[Crypto-Bankruptcy Series] Concluding Thoughts on the Series

By Xiao Ma (Harvard Law School)

Xiao Ma

Note: This post is the concluding post in a series of posts on bankruptcies of cryptocurrency companies and the emerging issues they pose. Previous posts in the series include:

1. The FTX Bankruptcy: First Week Motions, Jurisdictional Squabbling, and Other Unusual Developments, by Megan McDermott

2. Quantifying Cryptocurrency Claims in Bankruptcy: Does the Dollar Still Reign Supreme?, by Ingrid Bagby, Michele Maman, Anthony Greene, and Marc Veilleux

3. The Public and the Private of the FTX Bankruptcy, by Diane Lourdes Dick and Christopher K. Odinet

4. Staking, Yield Farming, Liquidity Mining, Crypto Lending – What are the Customer’s Risks?, by Matthias Lehmann et al. (University of Vienna)

5. The Treatment of Cryptocurrency Assets in Bankruptcy, by Steven O. Weise, Wai L. Choy, and Vincent Indelicato

6. FTX Bankruptcy – A Failure of Centralized Governance in the Name of Decentralized Cryptocurrencies, by Vivian Fang

7. Roundup: Celsius Network LLC, by Jessica Graham

8. The Implications of CeFi and DeFi in Bankruptcy: A Hot Take on Celsius, by Kelvin FK Low and Timothy Chan

9. Crypto Volatility and The Pine Gate Problem, by Anthony Casey, Brook Gotberg, and Joshua Macey

This series is being managed by the Bankruptcy Roundtable and Xiao Ma, SJD at Harvard Law School, xma [at] sjd [dot] law [dot] harvard [dot] edu.

Check the HLS Bankruptcy Roundtable periodically for additional contributing posts by academics and practitioners from institutions across the country.


There is a new category of bankruptcies: crypto-bankruptcies. Although difficult to pinpoint the exact beginning of the recent wave of crypto winter (the common belief is that it can be traced back to the collapse of Terra/Luna in May 2022.) Since then, several crypto companies – such as Voyager, Celsius, FTX, BlockFi, and Genesis – have landed in U.S. bankruptcy courts. This trend has prompted our Roundtable to devote a special series to exploring these new developments. I appreciate the opportunity to have managed this series and enjoyed working with authors who contributed thought-provoking posts. While the crypto-bankruptcies will continue to unfold, we are concluding our series for now to feature other content on our forum. We hope that the series has provided some initial food for thought, and that discussions will extend beyond this series as we, the community of bankruptcy academics and practitioners, continue to learn and forge new thinking together about these novel crypto-bankruptcies. 

I would like to take this opportunity to add some concluding thoughts. First, the jurisdictional squabbling present in FTX’s bankruptcy, as highlighted by Megan McDermott, may signify a broader trend that the U.S. bankruptcy courts could become the leading venue in resolving crypto-related insolvencies. Cryptocurrencies are perhaps uniquely international, with no clear need for insolvency proceedings to take place in any particular jurisdiction. Indeed, other jurisdictions (most notably Singapore and London) have recently tried to increase their attractiveness as the home of major cross-border insolvencies, and cryptocurrency companies may have been a major test case for these efforts. Nevertheless, this wave of crypto-bankruptcies has taken place in the United States.

This new set of crypto-bankruptcy cases will put the efficacy and efficiency of Chapter 11 to the test. Crypto investors worldwide are closely monitoring the processes and carefully studying the rulings of U.S. bankruptcy judges (such as the critical Celsius opinion briefed by Jessica Graham). These opinions may have broad implications and global reach for the whole crypto industry. The ongoing crypto-bankruptcy proceedings also provide great insights into the business activities, financial condition, and commercial realities of major players in this fast-evolving industry. For example, the 600+-page Celsius examiner’s report not only detailed how Celsius struggled to generate enough yield to support its high reward rates and made terrible investment and asset deployment decisions, but also brought  public attention to its governance deficiencies and problematic representations made to the public. Diane Dick and Christopher Odinet reminded us of the need to investigate the causes of debtors’ failures and to craft appropriate laws and regulations safeguarding substantial public interests. On the other hand, they also highlight the dilemma of whether the limited resources of bankruptcy estates can support the type of independent management and fact-finding that might be essential to addressing the public concerns of crypto-bankruptcies, but which are not typically central to the chapter 11 model. 

Second, in reflecting on the cause of FTX’s massive failure, Vivian Fang noted how distressed companies’ financial positions have been inflated with illiquid assets and obscure instruments throughout corporate history. In FTX’s case, the related party transactions that are secured by FTTs, its own token, remind us of the SPVs of Enron that were solely financed by its own stock, and how a drop in the value of this stock led to Enron’s collapse. Investigations of fraudulent transactions and preferential payments are likely to be themes shared by the highly interconnected crypto-bankruptcies. Note that one essential (and as-yet-unanswered) issue that will greatly impact how these cases proceed is how to effectuate transaction avoidance law and enforce the clawback of payments that take place on the blockchain via nodes of anonymity. 

