Celsius turns up the heat on customer clawbacks

The Litigation Adminsitrator for the bankrupt crypto exchange and lending platform Celsius has started issuing demand emails to former customers who made net withdrawals from Celsius greater than USD$100,000 in the 90 days prior to Celsius' bankruptcy filing date (Withdrawal Preference Exposure). The Administrator is seeking to rely on broad preference rules under the US Bankruptcy Code to clawback withdrawals in the lead up to the exchange's collapse and ultimate bankruptcy filing on 13 July 2022.

The Celsius' bankruptcy administrators have previously made a number of offers to customers with preference exposure to settle clawback claims. The administrators had previously presented creditors with the choice of:

1. paying back 27.5% of their net withdrawals to settle any clawback actions (an offer that it later sweetened to 13.75% of the amount claim); or

2. obtain a court order ruling that the creditor has no preference liability to Celsius; or

3. resolve their Withdrawal Preference Exposure with the Litigation Administrator before receiving any distributions under Celsius' Reorganization Plan (Reorg Plan).

Those who did not take up the settlement offer (i.e. Option 1 above) are now being threatened with preference claims in the Bankruptcy Court for the Southern District of New York if they do not return the preference amount claimed within 30 days. Those who choose to settle will receive a general unsecured claim in the Celsius estate. The value of those claims is not yet clear, although Celsius had previously projected recoveries equivalent to around 67 cents on the dollar, subject to the claim type. We are not aware of Celsius having issued any guidance updating those projections.

There a number of potential defenses to preference claims under the US bankruptcy code. Depending on their individual circumstances, some creditor may be able to rely on one of these clawback defences to defeat a preference claim, although this remains a live issue. For now, the Litigation Administrator is arguing that no defences will apply.

Given the Litigation Administrators' 30 day deadline - there is now about 20 days left - creditors will need to assess their options, which may involve seeking legal advice from experienced legal counsel on their potential defenses and settlement options.

Piper Alderman is liaising with experienced US counsel on developments in the Celsius bankruptcy and offering assistance to Australian-based customers who may be affected by clawback claims.

Written by J Huang and S Pettigrove