[ad_1]
January 11, 2023 – When the history books are being written, the biggest event to shake the cryptocurrency world isn’t the cryptocurrency bankruptcies of 2022, but the billions of dollars in cryptocurrency value in those bankruptcies. You could say it was a clawback.
Five major cryptocurrency companies have filed for bankruptcy since summer 2022. A hedge fund (Three Arrows Capital), two lenders (Celsius and BlockFi), a broker (Voyager) and an exchange (FTX). It is reasonable to expect the next wave of lawsuits to recover cryptocurrency transfers made to customers and investors prior to bankruptcy. Courts would then have to consolidate existing laws with modern finance, and new laws could be created in the process.
Familiar tools for an unfamiliar future
In a bankruptcy case, the holding debtor (or trustee) seeks to void or “avoid” certain pre-bankruptcy transactions and restore their value to the benefit of the debtor’s property through avoidance or “clawbacks.” ” action can be submitted. As further explained below, these claims are typically styled as preferential assignment and/or fraudulent assignment claims. In the case of voluntary bankruptcy, as a general rule, it must be filed within two years after filing for bankruptcy and within one year after appointment of a trustee (provided that the appointment of a trustee is within two years of bankruptcy).
Section 547 of the Bankruptcy Code allows debtors to avoid so-called “preferred assignments”. An assignment of assets of a debtor shall be made only if the assignment is (i) made to a creditor, (ii) for pre-existing debt, (iii) made within 90 days of bankruptcy, or (iv) to a debtor. shall be considered preemptive if made while insolvent. Moreover, such an assignment must have enabled the creditor to receive more than a Chapter VII liquidation without an assignment.
Separately, Section 548 allows a debtor to avoid and recover from actual constructive “fraudulent assignments” made by the debtor within two years of filing for bankruptcy. An actual fraudulent remittance is a remittance actually made by the debtor for fraudulent purposes. A Constructive Fraudulent Remittance is a payment of a debt (i) for an amount of less than reasonably comparable value and (ii) if the debtor is insolvent (or the debtor becomes insolvent at the time of the transfer). remittances made by
Section 544 also permits a debtor to use applicable state fraudulent assignment laws to avoid a pre-bankruptcy assignment.
Crypto clawback action will soon flood courts
According to In re: FTX Trading Ltd., et al., No. 22-11068 (JTD) (Bankr. D. Del.), customers reportedly withdrew $5 billion on the eve of filing for bankruptcy. Some of these transfers can be expected to be subject to clawback claims. FTX also said in his press release in December 2022 that it would seek to recover tens of millions of dollars in political donations by Sam Bankman-Fried and others.
In Voyager’s bankruptcy, In re: Voyager Digital Holdings, Inc., et al., No. 22-10943 (MEW) (Bankr. SDNY), Celsius recently pursued a $7.7 million crypto-first claim against Voyager I submitted a petition for permission. Celsius also said in his own bankruptcy filing that he continues to evaluate whether there are any colorable crypto priority claims. Reference: Celsius Network LLC, et al., No. 22-10964 (MG) (Bankr. SDNY).
Issues with prima facie cryptographic clawback claims
Transfer date
In 1992, in Barnhill v. Johnson, the U.S. Supreme Court ruled that payment by check cannot be made if the check is accepted by a bank or if it is “cleared” (not if the check is delivered but for the purposes of priority claim). in) ruled that it was deemed to have taken place. ). The court will decide when a cryptocurrency transaction is deemed to have taken place whether the transfer occurred within his 90-day priority period or within the lookback period applicable to allegations of fraudulent transfers. We have not yet made a decision on whether.
Litigants may argue that cryptocurrency transactions occur on the day they are “liquidated.” It is unclear whether that date is, for example, the date the transaction was recorded on the blockchain or, if another date, the date the cryptocurrency was actually received by the transferee.
A mix of digital assets
Only the transfer of the debtor’s assets is subject to clawback claims.
A pre-bankruptcy crypto transaction may not involve the transfer of property of a debtor if the transferred assets belonged to the client and were simply trusted by the debtor for the benefit of such client. could depend on whether customer assets were commingled with non-customer assets. Bankruptcy judge Martin Glenn, who presides over the Celsius bankruptcy, is likely to issue a ruling soon to determine ownership of virtual assets held in accounts maintained by virtual debtors.
Interestingly, according to FTX’s Terms of Service, none of the digital assets in customer accounts are owned by FTX, and FTX has expressly agreed not to treat customer property as its own. Notwithstanding such terms, the manner in which such assets were maintained by FTX may ultimately determine whether they constitute the property of the debtor for clawback purposes.
self-defense
For priority claims, common defenses include, among others, the ordinary course of business (OCB) and the new value defenses (Sections 547(c)(2) and (c)(4)). OCB’s defense is limited if the assignment is made in the ordinary course of business or finances of the debtor and creditor (i.e. subjective test) or in accordance with normal business terms (i.e. objective test).
Separately, a new defense of value applies if the creditor offers value to the debtor after receiving a claim of preferential assignment. This value can offset the creditor’s priority liability.
Courts have not addressed these highly factual defenses in the context of virtual currencies. As such, it is unclear what factors courts will apply in determining whether a debtor made her OCB crypto trades. Likewise, it is unclear what constitutes new value in this context.
Another open question is whether assignees can assert “safe harbor” defenses. Section 546(e) prohibits circumvention of certain assignments made in connection with “securities agreements,” “commodity agreements,” or “forward contracts.” Section 546(g) specifically prohibits circumvention of certain transfers made in connection with currency or commodity swaps.
The applicability of safe harbors partly shifts to the specific cryptographic classification involved, including commodity or security. Future regulations promulgated in part in response to recent bankruptcies may affect such classification.
When values change
Even if debtors win to avoid crypto trading, another open question is the date when crypto or digital assets need to be valued. This is especially important given how quickly the value of such assets can fluctuate. (i) Transfer Date. (ii) the date of judgment or (iii) the date of petition; The obligor claims the highest date and the transferee claims the lowest date.
Similar to the applicability of safe harbors, the answer to the question of value depends on whether a court considers a particular crypto-asset a currency, commodity, or security. If the asset is currency, the debtor’s recovery may be limited to its value on the date of transfer. The answer is less clear when the asset in question is a commodity or security.
Conclusion
Soon, news flashes of cryptocurrency bankruptcies caused by the so-called “crypto winter” will give way to a wave of evasive action. We already see a lot of legal uncertainty around fundamental issues, such as how debtors can make obvious clawback claims and how defendants can raise statutory defenses. Courts, and perhaps even Congress, will be tasked with using past jurisprudence to settle future clawback claims.
Joseph Ciofi is a regular contributing columnist on consumer and commercial finance for Reuters Legal News and Westrow Today.
Opinions expressed are those of the author. They do not reflect Reuters News’ commitment to integrity, independence and freedom from bias under its Trust Principles. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.
[ad_2]
Source link