Another major theme, as predicted and discussed by Matthias Lehmann, Kelvin Low and Timothy Chan, and Diane Dick and Christopher Odinet, is how to characterize the crypto assets that the customers stake on the troubled crypto platforms. Steven Weise, Wai Choy and Vincent Indelicato’s memo analyzed the legal framework under which the crypto assets that are custodially held by a platform should be treated as customers’ assets, not the property of the bankruptcy estate. Whether such a custodial relationship exists would be a separate question, as many customer agreements provide otherwise (e.g., terms governing Celsius customers’ earn accounts were central to the opinion in that case). Crypto exchanges commonly comingle and rehypothecate crypto assets, making it even harder for customers to withdraw their staked cryptos during a chapter 11 case. This, in turn, makes the industry more susceptible to contagion (and such contagion has reached traditional banking where institutions have substantial ties to crypto, e.g., Silvergate Capital) as downward pressure on the value of crypto assets could quickly spread among a network of lenders and borrowers whose financial activities are linked to an identical set of collateral. The ongoing crypto-bankruptcy proceedings also revealed much interconnectedness among these distressed debtors through crypto-collateralized loans and cross-crypto-holdings.

In these evolving crypto-bankruptcies, judges are likely to set parameters around various substantive issues related to the valuation and recovery of crypto assets. Ingrid Bagby, Michele Maman, Anthony Greene, and Marc Veilleux considered the popular request for “payment-in-kind” distribution as prices of crypto assets are incredibly volatile and concluded that the USD continues to reign for now. The fluctuation of crypto assets’ value raises other concerns, such as the Pine Gate problem, as Anthony Casey, Brook Gotberg, and Joshua Macey noted. With the petition date serving as the artificial moment of reckoning, debtors in crypto-bankruptcies may effectively force customers into a bottom-of-market sale to finance the Chapter 11 process, and the liquidity generated may be redistributed to other creditors or managers. Relatedly, Kelvin Low and Timothy Chan discussed the fungible nature of crypto assets and how they do not have any inherent utility except for the ability to (potentially) make a profit upon alienation. 

This line of reasoning, in turn, gets to the heart of the heavily debated question of the nature of cryptocurrencies. Since the beginning of crypto-bankruptcies, a lingering question of mine has been – if these crypto exchanges and debtors’ business models bear significant similarities to banks, stock brokers, or commodity brokers, should they be excluded from filing under Chapter 11 in the first place pursuant to 11 U.S.C. § 109? Before Judge Wiles approved the Voyager-Binance deal, regulators raised objections stating that Voyager may be involved in unregistered offers and sales of securities, as well as illegal operations of virtual currency businesses without licenses. Once these crypto debtors’ business endeavors are better defined through the magnifying glass of bankruptcy proceedings and the governmental agencies settle on the regulatory framework for the crypto industry, future crypto debtors may not necessarily be eligible to seek chapter 11 remedies but will have to resort to chapter 7 liquidation or other proceedings that are specifically tailored to financial institutions. 

It is fascinating that U.S. bankruptcy courts, in addition to resolving mass torts, are now facing new challenges in navigating the ambiguities and uncertainties of U.S. crypto regulations. As they make rulings and decisions, these courts are essentially shaping the law for the entire crypto world, which was founded on the ideal of transcending centralized governance. While some jurisdictions, such as Singapore, have a manifested ambition to become a crypto hub, others, like China, have shown great animosity toward the industry. In contrast, the European Commission has recently launched a blockchain regulatory sandbox, which aims to facilitate dialogues between developers and regulators. Nonetheless, I find no dialogue more informative and soul-searching than the evolving crypto-bankruptcy cases happening here in the U.S. All eyes are on these cases, and questions are hammering at the doors of courthouses.

[Crypto-Bankruptcy Series] The Implications of CeFi and DeFi in Bankruptcy: A Hot Take on Celsius

By Kelvin FK Low and Timothy Chan (National University of Singapore)

Kelvin FK Low
Timothy Chan

Note: This post is the eighth post in a series of posts on bankruptcies of cryptocurrency companies and the emerging issues they pose. Previous posts in the series include:

1. The FTX Bankruptcy: First Week Motions, Jurisdictional Squabbling, and Other Unusual Developments, by Megan McDermott

2. Quantifying Cryptocurrency Claims in Bankruptcy: Does the Dollar Still Reign Supreme?, by Ingrid Bagby, Michele Maman, Anthony Greene, and Marc Veilleux

3. The Public and the Private of the FTX Bankruptcy, by Diane Lourdes Dick and Christopher K. Odinet

4. Staking, Yield Farming, Liquidity Mining, Crypto Lending – What are the Customer’s Risks?, by Matthias Lehmann et al. (University of Vienna)

5. The Treatment of Cryptocurrency Assets in Bankruptcy, by Steven O. Weise, Wai L. Choy, and Vincent Indelicato

6. FTX Bankruptcy – A Failure of Centralized Governance in the Name of Decentralized Cryptocurrencies, by Vivian Fang

7. Roundup: Celsius Network LLC, by Jessica Graham

This series is being managed by the Bankruptcy Roundtable and Xiao Ma, SJD at Harvard Law School, xma [at] sjd [dot] law [dot] harvard [dot] edu.

