American court hearing recordings and interviews - Season 6. Episode 17. September 21, 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

publicly available hearing audio

All right. Good morning, everyone. This is Judge Kaplan, and this morning we'll be hearing a couple of matters in the Blockby Inc. case. I have counsel, certain counsel who are present in court, and I have counsel who are appearing remotely. Let me start with those in court and ask for appearances. Good morning, Your Honor. Seth Shapiro on behalf of the United States of America. Thank you. It's always nice to see you in Trenton. Thank you. Nice to be here. Morning, Your Honor.

Sharon Duoskin from Groundrodnick on behalf of the committee. Thank you. It's my partner, Kenalette, who you know well. I've seen them a couple of times. Good morning, Judge. Donne Clark, Genova Burns, Local Counsel for the committee. Thank you, Mr. Clark. Good morning, Your Honor.

Jeff Sponder from the Office of the United States Trustee. I believe Lauren Bilski is also participating, but she is virtual. Thank you. All right. Let me. have appearances from those who are appearing remotely? Thank you, Your Honor. Richard Bernard and Fagree Drinker on behalf of the Bermuda Joint Provisional Liquidators.

All right, thank you. Anyone else? Good morning, Your Honor. This is Dean Oswald from Corsio, Bromberg and Newman, serving as local counsel to Flore Marquez and Zach Prince. I'm joined virtually by my co-counsel, Karen Park, of Zuckerman Gore, Brandeis, and Crossman, and Dan Gold, with Sherman and Sterling.

All right. Thank you all. Good morning. Your Honor. Anyone else? Yes, good morning, Your Honor. This is Annapia Felix from the law firm of Lazzari, Potter, Jacobus, and Moyle. Our firm represents Uri Muschkin, and we had filed a joinder with Supreme Prince.

All right. Thank you. Good morning. And I think that's it. For those who are appearing remotely, as always, please use the raise hand function if you need to be called upon unless I've already called on you. Let's start with the motion of Zachary, Prince, and Florey, Marquez for an order of lifting the automatic stay to access certain funds or reimbursement under of existing insurance policy. I have, I think it has been mentioned, I received a joinder on behalf of Yuri Muskin.

I have not received any opposition. Does anybody wish to address the matter either in favor of or in opposition to the request of relief? Your Honor, Dan Gold from Sherman and Sterling Council for Zach Prince. As you note, our motion for an order lifting the automatic stay to the extent applicable, as well as our motion to file under seal, the D&O policy, there have been no objection. So I don't need to be heard on that unless Your Honor has questions. No, I think it's pretty straightforward.

I don't have any questions. I have no basis to object. I've read through the request. acceptable. So absent any further objections from anyone, I will grant the motion and enter the order later today or tomorrow. Thank you, Your Honor. Thank you. Those who are appearing on that matter may be excused or may stay around for the entertainment value in the second matter to be addressed. Thank you, Your Honor. Thank you, Your Honor.

You're welcome. All right. Then we'll turn to I'll call it tongue-in-cheek the main event the United States motion to dismiss adversary number 23-1144 this is the adversary

proceeding brought on behalf of the committee with respect to certain funds that have been the subject of a criminal warrant relative to a criminal forfeiture proceeding, relative to a criminal prosecution, that is ongoing out in the state of Washington.

Let's get right to it. This is not a new matter for any of us here. If I may, I'm going to take a little liberty. in that I've had the benefit in the pleadings, in the written submissions rather, to read certain very colorful analogies. There was flip-flops to Air Jordans, there's red Mercedes and blue jeeps, I think was argued. I'd like to offer a very simplified fact pattern to form the bill. basis of our argument and discussions today. I draw the fact pattern from the allegations in the motions to dismiss, but in the underlying pleadings, which, because this is a motion to dismiss, I can infer as true. So let's say, I don't think the fact pattern doesn't even work because we don't have enough people in the courtroom, but let's say we had

eight people in this courtroom or appearing remotely, one of which is my law clerk, Becker, Earl, who has invested or deposited with BlockFi $100 through their accounts. And then our two criminal defendants also invested $100 each. with BlockFi through their accounts for a total of $1,000. Now, BlockFi or BlockFi International may be more accurately, takes this $1,000 from these respective accounts and puts it in another BlockFi account, owned and controlled by BlockFi,

from which it lends, spends, invests, all of the $1,000. The account is thereafter subsequently replenished by BlockFi with other borrowed money, other loan repayments, other in new investments and deposits. Now, there comes a point in time where BlockFi has lost the money and only has $500 in this blockfye account and BlockFi files for bankruptcy. At this point in time, all of our 10 investors, the 8 in the

