The investment bank B Riley is so determined to persuade the troubled bitcoin miner Core Scientific to avoid filing for bankruptcy that it has offered as much as $72mn in fresh financing to keep the company from seeking a court-supervised Chapter 11 restructuring.
“Bankruptcy is not the answer and would be a disservice to the Company’s investors,” B Riley wrote in a letter from early December. “It will destroy value for the Company’s shareholders, reduce potential recoveries for the Company’s lenders, deplete its limited resources and create massive uncertainty for all its stakeholders.”
Core Scientific filed for bankruptcy anyway last week. Still, B Riley’s aversion should be understandable. A series of players have succumbed to the ongoing crypto winter including FTX, BlockFi, Voyager Digital and Celsius with customer accounts largely frozen. The novel legal issues about digital asset ownership, the continuing problems in the sector and the deliberative nature of US bankruptcy proceedings have kept any of the major companies from exiting court protection yet. The 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 requests to the New York federal bankruptcy court totalling $53mn. Per US law, these official advisers will have these so-called “administrative expenses”, subject to court approval, paid by the “estate” or the company which will naturally eat into the recoveries of account holders.
Law firms involved including Kirkland & Ellis and White & Case which are usual powerhouses in corporate and private equity bankruptcies are involved in Celsius and have top lawyers billing more than $1,800 per hour. (This may remain a bargain as top lawyers in the FTX bankruptcy at Sullivan & Cromwell are charging in excess of $2,000 per hour).
Frustrated Celsius account holders are taking to Twitter to complain about the costs and slow progress. “It is a lot of money,” conceded one top lawyer in the case.
Celsius has said that it has slashed annual labour and operating costs by more than 60 per cent during the case, or around $100mn, but its liquidity remains challenged as the majority of its “traditional income sources have been eliminated”, according to court papers.
A company consultant testified in the bankruptcy court hearing that selling $18mn worth of stablecoins would allow Celsius to survive another month past its March estimate of exhausted liquidity.
Legal and operational issues presented in crypto bankruptcies have forced Celsius and its creditors to hire a variety of experts. In addition to Kirkland & Ellis, it has hired specialist legal counsel from Latham and Watkins and Akin Gump. An official committee of unsecured creditors has also hired a consultant, Elementus, as “blockchain forensics adviser”.
The bankruptcy court also has allowed an independent “examiner” to investigate the events leading up to the bankruptcy. The examiner herself hired a law firm and financial expert for which Celsius is picking up the tab.
Among the thorny legal issues for Celsius to be decided in court is resolving whether account holders who lent their crypto on the platform to earn high interest rates are simply in the pool of unsecured creditors or otherwise have specific claims on specific crypto assets. A ruling on the matter will guide whether the company can sell the $18mn worth of stablecoins.
Crypto lenders and exchanges almost have no possibility of avoiding bankruptcy when facing a bank run among customer deposits. The court is uniquely positioned to bring order to the process of finding assets and determining a restructuring plan.
But there is little way for the process to move quickly, with all sides — company management, account holders, investors — getting a voice in court. The continued chaos in the sector has not helped maintain cryptocurrency prices while accounts are frozen, further frustrating customers.
Nancy Rapaport, a law professor at the University of Nevada, says players in bankruptcy are often inexperienced and reliant on the judgment of their expensive advisers.
Worries about fees have not gone totally unchallenged in the Celsius case. A former bankruptcy judge, Christopher Sontchi has been appointed by the court as a so-called “fee examiner” to scrutinise the expenditures for professional services firms. Sontchi will bill his time at $1,500 per hour.
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