds, including that the Terms of Use were ambiguous because they used the terms “loan” and “lending” with respect to the transaction; that statements by the Debtors and the Debtors’ CEO outside the Terms of Use orally modified the contract; that no contract may have been formed because the Debtors had not submitted sufficient documentation that the account holders actually agreed to the Terms of Use; and that the contract was void and unenforceable on various grounds.
The Court granted the Debtors’ motion. It began by assessing whether a contract had been formed, examining whether there had been mutual assent, consideration, and intent to be bound. On mutual assent, the Court noted that the agreement here was a “clickwrap” agreement, in which a customer is required to click a button indicating acceptance of the terms but is not necessarily required to actually view the terms. Clickwrap agreements are enforceable under New York law. On consideration, the Debtors provided consideration by paying proceeds from Earn Assets to the account holders. On intent to be bound, the Court noted that no party had submitted any evidence that account holders lacked such intent. The Court similarly concluded that the modifications to the Terms of Use were valid, noting the language in each version permitting modification of the terms by the Debtors and that account holders had been required to agree to Version 6. However, the Court rejected the arguments from certain creditors that advertisements, media uploaded on social media channels, and statements from Celsius’s CEO constituted modifications to the contract, observing that the media was not submitted to the Court as evidence and also noting case law that advertisements and similar statements do not generally constitute “offers” that could amend the Terms of Use.
Next, the Court held that the Terms of Use unambiguously transferred ownership of the Earn Assets to the Debtors. The Court relied on language in the Terms of Use providing that account holders “grant Celsius . . . all right and title to such Digital Assets, including ownership rights.” The Court rejected the argument of many objectors that the use of the terms “loan” and “lending” conflict with the clause transferring ownership. The Court stressed that it could not ignore the plain language of the clause, and that adopting the interpretation preferred by the objectors would read the clause out of the contract. The Court also found that even if the account holders should be understood as having lent the assets to the Debtors, they would be in the same position: a loan of money or property creates a debtor-creditor relationship and there is no perfected security interest here, so the account holders would still be unsecured creditors. The Court further observed that the lending language and the transfer of ownership language could be read in harmony, because a loan can and commonly does transfer title.
The Court made clear that it was not ruling on individual contract defenses, including allegations of fraudulent inducement and arguments that the contract was void because it violated state securities laws. The Court stated that such claims could be raised in the claims resolution process. Finally, the Court approved the Debtors’ proposed sale of stablecoins, concluding that the sale had a sound business reason given the Debtors’ declining liquidity.
