On January 4, 2023, Judge Glenn of the United States Bankruptcy Court for the Southern District of New York issued a much-awaited decision in the Celsius Network LLC (along with its affiliated debtors, “Celsius” or the “Debtors”) chapter 11 cases relating to the ownership of crypto assets deposited by customers in the Celsius “Earn” rewards program accounts.[1] As predicted, the Court found that under the plain language of the Celsius terms of use (the “Terms of Use”), the customers transferred ownership of the deposits to Celsius and thus such assets are presumptively property of the bankruptcy estate. However, the Court left the door open for individual customers to rebut that presumption based on defenses or other circumstances unique to them. We briefly discuss the background of the Celsius cases, the Court’s reasoning in reaching its decision, and a few key takeaways below.
Background
In July 2022, in the wake of the now-infamous Terra-Luna crash and collapse of crypto-focused hedge fund Three Arrows Capital, Celsius filed for chapter 11 protection to stave off a “run on the bank” by retail customers. Prominent among the many unknowns identified at the outset of the cases (a number of which are legal issues of first impression) was the question of who owned cryptocurrency assets deposited by customers in connection with Celsius’ various products, which included traditional deposit accounts, rewards programs, and more exotic products like swaps and other derivatives.
Of particular importance to retail customers was the ownership of crypto deposited in Celsius’ “Earn” rewards program (“Earn” or the “Earn Program”), which enabled customers to receive “Rewards” on deposited crypto in the form of yield paid-in-kind (i.e., BTC earned yield denominated in BTC, ETH earned yield denominated in ETH) or in Celsius’ proprietary token. Earn was far and away Celsius’ most popular retail product, constituting of 77% of assets on the platform, with a market value of approximately $4.2 billion as of the bankruptcy filing.[2]
Among the assets deposited in Earn were approximately $23 million of “stablecoins”—crypto tokens, the value of which is pegged to a “stable” asset class like fiat currency, gold, or other commodities.[3] In September 2022, facing a projected liquidity crunch, the Debtors filed a motion seeking the Court’s authority to sell approximately $18 million of stablecoins to fund the administration of the bankruptcy cases. That motion was opposed by multiple parties in interest (including the United States Trustee, various states, and numerous customers), which required the Court to decide, among other things, whether crypto in the Earn accounts belonged to the Celsius estate.
The Debtors argued that the Terms of Use agreed to by customers were explicit that crypto deposited in Earn became Celsius’ property. Specifically, the Terms of Use stated that in exchange for earning yield, customers “grant[ed] Celsius all rights and title” to the underlying crypto (referred to by the Court as the “Transfer of Title Clause”), which would become “Celsius’ property, in every sense and for all purposes,” and that thereafter, Celsius “may lend, sell, pledge, hypothecate, assign, invest, use, commingle or otherwise dispose of” such assets in its sole discretion.[4]
Customers opposing the motion, on the other hand, largely argued the Terms of Use were ambiguous in their references to “loan” and “lending” of crypto; were not readily understood by laypersons; were modified by public statements made by Celsius or then-CEO Alex Mashinsky; or were unconscionable or otherwise unenforceable as a “clickwrap” agreement under New York law (which governed the Terms of Use).[5] Many of the objecting states, for their part, asserted the Earn Program violated state securities law prohibitions on the marketing of unregistered securities, thus rendering the contract void for all customers.
The Bankruptcy Court’s Decision
In reaching its conclusion that Earn Program assets are presumptively estate property, the Court largely agreed with the Debtors’ framing of the issue as one of ordinary contract law. The Court found that the requisite elements for formation of a contract under New York law (offer & acceptance, consideration, and intent to be bound) had been satisfied. Specifically, the Debtors had offered Earn pursuant to the Terms of Use, which were accepted by substantially all customers (more on this point below); the Debtors provided rewards to customers as consideration in exchange for their deposit of crypto; and no party “provide[d] evidence that Celsius and its [customers] . . . lacked intent to be bound by” the Terms of Use.[6]
In addition to these general principles of contract law, the Court separately analyzed at some length the question of whether the various iterations of the Terms of Use—of which there have been historically at least eight versions—were enforceable as so-called “clickwrap” agreements under New York law. Clickwrap agreements are electronic agreements requiring a user to affirmatively click a button or check a box indicating their assent to the terms and conditions stated therein (even if the user does not actually read such terms and conditions). Although sometimes controversial, clickwrap agreements are regularly upheld under New York law in the absence of bad faith and where it is clear to the purportedly accepting party that the terms will be binding upon them.[7] The Court found that these requirements had been met here, relying on, among other things, evidence that users could not continue to use the platform unless they affirmatively accepted the Terms of Use, which terms were disclosed via a conspicuous pop-up and required two separate “clicks” by each user.
