Celsius Bankruptcy: With The Filing Of The Disclosure Statement, Is The End In Sight For This Marathon Of Uncertainty – Insolvency/Bankruptcy

Introduction

After multiple delays, on June 27th, Celsius Network, LLC and
certain of its affiliates as debtors and debtors in possession
(collectively, the “Debtors” the
“Company” or
“Celsius”) filed a disclosure statement
to provide creditors and other parties in interest with information
regarding the Debtors’ Joint Chapter 11 Plan of Reorganization
of Celsius Network LLC and Its Debtor Affiliates (the
“Plan“). The court has set the hearing
to approve the Disclosure Statement for August 10th.

The Disclosure Statement, which we summarize below, contains
projected recoveries for creditors under the scenario of a
“NewCo Transaction” and also an alternative “Orderly
Wind Down” scenario if the NewCo Transaction cannot be
consummated. Additionally, since the filing of the Disclosure
Statement the Company has entered into a few settlement agreements
which hopefully will pave the way to the end of this case and a
recovery for creditors.

The Chapter 11 Bankruptcy Process

A bankruptcy case voluntarily initiated by a company under
Chapter 11 of the United States Bankruptcy Code, with the hope or
intent to emerge as a going concern, is frequently referred to as a
“reorganization” bankruptcy. In Chapter 11 cases, the
debtor remains “in possession”, and has the powers and
duties often granted to a trustee under other bankruptcy regimes.
The debtor may continue to operate its business in the ordinary
course; however, for any material transactions such as taking on
post-petition debt or the sale of assets outside of the ordinary
course of business, bankruptcy court approval is required. During
the bankruptcy process, creditors generally cannot proceed with
foreclosure or other enforcement actions. This broad, statutory
injunction (commonly referred to as the “automatic stay”)
aims to give the debtor breathing room to plan an effective
reorganization of its business, which will provide the maximum
recovery for all stakeholders. Furthermore, in Chapter 11 cases,
the debtor has an exclusive period to file and solicit a plan of
reorganization. Once a plan is proposed, creditors whose rights are
affected are entitled to vote on the plan. If a sufficient number
of creditors (often organized into separate “classes”
based on the nature and priority of their claims) vote to accept,
then the plan may be confirmed by the court so long as it satisfies
other legal requirements. Importantly, unless the exclusivity
period expires, other parties in interest have no ability to
propose a competing plan of reorganization. At this moment in the
Celsius case, the Disclosure Statement has been submitted for
approval but has not yet been approved by the Bankruptcy Court.
Accordingly, the current draft of the Disclosure Statement is
subject to revision and may ultimately be rejected by the Court at
the upcoming hearing.

NewCo Transaction: Plan Proposed by the Debtors and
Creditors Committee

Prior to filing the Plan and Disclosure Statement, the Debtors
entered into an agreement with the Fahrenheit Group
(“Fahrenheit“), which would allow
Fahrenheit to become a plan sponsor with the goal of providing the
Debtors with funding and operational expertise. The agreement with
Fahrenheit will allow the Debtors to enter into a restructuring
transaction with a new company, which the Debtors allege will
maximize the recovery for stakeholders. According to the Debtors,
if they were to sell all assets (including their cryptocurrency
assets) now, the recovery for creditors will be far lower than if a
new entity is set up to continue to operate certain aspects of the
Debtors’ businesses.

Specifically, the Debtors argue that the Plan provides for
“(a) the distribution of a significant amount of the
Debtors’ Liquid Cryptocurrency to creditors on or around the
Effective Date of the Plan, and (b) the creation of NewCo -a new
public-reporting, compliant entity, which will be owned by the
Debtors’ customers when the Debtors exit bankruptcy. NewCo will
be governed by a board of directors, a majority of which will be
appointed by the Debtors’ creditors. NewCo intends to be
engaged in two business lines: Mining and
Staking.”

