American court hearing recordings and interviews - Season 6. Episode 16. September 20, 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

Episode Date: September 23, 2023

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And we'll start the video. Shut off my phone. Okay. Bear with it. Good morning, everyone. This is Judge Kaplan. And we are addressing today's calendar with the Blockby matters. I'm hearing a little feedback.

Bear with us while we test. The speaker's not supposed to be all right. All right. All right, well, let's... Are you stuttering it? Slightly, but I assume all on remote, Can you all hear me? I see not here.

You're fine, Your Honor. Okay. It does seem a little feedback from the laptop here, but... From your laptop? Yeah. All right. Yep, much better. This is what we face with these days.

Good morning, counsel. So I have counsel who are here in court as well as counsel appearing remotely. Let me just have an appearance on behalf of the debtor. Good morning, Your Honor. pay it please the court, Richard Kanoitz of hands in doing on behalf of the debtors and debtors in possession block right. Thank you. By behalf of the committee.

Good morning, Your Honor. Kenneth Allette of Brown Rudnick for the committee. Good morning, Your Honor, Daniel Stahlson, you know, evidence on the FAC committee. All right. Let me take other appearances who are here. More for it just to let those who are appearing remotely know who's sitting in the courtroom.

Good morning, Your Honor, Adam Goldberg of Latham-Walkins on behalf of the Joint Liquidators of Three Arrow's Capital. I'm joining with my colleagues Brett Nade. Morning. Good morning, Your Honor. Brian Gluckstein, Sullivan, and Cromwell on behalf of the FTX debtors. Great, thank you. Mr. Sponder, good morning.

Good morning, Your Honor, Jeff Sponder from the Office of the United States Trustee. And now let's do the reverse. Let me have appearances for those appearing remotely. Good morning, Your Honor. Dan Kerth on behalf of Prime Block Operations LLC. All right, thank you. Good morning, Your Honor. Douglas Tabachnik, local council for prime block operations.

Okay. Morning, Your Honor, Bennett Silverberg, or Brown Rutherick, on behalf of the committee. Thank you, Mr. Silverberg. Good morning, Your Honor, Jeff Traurig, on behalf of Elise Fresco, the fee examiner. And I see Mr. Lerner. Good morning. Good morning, Your Honor. Good morning, Your Honor. Nima Hedby on behalf of the Joint Liquidators of Three Arrows Capital.

Great. Thank you. Good morning, Your Honor. David Adler from MacArthur in English efficiency council to the committee. Good morning, Mr. Adler. Morning. Anyone else? There we go.

Amy Fernette from Haines and Boone here on behalf of the debtors and veterans and possessions. All right. Thank you. Good morning. Joshua Dorichick of Morgan Lowe's on behalf of Emerging Fidelity Technologies Limited. Good morning. And all right. So, counsel, the Catalyst, look.

Yes, Your Honor. What would you like to start with? Well, good news. This should be relatively straightforward hearing nothing contested. This is truly a status conference on four matters regarding FTCS and three arrows that are on the docket. You have the claim objection against three arrows at 1375, the estimation motion at 1346, and as to the FTCS debtors, claim objections 1376, and estimation, immersion 1347. We thought we'd take the opportunity to have a status conference,

Your Honor, before we maybe launch into war. So here we are. But there's going to be no argument today. Today is really to answer any questions you have as you saw a flurry of documents being filed and to really map out for you in general terms. Again, nothing's hard-fast and I'll explain as I go along of where the debtors or the estate see us going over the next few weeks, few months, confirmation is right around the corner, and these issues that arise today in connection with estimation and the claim objections tangentially relate to those issues, but do not stop confirmation, right? We were talking about estimation for distribution purposes only in connection with our estimation motion, and claim objections which deal with the amount allowed, if any, and the

distribution under a plan that gets confirmed. So again, no oral argument today, but I thought it was really important to get in front, Your Honor, before we go all out against one another. I appreciate that. It always helps, and I enjoy not having argument. We save that for, I think, we're tomorrow. So, before we go into the status conferences, and since we have the fee examiner and her counsel on, why don't we address, and it's always nice to talk about fees, right, first? As long as they're approved. So let me turn to what's on my calendar, as numbers said. seven and eight, but it's the uncontested matters going forward. The fee examiners, final report regarding first interim fee applications for both debtors council and committee

counsel. Let me turn to the fee examiner and or her counsel. Good morning, Your Honor. Elise Craika and the fee examiner appointed in this case. I think that will be very brief. There are two final reports filed at docket numbers 1464 and 1465. They're separated by representation. I spent an extensive amount of time both reviewing the fees and discussing work streams and staffing and timekeeping with all the professionals. After that extensive review, we engaged in negotiations and the proposed order that was filed as an exhibit to both of the final reports reflect those agreements.

