Celsius Pursuit of Mashinsky Highlights Crypto Customer Fortunes

A new lawsuit against Celsius Network’s criminally indicted co-founder may reap benefits for some crypto customers already set to receive payouts that would make creditors in most corporate bankruptcies jealous.

Litigation winnings recovered from Alex Mashinsky and other former leaders of the bankrupt crypto lender would add to the 67% to 85% recovery customers are expected to receive on the debts they’re owed under Celsius’ court-approved restructuring plan. That rate is high for low-ranking creditors—a class the crypto customers technically fall into—in Chapter 11.

WeWork’s bankruptcy plan, for example, will pay at most 1% back to the company’s unsecured creditors, while those in Bed Bath & Beyond Inc.'s bankruptcy were in line for 2.5% and BowFlex Inc. were slated for 3.5% to 20.6%, according to court filings. Unsecured creditors in those cases often include vendors and suppliers.

Celsius isn’t even offering the highest recoveries among crypto firms and lenders that filed for bankruptcy. FTX Trading Ltd. and Bittrex Inc. said they’ll pay creditors 100% or more of what they’re owed. Genesis Global Capital estimated its creditors could receive up to 77% of what they’re owed.

It’s a stunning recovery that has far exceeded expectations from the depths of the crypto industry’s collapse in 2022, when it appeared little value would be left for customers. That customers in crypto bankruptcies are faring far better than typical unsecured creditors in Chapter 11—who often rely solely on potential litigation proceeds for recoveries—is due in part to the crypto rally shortly after many of the biggest firms filed for bankruptcy, as well as crypto firms’ corporate structure.

“By the good fortune of a market recovery, FTX and other crypto companies were able to liquidate their claims,” Dan Gwen, a restructuring lawyer specializing in cryptocurrency for Ropes & Gray LLP, said.

How much creditors ultimately recover—and how they feel about it—depends on complex questions, including whether customers will be paid back in crypto or in cash. Repayment in crypto, offered in the cases of Bittrex and Genesis, is far different from a 119% recovery in cash, offered in FTX.

Senior Lawyers, Not Senior Lenders

The surge in the crypto market over the last year and a half increased estate value that can be used to pay back creditors across the board. Thanks to the structure of crypto companies, some customers got a bigger piece of the pie.

Even though customers were slotted into a low rung of the creditor repayment ladder, higher rungs—reserved for senior lenders and usually filled by sophisticated parties like hedge funds—were left vacant in many crypto bankruptcies. Voyager Digital Holdings Inc. and Bittrex, for example, had no secured debt, according to court filings.

In Bittrex, that credit structure, among other factors, yielded customers a one-to-one recovery.

“We could safely say at the beginning of the case that we were going to pay customers in full,” Patty Tomasco, who led Quinn Emanuel Urquhart & Sullivan LLP’s representation of Bittrex, said.

In exchange, customers had to give up any claims they held against Bittrex. The payout also ensured customers wouldn’t form an unsecured creditors’ committee. Those committees often work to claw back funds for creditors but also increase legal costs.

Although the lack of senior lenders freed up assets for customers, the cryptocurrency bankruptcies featured another powerful and high-priced constituency: lawyers. The novelty of crypto bankruptcies meant judges were answering many unprecedented questions, casting them in a quasi-regulatory role and creating thousands of hours in high-priced legal work for law firms, who are paid out first in bankruptcy.

“We are dealing with lawyers who will without a shadow of a doubt be paid first,” Yesha Yadav, a law professor at Vanderbilt University, said.

Controlling the Assets

The high recoveries shouldn’t distract from some hard lessons learned during the crypto winter, like ensuring that customers retain ownership over their assets, Gwen said.

“I’m just fearful because people came out relatively okay, they’ll just kind of turn a blind eye to the fact that this could have been a complete 180 situation,” Gwen said.

While the turnaround is a good result for customers, many of them are still coming out worse than they were before because they will be paid out over years and missed out on the crypto rally, Yadav said.

“In the small picture, they won the bankruptcy game,” Yadav said.

Judge Martin Glenn of the US Bankruptcy Court for the Southern District of New York ruled last year that crypto assets in Celsius’ “Earn” accounts, which accumulated interest, belonged to Celsius, not to the customers who deposited them.

That ruling lumped thousands of customers into the unsecured creditor bucket. Now their recoveries hinge in part on the success of dozens of lawsuits aimed at clawing back potentially fraudulent transfers, including the case against Mashinsky.

“That became an issue but it didn’t have to be if people who got involved in crypto just made sure that they had their own wallet,” said Eric Snyder, a bankruptcy attorney at Wilk Auslander.

There are signs that the crypto world has absorbed some lessons, Snyder said. Regulators like the SEC are starting to get a grip on policing the industry, and leading crypto companies are advertising products that allow customers to keep control over their assets.

“Unfortunately, Wall Street doesn’t always learn from its mistakes,” he said.