Expected Recovery Under NewCo Transaction

Through the NewCo transaction, the Debtors believe that
creditors will receive some form of the following three types of
distributions: (a) Liquid Cryptocurrency (namely, BTC and/or ETH);
(b) NewCo Common Stock; and (c) Litigation Proceeds.

a. Liquid Cryptocurrency

Under the plan, the Debtors will distribute either BTC and/or
ETH to creditors. The Debtors have estimated that the total amount
of cryptocurrency to be distributed to creditors is approximately
$1.98 billion. However, due to price instability, the recovery
estimated by the Debtors is subject to change depending on the
value of the Cryptocurrency as of the Effective Date. Creditors
will receive further details on their distributions in a revised
form of disclosure schedules, once the Debtors finalize their
agreement with the distribution agent.

b. NewCo Common Stock

Additionally, the NewCo transaction aims to provide certain
creditors¹ with a
distribution of NewCo common stock. The Debtors intend to list
NewCo stocks on NASDAQ. Therefore, once the creditors receive their
NewCo common stock distributions, they can (a) hold their shares in
NewCo, or (b) easily sell their stake in NewCo via a liquid public
marketplace. The creditors entitled to NewCo stock will receive
their pro rata share of stock regardless of whether they voted to
accept the Plan, reject the Plan, or abstained from voting on the
Plan altogether. Holders that vote to accept the plan may indicate
a preference to receive a greater share of the NewCo common stock
in lieu of their share of the “Liquid Cryptocurrency”.
Alternatively, creditors entitled to NewCo stock that vote to
accept the Plan may request to receive a greater share of Liquid
Cryptocurrency distribution in lieu of their NewCo Common
stock.

c. Litigation Proceeds

The Litigation Proceeds represent certain anticipated rights to
litigation claims that the Debtors have against third parties
including former executives of the Debtors. The Debtors will
establish a Litigation Administrator and a Litigation Recovery
Account. The Legal Administrator will litigate against former
directors of Celsius including Alex Mashinsky, and Shalomi Daniel
Leon. Additionally, the Litigation Administrator will also pursue
the claims that the Debtors have against third parties. The
potential litigation proceeds have not been valued while
calculating the estimated recovery under the NewCo transaction
anticipated by the Plan. As such, the litigation proceeds are
supplemental to any projected recoveries for the holders of the
claims entitled to a share of the litigation proceeds.

Orderly Wind Down: A Backup Plan

In the event that the NewCo transaction is not approved by the
creditors, the Debtors have proposed an alternative, which they are
calling the “Orderly Wind Down Plan.” The Orderly Wind
Down plan will be conducted on the terms set forth in the Backup
Plan Sponsor Agreement that the Debtors have negotiated with the
Backup Plan Sponsor. The Backup Plan Sponsor is the Blockchain
Recovery Investment Consortium, which includes Van Eck Absolute
Return Advisers Corporation and GXD Labs LLC (collectively,
“BRIC“). Alternatively, the
backup plan may be on terms that provide a better recovery to the
Debtors’ creditors than the Backup Plan Sponsor Agreement,
which terms may utilize a different Backup Plan Sponsor than
BRIC

The BRIC transaction anticipates providing recoveries to
creditors in the following ways: “(a) 100 percent of the
equity interests in a publicly traded mining business with a
potential management contract with GXD Labs LLC; (b) a Liquid
Cryptocurrency distribution on or as soon as practicable after the
Effective Date; and (c) a timely monetization of the remaining
assets of the Debtors’ Estates and subsequent Liquid
Cryptocurrency distributions to creditors from the proceeds
thereof, likely through the creation of a liquidating trust.
Exhibit A provides for the estimated recovery
under the Orderly Wind Down Plan.

Who is eligible to vote on the Plan?

