Celsius Bankruptcy Court Confirms That Customer Digital Assets Are Property of the Estate in Key Ruling

The bankruptcy court presiding over the Chapter 11 cases of digital asset platform Celsius Network LLC and its affiliates (Celsius) issued a key ruling on January 4, 2023 (the Decision), by concluding that a significant portion of digital assets held in Celsius’ customer accounts are property of the debtors’ estates, and holders of such accounts accordingly are unsecured creditors.1 The digital assets at issue in the Decision were held under Celsius’ “Earn” program, pursuant to which the digital assets were not segregated or held in custody but used freely by Celsius to generate investment returns, and were subject to contract terms stating that the digital assets belonged to Celsius.

The Decision did not address the digital assets held under Celsius’ “Custody” or other programs, each of which is the subject of separate disputes and litigation. Resolving the issue of who owns these digital assets held on Celsius’ platform was an important gating item for the Chapter 11 cases, as the answer has significant implications for, inter alia, the account holders’ potential entitlements in any reorganization and potential clawback claims that the estates may be able to assert against its account holders. This decision may also inform digital asset ownership rights that are developing in other areas of law or pending regulations.2

Events Leading Up to the Decision

From the outset of the Chapter 11 cases, Celsius has taken the position that digital assets deposited by account holders in Earn accounts were Celsius’ property and became property of the estates upon the filing. However, until the Decision, the bankruptcy court presiding over the Chapter 11 Cases (the Bankruptcy Court) had not weighed in on the issue, and Celsius was not authorized to sell or use the digital assets absent further court authority.3 In September 2022, Celsius requested authority to sell stablecoin held in the Earn accounts to provide much-needed liquidity to fund operating expenses and the costs of the Chapter 11 cases, but several parties, including the official committee of unsecured creditors, objected on the basis that Celsius had not yet met its burden to establish that the platform actually owned the stablecoin it was intending to sell.

In November 2022, Celsius filed an amended motion requesting entry of an order establishing that the digital assets in the Earn accounts are property of the estates and granting authority for Celsius to sell up to $18 million in stablecoin from the Earn accounts, and submitted supporting declarations regarding the debtors’ rights to these assets.4 The creditors’ committee ultimately agreed that the digital assets deposited into the account holders’ Earn accounts at Celsius are property of the estates, but many individual account holders as well as several state governments objected and asserted a variety of arguments for why account holders retained ownership rights to the digital assets.

Nature of the Earn Accounts

Prior to the July 15, 2022, petition date, Celsius’ platform offered a few different programs or account types for customers: (i) “Earn,” (ii) “Custody,” and (iii) “Borrow.” The Earn program was Celsius’ main product, and Celsius had approximately 600,000 accounts in the program. Under the Earn program, an account holder would deposit digital assets into its Earn account on the Celsius platform, and Celsius was permitted to invest such assets at its own discretion in order to obtain a return on investment that was shared with Earn account holders. As a result, Celsius generally did not retain or segregate the digital assets deposited in the Earn accounts but rehypothecated, loaned, and exchanged those assets as it would its own assets. In contrast, under the Custody program, Celsius was not permitted to invest customer digital assets held in Custody accounts, and such assets did not generate investment returns. Under the Borrow program, account holders pledged their digital assets to Celsius as collateral for cash loans, and Celsius would release the collateral back to the account holders when the loans were repaid. At the time of filing, Celsius also maintained “Withhold” accounts for (i) digital assets sent to Celsius that were not supported by Celsius’ platform and (ii) digital assets to be temporarily held for account holders in jurisdictions in which Celsius was not authorized to offer the Earn or Custody programs.

The nature of the debtors’ interests in and rights to the digital assets held under each of these programs or accounts is different, and accordingly the disputes as to whether the digital assets held under these programs are property of the estate have unfolded through separate motions and proceedings.5

The Property of the Estate Decision

The bankruptcy court viewed the question of ownership as a contract law issue and focused on the questions of (i) whether the Celsius user agreement (Terms of Use) constituted a valid, enforceable contract between Celsius and the account holders and, (ii) if so, whether the Terms of Use conveyed title and ownership rights in the digital assets from the account holders to Celsius.

First, the Bankruptcy Court concluded that the Terms of Use constituted an enforceable contract between Celsius and its customers. The Terms of Use were an electronic “clickwrap” agreement, which required account holders to confirm that they accepted the terms by clicking a button on the screen but did not necessarily require the account holders to actually view the terms.6 The Bankruptcy Court observed that these clickwrap contracts are routinely enforced under New York law, and an account holder manifests sufficient assent to be bound by the contract terms when it clicks the acceptance button online. The Bankruptcy Court further found that the Terms of Use for the Earn accounts were supported by sufficient consideration in the form of the “rewards” payments account holders earned from the digital assets deposited into the Earn accounts and that the account holders had understood and intended that they would be bound by the Terms of Use with Celsius even if they did not intend the effects of the contract.7

Second, the Bankruptcy Court focused on whether the Terms of Use had clear and unambiguous language regarding the ownership of the digital assets deposited into the Earn accounts. The Terms of Use provided that account holders “grant Celsius  … all right and title to such Digital Assets, including ownership rights” and “the right … to pledge, re-pledge, hypothecate, rehypothecate, sell, lend, or otherwise transfer or use any amount of such Digital Assets … with all attendant rights of ownership … and to use or invest such Digital Assets in Celsius’s full discretion.” The Bankruptcy Court found that this language unequivocally transferred title and ownership of the digital assets in the Earn accounts to Celsius, and such assets became property of the estates upon the bankruptcy filing.

