Investment bank B Riley is so determined to persuade struggling bitcoin miner Core Scientific to avoid filing for bankruptcy that it has offered up to $72 million in fresh funding to prevent the company from seeking a court-supervised Chapter 11 restructuring.
“Bankruptcy is not the answer and would do the company’s investors a disservice,” B Riley wrote in a letter in early December. “It will destroy shareholder value for the company, reduce potential recoveries for the company’s lenders, deplete its limited resources and create massive uncertainty for all of its stakeholders.”
Core Scientific still filed for bankruptcy last week. Still, B Riley’s dislike should be understandable. A range of players have succumbed to the ongoing crypto winter, including FTX, BlockFi, Voyager Digital and Celsius, with client accounts largely frozen. Emerging legal issues surrounding ownership of digital assets, ongoing issues in the industry, and the deliberative nature of US bankruptcy have so far prevented one of the major companies from emerging from legal protection. Costs are piling up and account holders are noticing.
Lawyers, bankers and other advisers in the Celsius case that began in July recently submitted detailed fee claims to federal bankruptcy court in New York totaling $53 million. Under US law, these official advisers will have these so-called “administrative expenses”, subject to court approval, paid by the “estate” or corporation which will naturally eat away at account holder recoveries.
The law firms involved, including Kirkland & Ellis and White & Case, which are usually powerhouses in corporate and private equity bankruptcies, are involved in Celsius and have top lawyers charging more than $1,800 Of time. (It can still be a bargain because the top FTX bankruptcy attorneys at Sullivan & Cromwell charge upwards of $2,000 an hour).
Frustrated Celsius account holders are taking to Twitter to complain about costs and slow progress. “That’s a lot of money,” conceded a leading lawyer in the case.
Celsius said it cut its annual labor and operating costs by more than 60% over the course of the deal, or about $100 million, but its liquidity remains disputed because the majority of its “sources of traditional incomes have been eliminated,” according to court documents. .
A firm consultant tested in the bankruptcy court hearing that selling $18 million worth of stablecoins would allow Celsius to survive another month after its March estimate of depleted liquidity .
The legal and operational issues presented in crypto bankruptcies have forced Celsius and its creditors to hire various experts. In addition to Kirkland & Ellis, he has hired specialist legal advisers from Latham and Watkins and Akin Gump. An official board of unsecured creditors has also hired a consultant, Elementus, as a “blockchain forensics advisor.”
The bankruptcy court also authorized an independent “reviewer” to investigate the events leading up to the bankruptcy. The reviewer herself has hired a law firm and a financial expert for which Celsius takes note.
Among the thorny legal questions Celsius must decide in court is whether account holders who lent their crypto to the platform to earn high interest rates are simply part of the unclassified group of creditors. secured or otherwise have specific claims on specific crypto assets. A decision on the matter will determine whether the company can sell the $18 million worth of stablecoins.
Lenders and crypto exchanges have almost no chance of avoiding bankruptcy when faced with a bank run among customer deposits. The court is uniquely placed to bring order to the process of finding assets and determining a restructuring plan.
But the process is unlikely to move quickly, with all parties – company management, account holders, investors – having a voice in the courts. The continued chaos in the industry has not helped sustain cryptocurrency prices as accounts are frozen, further frustrating customers.
Nancy Rapaport, a law professor at the University of Nevada, says bankruptcy workers are often inexperienced and dependent on the judgment of their trusted advisers.
Fee concerns are not entirely unchallenged in the Celsius case. Former bankruptcy judge Christopher Sontchi has been appointed by the court as a so-called “costs reviewer” to review the expenses of professional services firms. Sonchi will bill his time at $1,500 per hour.
sujeet.indap@ft.com
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