courtroom, including Becca, and the two criminal defendants, each have claims for a share of that $500 that's there, 500 being lost, 50%. Now comes the United States Department of Justice and lay claims and demands a return of the United States Department of Justice and lay claims and demands a return of the criminals full share, they're $200 that they had put in, $100 each, out of that $500, leaving only $300 to be shared by the remaining eight. That's the fact pattern. Seems some pretty straightforward. So I would ask the United States to start, to explain why, in light of 28 U.S.C. 1334E and 28 U.S.C. 157, Block FI being in bankruptcy, the money in Block Fai's account, a new account, a different account than the deposit holders, why I don't have jurisdiction

and authority to determine whether the original $500 is property of the bankruptcy estate under Section 541, and protected under the automatic stay provisions under Section 362. That's one area. Number two, why I don't have jurisdiction under Section 105 to issue an injunction if necessary, if appropriate. And for me, most importantly, why is it of sound, positive? public policy to have the remaining eight investors and depositors in the courtroom put up, including poor old Becca here, put up and chip in $12.50 out of the remaining $50 share that each of them would have to pay the forfeiture obligations.

of the criminal defendants. So we'll start with that, and I'm here to listen. Counsel? Thank you, Your Honor. For the record, Seth Shapiro, for the United States of America. As to your first question, with respect to why this court would have no jurisdiction to decide that matter, it's because of 21 U.S.C. Section 853K and N. The United States believes that that criminal code statute takes precedence over 28 U.S.C. 1334E.

We believe that 28 U.S.E 1334E assumes that an action is filed before the grant of jurisdiction to the district court and the referral to the bankruptcy court under 157. The criminal code, which is more specific than the general jurisdictional grant in 1334E, is very specific that no action shall be filed, period, challenging assets subject to a criminal forfeiture, regardless of whether that action is filed in the bankruptcy court or any other court, in a post-indictment situation until after the criminal conviction and the forfeiture proceedings are in progress where parties can come to the criminal court and actually make a presentation as to why they should be entitled to the money or why if they believe tracing is relevant,

why the tracing is not sufficient for the government to take that money, which it doesn't keep, of course, the government is acting pursuant to its police and regulatory powers under 360. to before. The government takes that money and simply would distribute it to the victims of the crime. And the government believes that Congress, in its infinite wisdom, decided that in this kind of a situation, the victims of the crime should take precedence over the creditors of the bankruptcy estate. And there's a case that we cite in our briefs that kind of discusses that issue. It's the Guildmaster case. And if I could quote from that, it's in our brief that says, all of these issues relating to the relative rights of the parties in the lamps, which in that

case had been seized, namely whether the lamps or property of the bankruptcy estate in light of the criminal statutes purporting to vest retroactive title of the government, whether any of the lamps were or were not properly seized, or all issues which necessarily involve the, interpretation and application of criminal statutes, a task that's outside the scope of this court's jurisdiction while the criminal action remains pending, and then dismissing the suit, noting that bankruptcy is not an alternative forum for deciding criminal actions. So we take the view that the same is true here, that questions concerning what assets are subject to these criminal seizure warrants have to be adjudicated.

in the Western District of Washington in the criminal case, and that until the criminal defendants are extradited from abroad, wherever they might be, there's a conviction, and then there's a forfeiture, no court can really take jurisdiction over those accounts and that cryptic. Does that hold true, were the criminals in that case, the debtor? I believe they were, Your Honor. Does that hold true? If the criminal action is not directed against this debtor here, BlockFi,

nor are these funds, unless you could tell me you can trace them. And we've said, in my hypothetical, they all went into a new account. And I think that's pretty much how it worked at BlockFi. There were individual accounts. There were ledger accounting issues. But apart from wallets, which are not at issue here, there's no separate accounts. The assets don't belong to the debtor defendant as in your situation.

These assets were of a third party, the debtor here block five, and tangentially the customers and depositors who have a share in it like the criminal defendants. How is it the same situation? Well, we argue that the relation back doctrine that applies under federal criminal law is not dependent upon whether or not the debtor is the criminal defendant or not. That at the time of the crimes, which occurred, you know, many, many, many years ago, between, you know, five to ten years ago, that all of the crypto at issue and the accounts, you know, were established in that timeline.

and then that's where the government's rights to seize because the case law, Fernandez and the other cases, the rights in the accounts, the money in the accounts, right? No, it's, well, how do you seize an account? You're trying to seize the funds. You serve a, you know, you have the U.S. marshals come in, and they serve a warrant or court order, as they did from the U.S. magistrate, judge. And then the accounts, the contents of the accounts, which at that time had been

represented to us was the full amount. But bank accounts are pretty much debts under the UCC. It's not really fun sitting in an account. When we have a checking account, I'd love to think the bank is holding my money in an account. It's really, when I deposit a check, I loaned the bank money and they owe me. It's a debt from the bank. Aren't you seizing the debt owing? that is not the government's view in a criminal case, Your Honor. In a criminal case, we believe we are seizing the account itself and the contents of that account. And that's why the government takes the view that we are not a creditor of the estate, and we are not a, we're not seizing some kind of debt obligation or right to payment as defined in 101.5 of the code.

