[Crypto-Bankruptcy Series] The Treatment of Cryptocurrency Assets in Bankruptcy
by | posted in: Bankruptcy, Chapter 11, Crypto-Bankruptcy Series, Cryptocurrency, Priority, Statutory Interpretation | 0

By Steven O. Weise, Wai L. Choy, and Vincent Indelicato (Proskauer Rose LLP)

Steven O. Weise
Wai L. Choy
Vincent Indelicato

Note: This post is the fifth 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)

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.

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The cryptocurrency market has experienced significant liquidity events, accelerating an industrywide sell-off and leaving the value of cryptocurrencies at historic lows—what many call a “crypto winter.” The idea that participants in the cryptocurrency industry, namely exchanges that operate platforms that allow users to transact in cryptocurrency, may resort to chapter 11 bankruptcy has created questions as to how such assets would be handled during a bankruptcy.

In “The Treatment of Cryptocurrency Assets in Bankruptcy,” Proskauer partners Steven O. Weise, Wai Choy, and Vincent Indelicato explore the question of whether crypto assets deposited by customers in a cryptocurrency exchange may be considered property of the bankruptcy estate and therefore not recoverable by the customer.  While some commentators have suggested that crypto assets might be considered property of the bankruptcy estate, existing common law, current provisions of Uniform Commercial Code (UCC) Article 8, and proposed amendments to the UCC recognize that if the arrangement and relationship between the exchange and its customers is one that is characterized as “custodial,” the crypto assets held by the exchange should remain property of the customers and, hence, not subject to dilution by general unsecured claim holders.  However, the analysis of when a custodial relationship exists will depend on the agreements and other facts of a particular relationship.

Click here to read the full article.

Roundup: Ultra Petroleum and Contractual Make-Wholes
by | posted in: Bankruptcy Roundtable Updates, Chapter 11, Default-Rate Interest, Statutory Interpretation | 0

The Fifth Circuit held in October of this year in In re Ultra Petroleum Corp., 51 F.4th 138 (5th Cir. 2022) that a contractual make-whole provision in the debt instruments of certain unsecured creditors was unmatured interest under Section 502(b)(2). In this unusual case, where the debtor became solvent after filing for bankruptcy, the Fifth Circuit also held that the Solvent Debtor-Exception applied to claims for unmatured interest. The Fifth Circuit then determined that the Make-Whole Amount was a valid contractual claim and held that Ultra must pay the contractual Make-Whole Amount under the Solvent Debtor-Exception. Lastly, the Fifth Circuit held that an unimpaired creditor of a solvent debtor is entitled to interest at the bargained-for rate rather than the Federal Judgment Rate. In reaching this conclusion, the Fifth Circuit interpreted Section 726(a)(5)’s interest at the legal rate provision (relevant to a plan under Chapter 11 through Section 1129(a)(7)(A)) as a floor, rather than a ceiling, for interest payable by a solvent debtor.

Several law firms have now written memos summarizing this impactful decision. Weil summarizes the history of the Ultra Petroleum series of cases. Davis Polk suggests that the decision may have far-reaching consequences on the market use of make-whole provisions given the popularity of the Southern District of Texas as a forum for bankruptcy petitions. Proskauer notes that the Fifth Circuit’s decision addressed only the rights of an unsecured creditor with respect to a make-whole provision and suggests that Section 506(b) provides a legal basis for recovery of a make-whole provision by an oversecured creditor.

(This post was authored by Wesley Sheker, J.D. ’23.)