The Debtors’ Plan categorizes various creditors who are
entitled to receive distributions into different
“classes”. Whether a Creditor is eligible to vote on the
Plan is contingent on which class they belong to. This system of
voting is allowable pursuant to section 1122 of the Bankruptcy
Code. There are 16 classes in total. Pursuant to the Debtors’
current proposed Plan, the classes that are eligible to vote are
Class 2, Class 4, Class 5, Class A, Class 7, Class 8, and Class 9.
(the “voting classes”). The
next section explains what these classes are and what type of
claims and interests are in that particular class.

Types of Voting Classes: What Class do I belong
to?

The following Classes will be permitted to vote on the approval
of the plan:

Class 2 – Retail Borrower Deposit Claims

Retail Borrowers are the account holders that have borrowed
money from the Debtors. As a Retail Borrower, to be able to borrow
from the Debtors, the creditors had to deposit cryptocurrency with
the Debtors. Creditors in this class have claims against the
cryptocurrency that they transferred to the Debtors while borrowing
from the Debtors. Therefore, if you deposited Crypto
Currency with the debtors, and in exchange, borrowed money from the
Debtors, your claim will likely fall within Class 2.

Class 4 – Convenience Claims

A Creditor will have a convenience claim if the aggregate
monetary value of the claims of such creditor is greater than $10
and less than or equal to $5000.² Creditors also have the option to opt for
Convenience Claims even if they exceed the threshold.
Therefore, if the total monetary value of your claim is
more than $10, but less than $5,000, your claim will likely fall
within Class 4.

Class 5 – General Earn Claims

Creditors that participated in the Debtors’ “Earn
Program” fall within Class 5 General Claims. The Earn Program
is a program through which the Debtors’ account holders could
earn rewards in exchange for transferring their cryptocurrency to
the Debtors pursuant to Section 4D of the Debtor’s General
Terms of Use. Therefore, if your claims relate to your
participation in a rewards program while exchanging or transferring
cryptocurrency with Celsius, your claim will likely fall within
Class 5.

Class 6A – General Custody Claim

Creditors that have a general custody claim are creditors that
used the Debtors’ services to store cryptocurrency on the
Debtors’ platform. The General Custody Claims class covers all
the cryptocurrency that is not eligible for withdrawal under the
Custody Settlement Order issued by the Bankruptcy Court in March,
which approved a settlement agreement giving Celsius custody
account holders the right to receive 72.5% of their crypto-based
claims. Therefore, if you had deposited cryptocurrency with
Celsius, and your cryptocurrency was not eligible for withdrawal
under the Custody Settlement Order, your claim will likely fall
within Class 6A.

Class 7 – Withhold Claims

If a creditor attempted to transfer cryptocurrency in
jurisdictions where the Debtors did not provide a Custody Program,
such transfers were held in “Withhold Accounts”. Withhold
Claims comprise all claims arising out of the attempted transfer of
cryptocurrency held in Withhold Accounts. Similar to the General
Custody Claims class, this class of claims also consists of
cryptocurrency that is not eligible for withdrawal under the
Custody Settlement Order.

Class 8 – Unsecured Loan Claims

Unsecured Loan Claims are essentially the claims arising out of
agreements under which the Debtors are a borrower and which loan is
not secured by any lien or any property interest of the Debtors.
Therefore, if you lent money to the Debtors without any form of
collateral/security, you likely have an Unsecured Loan Claim.

Class 9 – General Unsecured Claim

Put simply, the General Unsecured Claims class consists of all
Unsecured Claims that have not been specifically classified by the
debtors. The Plan specifically notes that no “Account Holder
Claims” will be in this class, thus your claim will only fall
into this class if it is unsecured and does not meet the
definitions of any other class categorized by the Plan.

How are Claims Valued under the Plan?

All Claims under the plan relating to cryptocurrency associated
with the Earn Program and Withhold Accounts – Class 4 Convenience
Claims, Class 5 General Earn Claims, and Class 7 Withhold
Claims-are valued based on the dollar value of the
applicable cryptocurrency that underlies such Claims on the
Petition Date.