We're simply seizing the actual contents of that account. Which account? the criminal defendants account? Well, we're seizing the account on file with BlockFi or BlackFi International, whatever happened to be the case. We're not seizing the right of the criminal defendant to the payment. We're seizing the account and its contents from the innocent stakeholder BlockFai. But doesn't every investor customer in BlockFi have an account,

but those accounts, does not have anything in them? Once Block Buy exercise its contractual right to hypothesate pledge, and they take the money and put it in a different account. Isn't it or isn't, can we find out if that's, this is a motion to dismiss. Shouldn't we discover how it operates? I mean, I'm speaking from my knowledge that I've gleaned from the case so far, but is there anything in the account you just seized or are you looking to seize? We were told there was at the time that the warrants were served.

informed by counsel for BlackFi that the money was there. Were you told the money was there or that there was a debt owed? No, the money was there and they would cooperate with a turnover. And that's what eventually led to the negotiation of a stipulation. And as a professional courtesy, we agreed to inform the creditors committee so they would have an opportunity to come into your honor, to let your honor consider it if you wanted to. And that's how we ended up where we were. I interrupted enough.

No, no, I mean, I mean, we weren't trying to, I mean, this money is not going to go anywhere for a long time, right, and if we end up seizing it. We're just trying to take possession. Isn't that the problem for the 600,000 creditors and customers out there? Well, not just the eight in my hypothetical courtroom. The actual 600,000 who were depending upon seeing a return of their investment from, you know, their interest in the accounts. But they should blame Congress, Your Honor. They should not blame the United States Justice Department. I mean, if you look at the WINPAR case...

Oh, they're going to blame me. But if you look at the WINPAR case, Your Honor, that we signed in our briefs, the court acknowledged that allowing the forfeiture proceeding to go forward might benefit the crime victims at the expense of unsecured creditors. And the court noted that this outcome does not significantly outweigh the well-recognized public benefits of citizens. objection, namely the punishment of criminals and the deterrence of others who might be like-minded. So because, you know, we saw forfeiture the accounts at issue before Blockby filed for bankruptcy

in connection with a criminal action, there's no question that the enforcement of these warrants is accepted from the stay under 362 before and that the priorities set forth by Congress are to ensure that those criminal victims are afforded. the opportunity to assert claims to those, the contents of those accounts in the criminal forfeiture proceeding in the Western District of Washington. I think the district court judge in Washington deferred to Your Honor to see if he agreed, and we understand where he was coming from. But as a practical matter, we think that Your Honor should dismiss the action and let it go back to Washington. Well, because the-

Or do we take it that the district court judge recognized this court's authority under 28 U.S.C. 1334E. I could read it that way, couldn't I? Well, he didn't state that on the record, Your Honor. What he did state is that he doesn't know very much about bankruptcy, that he had gone out to lunch with his local bankruptcy judge and explained that there could be bankruptcy issues here. And since Your Honor is...

We're good at Losh. Yeah, right. Well-respected. No, you're a well-respected judge. and he wanted to give Your Honor an opportunity to rule, but that doesn't mean he might not take back jurisdiction if he thinks that something, you know, who's going to happen in the case,

that goes beyond what he feels is legally permissible. Doesn't that go back on aside to the question I asked, I think, during the stay motion, and by the way, I did make an error. We have also the motion to stay, the action pending withdrawal of the reference that I carried to today as well. That action might be partially mooted by the fact that the district court last night, Your Honor, you may not be aware of this, denied our motion to withdraw the reference without prejudice.

Well, I got to keep up. I didn't know they would, okay, then. It happened late yesterday. You might want to take some time and read it's a very short decision. All right. So then the most, so that stay is mooted. The request to stay is mooted. at this point.

To an extent, there have been some other factors that have come up, such as, for example, the possible government shutdown in a week, and we've talked to the President's counsel about possibly, you know, maybe waiting to see what happens with the government so that, you know, we don't have to be trying cases while people might not be able to, you know, be here in New Jersey to argue before you're on. All right, fair enough. Thank you.

No, I'm glad I did not know that Judge Kirscher ruled on. the motion. Continue or, I mean, again, I keep interjecting. No, no, that's perfectly fun. I completely understand. I think you were going to raise the question about when you asked me at the earlier hearing about whether or not it was our intention to move to transfer a venue. Right. If, right, but that was a slight, it was not our intention to move to transfer venue, of course, but we intended to, of course, continue with our motion to dismiss. And the practical reality is, if Your Honor were to grant our motion to dismiss then as a it the matter would simply you know go back to the

district court in the Western District of Washington I think by operation of law understood so it's not something intentional that we would be trying to to go there and take the matter away from your honor but if obvious if your honor dismisses it then some judge is gonna have to rule on the enforceability of the seizure warrants and the issue of whether or not those assets are subject to seizure or not. All right. Again, if you have anything you wish to add to the papers, the opportunity.

