American court hearing recordings and interviews - Season 6. Episode 12. May 18, 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 NJ, USA #crypto (emergency motion, court ruling, mediation ordered)

Episode Date: May 20, 2023

The hearing starts approximately one minute into the recording.A free publicly available bankruptcy court docket for the BlockFi chapter 11 bankruptcy proceedings is available at: https://restructuring.ra.kroll.com/blockfi/Home-DocketInfo

Good morning again. This is Judge Kaplan, and I am hearing the committee's emergent motion in the BlockFi Inc. matter. I have limited counsel in front of me, so let me take appearances on behalf of the debtor. Thank you. Michael Sirota, Cole Schatz, and with Judge McPherson, and Michael Slate from Kirkland. Thank you. On behalf of the committee? Good morning, Your Honor. Robert Stark and Ken Alec and by the President. Thank you, counsel. On behalf of the U.S. trustee. Good morning, Your Honor.

Jeff Sponder and Lauren Bilski on behalf of the United States trustee. This court engaged with all counsel in chambers in a conference outside of the record in an effort to address the issues that were raised in the emergent motion brought before the court. Specifically, the committee's, the committee filed an emergent motion requesting an order remedying the debtor's improper plan solicitations in violation of the Bankruptcy Code Section 1125B.

The purpose in speaking with counsel off record were to examine the various issues and statements under scrutiny. in a matter which didn't further exacerbate any issues with respect to whether creditors, parties in interest or the public, received unauthorized improper communications. Your Honor, maybe. Is that come, I'm mooted? It shows that you're muted out there. Yeah. So it is. Forgive me for interrupting.

I just want to make sure you're going to be. All right. I don't think I'm muted. It says it on there. It says it there, but we run through the communications through our court recording. Not a problem. Better safe than sorry. So let me first address, because the manner in which the court addresses the motion is going to be a bit unusual. Let me say at the outset, the issue that's the issue that's the issue that's,

has been raised by the committee. Are the statements that have been made in tweets and letters emailed by the debtor to its customers, as well as statements reference in the filed disclosure statement and plan with links to certain statements contained. in the various communications. And the issue is whether or not these communications that fall outside the scope of permissible activity under Section 1125B. The court has reviewed, for instance,

the letter to creditors that was emailed to BlockVise customers that was referenced in their tweets. The court has reviewed the various identified provisions of the disclosure statement to which the committee has raised concerns, concerns, given that there were links to such provisions in the various communications to the public, to the customers, and to the creditors. And the court, in all candor, takes issue with the manner in which these communications were made. Indeed, many of the communications fall outside the scope of permissible solicitation under the bankruptcy code.

I applaud the committee for acting in this emergent fashion to bring the matter before the court professionally, quickly, and efficiently. The manner in which the committee raised these issues, of course, are consistent with the manner in which they've prosecuted the case on behalf of the committee, counsel, the manner in which they have protected both the committee and the Council have protected the interest of creditors. The court is cognizant that you don't see often what goes on outside of court, that the public, unfortunately, is limited to what they see inside the court, and there's usually a tremendous amount of activity.

This case is no different. Indeed, I think I've referred to this case as being a stealth case, in that so much of the work that is being done to protect the interests of both the creditors, the debtor, and parties in interest, is being done outside of the courtroom without a show, so to speak, that it usually just adds and feeds into the cost of the case. So the court is appreciative of the manner in which the committee and counsel have worked to protect their interests. In doing so, and now having said that, over the committee council's strenuous objections in chambers, I have decided to limit the matter in

which the motion today is going to be presented to the court in that I'm directing the parties to rely on their papers without adding additional argument. I'm doing so because in this court's view, continued argument over the merits or lack of merits or the truthfulness of statements and positions that appear in the communications that are on file would simply exacerbate the problem. The court does not want oral argument in which certain statements that have not been vetted by the court, that have not been authorized by the court, that have not been supported by outside evidence to be communicated to the public for reliance outside of the process that is improved by the code in Section 1125B. For parties to argue and contest the merits and truthfulness