Projected Recovery Under the NewCo
Transaction:

Currently, the Debtors’ Plan anticipates creditor recoveries
pursuant to the NewCo Transaction totaling:

§ 86.9% for Holders of Retail Borrower
Deposit Claims

§ 70% for Holders of Convenience
Claims;

§ 69.7% for Holders of General Earn
Claims;

§ 72.5% of the Cryptocurrency coins for
Holders of General Custody Claims (creditors who accept the Custody
Settlement as described further herein); and

§ 74.2% for Holders of Withhold
Claims.

It is crucial to emphasize that the percentages
mentioned above are not a definitive representation of the actual
amounts’ creditors will receive under the Plan. Rather, they
serve as an indication of what the Debtors anticipate the potential
recovery to creditors might be if the NewCo transaction is
successfully executed. It may be relevant that these numbers are
being provided by the Debtors in an effort to obtain approval of
the Plan and that the claims are currently not trading near this
price. Furthermore, it is important to note that the value of NewCo
common stock in the secondary market and the potential
“Litigation Proceeds” are subject to uncertainty and
cannot be accurately predicted.

Class 2 – Retail Borrower Deposit Claims

Creditors belonging to Class 2 are expected to recover
86.9% of their claims and to receive a combination of
cryptocurrency, NewCo Common Stock, and Litigation
proceeds. Class 2 claim holders, specifically retail
borrowers of Celsius who deposited their cryptocurrency in exchange
for a loan, will undergo Set-Off treatment. This means that the
amount owed to Celsius will be deducted from their total claim
against Celsius. Consequently, Class 2 – Retail Borrower Deposit
Claims will not have any outstanding debt to Celsius and will not
be required to repay their loan.

After the set-off is applied, these claims may receive a
combination of (a) Liquid Cryptocurrency (in the form of BTC and
ETH), (b) NewCo Common Stock, and (c) Litigation Proceeds. However,
if the post-set-off claims qualify for the Convenience Class
Distribution discussed above, the creditors will only receive
Liquid Cryptocurrency.

Exhibit B provides an illustrative example
demonstrating the potential recoveries that an account holder with
a Retail Borrower Deposit Claim might receive for their Retail
Borrower Claim if the NewCo Transaction is successfully
completed.

Class 4 – Convenience Claims.

Creditors belonging to Class 4 are expected to recover
70% of their claims. Holders of claims in this class will receive
their recovery in the form of Liquid Cryptocurrency.
Exhibit C provides a reference to understand the
treatment outlined by the Plan for holders of Convenience Claims,
including their rights and instructions for voting to accept or
reject the Plan.

Class 5 – General Earn Claims.

Creditors belonging to the General Earn Claim are
expected to recover 69.7% Of their claims. Class 5 Creditors will
receive Liquid Cryptocurrency, NewCo Common Stock, and Litigation
Proceeds. Creditors in Class 5 will be categorized as
“Unsecured Claim Distribution Consideration recipients”.
As a result, they will receive a combination of the following: (a)
Liquid Cryptocurrency (in the form of BTC and/or ETH), (b) NewCo
Common Stock, and (c) Litigation Proceeds. Exhibit
E below illustrates a potential recovery scenario for
holders of General Earn Claims if the NewCo Transaction is
successfully executed.

Class 6A – General Custody Claims.

Creditors belonging to Class 6A are expected to recover
72% of their claims. Holders of claims in this class will likely
receive Liquid Cryptocurrency. As previously stated, the
Bankruptcy Court issued a settlement order pertaining to General
Custody Claims. Holders of General Custody Claims are given the
chance to partake in the Custody Settlement by voting in favor of
the Plan. Exhibit D presents a table showcasing a
potential recovery scenario under Class 6A.

Class 7 – Withhold Claims.