Right. The only, there are two things I'd like to add. The first is the point that I think I generically made, that we believe the more specific statute is the Criminal Code statute, 21 U.S.E. 853, F and N in particular. and we believe your honor should rule that that statute should govern over 28 U.S.C. 1334 E1 because 1334 E1 presumes that an action can be filed to determine whether or not the property is property of the estate or not. And obviously, if the criminal code statute is the governing statute, then no action can be

filed arguing that 1334E1 grants the court jurisdiction. And that, I'm not so sure that came across very clearly in our briefs, but there is a general proposition that's been adopted in the Third Circuit, and we can provide Your Honor with the case law if you'd like, that the more specific statute should govern over the more general. And then I don't know if this is, if Your Honor feels this is relevant to the court's determination of the issues, but the issue of whether or not this matter involves a core proceeding or not. We discussed this pretty much in depth at the last hearing, but in light of the district court's

ruling, which Your Honor will have an opportunity to read at some point within the next week or so. The district court, of course, is doing exactly what Your Honor predicted, is giving, as ruled that the motion is being denied as essentially premature because Your Honor has not had an opportunity yet to rule on the question of whether or not. It's core or non-core, as Your Honor, particular at the last hearing. And so we would say that what's happened here in this proceeding is that the debtor has taken what is essentially a criminal forfeiture proceeding and put some bankruptcy labels on and terminology.

And has tried to argue that the automatic stay is being violated. in a way that turns what would ordinarily be a non-core criminal forfeiture proceeding into a core proceeding accusing the government of violating the automatic stay by seizing content or attempting to seize contents of an account which belong to the estate. I think at best in the case law that I've seen, the asset is in limbo. the debtor may have possession of it, the government doesn't have possession, but until that forfeiture proceeding is, you know, until there's a conviction and the forfeiture proceeding is

concluded, we don't really know, Your Honor, who's entitled to the contents of that account. And if in the confirmed, in this adversary proceeding or in the case generally, I think we have a stipulation on file that says no party will do anything with the asset until 30 days after a judgment in this adversary proceeding, but if at some point those contents are distributed to the unsecured creditors in the case under the, either judgment in this proceeding or in the plan generally, then Your Honor would be authorizing the contents of those accounts to go to creditors of the bankruptcy, which is not what Congress envisioned. Congress envisioned that if there is a final forfeiture judgment, it should go to those crime victims.

And yes, I do agree with Your Honor that there is some prejudice to be suffered by those unsecured creditors because they have to wait. But again... Well, it's more than waiting. It's actually, as in my hypothetical, it's the fact that if the government is successful in accomplishing what you're attempting to accomplish, then the victims of the criminality of those two defendants, that has nothing to do with BlockFi or its customers or its investors are being compensated by BlockFi's customers and investors. That money or a portion of it or their entitlement is being reduced.

There's no doubt about it. Their funds are going to be reduced. Their recovery is going to be reduced. We respectfully disagree with, Your Honor, from that perspective, because we do believe that the relation back doctrine, gives us the right, even in a case where the criminal defendants are not the debtor, we believe it gives us the right to seize for the benefit of the crime victims, what the government was entitled to between 1998 and 2000, I think it was August of 2022,

when the crimes were being committed. And as soon as those accounts were opened, well, even actually, not even before that, when the crimes were committed and the criminal defendants had possession of that crypto, we had the right to seize it all. You had the right because the criminals had the right. No, we had the right because of the case law in the criminal jurisprudence that we've cited, that essentially gives us what I said at the last hearing was a time machine. It gives us something that unsecured creditors don't,

and creditors generally in a bankruptcy don't have. It gives us the right to go back in time. and to see what the government's right was at the time the crimes were committed. Well before when the warrants were issued, once that forfeiture judgment is entered, if we can show, and we do have the ability to trace, and we have traced up until the time when the seizure warrants were issued, and this would come out if we have a trial, Your Honor, we will be able to show that what the criminal defendants had at that time. and we should be allowed to seize that. Now, Mr. Rostkin has very astutely noted that, well, that might be the case,

even if the relation back to action applies, but, which he can test, but she says, in any event, BlockFi doesn't have those assets right now. They're gone, she argued in her brief, that they might be in the hands of Alameda or somebody else. But what we're saying is that at the time that the crimes were committed, they did have it. It was represented to us by Block Fy when we served the seizure warrants that they had it, and so

we should be allowed to... But they don't have it now. Let's accept the premise that they don't have it now. So you're saying that you're entitled to it because they had it. But they don't have it now. So instead of getting other criminal assets, other assets

from the defendants, you're just going to latch on to third-party assets of the customers and the investors, because there's money there. How is that sound policy? How does that teach a lesson to the defendants, the criminals? It's okay. We're going to, your obligation, we're going to have the rest of the, we're going to have poor

