Ori Kopilev

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

In In re Celsius Network LLC, the U.S. Bankruptcy Court for the Southern District of New York held that the debtors retained the rights to the assets from users’ cryptocurrency accounts (“Earn Accounts”) and, therefore, were permitted to sell the stablecoins contained therein.[1] Prior to the bankruptcy filing, approximately 600,000 “Account Holders”[2] joined Celsius’s optional crypto lending program (“Earn Program”), depositing their digital assets into the Earn Accounts.[3] As of July 10, 2022, prior to the bankruptcy filing, the Earn Accounts held various cryptocurrency assets totaling approximately $4.2 billion with stablecoins comprising around $23 million of this amount.[4]

Under section 541 of title 11 of the United States Code (the “Bankruptcy Code”), “the commencement of a case under section 301, 302, or 303 of this title creates an estate.[5] Such estate is comprised of all the following property: . . . all legal or equitable interests of the debtor in property as of the commencement of the case.”[6] During the Celsius chapter 11 cases, the debtors argued that they were given possession of the assets of Earn Accounts (“Earn Assets”) when users joined the Earn Program and agreed to the “Terms of Use,” effectively transferring ownership to Celsius (now the debtors’ estates).[7] The Terms of Use allowed users to lend their digital assets to Celsius in exchange for a financing fee from Celsius.[8] By agreeing to the Terms of Use, users transferred ownership of the Earn Assets to Celsius (now the debtors’ estates under Bankruptcy Code section 541).[9] Accordingly, the debtors moved the bankruptcy court for permission to sell the stablecoins for the benefit of all creditors of the estates, not only those in the Earn Program.[10]

In Celsius, the bankruptcy court assessed the terms and enforceability of Celsius’s Terms of Use to determine whether the Earn Assets belonged to the creditor users or the debtors’ estates.[11] The enforceability of the Terms of Use was evaluated based on three aspects of contract formation: (1) mutual assent; (2) consideration; and (3) modification.[12]The bankruptcy court examined whether users were reasonably aware that they were bound by the terms of the electronic contract and whether “clickwrap” agreements, like the Terms of Use, were enforceable in New York.[13] “Clickwrap agreements are generally defined by the requirement that Account Holders ‘click’ some form of ‘I Agree’ after being presented with a list of terms and conditions.”[14] Under New York law, clickwrap contracts are generally enforceable.[15] Courts also acknowledge that customers rarely read the full terms of a clickwrap agreement prior to consent.[16] The bankruptcy court held that users were assenting to the clickwrap contract regardless of whether they chose to read some or none of the provisions.[17] Consequently, Celsius’s Terms of Use was deemed enforceable, allowing the debtors to retain ownership of the digital assets.[18]

Although the bankruptcy court found that users entered into valid contracts and, therefore, effectively transferred their assets to Celsius, it also stated that users may have a defense to contract formation in future proceedings.[19] A court may find that Celsius’s former chief executive offer violated state securities laws if he persuaded users to join Celsius, keep their cryptocurrency on Celsius’s platform, and deposit additional assets.[20]

The bankruptcy court authorized Celsius to sell its stablecoin assets, including the Earn Assets.[21] Under Bankruptcy Code section 363(c)(1), a debtor is given permission to enter into transactions, like selling assets, in its ordinary course of business.[22] With approval from the court, a debtor may also enter transactions that are not in its ordinary course of business if the debtor demonstrates a “sound business purpose” for doing so.[23] Given its financial circumstances, Celsius was no longer operating under an ordinary course of business and, therefore, the Court felt this was a moot point.[24] Additionally, Celsius would likely be forced to sell almost eighty percent of its stablecoin supply to combat liquidity issues.[25]

As a result of the bankruptcy court’s decision concerning ownership of the Earn Assets, those users were deemed unsecured creditors, rather than secured creditors with rights to collateral, reducing their chances of a full recovery.