Cryptocurrency traders are exploring ways to legally challenge Celsius’ reorganization plan, arguing that the agreement disproportionately favors some creditors over others, sources familiar with the matter told The Block. They say the existing scheme has resulted in a significant reduction in recovery rates for customers whose loan accounts hold debt on the lender’s assets.
Creditors who have borrowed money from Celsius are consulting with “several” lawyers to see if they can appeal the restructuring plan, a source told The Block. According to the same source, the loan’s creditor wants to recover some of the funds it used as collateral on the now-defunct platform.
According to Weil Restructuring, it is unclear whether loan users can file an appeal because bankruptcy laws have deadlines that limit when appeals can be filed. Generally, appeals must be filed within “fourteen days after the filing of the judgment, order, or decree being appealed,” according to the Federal Rules of Bankruptcy Procedure. Although a court may approve a plan change, the process for doing so can be complicated.
Chelsea Loan creditors said no timetable had yet been set for filing a potential legal challenge and they were still in the preliminary stages of exploring their options. A source told The Block that the lender’s major loan creditors will fund the group’s future legal action.
The effort by creditors to challenge the disposition of their claims comes amid a resurgence in digital asset prices that has raised two important questions for bankruptcy courts and stakeholders. What is the real value of creditors’ cryptocurrency holdings? And in what form should those holdings be returned?
Chief Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York approved Celsius’ restructuring plan in November last year, about a year after Celsius declared bankruptcy in July 2022. However, the results of implementing this plan were lower than expected. Some creditors have been hit with payouts to Chelsea Loan customers, claiming they received less than 30% of what they believed they were owed, according to one creditor.
Chelsea Loan account holders want to lodge an appeal based on two main claims, according to people familiar with the matter.
The first claim alleges that the court failed to ensure “fair and equal” treatment between two groups of creditors: users of Chelsea Earn, an interest-bearing cryptocurrency account, and customers of Chelsea Loan, a cryptocurrency-backed loan service. One creditor told The Block that Earn creditors’ claims were processed weeks before Loan customers earlier this year, boosting recovery rates for users of the company’s flagship interest-bearing product.
The second contention challenges the order dated December 27, 2023. The order directs Chelsea’s new mining company to capitalize $225 million from its lenders’ bankruptcy estate. Some loan creditors argue that the funds should instead be allocated to strengthening creditors’ recoveries, one creditor noted.
Celsius’ lawyers did not respond to The Block’s request for comment at the time of reporting. However, it is important to note that the evaluation and payment of bankruptcy claims involves numerous factors, complicating creditor’s comparison of recovery rates.
Update: Provides details on bankruptcy law rules for filing appeals (21:55 UTC).
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