Account holders who have a “Withhold Account”
are likely to have either a Withhold Claim or a Convenience Claim,
with the determination dependent on the total amount of their
claim. Estimated recovery for Withhold Claims – if the creditors
vote to participate in the Settlement Order is 74.2%.
Class 7 Creditors will receive Liquid Cryptocurrency, NewCo
Common Stock, and Litigation Proceeds. If the value of the
claim at issue is less than or equal to $5,000, it will be
classified as a Convenience Claim. As previously mentioned, Custody
Claims bear similarities to Withhold Claims. Consequently, holders
of a Withhold Claim have the opportunity to participate in the
Withhold Settlement by voting in favor of the Plan.

By choosing the Withhold Settlement, account holders will be
entitled to receive an in-kind distribution equivalent to fifteen
percent (15%) of the value of their Withhold Distribution Claims.
Moreover, the remaining eighty-five percent (85%) of the Withhold
Distribution Claim will be treated as a General Earn Claim. The
Plan refers this to as “Treatment A”.

However, in the event that the majority of Class 7 does not vote
in favor of accepting the Plan, regardless of an individual’s
own vote to accept Treatment A or the Withhold Settlement, they
will not be granted Treatment A under the Plan. Instead, all Class
7 members, regardless of their vote, will receive Treatment B.
Treatment B entails their claim being treated on an equal footing
with a General Earn Claim. The table in Exhibit F
provides illustrative examples of potential recoveries that a
Holder of a Withhold Claim might receive for their Withhold Claim
if the NewCo Transaction is completed, based on two scenarios: (a)
Class 7 voting to accept the Plan, or (b) Class 7 voting to reject
the Plan. Exhibit F provides a summary of the
various types of distributions entitled to each voting Class.

Conclusion and Other Settlements

In anticipation of the August 10, 2023 hearing, a number of
objections to the Disclosure Statement have been filed. Many of
these objections are from individual creditors. Additionally, over
the last few weeks, the Debtors have agreed to a number of other
settlement agreements which will hopefully pave the way for
creditors to be paid in an efficient manner. The Debtors have also
requested approval of a proposal aimed at resolving a class action
fraud claim against the company and other fraud claims. The claim
was filed by the unsecured creditor’s committee on behalf of
around 600,000 Celsius customers who alleged they were deceived
into depositing their cryptocurrency with Celsius through fraud and
misrepresentation. Additionally, many of the proofs of claims filed
by creditors listed additional fraud allegations. The proposed
settlement suggests that customers can add 5% to their Chapter 11
recovery if they agree to drop claims regarding alleged fraudulent
inducement to deposit cryptocurrency with Celsius. The Debtors and
the Creditors Committee jointly submitted the settlement motion,
stating that it would result in significant cost savings and
expedite the return of cryptocurrency to customers. The settlement
does not apply to “Custody” account holders who
previously reached a separate deal with Celsius. The option to opt
out of the settlement and pursue individual proofs of claim against
the company is also provided to account holders.

The Debtors have also agreed to a settlement with the Federal
Trade Commission. ³ As
part of this settlement, the Debtors have agreed to pay a record
$4.7 billion fine. Finally, the Debtors have agreed to a settlement
with “Borrow claim holders” who gave cryptocurrency
collateral in order to borrow funds. Pursuant to the settlement,
such claim holders will be able to receive a portion of the
collateral netted against any outstanding cryptocurrency loans,
along with shares of NewCo.

Footnotes

1. These creditors
include those with claims classified in the following classes under
the Debtors’ proposed Plan: “Retail Borrower claims,
Convenience Claims, General Earn Claims, Withhold Claims, Unsecured
Loan Claims, General Unsecured Claims”.

2. Creditors who have a
“General Custody Claim” or “Retail Borrower Deposit
Claim” under the Plan will not be classified as holding a
Convenience claim.

3. https://www.ftc.gov/news-events/news/press-releases/2023/07/ftc-reaches-settlement-crypto-platform-celsius-network-charges-former-executives-duping-consumers.

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