Next, the Court considered whether customers could be bound by modifications to the Terms of Use implemented after such customers initially signed up for the Earn Program (an important question given that, prior to version 5, those terms did not explicitly disclose that title to deposited crypto assets would transfer to Celsius). The Court found that all customers that had continued to use Celsius from and after the adoption of version 6 of the Terms of Use in July 2021, were bound by the Transfer of Title Clause, as continued use of the platform after such time required acceptance of the new terms. Notably, the Debtors provided “uncontroverted evidence [to] show[] that 99.86% of the Earn Account holders accepted” version 6 or later of the Terms of Use, and thus virtually all of the Debtors’ customers were bound by those terms.[8]
Finally, and having found that the Terms of Use constituted a valid and enforceable contract, the Court assessed whether the Terms of Use were “unambiguous with respect to whether [customers] retained ownership or transferred ownership of cryptocurrency assets by depositing the assets into Earn Accounts” (as under New York law, an unambiguous contract must generally be enforced according to its plain terms).[9] The Court agreed with the Debtors that the Transfer of Title Clause was clear and unambiguous: “title to and ownership of all Earn Assets unequivocally transferred to the Debtors” and became estate property upon the Celsius bankruptcy filing.[10]
The Court rejected customers’ arguments that the use of terms like “loan” or “lending” rendered the Terms of Use ambiguous or would cause a layperson to believe he or she would retain ownership of deposited crypto, because the use of those terms could be read consistently with the unambiguous language concerning transfer of title.[11] The Court also rejected customer arguments that the Terms of Use had been amended through “advertisements, media uploaded to Celsius’s social media channels, and the oral statements of Alex Mashinsky,” none of which were submitted to the Court as evidence and which the Court found would not constitute offers to amend the Terms of Use in any event.
Nonetheless, the Court noted that the objecting customers and states had raised issues, such as fraudulent inducement to contract, unconscionability, and securities law violations, that could constitute “colorable defenses to contract formation as individuals and as a group.” However, the opinion notes that, “[e]ven valid contract defenses would not necessarily give rise to Account Holders claims [sic] to ownership of the cryptocurrency assets they deposited.”[12] The Court specified that such defenses were reserved for the claims resolution process, through which individual customers’ rights vis-à-vis the Debtors will be determined.
Key Takeaways
For many observers, the decision was altogether unsurprising; regardless of whether users understand (or even read) what they are signing up for, courts time and again have found that clickwrap contracts such as Celsius’ Terms of Use, are valid and enforceable. Against that backdrop, it is hard to ignore just how clear and explicit Celsius’ Terms of Use were on the ownership of the Earn assets: once deposited, they became “Celsius’ property, in every sense and for all purposes.”
One immediately obvious impact of this decision is that it checks off one of the boxes necessary to avoid as preferences withdrawals from the Earn program in the 90 days prior to the bankruptcy: namely, that the withdrawn crypto assets constituted property of the Celsius bankruptcy estate. However, as we’ve discussed previously, a number of other obstacles may frustrate trustees seeking avoidance of crypto withdrawals.
The potential for avoidance actions aside, it is otherwise unclear how the Court’s decision will impact customer recoveries, both in the Celsius case and in other crypto platform bankruptcies.
With respect to Celsius, as the Court notes, there were insufficient crypto assets held by the Debtors as of the petition date to satisfy the claims of all Earn customers in full; accordingly, irrespective of the Court’s decision, customer claims were likely to be subject to haircuts.[13] In addition, and as previously noted, this decision did not fully dispose of any particular customer’s claim; rather, the Court only found a presumption that assets in the Earn program are estate property, which presumption remains subject to any defenses that might be raised by individual customers. Further, the decision only dealt with crypto held in the Earn Program; while those assets constituted the bulk of crypto on the platform, there were as of the petition date hundreds of millions of dollars’ worth of crypto deposited by customers in Celsius’ other programs, which will need to be dealt with by the Court in due course.
Still, that is likely to be cold comfort for customers that feel they can show they did not accept the Terms of Use or otherwise believe they have defenses to the enforcement of those terms against them. Although for now the only immediate consequence of this decision is that $18 million of stablecoins may be sold, who knows how much more presumptive estate property might be liquidated or transferred before individual customers have their day in court.
As to the broader crypto universe, while the decision is a helpful guidepost as to the legal issues and analyses likely to arise in other bankruptcies, the result in Celsius is unlikely to be outcome-determinative in any future case. As the Court’s decision makes clear, analyzing who holds title to crypto assets held on platform is fact-intensive, and the answer will depend upon the precise terms, conditions, and circumstances at issue in each case.
[1] Memorandum Opinion and Order Regarding Ownership of Earn Account Assets, In re Celsius Network LLC, No. 22-10964 (MG) (Bankr. S.D.N.Y. Jan. 4, 2023), ECF No. 1822 (the “Opinion”).
[2] Tr. of Hrg., In re Celsius Network LLC, No. 22-109640-MG (Bankr. S.D.N.Y. Jul. 18, 2022), at 37:21–22; Opinion at 5.
[3] Opinion at 5.
[4] See Declaration of Alex Mashinsky, Chief Executive Officer of Celsius Network LLC, Providing Terms of Use Dating Back to February 18, 2018, In re Celsius Network LLC, No. 22-109640-MG (Bankr. S.D.N.Y. Aug. 8, 2022), ECF No. 393, Ex. A-8; see Opinion at 10, 11.
[5] See Opinion at 18–21.
[6] Opinion at 31–34.
[7] Opinion at 27.
[8] Opinion at 6.
[9] Opinion at 38.
[10] Opinion at 39.
[11] Opinion at 39, 40.
[12] Opinion at 43.
[13] Opinion at 6.
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