“Light itself is a revelation.” – James Turrell
Bankruptcy proceedings are notoriously vicious affairs. When multiple classes of creditors are owed more money than what’s available to be split, the brawl over what remains can get bloody. Like vultures crowding a wounded animal, bankruptcy attorneys leave no bone unpicked.
Establishing the prioritization of creditor claims is the first step in all bankruptcies. The Absolute Priority Rule (APR) mandates that senior classes of creditors must be made whole before junior classes see any recovery and litigating where your claim sits in the seniority pecking order is of the utmost priority. Broadly, secured claims – those backed by pledged collateral, for example – will fare far better than unsecured claims such as junior bonds and common stock.
Not all secured claims are as “secure” as their holders might think. A classic tactic used by unsecured creditors is to pounce on small contract errors to invalidate the perfection of a secured claim. Success yields the obvious benefit of increasing any residual value available to unsecured creditors. As this Lexology blog post helpfully explains, every detail matters (emphasis added throughout):
“If a security interest is not properly perfected, it is subject to avoidance in a bankruptcy proceeding and the loan would become unsecured.
The general idea with perfection is that the lender must either have actual possession of, or control over, the collateral to put the ‘world on notice’ that the lender has a security interest in collateral (such as by filing a UCC-1 Financing Statement with the Secretary of State).”
And then there is the messy concept of fraudulent conveyance (and slightly less messy preference). The disbursement choices made by senior management in the weeks and months leading up to a bankruptcy filing – what bills they decided to pay and which they chose to postpone – can have a significant impact on the outcome in court. If it can be shown that management knew or should have known a bankruptcy filing was imminent, the appropriateness of certain transactions that occurred before the filing will be disputed. Just because you got your money out of a failing company before the bankruptcy filing date doesn’t necessarily mean you’ll get to keep it. As a general rule, the look-back period in such circumstances is 90 days for creditors and one year when transactions involve insiders directly.
We recite these admittedly generalized nuances of court-supervised reorganizations because we suspect the crypto community is about to become quite familiar with them. With the dramatic collapse and subsequent bankruptcy filing of Celsius Network LLC, a Delaware-incorporated crypto lending company we’ve profiled before, almost $5 billion of customer assets are now frozen. With these depositors now relegated to the status of unsecured creditors, the outcome of this precedent-setting case will have far-reaching consequences. We are not attorneys and this should not be considered legal advice – what we write here is simply the result of having closely studied Celsius’ bankruptcy filing and consulted legal experts in our network. The filing document itself contains explosive revelations and provides a rare peek behind the curtain of the shadowy world of crypto lending.
The entanglement of Tether in the Celsius affair puts the controversial operator of the world’s largest crypto stablecoin in an incredibly uncomfortable position, one which might finally pierce the veil of secrecy the company works so hard to preserve. If things play out the way we suspect, Tether could soon be forced to reveal damning specifics about the nature of its business practices. The relationship between Celsius and Tether – especially in the days leading up to Celsius’ demise – just might give interested teams of aggressive lawyers the opening they needed to force Tether to come clean. Let’s dig in.