Check the HLS Bankruptcy Roundtable periodically for additional contributing posts by academics and practitioners from institutions across the country.


The difference between owning (i.e. having property rights in something) and being owed (i.e. having a right against a person by way of obligation) is at its most stark in bankruptcy. In the wake of multiple bankruptcies of crypto entities last year, the question of whether customers of these entities owned or were merely owed has come into sharp focus, especially when the entity has been engaged in what the industry has coined CeFi (centralized finance), which involves the lending and borrowing of crypto assets. In theory, the same questions are engaged in a DeFi (decentralized finance) transaction, where one of the roles is substituted by a peer (often pseudonymous) rather than a centralized intermediary. Determining whether property in “loaned” crypto assets belongs to a failed borrower (whether centralized intermediary or peer) who simply owes an obligation to the lender or remains with the lender throughout involves a question of characterization. Two recent motions in the Celsius litigation are instructive of how this characterization is undertaken by the courts and although the case involves CeFi rather than DeFi, there is no reason why the same reasoning does not extend to DeFi as well.

The first motion pertained to customers with assets in Celsius’ “Earn” accounts, who had been promised as high as 18% interest on sums deposited. Despite their strenuous arguments to the contrary, the bankruptcy court decided that those assets had become the property of Celsius, giving effect to Terms of Use stating that those customers had “grant[ed] Celsius … all right and title to such Eligible Digital Assets, including ownership rights”. This outcome in truth was always inevitable, perhaps even in the absence of such clear language. 

The arrangement mirrors exactly the traditional position relating to interest-bearing bank accounts, established since the mid-19th century in the common law world to entail an obligation owing to customers rather than ownership of money by customers. Cases like Thompson v Riggs 72 U.S. 663 (1866) and Foley v Hill (1848) 2 HLC 28, 9 ER 1002 decided that absent any special conditions, money deposited with a bank became the property of the bank, with the customer obtaining a claim to the return of the same amount of money (plus interest) on demand. The obligation is fungible (the bank need not return the same coins and notes deposited) and forms the basis for borrowing short and lending long that is the backbone of modern banking. This characterization is necessary because money, unlike some other property, does not have any inherent utility except by way of alienation. A bank uses deposited money as it pleases (usually by extending loans itself), makes what profit it can, and pays back to its customer the principal and agreed interest. How could a bank generate profits off the money were it otherwise? 

It is the same with most crypto assets such as Bitcoin. Whether described as staking, liquidity mining, or onward lending, all these processes involve committing the assets in a manner inconsistent with the continued ownership of the original owner of the assets. In the first motion, Celsius’s customers argued that the Terms of Use stated that they had “loaned” the Earn assets to Celsius, claiming this meant that they retained ownership of those assets. Terminology has never been conclusive in an exercise in legal characterization, but this argument was doomed to fail for a more basic reason. The term “loan” has two different meanings. The customers argued that they believed they had made a “loan” in the non-fungible sense of the term (the exact thing must be returned), as where one lends a chattel which possession itself has utility. Many examples abound. A book can be read and enjoyed; a car can be used to ferry passengers for a profit. Such “loans” can be, and are often structured, as not involving the transfer of ownership from lender to borrower. No library transfers ownership of library books to patrons in return for a mere obligation for their return. Likewise, hire agreements of cars are careful to spell out that ownership of said vehicles remains with the hire company throughout. 

However, most crypto assets are not suitable for non-fungible loans since, like money, they can only be enjoyed through alienation. As Warren Buffett famously explained in a CNBC interview, “If you said … for a 1% interest in all the farmland in the United States, pay our group $25 billion, I’ll write you a check this afternoon,” Buffett said. ”[For] $25 billion I now own 1% of the farmland. [If] you offer me 1% of all the apartment houses in the country and you want another $25 billion, I’ll write you a check, it’s very simple. Now if you told me you own all of the bitcoin in the world and you offered it to me for $25 I wouldn’t take it because what would I do with it? I’d have to sell it back to you one way or another. It isn’t going to do anything. The apartments are going to produce rent and the farms are going to produce food.” Without treading on the controversial question of whether all or most crypto assets are thus Ponzi schemes, the point holds that simply holding crypto assets doesn’t generate any returns so, unless a loan of crypto assets is characterized in the same way as a loan of money, it is difficult to see what the point of the loan is (from the borrower’s point of view) and how the borrower is supposed to generate the profits in order to pay the lender the interest it has promised. As a result, it is unsurprising that the court found that the customers had clearly made a “loan” of the fungible rather than non-fungible variety, where ownership of the property passed to Celsius in return for an obligation to return an equivalent sum plus interest.

