American court hearing recordings and interviews - Season 6. Episode 11. May 11, 2023. In re BlockFi Inc. et al., chapter 11 bankruptcy case no. 2022-19361, audio of hearing held in the BlockFi bankruptcy proceedings pending in New Jersey, USA #crypto

Episode Date: May 11, 2023

The ruling starts approximately 01:40 minutes into the recording, and the ruling cuts off towards the end of the recording. Probably a party will advise the court there's a technical issue and there will be an attempt to fix.

Okay, good morning, everyone. This is Judge Kaplan, and I will be reading my ruling with respect to the BlockFi LLC matter. Given that I am currently at the Third Circuit Conference, I'm not in a position to have a hearing. Therefore, there will be no opportunity for questions or further discussion. I am happy to arrange for a subsequent telephone conference as needed if there are any issues that need clarification. I see there are still participants joining remotely, but I'm going to start my ruling. It'll take a few minutes, not too long, but it will take some time. Before the court is the debtor's motion for entry of an order authorizing the debtors, to honor withdrawals from wallet accounts, update the user face interface, the user interface

to properly reflect transactions and assets as of the platform pause conduct ordinary course reconciliation of accounts and other related relief. This court has jurisdiction over this matter pursuant to 11 U.S.C. section, 1334, and this is a core matter under 28 U.S.C. sections, 157B2A, B, E, E, E, E, E, E, E, M&O. Venue is proper under 28 U.S.C. Sections 1408 and 1409, pursuant to federal rule of bankruptcy procedure 7052, the court makes the following findings of fact and conclusions of law. To the extent the parties have argued that this matter should proceed through an adversary proceeding in lieu of a contested matter, the court exercises its

discretion to relax the requirements under federal rule of bankruptcy procedure 7,001, as permitted by federal rule of bankruptcy procedure 1001, and in light of the opportunity all parties had to engage in discovery, briefing, and oral argument. This is consistent with the approach taken by other courts in this district, and I refer the parties as an example to in-ray Gaines Electronics 117 Bankruptcy Reporter 805. The court incorporates into this ruling by reference the stipulated facts filed, by the parties at docket 842 and employs the same terms and definitions as defined in the stipulated facts. The court's currural argument on May 8, 2023, and has reviewed the written

submissions by all parties as identified in the notice of amended agenda filed by the debtors counsel at docket number 845. The court notes that in addition to all submissions by counsel on behalf of all parties in interest, the court has reviewed every pro se submission forwarded to this court by email and regular mail. At the outset, the court notes that during oral argument, the phrase picking winners of losers was used by counsel and the court. That phrase is not wholly applicable, as much as in this matter, there are no true winners among creditors, customers, or equity holders.

No one has gone unscathed, either in delays, loss of funds, loss of access to funds, or other contractual rights to which they are entitled. There clearly has been a loss of bargain for interests and rights. The task for the court today is not to select winners and losers, but to determine how best to preserve all stakeholders contracted rights with the least prejudice or harm possible. That task begins and ends with the language of the various applicable terms of agreement to which the debtors and his customers agreed in advance of entering into a business relationship.

The court finds that all digital assets held by the debtors in custodial omnibus wallets are indeed client property and not property of the bankruptcy estates, subject, of course, to possible avoidance and clawback rates. The block-fied terms of service, including the notice provisions found in the general terms of service, as well as the specific terms of service associated with BlockFi wallet, BlockFi interest account, BlockFi private client, BlockFi ACH, and BlockFi debit are binding on customers with respect to all of the BlockFi aspects of the BlockFi platform. These terms of service inform the court's analysis and determination that the debtors in their sole discretion

had the authority to discontinue, pause, and or refuse all current and future access for customers with respect to all account activity, meaning withdrawals, transfers, or trading, without advance notice. Certainly, advanced notice is not required under the terms of agreement in order to effectually pause on the platform. with limited exceptions detailed in the amended Chilean declaration, the debtors paused all activity on its platform for all accounts as in November 10, 2020, 8.15 p.m. Customer activity on the debtors platform through use of the customer user interface, along with back operations undertaken on the company-facing interface by debtors employees, are used. distinct and separate from the manual true-up and batching processes necessary to effectuate and complete client withdrawals, trades, or transfer requests initiated on the user interface. Quite simply, a customer's withdrawal or transfer request on the customer user face did not

and does not automatically transfer digital assets to or from the debtors, rehypofit catable wallets or custodial omnibus wallets or create legally protectable interests and assets held in such wallets. The court acknowledges that after the platform pause, customers were able to use the app and the user interface continue to show screens saying their transaction was complete and that they had received also confirming emails. The court understands that the continued functionality of the platform directly conflicts with the platform pause and recognizes that the contradiction was confusing, misleading, and frustrating. Nevertheless, it does not change this court's ruling or the underlying concept that the manual true-up and batching processes were required to actually effectuate and complete the transfer or withdrawal requests. The fact that the user interface did not accurately reflect the situation as unfortunate. However, debtors adequately explained the delay and the unexpected difficulty that was encountered and disabling the functionality of the platform.

Debtors also took action to inform its user clients of the effect and meaning of the platform pause by posting in-app messages. As a result of the platform pause, debtors did not. undertake manually either the true-up or batching processes necessary to effectuate a complete transfer or withdrawal requests made on the company user face after the pause. As the committee has noted, these back-end steps are indeed the linchpin for completing such transactions. Post-platform pause, the debtors have engaged in a requisite true-up or batching processes with respect only to transfers trades or withdrawal requests initiated on the user interface

prior to the platform pause. Put simply no transfer requests by customers between the BIA and the custodial wallet accounts initiated after 8.15 p.m. on November 10, 2022, were effectuated and completed. As a matter of both New Jersey and Bermuda contract law, as cited, indebtors reply submissions, the plain, ordinary, and unambiguous language of the reference terms of service agreements as applied to the facts herein were, wire that this court overruled all of the objections raised to the debtor's motion. To do otherwise would authorize an invasion of the very contract rights of custodial wallet holders as a respect to non-estate property and prefer certain general unsecured creditors.

BIA account holders deposited their assets into these accounts with the full knowledge that they were undertaking certain risk in exchange for the chance at greater returns. The risk included a potential platform pause at any moment of time. The custodial wallet holders, even those that undertook to transfer funds shortly before the platform pause, did not share this risk or return. It should not have their ownership of non-estate property diluted by those who took on such risk. The court bottoms its ruling as well on the following specific provisions of the reference debtor's general terms of agreement. First paragraph.

Pursuant to the BlockFi general terms of service, clients must, among other things, acknowledge and agree that BlockFi in its sole discretion may suspend or discontinue your and refuse any and all current and future access to or use of your BlockFi accounts at any time without notice to you. Second, clients agree that BlockFi and our third-party partners may experience cyber attacks, extreme market conditions, or other operational or technical difficulties, which could result in the immediate halt of transfers and withdrawals of cryptocurrency, either temporarily or permanently. And the third term of general term of service of import. The BlockFi general terms of service further provide that BlockFi reserves the right to

refuse service, terminate relationships, and cancel orders. transactions in its discretion. This last provision is particularly important in as much as to the extent any customer may contend that a particular transaction escaped the intended restraint under the platform pause. The terms of the agreement permit the debt is to employ their discretion to simply cancel the transaction. An important and improper cancellation may give rise to a claim for breach of contract, but it neither creates nor reservoir.