Becca satisfy it with her $32.75. Well, I understand your question, Your Honor, but the point is that this is the judgment that Congress made, that when Congress, created this jurisdictional scheme where they have two arguably inconsistent statutes that seem to conflict with each other. The toughest part for Your Honor and for all the courts here is to reconcile these two statutes and figure out. Well, in this kind of a situation, should the government be allowed to seize that particular part of the account or the crypto and distribute that to crime victims down the road a year or two,

post-conviction or forfeiture, or should that money be distributed now in this case? And that issue has never been decided in a published decision. I think I indicated I'd research it myself over a week. The cases that we've cited are cases where the government has actually already seized the asset. So in those cases, Guildmaster was clearly applicable, and we think it should also be applicable to a situation where the government has not yet seized the asset, because we're not trying to seize it for the public fist.

We're trying to seize it for crime victims who were defrauded based on wire fraud and money laundering and the like. And these particular unsecured creditors or creditors generally in the case, or the ones with respect to the particular BIA counts that we're talking about, those creditors signed a contract essentially that they agreed, including the criminal defendants, Your Honor, where they agreed that once the money was deposited, BlockFi could do what it wanted with it. The government didn't sign that contract. The crime victims in this Haschflare Ponzi scheme didn't sign that contract.

So why should the crime victims suffer as a result of some contracts signed by investors who lost their investment because they signed a contract that said, we're giving you our money and you can do with it what you want? and then they're saying, oh, now I'm suffering because I'm not going to get paid in full. Well, you know, it's the government's view that while we sympathize with those creditors, we think the crime victims are the larger victims in the general sense of the word here. The unsecured creditors, at least to the best of my knowledge, are not, they might allege that there have been victims of a crime,

but there's not, to my knowledge, been any crime yet asserted against blockfye or against anyone else with respect to their lost investment. And that's because they signed that contract. Well, all right, I appreciate your argument. Let me hear from the committee that I'm certainly going to tell you why, in their view, what you're seeking doesn't make sense. And also we have counsel for the JPL who are going to say you're looking at the wrong law to begin with. first start with Vermita law. Well, I did want to just quickly adjust that question because I'm the Bermuda law, that we believe the crimes were committed here in the United States, Your Honor,

and therefore it should be U.S. federal criminal law that should apply and not permitting it. All right. Thank you. Thank you. Mr. Shapiro. Thank you, Your Honor. Thank you, Your Honor. Once again, for the record, Sharon Walskin from Brown of NIC on behalf of the committee.

I want to address, and thank you, by the way, for laying out that fact pattern. The analogies are, I take full responsibility for those, and, you know, this is a, it's a tricky case to trace these assets through and to think about it in terms of assets that we're more used to dealing with. But I want to address, first and foremost, because I think this is really the thrust of the government's point, the allegation that sections 853K and N really do contradict what 1334E says. And I think, frankly, Your Honor, to use another analogy, we're comparing apples and oranges. We talked a little bit about 853K the last time we were here. That's the statute that prevents, and it's very specific about this, it prevents third parties

with a competing interest in property subject to forfeiture. from bringing actions concerning the validity of that interest, except as described in 853K. So it explicitly only applies to property subject to forfeiture. And 853A sets out what property subject to forfeiture is, and forgive my shuffling of papers. But 853A says that any person convicted of a violation of this subchapter, There's a later chapter that deals with indictment.

Punishable by imprisonment for more than one year shall forfeit to the United States. So the person that's the criminal defendant shall forfeit to the United States, irrespective of any provision of state law, any property constituting or derived from, any proceeds the person, the criminal defendant, obtained directly or indirectly as a result of the violation. There's a couple of other provisions that I think are not applicable here. One is property used in the commission of the crime, and the other is interests in a joint criminal enterprise and a joint venture. But in essence, the only property, in other words, that 853K applies to is property that constitutes proceeds that the criminal defendant received or is derived from that property. So here, our view is the only thing the seizure warrants can possibly refer to, right, is either

the actual crypto that is in the accounts, and as Your Honor knows, the government already sees the contents of the wallet account, their, you know, BlockFi, its standard practice was to actually keep funds segregated in those accounts. Those funds, we think, fall into this first provision, right, that their property constituting proceeds that the criminal defendant obtained as a result of the crime. That's what the seizure warrant says. We turned it over. Or what the, you know, funds from the account in the seizure warrants means, we think, is the proceeds of what those criminal defendants received from their commission of their crime that is still at BlockFi, right? And we don't know what the answer to that is yet, right? We don't know what the amount

is that the criminal defendants would receive on account of the funds, the balance that was in their accounts, the balance of their accounts at the time the criminal seizure warrants were served. But we'll find that out, right? That's the process of a normal bankruptcy case. You figure out what unsecured creditors are going to get. That's the proceeds that's described in 853A. That's what the seizure warrants described. We're happy to turn that over, right? There's no dispute here about who has the right to the accounts, right? We don't dispute that the debtors can turn over the criminal defendant's claim to the United States. So I think that that gets us around this contrast of laws issue.