More fortunate than the Earn customers were a group of customers who had placed crypto assets in Celsius’ “Custody” accounts. On 20 December 2022, Judge Glenn granted a motion authorizing their withdrawal of, among others, certain digital assets which had “only ever” been held in those accounts. The crucial difference was that the Terms of Use stated that ownership in crypto assets deposited in the “Custody Program” would “at all times remain with the [user]” and that Celsius would not “transfer, sell, loan or otherwise rehypothecate” such assets. The bankruptcy court agreed that assets in such “Custody Wallets” did not form part of the Celsius estate. This again is undoubtedly correct. Though the legal principles relating to ownership of crypto assets remain unsettled, in the absence of countervailing commercial indications and outside of the security context, the passing of title should be governed by the intention of the parties, such consensualism being consistent both with longstanding authority (see e.g. Cochrane v Moore (1890) 25 QBD 57; Metropolitan Trust Co of New York v McKinnon 172 F. 846 (1909)) and contemporary theories of justice in transfer. 

One theme that emerges from these two motions is the importance of the characterization process: intention is the starting point but the commercial nature of the transaction cannot be ignored. Yet, characterization is distinct from questions of actual segregation, which may pose independent obstacles to recovery. In the Celsius case it seems that customer assets were in fact segregated in the “Custody Wallets”. The “Custody” claimants were remarkably fortunate in this respect. Although ownership is superior to obligation in bankruptcy, its advantage is contingent on the customer’s ability to identify the property owned. Some crypto entities, such as FTX, are alleged to have been treated customer assets as belonging to them even though their terms of use indicate otherwise, in which case they would likely have been long dissipated or irretrievably commingled. In such cases, even if custody is taken to mean the retention of ownership, some aspects of crypto-systems may thwart customers’ claims. Given the pseudonymity and immutability of blockchains, establishing the ownership of property you are unable to identify or recover will likely prove to be cold comfort.

[Crypto Bankruptcy Series] Staking, Yield Farming, Liquidity Mining, Crypto Lending – What are the Customer’s Risks?

By Matthias Lehmann et al. (Universitat Wien)

Matthias Lehmann

Note: This post is the fourth post in a series of posts on bankruptcies of cryptocurrency companies and the emerging issues they pose. Previous posts in the series include:

1. The FTX Bankruptcy: First Week Motions, Jurisdictional Squabbling, and Other Unusual Developments, by Megan McDermott

2. Quantifying Cryptocurrency Claims in Bankruptcy: Does the Dollar Still Reign Supreme?, by Ingrid Bagby, Michele Maman, Anthony Greene, and Marc Veilleux

3. The Public and the Private of the FTX Bankruptcy, Diane Lourdes Dick and Christopher K. Odinet

This series is being managed by the Bankruptcy Roundtable and Xiao Ma, SJD at Harvard Law School, xma [at] sjd [dot] law [dot] harvard [dot] edu.

Check the HLS Bankruptcy Roundtable periodically for additional contributing posts by academics and practitioners from institutions across the country.


The consequences customers face in case a crypto exchange like FTX goes bankrupt are enormous, but they may be even more severe if they had previously staked their digital assets or engaged in a similar transaction. As a matter of fact, it is not a far-fetched to fret that a bankruptcy court may construe such a transaction as entailing an asset transfer to the exchange or a third party. In this case, the crypto assets – Bitcoin, Ether or token – would be considered as a part of the insolvency estate or as belonging to somebody else. Customer would have no propriety rights in them and be relegated to the status of mere creditors, with the prospect of receiving only a fraction of the asset’s value.

In this context, it is of paramount importance how the transaction in question is to be legally characterized. Characterization is the process by which an empirical phenomenon is attributed to a particular legal category. This exercise is not always easy, and it is particularly difficult with regard to the operations in the crypto space. There is hardly any literature on them, because they are in large part novel and unprecedented. The legal nature and effects of such operations depend in the first place on the terms and conditions to which they are submitted. But many of them use highly general notions and are legally unprecise. To achieve definite results, it is likely for a court to intuitively trying to associate the transactions described with a known category. This will be important in two respects.

First, the category chosen for a certain transaction will inform the conditions for its validity as well as its effects. In particular, it will decide whether the customer has transferred her rights fully and thus bears the full risk of the counterparty’s insolvency, or whether the transaction merely creates a more limited right in rem of the crypto exchange or a third party.

Second, characterization is also important to identify the national law governing these transactions. Conflict-of-laws rules will be applied by a bankruptcy court to determine, as a preliminary question, whether an asset forms part of the insolvency estate or whether it belongs to another person. There are different conflict-of-laws rules for different types of transaction, which point to different laws depending on the transaction’s characteristics.

Which category a transaction is shoehorned in will thus be decisive in several ways for the position of the crypto investor. But how can they be legally characterized?

Admittedly, this is not easy. To take just one example, the legal nature of staking is quite doubtful. Potentially, it could be considered as a secured transaction because it enables to ‘slash’ the investor’s crypto asset in case of manipulative activity or inactivity of a node. But it may also be compared to a deposit or a loan of cryptos. It is even not excluded to view staking through the lenses of a partnership that may exist between all nodes of a platform, or as being constitutive of a trust.

