BlockFi Inc. and eight of its affiliates (collectively, the “Debtors”) filed the most recent crypto-related chapter 11 this past Monday, November 28, 2022, in the U.S. Bankruptcy Court for the District of New Jersey (the “Bankruptcy Court”).1 The Debtors say the recent collapse and bankruptcy filing of FTX Trading Ltd. and its debtor affiliates (“FTX”) pushed BlockFi into a liquidity crisis. BlockFi has various relationships with FTX. FTX provided BlockFi with a $400 million rescue financing package earlier this year, but failed to honor BlockFi’s $125 million line of credit draw request in early November and defaulted on approximately $680 million in collateralized loan obligations owed to the Debtors. Critically, as well, $355 million of BlockFi’s assets are frozen on the FTX platform. The Debtors say they have $257 million of unrestricted cash on hand.
The Debtors’ first day hearing before the Bankruptcy Court was November 29. The Debtors described their proposed case strategy, which is to proceed with a “toggle” plan, going forward with either a sale to a third party or a standalone restructuring. Debtors’ counsel went to great lengths to distinguish BlockFi’s situation from that of FTX. Perhaps most significantly, Debtors’ counsel emphasized that the customer assets in crypto wallets are not commingled with other assets and are not property of the estate (i.e., crypto in wallets belongs to customers). The Debtors said they anticipate filing a motion to return the assets, in consultation with any official committee appointed in the cases, which they believe will be comprised primarily of retail account holders.
The “placeholder” chapter 11 plan filed by the Debtors would provide account holders a pro rata share of cash or coins and 100% of new common stock in reorganized BlockFi in a standalone restructuring scenario, or provide a distribution of net proceeds in a sale scenario, leaving optionality for a value maximizing transaction. No solicitation of or hearing on the plan has been set. The BlockFi bankruptcy has a different tone than some of the other crypto-related bankruptcies that have been filed. These cases will certainly be impacted by the FTX cases, and could be influenced by subsequent crypto-related filings.