I frankly just don't see it being there. And I don't think the relation back doctrine helps them because once again, the relation back doctrine applies only to this specific tainted property that's described in 853A. In other words, the property that is proceeds of the crime or that's derived from that, There's a second section, it's 853P, I believe, that talks about substitute property,

which essentially says that if the criminal defendant has transferred property to a third party, or it's been commingled, or it's hard to get, the government can go after the criminal defendant's other property, right, to make up the difference. But the relation back doctrine only applies to tainted property, not substitute property. And again, substitute property can only be seized from the defendant. not from a third party. So the WIN-PAR case and the Guildmaster case that Mr. Shapiro cited are both cases, both of them, all of them, in fact, are cases where the criminal defendant was a debtor, right? And there, I think it's easy to see how the relation-backed doctrine does apply to set the rights of the United States

apart from the rights of individual unsecured creditors, right? If, for example, the crime is committed before the chapter's, it's usually a chapter, seven case. Before a Chapter 7 estate came into existence, those funds never enter the estate because you can only give what you have, right? And the debtor at the time that they filed for bankruptcy did not have the right. They didn't, they may have possessed it. They didn't have a legal interest in the proceeds of this criminal enterprise. So for that reason, right, all of these cases say, well, you know, when the crime predates the bankruptcy case, the proceeds of that crime never enter the bankruptcy estate. That's true, right, with respect to a criminal defendant that

is a debtor. But let's think about how that works here. Okay. If it's true, and they've alleged that it is, I have no reason to believe that it's not true, if it's true that the crimes that were committed before the criminal defendants put their money in BlockFi and the DOJ had a right to those funds, the DOJ still has a right to those funds. But again, our allegation is we just don't have them. So it gives the DOJ the right to, I guess, step ahead of other competing interests to those funds, whether those interests are at FTCS at Alameda, wherever they happen to be. And if it's the case that the DOJ can trace the crypto to blockfy, that's a tainted asset, right? That's an 853 asset. We just don't think it's there. We've alleged that it's not

there. If it turns out that, you know, through discovery they find it, that's a tainted, that's a tainted asset, and we think that we need to turn that over. But that's not where we are. I'll just stop there. That's not where we are, right? Right now, we're in a motion to dismiss. We've alleged we don't have the cryptocurrency in its entirety or in principle part that the criminal defendants deposited. I want to mention one more case, Your Honor, and it's another case where the debtor was the defendant because they're all cases where the debtor was the defendant. This is the Arpenbeck case out of the Sixth Circuit. And that was kind of interesting. The FBI literally found a box of cash, okay, buried in a, in a Chapter 7 debtor's golf course. Okay, the Chapter 7

debtor was the criminal defendant. And the bankruptcy estate was still open, although the bankruptcy had concluded long before. And the trustee came in the trustee came in. said, hey, this is property of the estate. And the DOJ said, no, the relation back doctrine applies because the crime predated the burying of the cash, I suppose, on Skull of course, which was true. But the Sixth Circuit found that it was not, the relation back doctrine did not apply because they couldn't trace that cash to the crime. In other words, the connection is what's really important. 853A matters, right? It matters. That this. this specific property is property that's derived from the crime.

So even in the case of cash, right, which is fungible, because they couldn't trace it, it didn't count as 853A property, and so it was property of the estate. We've also alleged that BlockFi, as Your Honor noted in your fact pattern, was insolvent at the time that seizure warrants were served. So, you know, unsecured claims would get less than, they would if they're going to get less than what the United States is trying to seize, which is cryptocurrency

equal to the balances of the criminal defendant's accounts at the time the seizure warrants were served. So, you know, the fact that the relation back doctrine applies to tainted property doesn't mean that it doesn't apply, that it applies to anything

that BlockFi has, right? It can apply to what the criminal defendant's rights are. And if somebody else shows up and says, you know, that the criminal defendants promised me something, you know, I had a claim against them. They can go fight about that with the United States in the Western District of Washington. But we are not trying to seize any of those assets.

We are not trying to prevent the government from seizing those assets. We're trying to prevent the government from seizing the assets that are not proceeds of the crime or derived from proceeds of the crime. And those are the assets that are beyond either what was actually deposited by the criminal defendants or what the criminal defendants would receive on account of their claim. I've gone through this. So I think it really addressed all of this. I do want to address very briefly the United States sovereign immunity argument.