Similar problems arise for yield farming, liquidity mining and crypto lending. These operations must be distinguished from staking and from each other, even though the lines are often blurred. How they are to be legally characterized is highly relevant for the position of the crypto investor.

Any characterization needs to reflect the terms and conditions, the typical intention of the parties, and the economic purpose of the transaction. But above all, it should be informed by the consequences it has for investor protection. Unless clearly indicated in the agreement and absolutely indispensable for achieving the purpose of the transaction, it should not be assumed that the investor intended to part with her ownership or other rights of entitlement. Where the terms and conditions are equivocal or ambiguous about this point, they should be interpreted against the person that formulated them, according to the time honoured “contra proferentem” principle for constructing constructs. When and for which transactions a transfer of property or other rights can be presumed will be the decisive question. The debate about this problem has just begun. Felix Krysa, Emeric Prévost, Fabian Schinerl, Robert Vogelauer and I have examined different options and made suggestions for precise characterization in a new paper.

Click here to read the full article.

[Crypto-Bankruptcy Series] The FTX Bankruptcy: First Week Motions, Jurisdictional Squabbling, and Other Unusual Developments

By Megan McDermott (University of Wisconsin-Madison School of Law)

Megan McDermott

Note: This post is the first post in a series of posts on bankruptcies of cryptocurrency companies and the emerging issues they pose.  This series is being managed by the Bankruptcy Roundtable and Xiao Ma, SJD at Harvard Law School, xma [at] sjd [dot] law [dot] harvard [dot] edu.

Check the HLS Bankruptcy Roundtable periodically for additional contributing posts by academics and practitioners from institutions across the country.


The FTX bankruptcy isn’t just significant for its size and scope, but also for some extraordinary procedural wrinkles.  Here are a few notable developments from the first six weeks of the FTX bankruptcy:

  • Unusual delays. Most Chapter 11 bankruptcies are the products of weeks, if not months, of behind the scenes planning.  As a result, the typical debtor is able to file a flurry of first day motions that ensure a high degree of debtor control – at least during the early stages of bankruptcy, while creditors are scrambling to find representation and determine strategy.  Not so with FTX, due to the fact that current CEO John Ray took over from Sam Bankman-Fried immediately before the Chapter 11 filing.  Ray has testified that FTX’s abysmal record-keeping and absence of corporate controls have made it extremely difficult to get an accurate picture of FTX’s assets and liabilities.  As a result, the traditional first day motions were heard a week into proceedings, and second day motions were postponed to January 11. The delay makes it easier for individual creditors to organize push back to the debtors’ plans, which could in turn impact overall creditor recovery.
  • Jurisdictional squabbling. Bahamian regulators are mounting a spirited fight to retain control over the liquidation of FTX Digital Markets, one of the many entities in FTX’s global web of related businesses.  The Bahamian regulators backed off their initial strategy of asking the Southern District of New York to open a parallel Chapter 15 proceeding.  Nonetheless, they are currently arguing that the Delaware Bankruptcy Court lacks authority to halt liquidation under Bahamanian law.  Given the rumors that Bahamanian authorities encouraged (or possibly compelled) Bankman-Fried to give Bahamanian customers preferential treatment in withdrawing frozen funds, there is a lot at stake in this jurisdictional skirmish.  In his testimony to Congress, Ray mentioned this “extraordinary pushback” but expressed confidence that these efforts would be rejected in favor of the transparency and clarity that Chapter 11 promises to all stakeholders.
  • Sealed submissions. Despite this commitment to transparency, FTX has asked to file a variety of court submissions under seal, including creditor lists.  FTX’s lawyers argue that revealing creditor names would make them a target for hacking or, at the very least, poaching by competitors of FTX.  The U.S. Trustee has objected strenuously to sealing these records, on the grounds that these risks are the trade-offs of a public and transparent proceeding.  In addition, Dow Jones, Bloomberg, and other media interests have moved to intervene in order to oppose the debtor’s efforts to avoid disclosing creditor identities.  In the Celsius bankruptcy, the Southern District of New York decisively rejected efforts to keep parts of the docket under seal.  Judge Dorsey hasn’t taken a clear position yet but has agreed to keep creditor lists under seal – for now.
  • Preferential transfers. During Congressional questioning, Ray was asked about rumors of looting in the months preceding the Chapter 11 filing, as well as some dubious post-petition maneuvers.  There are also likely to be a number of insider transfers, especially since at least one of Bankman’s Fried’s parents (Stanford Law Professor Joseph Bankman) has reportedly received payments from FTX.  Transfers between FTX and Bankman-Fried and his family may be in the billions.  Expect some bombshells as FTX seeks to use Chapter 11 to avoid these transfers.
  • Property of the estate. Major stakeholders are already wrangling to have their assets returned on the ground that these assets should not be considered property of the estate.  Of particular note are two motions filed by committees representing U.S. and non-U.S. exchange customers.  The customers are arguing that they are entitled to have their crypto assets returned rather than having to wait in line for a pro rata recovery alongside other unsecured creditors.  Although some commentators have suggested that FTX’s terms of service may support these arguments, the legal authority for how to treat these assets is far from clear.  Another early mover is crypto lender BlockFi, which is staking its claim to 56 million Robinhood shares that Alameda Research had pledged as collateral shortly before FTX’s Chapter 11 filing.  These shares have lost around 40% of their value since early November, which is part of the reason BlockFi has filed its own Chapter 11 bankruptcy in the District of New Jersey.  Bankruptcy courts across the country will likely see many similar ripple effects before FTX’s creditors see any recovery.
  • Executory contracts. Given FTX’s lavish public relations spending and celebrity co-branding, many FTX partners are undoubtedly eager to extricate themselves from the now-disgraced company.  For example, the publisher of the League of Legends video game filed an early motion for relief from the automatic stay, asking the court’s permission to halt their contractual obligation to promote FTX at various events.  Right before the new year, FTX granted their wishes, moving to reject that cobranding deal alongside a long list of other executory contracts.  FTX’s motion details almost two dozen sponsorship deals, ranging from the Golden State Warriors to Berkeley Athletics to an international cricket competition.  FTX also hopes to cast aside paid celebrity endorsements from the likes of Gisele Bundchen and Shohei Otani.  In the motion, FTX explained that “the Contracts are not integral to the Debtors’ Chapter 11 efforts, are not otherwise beneficial to the Debtors’ estates and present burdensome liabilities.”  Accordingly, FTX requested that the contracts be deemed terminated immediately.  That means the Miami Heat Arena may soon be in the market for a new naming rights partner.  (See photo.)  [Editor’s Note: On January 11, 2023, the bankruptcy court approved the termination of FTX’s naming rights: https://www.nba.com/news/miami-dade-coun…]