and accuracy of their competing positions simply provides the public with information that has not yet been vetted and approved and only makes this situation even worse. The court is prepared to enter an order, and I'm going to read portions of the order into the record. That addresses the fact that in the court's view, the debtor's statements outside of their filing invade the process, and the court wants certain steps taken to ensure at the committee's assistance. and the court agrees, that all creditors understand that what's reflected in the disclosure statement and the plan that's on file has not been authorized by the court, has not been vetted by the court, has not been approved by the court, and that solicitations based on

what's been filed, the committee has filed a statement in which, which they outline the issues they have generally with the plan by category and by substance. And since that information is on file, along with the information that's included in the debtor's disclosure statement and the debtor's position, further argument should await proper process, which is a contested disclosure statement hearing, where both the debtor and the committee can supplement their arguments, and this court will decide what information should go out to the public to the parties and interests and the creditors. Before that process is completed, the court urges all parties and interest to avoid reliance on any of the statements

that they are reading because they reflect only the position of competing parties and advocacy. The court is prepared to enter today on the emergent motion the following order enforcing section 1125 of the bankruptcy code. To summon substance of the court's order will read as follows. Apart from the pleadings consistent with the bankruptcy code and rules, or as permitted by today's ruling. Neither the debtor nor the official committee of unsecure creditors shall publish any advocacy communication to a website, Twitter feed on the docket or otherwise concerning the debtor's plan and disclosure statement until such time as the disclosure statement and solicitation materials have

been approved. Within 24 hours of the entry of this order, the debtor shall post a corrective letter on the case docket, their website, and their Twitter feed, and will also email to all creditors that receive communications described in the emergency motion. The corrective letter shall state as follows. To all concerned, block by prematurely posted certain statements to the court docket, its website, and its Twitter feed on May 13, 23, regarding a proposed plan of reorganization. We urge each of you to disregard those communications until such a time as the publication and dissemination of such statements are authorized. BlockFi's publication of those communications is inconsistent with the requirements of the

bankruptcy code and undertaken without court authorization. The court has directed BlockFi to circulate this communication on behalf of the committee to clarify that the court has not yet approved BlockFi's disclosure statement or BlockFi's ability to solicit acceptance of its plan. At this juncture, the committee, among other parties, does not support the plan of reorganization in question. Among other issues, the committee believed that the plan provides releases of litigation claims against, among others, current and former directors and officers of BlockFi that committed significant misconduct that harmed BlockFi and its customers. These are the positions taken by the committee as of this date. The committee also believed that it is not appropriate for Block 5 via its current management and professionals to control the liquidation of BlockFi and distributions to creditors. The committee has requested changes to the plan.

The committee has not, however, proposed its own plan and, in fact, is barred from doing so by the debtor's exclusivity entitlements under the Bankruptcy Code. Nor has the committee taken any formal position on certain issues ascribed to the committee in the prior communication. A disclosure statement must be approved by the court before any party may lawfully encourage you to accept or reject any plan of reorganization. Accordingly, BlockFi withdraws any prior statements concerning your vote on the plan, the committee's positions regarding the plan, and any alternatives that might be proposed by the committee. At the appropriate time after the court has authorized the dissemination of one or more disclosure statements, the parties may communicate to all creditors their respective positions as part of the solicitation process. That's this court's ruling today. I am authorizing the committee in conjunction with the efforts of the debtor

to communicate the court's ruling, to provide its statement, which is already on the docket, to those parties that have received the communications by BlockFi. and to reiterate, of course, today's court's ruling. Now, the court recognizes that both the committee's statement, as well as the debtor's disclosure statement, and responses will be supplemented, consistent with the bankruptcy court,

with the bankruptcy rules and the code, and that all parties are reserving their rights going forward with respect to the plan process. At the same time, the court is of the firm belief that parties are not served by a hotly contested, expensive, and time-consuming litigation over this plan process. If that happens, the court will address the contested issues in an efficient and expeditious fashion. But in order to avoid those costs and delays and risks, the court is directing the parties to engage in an expedited mediation process with respect to the plan, debtor's proposed plan. The court will identify a mediator after taking recommendations from both the committee and the debtor.

If the parties can agree on a proposed mediator, of course, the court will pursue the efforts of that mediator. The court will also ask debtors' counsel to prepare a proposed form of mediation order once the mediator has been identified and a protocol. and of course, communications made and documents and information provided during the course of the mediation will remain confidential and not be available absent consent. There are also pending motions to seal much of what we've referenced, what the court has referenced, as far as information that was included in the declaration of Tristan Axelrod, as well as information that was included in the statement that's on file. The only objection that the court is aware of, well, I shouldn't say that.

