Attorney fees are increasing in crypto bankruptcies

Investment bank B Riley is so determined to persuade troubled bitcoin miner Core Scientific to avoid filing for bankruptcy, it has offered up to $72 million in new funding to prevent the company from pursuing a court-supervised Chapter 11 restructuring.

“Bankruptcy is not the answer and it would be a disservice to the company’s investors,” P. Reilly wrote in a letter from early December. “This will destroy value for the company’s shareholders, reduce potential recoveries for the company’s lenders, deplete its limited resources, and create enormous uncertainty for all of its shareholders.”

Core Scientific filed for bankruptcy anyway last week. However, P. Reilly’s aversion should be understandable. A string of players have succumbed to the ongoing crypto winter including FTX, BlockFi, Voyager Digital and Celsius with customer accounts largely frozen. New legal issues related to ownership of digital assets, persistent problems in the sector and the deliberative nature of bankruptcy proceedings in the US have prevented any of the major companies from exiting court protection thus far. Costs are piling up and account holders are noticing.

Attorneys, bankers and other advisors in the Celsius case that began in July recently filed detailed fee applications with federal bankruptcy court in New York totaling $53 million. In accordance with US law, these so-called “administrative expenses” will be borne by these official advisors, which are subject to court approval, and paid for by the “estate” or corporation that will normally eat the refunds to the account holders.

Law firms including Kirkland & Ellis and White & Case, regular powerhouses in corporate and private equity bankruptcies, participate in C and have top attorneys who charge more than $1,800 an hour. (This may still be a bargain as top FTX bankruptcy attorneys at Sullivan & Cromwell charge more than $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,” said one of the senior lawyers in the case.

Celsius said it cut annual labor and operating costs by more than 60 percent during the case, or about $100 million, but liquidity remains a challenge as the majority of its “traditional sources of income” have been eliminated, according to court papers.

A company advisor testified in a bankruptcy court hearing that the sale of $18 million worth of stablecoins would allow Celsius to survive another month after its March estimate of depleting cash.

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The legal and operational issues presented in the cryptocurrency bankruptcies forced Celsius and its creditors to hire a variety of experts. In addition to Kirkland & Ellis, it has employed expert legal counsel from Latham, Watkins and Akin Gump. A formal committee of unsecured creditors has also appointed an advisor, Elementus, as a “blockchain forensic advisor.”

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 as Celsius picks up the tab.

Among the thorny legal issues to be decided in court regarding Celsius is the resolution of whether account holders who lent their cryptocurrency on the platform to earn high interest rates are simply in a pool of unsecured creditors or have specific claims on certain crypto assets. The ruling in this matter will direct whether the company can sell $18 million worth of stablecoins.

Cryptocurrency lenders and exchanges have almost no possibility of avoiding bankruptcy when faced with banks’ influx of customer deposits. The court is uniquely positioned to order the asset finding process and determine the restructuring plan.

But there is no way enough for the process to move quickly, with all parties — company management, account holders and investors — getting a voice in court. The ongoing chaos in the sector has not helped keep cryptocurrency prices down while accounts are frozen, adding to customer frustration.

Players in bankruptcy cases are often inexperienced and dependent on the judgments of their expensive advisors, says Nancy Rappaport, a University of Nevada law professor.

Concerns about fees did not go completely unchallenged in the case of Celsius. Christopher Sonchi, a former bankruptcy judge, was hired by the court as a so-called “fee examiner” to scrutinize the expenses of professional services firms. Sontchi will bill his time at $1,500 an hour.

sujeet.indap@ft.com

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