Balancing Debtor and Creditors’ Interests in Bankruptcy Reorganization Proceedings: Best Practices for the Procedural Design of Claims’ Classification

By Anaïs Alle (Harvard Law School, L.L.M. 2022)

Anaïs Alle

Reorganization proceedings, in contrast to liquidation sales, constitute a rather recent development in insolvency law. Embodied by Chapter 11 in the US, this trend has been further brought to light by the European Directive 2019/1023 of 20 June, 2019 on restructuring and insolvency, that requires EU Member States to set up a preventive reorganization framework. Reorganization plans typically involve complex interplays between competing stakeholders’ interests, and the classification of claims for the purpose of voting on the reorganization plan is both an illustration of these tensions and a mechanism designed to address them. Choices of European policymakers, especially in France where the classification of claims represents a major change, can offer new perspectives on best practices for modern reorganization plans. The classification of claims is an important feature of reorganization proceedings. First, it appears as a countermeasure to the debtor-in-possession and other debtor-friendly rules. Second, it promotes the adoption of a plan against hold-out problems from hostile minority or out-of-the-money creditors. Third, it provides guarantees of fairness and viability of the plan, through the consent of a representative majority of creditors.

Given the importance of claims’ classification, the design of classes has drawn a lot of attention during the implementation of the EU Directive in France. Debtor-in-possession proceedings leave the debtor with significant power over classification, with the potential for abuse through “gerrymandering”, i.e., the strategic classification of claims to create an artificially accepting impaired class, ensuring the adoption of a potentially unfair plan. Bankruptcy statutes fail to provide clear and binding criteria to restrict such strategies. Similarly, Chapter 11 case law – although precedents, notably Matter of Greystone III Joint Venture out of the 5th Circuit, have suggested a ban on gerrymandering – has been reluctant to challenge debtors’ classifications. Instead, policymakers have set protective rules for creditors, mainly the best-interest-of-creditors test and the absolute priority rule. However, these protections may be circumvented and difficult to enforce.

In this context, procedural design is suggested as a means of reconciling debtor-friendly rules with effective protections for creditors, thus ensuring a balance of interests in reorganization proceedings. First, effective judicial review over the classification of claims appears desirable and is addressed under French law with (i) the appointment of a trustee, with limited powers, assisting the debtor in possession, and (ii) an early, dedicated and fast-tracked appeal against the classification of claims, allowing the judicial resolution of disputes over classification before the adoption of the plan. A similar result may be achieved through a reinforcement of classification hearings. Second, hostile classification strategies could be avoided through prepackaged plans, in which the debtor negotiates with its creditors prior to filing for Chapter 11. French law provides for a dedicated two-stage framework through conciliation proceedings – confidential negotiations under the supervision of a court-appointed professional – followed by fast-tracked reorganization proceedings, where the plan can be adopted through a vote in classes that have been designed within the conciliation negotiations. Such proceedings are consistent with the modern negotiated, deal-approach to reorganizations while making use of insolvency mechanisms against hold-out problems, thus favoring a preventive and pragmatic solution to distressed situations.


Click here to read the full article.

