Granting a motion by the U.S. Attorney and the U.S. Trustee, District Judge Jennifer H. Rearden of New York granted a stay pending the government’s appeal of the March 8 order confirming the chapter 11 plan for Voyager Digital Holdings Inc.
Voyager filed a chapter 11 petition in Manhattan in July, originally intending to sell the business and assets to FTX. After FTX itself ended up in bankruptcy with some of its executives indicted, Voyager tapped Binance.US to buy the assets, including cryptocurrencies held by the debtor and its customers. Binance is the world’s largest cryptocurrency exchange.
Following confirmation, the plan called for so-called rebalancing transactions together with a distribution of cryptocurrencies to creditors.
The debtor’s chapter 11 plan contained releases and exculpations running in favor of parties who participated in the chapter 11 case, including Binance.US. When state and federal governmental units filed objections, the debtor amended the plan to carve governments out from the releases and exculpations.
On March 2, when the confirmation hearing began, Judge Rearden said in her March 31 opinion that the debtor amended the plan in a manner that “would effectively undo the Government carve-out they had previously proposed.” To no avail, the government objected, and the bankruptcy judge confirmed the plan on March 8.
The release and exculpation provisions are lengthy, complex, convoluted and (in this writer’s judgment) susceptible to varying interpretations.
In the words of the U.S. Attorney, the exculpation clauses “would relieve various parties of liability based on the negotiation, execution, and implementation of any transactions or actions approved by the bankruptcy court, except for certain causes of action premised on actual fraud, willful misconduct or gross negligence.”
Significantly, the U.S. Attorney interpreted the exculpations to mean that “no exculpated parties may be liable for distributing cryptocurrencies in the manner provided in the plan.” The government interpreted the plan to mean that “the Government’s only remedy would be to seek prospective relief to enjoin any ongoing transactions that it comes to believe are illegal.”
The government took the position that a plan cannot allow the enforcement of federal statutes only if the “causes of action sound in actual fraud, willful misconduct, or gross negligence.” According to the government, the exculpation “also applies to transactions that will take place after the plan’s effective date. For such future transactions, it is impossible to know in advance what the parties will actually do, and whether they will engage in any misconduct.”
To enforce laws and regulations, the U.S. Attorney argued that the plan would require the government first to obtain an injunction. Absent an injunction before the fact, the exculpations would cut off government enforcement. Because the plan would become effective shortly after any stay expires, the government would have little time to obtain an injunction.
In short, the U.S. Attorney believes that the plan would “improperly” bar “the Government from enforcing its laws and regulations in the ordinary course against the Debtors and third parties in connection with the Restructuring Transactions.”
Putting the provisions together, the U.S. Attorney said that the “exculpation would bar the Government from exercising its police and regulatory authority, including its power to prosecute crimes, unless the laws it seeks to enforce sound in actual fraud, willful misconduct, or gross negligence.”
Moreover, the government saw the plan as absolving “Exculpated Parties not just for conduct that took place during the bankruptcy but also for the ‘implementation of any transactions’ contemplated by the plan that will largely happen after the plan becomes effective.”
The Motion for a Stay
The government filed an appeal from the confirmation order and sought a stay pending appeal. When the bankruptcy court denied the government’s motion for a stay pending appeal, the government applied to Judge Rearden for a stay on March 17.
Having taken briefs and heard argument, Judge Rearden granted a stay pending appeal on March 27 and filed an opinion and order on March 31 stating reasons for the stay. Given the urgency in the matter, Judge Rearden is expediting the appeal from the confirmation order. The last brief is due on April 18.
The Reasons for a Stay Pending Appeal
Addressing the merits, Judge Rearden cited the usual four factors governing the exercise of discretion in granting a motion for a stay pending appeal: (1) a strong showing of a likelihood of success on appeal; (2) irreparable injury; (3) whether a stay will injure other parties; and (4) where the public interest lies.
Judge Rearden said that the government had demonstrated “substantial questions” about the power of the bankruptcy court on one hand versus police and regulatory powers on the other.
In that respect, she said that bankruptcy courts have “limited, if any, jurisdiction over criminal cases.” For example, criminal prosecutions and enforcement actions are not subject to the automatic stay, she said, citing Section 362(b)(1), (4).
Judge Rearden said that the debtor and the creditors’ committee offered no “authority for the proposition that a bankruptcy court can release criminal liability.” She added that “preventing Government enforcement actions is at odds with the general principle that ‘confirmation of a plan does not insulate debtors from prosecution for criminal activity, even if that activity is part of the plan itself,’” citing the Ninth Circuit.
On the other hand, Judge Rearden said it was “likely” that quasi-judicial immunity might apply to some parties, but the exculpations appear “to go further than the quasi-judicial immunity doctrine allows.” For example, judicial immunity does not preclude injunctive relief.
More to the point, Judge Rearden said that “neither the Debtors nor the Committee has offered any authority rebutting the proposition that immunity must be raised as an affirmative defense, rather than granted preemptively before any action has even taken place.”
The government had shown a substantial case on the merits that weighed in favor of a stay, Judge Rearden said.
Likewise, Judge Rearden said that the injury and public interest factors also favored a stay. “There is,” she said, “a fundamentally strong public interest in the Executive Branch’s enforcement of the democratically enacted laws of the United States.”
“Furthermore,” Judge Rearden said that a stay pending appeal would preserve the government’s “and the public’s” right to meaningful appellate review because equitable mootness could moot the appeal.
While each side had shown “unquantifiable and irreparable injury,” Judge Rearden concluded that “the balance of hardship lies with the government.” She granted the stay pending appeal, finding a substantial case on the merits and irreparable harm absent a stay.
Update: The debtor and the creditors’ committee have filed emergency appeals, asking the Second Circuit to vacate Judge Rearden’s stay pending appeal.
Granting a motion by the U.S. Attorney and the U.S. Trustee, District Judge Jennifer H. Rearden of New York granted a stay pending the government’s appeal of the March 8 order confirming the chapter 11 plan for Voyager Digital Holdings Inc.
Voyager filed a chapter 11 petition in Manhattan in July, originally intending to sell the business and assets to FTX. After FTX itself ended up in bankruptcy with some of its executives indicted, Voyager tapped Binance.US to buy the assets, including cryptocurrencies held by the debtor and its customers. Binance is the world’s largest cryptocurrency exchange.
Following confirmation, the plan called for so-called rebalancing transactions together with a distribution of cryptocurrencies to creditors.
The debtor’s chapter 11 plan contained releases and exculpations running in favor of parties who participated in the chapter 11 case, including Binance.US. When state and federal governmental units filed objections, the debtor amended the plan to carve governments out from the releases and exculpations.