Deal is to say the committee has expressed an interest in having full disclosure but recognizes the mandate to at least pursue sealing efforts. But I understand that the U.S. trustee has objected to sealing or redactions under Section 107. Mr. Sponder, did the U.S. trustee want to place anything on the record? Thank you, Your Honor. Good afternoon again. Jeff Sponder from the Office of the United States of Trustee. Your Honor, the debtor and or the committee, since the committee is the one that filed the motions to seal, bear the burden of showing that the information to be sealed falls within the parameters of an exception to Section 107A

by demonstrating that the interest in secrecy outweighs the presumption in favor of access. It appears that the sealing motions rely on a protective order and or some type of confidentiality agreement. Your Honor, a protective order is not sufficient grounds to support the sealing of information, nor is an agreement among parties to keep information confidential, not sufficient grounds. Neither the debtor nor the committee have made any showing that the information to be sealed is protected under Section 107. As a result, the United States trustee believes, Your Honor, that these motions should be denied and the information should be disseminated to the public. Thank you, Your Honor.

Thank you, Mr. Spinder. The court is overruling the objections of the U.S. trustee, and in doing so, notes the inherent tension between 1125 of the Code and 107, with Section 1125 restricting the information that can go out to the public as part of the plan and disclosure statement process, until court, court approval to avoid improper solicitation activity and to ensure that the information that the public receives as part of this process has been vetted, has been reviewed by all parties and interest, and has been approved only after the court has had the ability and the opportunity to hold a hearing in which the parties can raise issues with the language and content. That flies in the face of Section 107, which mandates disclosure of information that is on file. In order to ensure the proper administration of this case and to better serve the interest of the creditors

in getting accurate information that has been approved, vetted, and authorized, the question. is going to employ its authority under section 105 to overrule the objection noting the tension between the statutory sections let me ask at this point do do any council wish to raise any issues or concerns that the court may have missed just some clarification if i may again robert stark brown redneck on behalf of the creditors committee first just so that we have a clear record, we had asked that I do not believe there's an objection from my opposition, that the documents that were attached to the Axelrod declarations would be formally admitted into evidence so that they are as part of the record in evidentiary fashion, all of them.

That was my understanding that there would be no objection, albeit they are under seal. No objection, Your Honor, as long as they're under seal. They are under seal and the court accepts those documents into the record. Thank you, Your Honor. Second clarification, Your Honor, when we were chatting earlier, Your Honor's ruling earlier, about clarification that creditors would receive. And I think, Your Honor, was clear with respect to what the debtor has to do, but I want to make sure that we have clarity on the record about the committee,

authorization in terms of making its views known, my understanding had been, and I think Your Honor alluded to it, but I want to make sure we have a clear record and I have clear instructions, is that the committee is authorized to send emails to the same people that received the company's emails, and we can hyperlink or otherwise attach our statement with respect to the plan. And today's ruling from Your Honor, whether it be in whole or in part from the record. And that would be the same communication format that individual creditors receive, whether it be email, what have you,

and that the company is required to assist us in terms of being able to get that out the door. That is my understanding. Is there any objection? No, Your Honor. We will coordinate. We will send the order and the statement. No, no, no, Your Honor. It's ours.

The committee statement. It will be the order. The committee's communication, I thought that the debtor has to actually undertake that as part of the same platform. Or share with us how it can be done. Correct. It will be ours. It's your communication. It won't be block-vice communication.

Thank you. All right. Thank you. Any other issues? Nothing further from us, Your Honor. Joshua Sussberg from Kirkland-Alas on behalf of the debtors. We appreciate your time today and look forward to mediation. All right.

I will ask, let's see, it's Thursday. if possible by the close of business tomorrow, can I get recommendations on mediators? Yes, Your Honor. Yes, you're up. Thank you. Please meet and confer. Again, I want to thank all the professionals involved. I know this is an emotional that there are issues here that are troubling, that they are difficult.

and I appreciate the courtesies and professionalism engaged in by all counsel. Thank you. Thank you.