106A includes a broad abrogation and waiver of sovereign immunity with respect to both sections 105 and 362 of the Code. This summer, the Supreme Court expounded on what that means. I'm going to read this because I just don't want to get it wrong. The Lac de Flambeau Band of Lake Superior Chippewa Indians case, and that's 599 U.S. 382. And they're describing the automatic stay and certain other provisions of the code the Supreme Court held that courts can also enforce these requirements

against any kind of non-compliant creditor, whether or not the creditor is a governmental unit, by virtue of 106A's abrogation of sovereign immunity. So it's technically true, I suppose, that the DOJ is not a creditor, but it's a distinction without a difference because their only role in this case, the only thing they can possibly do

with respect to blockfy is stand in the criminal defendant's shoes, and the criminal defendants were a creditor. So their position in this case is as a creditor seizing the creditor's property, that is their rights. against BlockFi. Let me pause and see if Your Honor has any questions about jurisdiction,

because I want to turn to the 362B4 issue, but the jurisdictional issue here is relatively complicated. No, go ahead. Thank you. So that leads in, I think, to the next point, which is that the United States is making, which is that they're subject to the Section 362B4 exception because criminal forfeiture proceedings are an exercise of police power, and of course they are, right?

but the adversary proceeding doesn't seek to enjoin the criminal forfeiture proceeding. It just asks this court to find that by transferring the criminal defendant's claim to BlockFi against BlockFi to the United States, BlockFi has complied with the seizure warrants, and the United States is not entitled to anything else. And again, you know, the United States has other avenues to obtain those assets, right? It can obtain the tainted assets wherever they are, if it can trace them, it can find out where they are and it can go get them. or it can obtain as 853P allows it to do substitute property from the defendants,

their house, their yacht, their car, whatever they want. So seizing the criminal defendant's unsecured claim against BlockFi is a proper exercise of the United States police power and not subject to the stay. That's why the committee had no objection to turning over the funds in the wallet account. But 362B4 does not apply when the government is exercised. a pecuniary interest in the debtor's property. So in the Nortel Networks case, the Third Circuit held that liquidating a claim to property of the debtors

is primarily an adjudication of private rights rather than an exercise of public policy. In other words, 362B4 allows them to take the claim, but not get paid on it. And we think the legislative history of the section makes that very clear. We cited in our brief, the exception permits entry of a money

judgment, but not enforcement of that judgment. And the reasoning of Congress, which is quoted by the Third Circuit in the Pantara case, is that enforcement of a money judgment would give the government preferential treatment to the detriment of all other creditors. It's also in line with Your Honor's ruling in the LTL case on the state Consumer Protection Actions, finding that those actions were accepted from this day for the purpose of fixing, but not collecting civil penalties. So here, by contrast, what the United States is trying to do is not just sees the criminal defendant's claim, again, to which we have no objection, but to collect on that claim in full, in kind now, which no other creditors are able to do.

And that's beyond what Section 362B4 allows. So unless Your Honor has any other questions, I'll see the podium. No. No, I don't have any additional questions for you, thank you. Thank you, counsel. Oh, I'm sorry, you want to. Mr. Allett. Yeah.

And then I'm going to go to Mr. Bernard, and then I'll, Mr. Shapiro, I'll respond. Yeah, Your Honor, sir. Let me see. I'm sorry. So I just wanted to, there's a particular factual assertion that Mr. Shapiro made that I wanted to respond to, where he said that the debtors said that the money was there. Yaron, we wouldn't be here if we believe that the money had been properly traced. I've spoken to the debtors, and my understanding of what the debtors conveyed is, to use your analogy, they have $200 in the bank account.

They did not say that those $200 bear the same serial number as the $200 that was deposited by the criminals. Obviously, that's a factual matter, and of course the government would be entitled if this case is not dismissed to try and trace. but I just wanted to clear up that particular factual issue. I guess along those lines, the issue that I raise, and the court has to come to more fulsome understanding, even when a bank you didn't go to any bank teller, you have $200 in the account. It doesn't necessarily, and actually under the UCC,

it doesn't mean you actually have physically $200 in an account. You have a debt owing. It's a credit or debtor-reliven. between the bank and the account holder. So you're free to comment further on that. The court is trying to take into account how that relationship differs from this actual seizing as if we're in a safety deposit box.

But before I return to you, Mr. Bernard. Thank you, Your Honor. Listen, we filed papers surprisingly or unsurprisingly, Bermuda law is substantially similar to U.S. law with respect to the contents of the account and the account holders' rights. In that, you know, when you look into the account, it's a ledger. It's an IOU from BlockFi International that IOU these assets. The rights of the holders of those accounts are to share per rata in the assets available. to satisfy those claims in a liquidation.

