Lawyer Fees Rise in Crypto Bankruptcies

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Investment bank B Riley is so determined to persuade troubled bitcoin miner Core Scientific to avoid filing for bankruptcy that it has offered up to $72 million in new financing to prevent 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 an early December letter. “It will destroy value for the company’s shareholders, reduce possible recoveries for the company’s creditors, deplete its limited resources and create enormous uncertainty for all interested parties.”

Core Scientific filed for bankruptcy anyway last week. Still, B Riley’s dislike should be understandable. A number of players have succumbed to the ongoing crypto winter, including FTX, BlockFi, Voyager Digital and Celsius, with customer accounts largely frozen. New legal issues over ownership of digital assets, ongoing problems in the industry, and the deliberative nature of US bankruptcy proceedings have prevented any of the major companies from coming out of court protection. Costs are piling up and account holders are taking notice.

Lawyers, bankers and other advisers in the Celsius case, which began in July, recently filed detailed requests for fees with the federal bankruptcy court in New York, totaling $53 million. Under US law, these official advisors will have these so-called “administrative expenses”, subject to court approval, paid by the “estate” or company that will naturally consume account holders’ recoveries.

Law firms involved, including Kirkland & Ellis and White & Case, which are regular powerhouses in corporate and private equity bankruptcy, are involved in Celsius and have top-notch attorneys making more than $1,800 an hour. (This may remain a bargain, as the top FTX bankruptcy attorneys at Sullivan & Cromwell are charging upwards of $2,000 an hour.)

Frustrated Celsius account holders are taking to Twitter to complain about costs and slow progress. “It’s a lot of money,” admitted one of the lead lawyers in the case.

Celsius said it reduced annual labor and operating costs by more than 60% during the case, or about $100 million, but its liquidity remains questioned as most of its “traditional income streams have been eliminated,” according to court documents. 🇧🇷

A company adviser testified at the bankruptcy court hearing that selling $18 million worth of stablecoins would allow Celsius to survive another month after its liquidity estimate depleted in March.

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Legal and operational issues presented in cryptocurrency bankruptcies have forced Celsius and its creditors to hire a variety of experts. In addition to Kirkland & Ellis, he retained expert legal counsel from Latham and Watkins and Akin Gump. An official committee of unsecured creditors also hired a consultant, Elementus, as a “blockchain forensics consultant”.

The bankruptcy court also 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 footing the bill.

Among the thorny legal issues for Celsius to be decided in court is resolving whether account holders who have borrowed their cryptocurrencies on the platform to get high interest rates are simply in the unsecured lender pool or have specific claims on specific crypto assets. A decision on the matter will determine whether the company can sell the $18 million worth of stablecoins.

Cryptocurrency lenders and exchanges have almost no possibility of avoiding bankruptcy when facing a bank run on customer deposits. The court is uniquely positioned to order 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 – having a say in court. The continued chaos in the industry has not helped to keep cryptocurrency prices going as accounts are frozen, further frustrating customers.

Nancy Rapaport, a law professor at the University of Nevada, says bankrupts are often inexperienced and dependent on the judgment of their expensive advisers.

Rate concerns have not gone unchallenged in the Celsius case. A former bankruptcy judge, Christopher Sontchi was appointed by the court as the so-called “fee examiner” to examine the expenses of professional services firms. Sontchi will charge $1,500 per hour.

sujeet.indap@ft.com

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