I can say after looking at the time entries extensively that the work performed and the description provided align nicely, and I recommend allowance as recommended in the two final report. All right. Any counsel wish to comment? Just on behalf of all the professionals, we want to thank Ms. Fretschka for her diligence and her reasonableness in working through with all of us. whipping us into shape in certain respects. So we wanted to all thank her for that. My out of court, I've heard that she was very effective in her job.

And in reviewing the reports, it's apparent that, Ms. Fresco, your diligence and professionalism was shown. And I appreciate your efforts. I think the reports reflect fair compromises, fair adjustments. I've gone through both reports, both for debtors' committee, I mean, debtors' professionals and committee professionals. I have no issue with the recommendations, and I will approve the fees as based on the fee examiner's recommendations in both matters. Thank you for your time. As well as your counsel. We will submit.

We'll upload the order as by. That's great. Thank you. And thank you, Mr. Trowick, as well. May we be excused from the balance of the hearing? It's entertainment, but you're more than happy to be excused. Thank you. All right, thank you.

All right. So those were number seven and eight tier, and now we'll return to Mr. Canowitz. Yes, thank you, for the record, Richard Canoitz, Haines and Boone for the debtors. So getting back to what the debtors is. what the debtors propose or will propose we're going to work diligently and in good faith with both three arrows and FTX between now and October 10th to see if we can chart the procedural course and substantive course to resolve the estimation motion and the claim objection motion if we can't resolve it substantively we're

going to propose both a process to deal with the estimation motion as well as the claims objection as well as a time schedule right so what do I mean by process Well, what type of hearing should we have? You know, should they be bifurcated legal issues first, factual issues second, of trial on estimation first, trial later on, claims objection, all of those type of things are going to be in the mix. And the debtors with, of course, the state parties, the committee as well, will make a proposal. If the parties cannot agree on the process as well as the schedule, we're going to come before, Your Honor, on the 10th, in written form, and ask Your Honor to rule. These issues are very important to the estate, both estimation and claim objection, and we're going to put our energy towards that to try to see what can we get done consensually

and what issues need Your Honor's attention if we can't. So that's what I anticipate between now and the 10th. There'll be another filing by the estate concerning, again, process and scheduling. Even if we make a deal on process and scheduling, we're still going to put something before Your Honor so you could really give us your input about how to, move forward with these significant matters in the estate. The fact is, Your Honor, since we filed our estimation motion and claim objection, there has been discussion between the parties, and in fact, three arrows came forth with a number. We don't agree with it. They amended their

claim, which will give rise to another claim objection, but at least we're talking, we're getting somewhere. There's been movement. Likewise, as FTX, a lot of discussion, a lot of talk. They came down from several billion dollars claims to, I believe now, is a $488 million claim for purposes of estimation. So again, moving forward, not there yet, but we're looking forward to having, again, productive discussions about how do we resolve it or how do we move forward? Also, in the interim, three arrows filed their motion to lift stay. It's returnable on the 10th. We will be opposing that as well. That must also get put into the fold.

So you're going to have additional pleadings, i.e. the objection to the amended three arrows claim on a whole host of defenses and reasons, as well as opposition to the left state. So all of that ball of wax will be put in front of Your Honor, either to approve or to sort out on the 10th. At least that's the goal at this point in time. There were some concerns raised by parties outside of the claimants to wit the emergent debtors. and I made it clear in an email to them, and I'll make it clear on the record, we are not seeking to have a determination about what has been preserved, reserved concerning the emergent pledge and the Robin Hood shares. That is clearly embodied in the stipulation that Your Honor approved,

that Judge Dorsey approved, that the government is aware of, that the government has been working with the estate on those issues. So we're not going to use estimation motions or the claim objections to deal with the emergent pledge. It's just that simple. And in fact, on estimation where we're seeking estimation for distribution purposes, a lean challenge, which is what emergent potentially has, is not even relevant. So we couldn't ask, Your Honor, to make a determination on a lean challenge for distribution purposes, especially where we do not have the collateral asset, rather the government seized it.

And on that, Your Honor, I think you might have seen it. the news, which is good for all parties who claim to have an interest, the government was able to do a buyback with Robin Hood, and now there's $605 million there, subject to everybody's rights to assert priority or some other type of interest in there. And that's a little bump up? It's something to look forward to in terms of creditor distributions in one or more cases. So that's really where we're at. I don't have many more comments.

If Your Honor would have any questions, happy to answer or see the podium to anybody who would like to speak on these issues. But really, it's to table everything, see what we could work out consensually. If not, we'll be back in front of Your Honor on the 10th for some guidance. Well, let me – thank you, Mr. Kenowitz, and I certainly will hear from any and all counsel. Two things of concern. And I'm pleased to hear that the parties are speaking and trying to work out. a sensible approach to resolving the issues, or if not at least narrowing the issues for the court to resolve. The question I have is, is it an vision, and this could be addressed by other

counsel as well, that these disputes will have an impact on the plan confirmation hearing going forward? And ours, no, I think I remarked at the beginning, they're related because clearly when we're asking for estimation for distribution purposes, it's related to the plan. but that presupposes a confirmed plan. So none of the issues that arise from these claim objections or estimation are a block to confirmation. There are other objections that have been raised that will deal with in due course next week, but nothing as it rises from these pleadings.