Changes and Convergence of Bankruptcy Law: Recent Experience in Brazil

By Joao Guilherme Thiesi da Silva (Cleary Gottlieb Steen & Hamilton LLP)

Joao Guilherme Thiesi da Silva

Bankruptcy regimes across the globe have been constantly changing in response to new market demands and the evolution of insolvency law principles and objectives. Part of the academic community argues that such changes may lead to a convergence of domestic bankruptcy laws, as a result of globalization and market integration. Scholars have reviewed the phenomena of changes and convergence of bankruptcy laws in Europe, East Asia and Africa. However, little attention has been given to Latin American countries, such as Brazil. This paper aims at contributing to the discussion on changes and convergence of bankruptcy law, by focusing on four recent experiences within the Brazilian legal system, namely (i) the recent adoption of the UNCITRAL Model Law on Cross-Border Insolvency, (ii) the ability of creditors to propose a competing plan of reorganization, (iii) the adoption of pre-insolvency procedures, and (iv) the recognition of bondholders’ right to vote on a plan of reorganization. This paper concludes that there are indicia of a continuous convergence of Brazilian bankruptcy law with foreign and international norms, as changes in Brazilian bankruptcy law have increasingly mirrored the law and practice of certain metropolitan nations, as well as global norms and soft laws developed by international organizations and standard setting bodies. This paper further discusses the diverse array of processes through which convergence has taken place in Brazilian bankruptcy law, as well as the main driving forces underlying this convergence, such as the increasing influence of cross-border investments and international market players.

The full article is available here.

The Cannabis Conundrum: Can Cannabis Companies File Chapter 15?

By Colin Davidson and Catherine Jun (Sheppard, Mullin, Richter & Hampton LLP)

Colin Davidson
Catherine Jun

Cannabis is now legal in 19 states and Washington D.C., driving the growth of a legal cannabis industry estimated to be valued at $33 billion this year—up 32% from 2021—and expected to reach $52 billion by 2026. This growth in the cannabis industry, of course, also means that operators and their investment partners face increased commercial risk, including insolvency. Cannabis companies have thus far been precluded from accessing federal bankruptcy protection—i.e., chapter 7 or chapter 11—largely due to the status of cannabis as an illegal substance under federal law. The legal framework used in the United States, where cannabis is illegal federally but has been legalized by many states, differs greatly from the framework in Canada. In Canada the federal Cannabis Act 2018 legalized cannabis nationwide, while the provinces maintain certain regulatory powers related to the distribution, sale and use of cannabis. This suggests that for cross-border operators one potential route to U.S. bankruptcy relief is for the company to first commence an insolvency proceeding in Canada and then seek recognition of that foreign proceeding in a U.S. bankruptcy court under chapter 15 of the Bankruptcy Code. We examine the viability of chapter 15 as an alternative avenue to the U.S. bankruptcy courts and the challenges that a cannabis company may face in an article originally published by Cannabis Business Executive.

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A Russian Sovereign Debt Default? No Longer Improbable

By Dennis Hranitzky, Richard East, Liesl Fichardt, Epaminontas Triantafilou, Yasseen Gailani, and Rupert Goodway (Quinn Emmanuel Urquhart & Sullivan, LLP)

The article summarizes the likelihood and implications of a sovereign bond default by the Russian Federation. It first discusses the economic sanctions imposed on the Russian Federation, their impact on Russia’s ability to access gold and foreign currency reserves and the consequences of sanctions on Russia’s ability to satisfy its obligations under the approximately $40 billion in UK law bonds. Noting that a payment default will likely lead to litigation arbitration, the article analyzes key provisions of the bonds, noting that atypical of sovereign bonds, they include no choice of law or venue provisions or waiver of sovereign immunity. The article explores anticipated litigation hurdles in both the US and the UK, with a focus on sovereign immunity and forum non conveniens defenses that may be available to Russia, including the particular difficulties that may be faced by litigants in enforcing a judgment from a US or UK court in the absence of a sovereign immunity waiver. The analysis of sovereign immunity necessarily includes consideration of the commercial activity exception and the article analyzes the US and UK interpretation of this exception. The availability of judgment enforcement discovery is also addressed, noting that broad written and sworn deposition discovery of both the debtor and third parties is the norm in the US and also potentially available in the UK. The article concludes with a recommendation that holders of Russian bonds organize themselves and seek advice on their options prior to the occurrence of a default.

The full article is available here.

The Importance of Being Bound: Bondholders’ Vote and Workouts in the U.S. and in Italy

By Francesca Prenestini (Bocconi University, Milan)

Francesca Prenestini

Most legal systems follow one of two rules for regulating the capacity of an issuer to renegotiate the terms of the bond loan to avoid insolvency or to accommodate changing capital needs. The first rule requires the individual consent of every bondholder while the second one permits the proposed agreement to be approved upon a majority decision which also binds dissenting bondholders.

This article analyzes the desirability of adopting a regulatory approach that allows a binding vote of bondholders on amendments of the core terms of the loan and other restructuring measures, including the conversion of bonds into shares. In doing so, this article examines the drawbacks of the prohibitive approach, which requires consent from all bondholders, with particular regard to the judicial cases and business practices of two major legal systems (the U.S. and Italy).

