Understanding Celsius Network Adversary Proceedings: An Insight into the Complexities of Bankruptcy Claims

By: Michael L. Moskowitz, Esq., Moish E. Peltz, Esq., and Richard E. Weltman, Esq.

The Celsius Network bankruptcy case is a landmark event in the cryptocurrency world, not just because of the scale of financial failure but due to the complex legal battles it has ignited against tens of thousands of consumer creditors. One of the critical aspects of this case involves adversary proceedings, where Celsius is bringing over 2,000 cases, largely against consumer creditors, seeking to recover amounts withdrawn from Celsius in excess of $100,000. This blog post explores the nature of these adversary proceedings and illustrates the broader legal and financial implications for creditors and the Celsius bankruptcy estate.

The Nature of Adversary Proceedings

Adversary proceedings are essentially lawsuits within a lawsuit, filed in furtherance of a bankruptcy case. They are used to resolve disputes that require a court's intervention. In the context of Celsius Network, these proceedings are focused on recovering funds that were allegedly “preferentially transferred” to creditors before the bankruptcy filing. These actions are grounded in the bankruptcy principle that all creditors should be treated equitably, so those creditors who withdrew assets immediately before the bankruptcy filing should be treated similarly to those that did not.

Background of the Case

Before filing for Chapter 11 protection on July 13, 2022, Celsius Network claimed to be "safer than a bank," but it was later revealed to be insolvent and found to have engaged in fraudulent activities. Adversary proceeding complaints are being filed on several legal grounds, including:

• Fraudulent Transfers or Constructive Fraudulent Transfers Relating to the Withdrawal of funds or CEL Tokens;
• Participation in Liquidity Pools or other investment activities related to Celsius;
• Declaratory Judgment that creditors should be required to return assets.

Implications for Creditors

Successful recovery of these funds means that more assets will be available in the bankruptcy estate, potentially increasing the distribution to all creditors. However, it also means that creditors who received payments before the bankruptcy filing might have to return those funds, complicating their financial situations further. Even if a creditor had a valid reason for withdrawing those funds, they will now have to assert a defense in the context of an adversary proceeding or otherwise come to a settlement. Creditors may also not have the financial means to both: (1) mount a litigation defense, and (2) contribute to a financial settlement with the debtors (Mohsin Meghji, acting as Litigation Administrator for Celsius Network LLC and its affiliated debtors).

The Broader Picture

The Celsius adversary proceedings highlight the complexities involved in large-scale bankruptcy cases, especially in the relatively new and volatile cryptocurrency sector. These proceedings are not just about recovering funds but also about unraveling fraudulent schemes and ensuring equitable treatment of all creditors. As the various adversary proceedings unfold while the broader bankruptcy case proceeds, it will set important precedents for how cryptocurrency bankruptcy cases are handled in the future.

Conclusion

The Celsius Network Chapter 11 bankruptcy and the ensuing flood of adversary proceeding lawsuits underscore the critical need for transparency and regulation in the cryptocurrency marketplace. These actions may be a double-edged sword—they appear to offer a chance to reclaim some of their losses while posing the risk of having to return significant funds. As these claw-back cases progress, they may offer valuable insight into the interplay between bankruptcy law and the burgeoning world of digital assets.

In the coming months, the outcomes of these adversary proceedings will be closely watched, not just by those directly involved but by the entire financial and legal community, as they navigate the developing crypto insolvency landscape. But owing to the propriety, uncertainty and potential cost of litigation many of these claw-back lawsuits will settle out of court. 

The lawyers at Falcon Rappaport & Berkman have defended scores of adversary proceedings across almost every industry, including claw backs, preferences and fraudulent conveyances. We know how to represent individuals impacted by Celsius, Voyager, and other cryptocurrency bankruptcies and leverage our experience to achieve better outcomes. If you have been named in a Celsius adversary proceeding, please reach out to Richard Weltman, Moish Peltz, or Michael Moskowitz to learn your options. Our collaborative team is here to guide you through this challenging process.

DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship.  This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm.  Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.