All right. At least that's my view. And from the limited amount I've read, because obviously you all have been working on it, and I just see what gets filed and try to glean the import of it. What I'm able to glean is part of this an issue as to which court is going to be addressing some of these issues, whether it's going to be Judge Dorsey or I? There are multiple jurisdiction and venue. Or maybe even another court.

Yes, Your Honor. Those issues have been raised and will be raised. Okay. I will urge the parties. I think I could speak for Judge Dorsey as well, that neither one of us want to have an arm wrestle over jurisdiction. It's always unseemly when courts are taking up opposing, or forced to take opposing position. So to the extent you all can come to a consensus, I think that would benefit both, well, both Chapter 11s that are proceeding as well as the insolvency of proceeding. outside of this country.

So I just offer that for two cents, but I certainly want to hear from counsel. Sure. And that issue, not on for today. Right, exactly. Let me turn to committee, Mr. Allett. Good morning, Your Honor. Kenneth All right of Brown-Rudnik. The committee fully supports the debtors on these issues. This is perhaps the first hearing where we've been on the debtor side. We're pleased to do.

see you sitting together and yes we fully support everything that the debtors have said and done with respect to these claims and with respect to the discussions that they've been having with the other parties great thank you let me turn to other council good morning your honor for the record out of Goldberg of Latham-Walkins on behalf of the joint liquidators of three arrows before addressing the the issues of the status conference if your honor would have permitted I'd just like to take a minute or to give you the three errors a story on our first appearance before you today. Absolutely.

Thank you. Our case also presents a dueling debtor case, and so a little background may be helpful. But before I get into that, I would also like to mention for the court's benefit. We are in the process of retaining local counsel here in New Jersey, and I appreciate the opportunity to appear before you in person today with that in process. That's great. Thank you. Thank you, Your Honor.

So three arrows capital, it was an investment. investment firm organized in the British Virgin Islands to BVI, focused on cryptocurrency trading. It incurred billions of dollars of loans from a whole host of parties. One of the lenders to three arrows was BlockFi. That trading strategy began to unravel and collapsed over the course of 2022, culminating in the BVI liquidation proceeding that was filed on June 27, That case has now been recognized as a form of

proceeding in the Southern District of New York before Judge Martin Glenn. One of the key issues that has been facing our liquidation proceeding has been that the founders of Three Heroes essentially disappeared upon the filing of the liquidation. And while they have reappeared in the public sphere for their own parochial purposes, they have refused to cooperate with the liquidation and have completely resisted discovery demands

through a whole number of courts there in which we're trying to pursue them. As a result, the three arrows liquidators have been scrambling from the get-go to identify and preserve assets that are very easily movable, to liquidate and realize the value of those assets in a highly volatile environment, and really completely rebuild from the ground up, the books and records of three arrows. In that context, Your Honor, we've been engaged in a discovery process, involving dozens and dozens of parties to attempt to rebuild those books and records. And that effort has then been ongoing with the debtors.

We've been issuing discovery requests and working with them behind the scenes for a little over two months now. That process has enabled us to now begin pursuing avoidance actions under BVI law, and we are earnestly pursuing those actions against the debtors here, as well as against other Chapter 11 debtors, namely Genesis Global, which is in Chapter 11 in the SDMI, against FTX, as well as Celsius, and a number of other parties which actually are not in Chapter 11. As part of that effort and to provide additional clarity on the claims before this court, we filed an amended proof of claim that sets out the detail of our claims that was filed on September 13th, and it reflects a headline claim amount of approximately $283 million.

So our claim in this case is from our perspective, one that involves common issues across an array of cases, as the debtors council mentioned. And that is why we filed our motion for relief from the stay that's before the court on October 10th. And in the meantime, Your Honor, I should also mention we have a motion for relief from stay pending in the Genesis Global Chapter 11 cases that is currently scheduled to be heard next week on September 26th as well. So that that's our brief introduction for- Who's hearing Genesis case? That's Judge Sean Lane, Your Honor. Okay. So that's the context for our case and appreciate Mr. Kammis's remarks. I think I largely agree with what he is framed. We look forward to working on how we can frame and perhaps even resolve these

issues before the hearings and we'll be working earnestly to do that. I appreciate the background. Thank you. Thank you, Your Honor. Sounds like all the judges should get together at the NCBJ and just try to bring order to this. Thank you, Your Honor. Good morning again, Brian Gluckstein, Seldon Kromwell for the F.TX debtors. I do echo Mr. Kanois' comments.