In the U.S., the Marblegate and Caesars cases have reignited the debate on out-of-bankruptcy restructurings of bond issues. In 2015, the U.S. District Court for the Southern District of New York reaffirmed that coercive exit consent transactions which force bondholders into questionable restructurings are prohibited by § 316(b) of the Trust Indenture Act of 1939 (“TIA”). Then, in January 2017, the U.S. Court of Appeal for the Second Circuit adopted a narrower interpretation, holding that § 316(b) only prohibits formal non-consensual modifications of an indenture’s core payment terms.
The district court’s interpretation, though broad, is more coherent with the text, the legislative history, and the purpose of the TIA. Section 316(b) provides that the individual right of each bondholder to receive payment of the principal of and interest on their indenture security on the due dates cannot (with a few minor exceptions) be impaired without the bondholder’s consent. This section was enacted to protect bondholders from insider abuses by giving individual bondholders the power to veto proposed amendments in an out-of-court restructuring. However, this individual veto power often precludes even fair renegotiation agreements between the issuer and the bondholders.

Under Italian law, the meeting of bondholders may approve “amendments of the terms of the loan” by majority vote. Nevertheless, in the light of quite restrictive interpretations of such a rule, those modifications may not change the structural characteristics of the bond loan.

This article suggests that governments should adopt rules that allow a majority bondholders’ vote to accept out-of-bankruptcy restructurings of bond issues. Currently two different solutions may be implemented in the U.S. and Italy: in the U.S., until § 316(b) can be reformed, the Securities and Exchange Commission could exercise its power to grant exemptions to authorize transactions and agreements otherwise banned; and in Italy, in the absence of a statutory prohibition, the contract governing the loan could include a provision allowing the meeting of bondholders to vote upon amendments of the core terms of the loan and other restructuring measures, such as the conversion of bonds into shares.

This article first examines the two different approaches to bond loans restructuring in various legal systems and in the context of sovereign debt, and considers why allowing a binding vote of the bondholders in workouts is so important given the rationales for and against this rule. Then it focuses on the U.S. legal system, and discusses the statutory provision that bans the majority rule, how the jurisprudence and business practices have evolved, and recent proposals for reform. The article also considers the Italian system, its rules and business practices, and how to overcome its limits. In the end, this article suggests an alternative rule and proposes interim solutions to the problem while awaiting statutory reform.

The full article is available here.

For previous Roundtable posts on § 316(b) of the TIA and Marblegate, see William W. Bratton, The New Bond Workouts; Out-of-Court Restructurings After Marblegate: Trust Indenture Act Section 316(b) and Beyond; Benjamin Liu, Exit Consents in Debt Restructurings; Second Circuit Rules on § 316(b) in Marblegate; Mark Roe, The Trust Indenture Act of 1939 in Congress and the Courts in 2016: Bringing the SEC to the Table; National Bankruptcy Conference Proposed Amendments to Bankruptcy Code to Facilitate Restructuring of Bond and Credit Agreement Debt; David A. Brittenham, Matthew E. Kaplan, M. Natasha Labovitz, Peter J. Loughran, Jeffrey E. Ross, and My Chi To, 28 Law Firms Publish White Paper Addressing Trust Indenture Act Complications In Debt Restructurings; Carlos Berdejó, Revisiting the Voting Prohibition in Bond Workouts (providing evidence related to argument made in Mark Roe, The Voting Prohibition in Bond Workouts, 97 Yale L.J. 232 (1987)).

Creditor Rights, Corporate Leverage and Investments, and the Firm Type

By Aras Canipek (University of Konstanz), Axel H. Kind (University of Konstanz), and Sabine Wende (University of Cologne – Faculty of Management, Economics and Social Sciences)

Aras Canipek
Axel Kind
Sabine Wende

Stronger creditor rights reduce credit costs and thus may allow firms to increase leverage and investments, but also increase distress costs and thus may prompt firms to lower leverage and undertake risk-reducing but unprofitable investments. Using a German bankruptcy reform, we find evidence on average consistent with the latter hypothesis. We also hypothesize and find evidence that the effect of creditor rights on corporate leverage and investments depends on the firm type, as it influences the effect creditor rights have on credit costs and distress costs and thus which effect dominates. For example, our findings suggest that stronger creditor rights are costly for large firms, for which the effect of creditor rights on distress costs should outweigh the effect on credit costs, but beneficial for small firms, for which the effect on credit costs should outweigh the effect on distress costs. Our understanding not only reconciles the mixed empirical evidence of existing studies, but also has important implications for optimal bankruptcy design. In particular, our findings are contrary to a widely held opinion that bankruptcy law should be uniform and balance the effect of creditor rights on credit costs and distress costs. Rather, they point to a menu of procedures in which a debtor-friendly and creditor-friendly procedure co-exist and thus allow different types of firms to utilize the procedure that suits them best. If such a menu is not possible, our analysis suggests that countries should choose a debtor-friendly or creditor-friendly procedure, depending on the most important firm type in the country.

The full article is available here.

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