The Bankruptcy Court rejected account holders’ arguments that the Terms of Use were ambiguous (notwithstanding the language transferring title and ownership to Celsius) because the Terms of Use described the account holders as “lending” their assets to Celsius, which suggested that the account holders retained ownership but temporarily allowed Celsius to use the assets. The Bankruptcy Court found that the transfer of title clause was clear and observed that it was not at all inconsistent for a party “lending” its assets to a debtor to be an unsecured creditor in a bankruptcy case. Further, nothing in the Terms of Use would suggest that the account holders retained a lien on the digital assets deposited into the Earn accounts, much less a perfected lien, and the account holders therefore did not have a secured claim to the assets in their Earn accounts. The Bankruptcy Court also rejected arguments that marketing materials and statements made by Celsius’ former CEO could modify the Terms of Use even if the advertisements and statements suggested that Celsius account holders own the digital assets in their accounts.

Key Takeaways

The Decision highlights how important it is for digital asset investors to read and understand the user agreement governing their relationship with the digital asset platform, particularly the language regarding the parties’ respective rights to and interests in the digital assets held in an investor’s account. In this case, the Terms of Use accepted by Celsius account holders were unequivocally clear that the title to and ownership of digital assets deposited by customers into the Earn accounts were transferred to Celsius, and Celsius had full rights to use and invest those assets. Account holders can be bound by such terms even if they did not read or fully appreciate the consequences of the terms.

Disputes over ownership of digital assets will continue in the Celsius and other digital asset bankruptcy cases. The Decision makes clear that terms of the applicable user agreements, including the rights granted to the insolvent platform under such agreements, will be a primary focus of those disputes. As such, it is important for blockchain market participants to be thoughtful about the language in any digital asset customer agreements, including the choice of law provision, and any related marketing materials.

And while the Bankruptcy Court found that the contract language on title transfer and ownership was dispositive to determining that the digital assets at issue in the Decision are property of the estate, it is important to recognize that the contract language may not be dispositive in all contexts, particularly if a party is seeking to exclude assets from a bankruptcy estate. Other factors include, among other things, whether the assets to be excluded have been commingled with estate property and whether a party can trace those assets following such commingling.8 Further, as a practical matter, Celsius has a significant shortfall in the amount and types of coins it was holding for Earn account holders, so it would not be possible for Celsius to return the digital assets to each account holder even if the contract terms provided that the Earn account holders retained ownership of the digital assets.9 Market participants should therefore be mindful of practical, as well as legal, risks of digital asset investing.

1In re Celsius Network LLC, Case No. 22-10964 (Bankr. S.D.N.Y. Jan. 4, 2023), Memorandum Opinion and Order Regarding Ownership of Earn Account Assets, Docket No. 1822.
2See, e.g., U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 121 (Apr. 11, 2022).
3See Final Cash Management Order, Docket No. 1152 (Bankruptcy S.D.N.Y. Oct. 21, 2022).
4Docket Nos. 1325, 1326, 1328, 1584.
5For example, Celsius has taken the position that digital assets held as part of the Custody program are not property of the estate but that a large portion of the custodied digital assets cannot be released to customers until preference claims against the customers are resolved. On December 20, 2022, the Bankruptcy Court issued an order without a legal analysis stating (i) that digital assets held in the dedicated wallet for the Custody program and digital assets that were transferred to Celsius but not supported by the Celsius platform are not property of the estate, but (ii) such assets could be released only if the debtors did not have potential preference claims against the applicable account holder. See Docket No. 1767. The Bankruptcy Court did not address the more complex questions of whether digital assets held for the Custody program outside the dedicated wallet are property of the estate or whether the other withhold account assets are property of the estate.
6There have been eight versions of Celsius Terms of Use, the last of which became effective on April 15, 2022. The debtors were able to demonstrate that 90% of the Earn account holders, representing 99% of the digital assets held in the Earn accounts, had accepted versions 6, 7, or 8 of the Terms of Use.
7The debtors’ amended motion preserved an opportunity for account holders to raise individual defenses to the presumption that the Terms of Use are a binding agreement between Celsius that the specific account holder, and the Decision reserves those defenses. The Decision also did not determine whether account holders may assert additional breach of contract claims against the debtors and did not address any right of governmental authorities respecting whether Celsius violated state securities laws.
8For example, in the Bankruptcy Court’s December 20, 2022, order addressing certain of the digital assets held under the Custody program, the Bankruptcy Court declined to find that the digital assets that were held for Custody accounts but that were not held in the segregated Custody wallet were not property of the estate and instead reserved on that issue for further proceedings. See Docket No. 1767. While Celsius argued that the Terms of Use provide that title and ownership of the digital assets in the Custody program are not property of the estate regardless of where such assets were stored, the creditors’ committee’s position is that only digital assets held in the segregated Custody wallet should be excluded from the estates. See, e.g., Debtors’ Responsive Brief on Phase I Custody and Withhold Issues, Docket No. 1567 (Dec. 2, 2022).
9As of November 25, 2022, Celsius reported having just over $5.053 billion in digital liabilities owed to account holders but had only approximately $2.638 billion in digital assets. Of that $2.638 billion in digital assets, the debtors only had approximately $1.676 billion of digital assets in their actual possession or control. See Public Coins and Budget Report, Docket No. 1676.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.