We are talking to the debtors about potential paths forward. As far as both process, Your Honor, hit the nail on the head. There are very important venue questions here from our perspective in these multi-debtor-issue cases. We clearly understand and believe we have an obligation as the Lock-Fi Dentors do to try to cut through those issues so that, Your Honor, does not have to adjudicate them and be put in that position. We have filed timely claims. We believe there are significant claims. the estate has a different view. As we did say in our preliminary response to the motion filed before

today, we have been working with our FAs, obtaining additional information, talking to the block-five debtors about the size of our preference claims in today's states here. Mr. Kahnowitz is correct. We have suggested that the totality of those claims for reserve purposes could be as low as around $488 million, which obviously significantly reduced from the claims we filed now that we have additional information. We do have questions, and there will be issues not before your honor today, about whether estimation is appropriate in that context with the size of that claim, whether the debtor can satisfy its burden under Section 502C, that undue delay would be incurred if we need to estimate these claims. They have, of course, filed these substantive

claim objections to our claims. They have filed significant claims into the FTX estate, upwards of a billion dollars worth of claims. I think at this point there's general agreement that the magnitude of the block-five claims into our estate are larger than the size of our claims into the estate here. And so that raises all sorts of issues when we have preference claims going effectively and other claims going in both directions. We, as I said, Your Honor, we do believe that the complicated questions around both venue and sequencing, how to adjudicate to the extent necessary, the substantive issues

are very complex. And we continue to have discussions with BOTFRI debtors' counsel about how to resolve them and pass forward that would either set reserves or in the context of potentially resolving some of these venue questions, perhaps even obviate the need. We will, certainly over the next couple of weeks, confer. in addition to those discussions with the debtors on process and schedule to the extent that one or both of the substantive motions need to proceed in short order and we look forward to trying to you know narrow the issues at least as much as possible between now and October 10th. Thank you. Great.

Mr. Glekson, thank you. Thank you. Anyone else in court? Let me turn to any counsel appearing remotely if they wish to be heard? Mr. Dorchak. MR. If you may, thank you. Joshua Dorchek or Morgan Lewis again on behalf of Mergent Fidelity Technologies.

Just quickly to explain our objection, Your Honor. I was pleased to hear Mr. Kanowitz say on the record that the debtors aren't going to ask, Your Honor, to just make any determinations that would be contrary to the stipulation in order that stayed the litigation over the Robin Hood assets. But just to be clear, the papers that were filed in motion to estimate and the interpretation actually did do that. The stipulation in order say, thou shalt not litigate ownership

of the shares. The papers filed by BlockFi as court to estimated zero on the principle that the BlockFi was the sole owner of the share. The stipulation in order said I shall not litigate the issue

of liens over the Robin Hood assets. The papers filed by BlockFi said, Judge estimate the claims at zero and deny the fraudulent insurance for claims coming in because Blockify has a valid lien on the robinhood asset. So we had reason to object. If there's not going to be determination on those subjects, glad to hear it, but I hope to

judge, I hope you, Your Honor, and the rest of the persons in the courtroom understand that the objection that we filed had the firm face it. Sure. No, I appreciate it. And I understand all the parties here. doing what they can to preserve their rights and try to reach a pathway to resolving some of the issues. Anyone else wish to be heard? All right.

Your Honor, on behalf of Prime Block Operations, we are here for a continued initial status conference. We have discussion for resolution of an adversary claim with BlockFi. We've made a settlement offer. They've asked for additional materials to review it and respond. respond to it. We provided that. In the interim, we sort of ran out of time, so we filed our motion to dismiss and compel arbitration. And the hearing date, I believe, of October 10th for that. We don't know if we might be seeking to continue that if some of the discussions continue to be fruitful. But right now, we have those dates. And I don't know if there's anything else to report to the court at this point, given if our motion is successful, this won't be heard before you're on or be in our arbitration. I'm cognizant of the pending motion. Needless to say, I urge the parties to keep discussions going forward. As always, I offer the court's assistance where I can.

I get myself in trouble when I do that because I run out of time, keeping all the balls in the air. But if I can, I certainly will assist. Otherwise, we're just moving, going to move the pretrial to that date. and keep everything for calendar purposes, and we'll see where you all go. Sounds good, Your Honor. All right. Thank you, Your Honor.

All right, then. I think we've exhausted the matters. I don't have any additional question. Mr. Sponder for the U.S. Trustee, or did you have anything you wish to weigh in on? As always, thank you, Your Honor, Jeff Sponder from the Office of the United States Trustee. Nothing today.

Okay, thanks. All right, then. I will say, I guess I'm a lot of time in-cheek. I look forward to seeing you all again. Some tomorrow, maybe. Others on next week. So thank you. We are adjourned.