As Celsius Network LLC, et al., Case Number: 22-10964 (MG), proceeds in the Bankruptcy Court for the Southern District of New York (the “Court”), on October 24, the Court issued two rulings related to matters mentioned in our October 14, 2022, update:

Approval of Bidding Procedures:

As introduced in a previous update, on September 29, 2022, the Debtors filed a motion to set bidding procedures for the auction and sale of substantially all of the Debtors’ assets, including Debtors’ retail platform, account holders, loan portfolio, and related technology, custody, and swap services, and staking and mining operations (the “Sale Motion”). On October 24, 2022, the Court approved the Sale Motion over the objection of the US Trustee and several other parties (the “Sale Order”).

One of the core objections of the US Trustee and a number of States is that the Debtors’ proposed (and now Court-approved) bidding procedures are premature since the Court has not yet determined whether the Earn, Custody and Withhold accounts will be part of the bankruptcy estate and thus included in the asset sale.  The objecting parties argue that “trying to proceed to an auction prior to determining what is to be sold would be no more realistic than if one sought to sell a car dealership without being able to tell the buyers whether some, all, or none of the cars on the lot would be part of the assets being purchased.” Although the Court-appointed Chapter 11 Examiner’s initial report is due before the bidding deadline, this report will not resolve the ultimate treatment of the Earn accounts, which represents the vast majority of creditors.

While the Sale Motion and Sale Order do not directly address how or in what way the “Earn” creditors will get paid out, they do provide insight into just how the Court and Debtors are understanding and analyzing this bankruptcy case. For instance, though the Court agreed that determination of the treatment of the Earn, Custody, and Withhold accounts would take time, it held that these issues “involve only a fraction of the potential estate assets that the Debtors propose to sell,” may be subject to “months or years” of appeals, and, therefore, the bankruptcy court process should not be delayed. The Court stated in its ruling that a winning bid could deal with the contingency of how these accounts will be treated. In any event, the Debtors have also noted that they “will not sell or purport to sell any Assets absent a finding by the Court that they have title and authority to sell the Assets.”

In the Sale Order, the Court appears to accept the Debtors’ view that time is of the essence in this case and gives great deference to the Debtors’ business judgment. (To those less familiar with the United States Chapter 11 system, this deference to the management of a bankrupt entity is likely to come as a surprise.)  Per the Court, the bidding procedures are designed to “maximize value of the Debtors’ assets.” In the Sale Order, Judge Glenn compared the Debtors’ businesses to a melting ice cube in that if the Debtors wait too long to act, liquidity issues are likely to impact the Debtors’ operations in 2023 as the assets available for sale dwindle. This view that “time is not on the side of maximizing recovery by all stakeholders” is in contrast to those “bullish” on crypto prices who would prefer the Debtors to wait for a price recovery before selling assets.

Key points on the bidding procedures, as approved by the Sale Order:

• Debtors intend to try to sell the entirety of their retail platform, including customer earn accounts and coin balances, retail and institutional lending portfolio, swap services, staking platform, Celpay, and CelsiusX. The Debtors also requested the ability to sell their staking and mining operations and any other assets;

• Sale timeline: Initial bids for the Retail Platform Assets are due November 21, 2022, an auction, if necessary, is scheduled for December 15, 2022, and a sale hearing is set for December 22, 2022;

• The Debtors have a list of over 30 parties they believe may be interested in bidding;

• As it remains an open question if certain accounts are part of the bankruptcy estate, it is unclear if bidders will be interested in bidding on accounts given such uncertainty;

• Debtors anticipate allowing the winning bidder to purchase assets free of potential liabilities;

• Debtors made clear that they plan, or at least hope, to sell all accounts. However, as seen in another bankruptcy case, bidders may only desire to acquire account information and not accept liabilities assets in accounts;

• The sale procedures do not appear to contemplate the Debtors making a distribution of crypto assets to creditors; however, nothing in these bid procedures is the final word on how any distribution will be made; and

• The bid procedures anticipate that any sale under these procedures will happen under a plan of reorganization that will be approved by the Court and creditors.

Rejection of the Equity Committee:

On October 24, the Court also denied a motion for the appointment of an official preferred equity committee (the “Committee Motion”). The equity holders in question have been active participants in the Debtors’ bankruptcy case from the start, often filing objections to the Debtors’ filings. Both the Debtors and the Official Committee of Unsecured Creditors filed objections to the Committee Motion. In general, under the rules of a Chapter 11 bankruptcy case, the equity holders are not entitled to any proceeds of the bankruptcy estate unless all impaired creditors are paid back in full with interest, something which is not expected to happen in this case.

Ultimately, the Court agreed with the objections, holding that appointment of an Official Preferred Equity Committee is inappropriate for three reasons: (1) the equity holders are adequately represented by already existing stakeholders and do not need additional representation; (2) the equity holders have not met their burden to demonstrate that there is a substantial likelihood of equity recovery; (3) other factors, such as the balance of costs and benefits to the bankruptcy estate, as well of the complexity of the bankruptcy, do not weigh in favor or appointing an Official Preferred Equity Committee.