Crypto Considerations in Reorganization Bankruptcy Plans | Lowenstein Sandler LLP

Lowenstein Sandler’s previous article on crypto bankruptcies discussed some basics of bankruptcy and the role of a creditors’ committee in protecting client rights. This article will dive deeper into the administration of a crypto bankruptcy case by discussing the negotiation of a crypto bankruptcy reorganization plan.

A Chapter 11 bankruptcy generally results in two scenarios: a bankruptcy sale (commonly referred to as a “363 sale”, a reference to the section of the Bankruptcy Code authorizing the sale of assets free and clear of liens and other ) or confirmation of a reorganization plan. A 363 sale will frequently involve the sale of all or substantially all of a debtor’s assets, followed by confirmation of a liquidation plan, conversion to Chapter 7, or dismissal of the Chapter 11 case. In many cases, a plan of liquidation creates a trust that has the power to litigate and liquidate preserved causes of action for the benefit of general unsecured creditors.


A Chapter 11 debtor is the only party who can file a plan during the “exclusive period.” The exclusivity period extends for the first 120 days of a Chapter 11 case, but can be reduced or extended (up to a maximum of 18 months) for a “cause”. It is generally found that there is a reason for extension in large and complex cases, or when the debtor demonstrates that it is progressing towards a successful reorganization. Courts do not grant extensions where the debtor seeks to use the exclusivity period as a delaying tactic or as a means of pressuring the parties to agree to a plan, and may reduce the exclusivity period in the event of serious mismanagement or where the debtor’s management is in conflict that interferes with the debtor’s recovery efforts.

Mandatory and optional plan provisions

The Bankruptcy Code requires that each plan must:

  • Classify claims and interest, other than certain priority claims
  • Specify any class that is not depreciated under the plan
  • Describe the treatment of any group that is impaired under the plan to enable those group members to make an informed decision whether to accept or reject the plan
  • Treat each claim or interest within a category identically
  • Establish adequate means to implement the plan, for example, through operating profits, funding from a sponsor, or sale of the debtor’s assets

Although not required, a plan can:

  • Mitigate or leave untouched any class of claims or interests
  • Provide for the assumption, rejection or assignment of any enforceable contract or unexpired lease not previously rejected
  • Provide for the settlement or adjustment of claims belonging to the debtor or the preservation or assignment of such claims
  • Provide for the sale of all or substantially all of the assets of the estate and the distribution of the proceeds of the sale

Disclosure and solicitation

Before a plan of reorganization can be circulated for voting among creditors, the debtor must seek court approval of a statement containing “adequate information”. A typical information statement describes the events that led the debtor into bankruptcy, the major events that occurred during the bankruptcy case, the classification of claims, the expected percentage return for each class, and whether or not each class is impaired. , the means of implementing the plan, and certain risk factors and tax consequences.

Once a statement is approved, the debtor is permitted to solicit votes on the plan from impaired debt holders receiving collection (non-impaired creditors are deemed to accept the plan and cannot vote; impaired creditors who receive nothing are deemed to reject the plan and also cannot vote). Voting is done class by class. A class of claims accepts a plan if the plan is accepted by creditors holding at least two-thirds in dollars and more than half in number of the claims in that class who actually vote on the plan. A plan may be approved if all impaired classes vote in favor of the plan, or if at least one impaired class votes in favor of the plan and the plan does not unfairly discriminate against any non-consenting impaired class, and is fair and equitable (for general unsecured creditors, this means that equity holders do not receive a distribution unless general unsecured creditors are paid in full).

In addition, the court must conclude that a plan is feasible and in the best interests of creditors. To meet this feasibility standard, the debtor must demonstrate that it is not likely to fail after emerging from bankruptcy and that the projected cash flows are sufficient to meet the obligations of a plan. For the best interests of creditors test, a plan must provide each debt holder with more than they would receive or keep in a Chapter 7 liquidation.

Cryptographic Considerations in a Reorganization Plan

The recent bankruptcy filings of Voyager Digital Holdings Inc. and Celsius Network LLC have raised many new questions that need to be resolved before any plans are confirmed in these cases.

Probably one of the most important questions is the ownership of crypto assets by account type. The differences between being a secured creditor, general unsecured creditor, or beneficial owner of crypto assets held in custody or in trust by a debtor may be among the most important distinctions when considering treatment under a bankruptcy plan. If customers are found to be the beneficial owners of crypto assets that a debtor simply holds in trust, then the debtor cannot distribute or use those assets as part of a plan of reorganization, and those assets should probably be given to customers well in advance. confirmation of a plan. If it is determined that a Client has a valid and enforceable security interest in Crypto Assets held by a Debtor, then the Client must receive, at a minimum, the “unmistakable equivalent” of such security under a plan, that is, the return of the guarantee, a distribution not less than the value of the guarantee, or a lien on the proceeds of the sale of this guarantee. Being classified as a general unsecured creditor, coupled with the finding that customer crypto assets in a debtor’s possession are the property of the estate, offers the least protection, as any plan of reorganization must provide general unsecured creditors with at least what they would receive in a hypothetical Chapter 7 bankruptcy liquidation, which can be as little as zero.

If the debtor is able to repay its customers all or part of their claims under a plan, the question arises whether the customers can be repaid in cash without prejudice to their claims. In addition, if a plan provides for distributions in cash rather than in kind, the question arises whether the debtor can value the claims as of the date of the petition, the effective date of the plan, or the date on which the distributions are made. ; these dates can potentially be years apart and result in wildly different payout percentages for clients depending on the state of the crypto market. Similarly, if a bankruptcy court applies the best interests test on the date of the confirmation hearing, should the debtor be allowed to benefit from the appreciation of the crypto assets? Or, in the opposite situation, if the value of the crypto assets depreciates after a confirmation hearing, should a debtor change their plan to provide for reduced distributions, or can they wait for the crypto assets to appreciate in value? A user-friendly plan structure could offer creditors the flexibility to choose a current or future distribution.

Finally, with respect to feasibility, what weight should the court place on client confidence in current management and any pending and potential government action or other regulation? In the Celsius bankruptcy cases, customers allege that current management, including the CEO, engaged in massive fraud before freezing customer accounts and filing bankruptcy petitions. Whether this is true or not, the court must determine whether a plan based on the reorganization of business operations is feasible when a “run on the bank” is likely to follow the confirmation. Additionally, if government entities claim that the debtor violates applicable laws and cannot continue to operate, will bankruptcy courts be first in line to determine the legality of crypto offerings (such as their securities status) in various jurisdictions?

Lowenstein continues to monitor crypto bankruptcies and the crypto market as a whole for new developments, and will post additional articles providing more details on new issues related to crypto bankruptcies.

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