The only variation in Bermuda is that under a scheme, that pro rata right could be modified. A scheme is akin to our Chapter 11, but does require supermajority voting of the creditors in each class. So in our situation in Bermuda, we are on track with the committee and its representation of what the content of the account is and what the account holder's rights. far with respect to that account. All right. Thank you, Mr. Bernard. Mr. Shapiro, anything in reply?

Yes, sir. So the conflict of law question is a relatively new question. We certainly, you know, will address that if the action is not dismissed. We'll have opportunity to speak with opposing counsel and also probably in various motions. But I did want to have an opportunity to kind of respond to some of the comments made. First is, in all fairness for the record, BlockFi did indicate after, later in the case, that the initial representations about the account and the funds being there was not completely accurate.

And we do, if we end up going to trial, Your Honor, we'll see, you know, correspondence reflecting that change of position. But part of what drove this so aggressively at the beginning was the belief of the government that what we were seizing was there based on what we were told. And then, of course, Block FI coalesced and was willing to sign a stipulation, turning it all over. And it had not been for the committee. We wouldn't be here today. So I just want to make sure the record is clear that there is some dispute about, you know, factually about what happened here.

What money was there when the accounts were seized on the day the warrants were served? What was there at the time the crimes were committed? And, of course, you know, the tracing issue, we argue that that issue should be decided by the district court in the Western District of Washington under 21 U.S.C. 853, and not, if tracing is relevant, and not in this court because of the jurisdictional framework. So we're not, it is conceivably possible that tracing will be required at some point, whether the matter's tried in this court, the district court here in New Jersey, or in the criminal forfeiture proceeding in Washington, but we argue that's where it should take place in Washington, not in this court, because of 21 U.S. 853.

Then I think I should address the sovereign immunity question, which, you know, we've briefed, but essentially that really boils up. down to the jurisdictional provision as well. We think that Congress in 21 U.S.C. 853, because it enacted that section of the criminal code, it essentially carved out the abrogation in Section 106A, which does specifically state that actions brought pursuant to Section 105 and 362, sovereign immunity is waived. So it essentially kind of like comes full circle back to the jurisdictional provision. If this court, doesn't have jurisdiction and the only jurisdiction to determine the scope and enforceability

of a criminal seizure warrant is in the criminal court, then sovereign immunity has not been weighed. And if that's not the case, if 28 U.S.C. 1334E1, if Your Honor decides that you do have jurisdiction, pursuant to that in the referral statute, then the legal conclusion will be that sovereign immunity has been waived under 106. And then, There was some discussion that Ms. Groskin had about LTL that is now being hotly contested in various cases. We think LTL is distinguishable, Your Honor, because in that case, this court found authority to stay a civil collection action to liquidate a claim to judgment. The United States government is not trying to liquidate a claim to judgment. We are simply trying to stop an attempt under Section 105 and the Declaratory Judgment Act

to stop us from seizing an asset in a criminal case. And Section 105 does not have an independent grant of jurisdiction, and the Federal Declaratory Judgments Act also does not have an independent grant of jurisdiction. So we think in LTL, Your Honor, we believe relied on Pantara, where the Third Circuit had addressed a state civil environmental action, explaining that there might be instances where state regulatory powers impermissibly dilute federal bankruptcy policy. But we don't think the LTL and Penteira cases apply here because the plaintiff is essentially trying to enjoin a federal criminal forfeiture proceeding where there's no question that the seizure would benefit the public

welfare and that the crypto funds would not be kept by the government. We're not going to keep the money, it's going to be distributed to the crime victims where Congress wanted it to go. So I think I've addressed all the questions raised by my opposing counsel. If Your Honor has any other questions, please feel free to let me know. Well, in all candor, and after three hearings on this, I'm not sure we haven't covered every aspect of it. And quite well, good-os to all counsel. Thank you. Thank you, Your Honor.

What became clear, and I think Mr. Shapiro acknowledged there is no case law on this. That is correct. On this fact pattern. And I think it was the last hearing, Mr. Shapiro suggested that I would be making law. Well, so be it. I'm reserving, number one. I think you can glean from my question. in all three hearings that I'm not sanguine with the government's arguments, that I am

more inclined, especially at the motion to dismiss stage, to deny the motion to see how it develops as far as tracing other elements. But I want to write on it, and in fairness, when you write, you sometimes change outlooks. I think it merits. a written opinion. Since poor Beck is not getting all her money, she'll need to keep working and work on it.

So I want to do it in the short term. I believe everybody's interest are better served by having a resolution at least of the motion to dismiss at this stage. As we were speaking, I see literally the clerk's office.

has forwarded an email to me, sending me Judge Kirsch's denial of the motion to withdraw the reference. I'll read through that. But I'm going to give this all some additional thought, and I appreciate your briefing in our or large. Thank you, Your Honor. May I just adjust two quick issues. One is, of course, about the government shutdown. We'll, of course, talk to the prison council and try to figure out something reasonable.

but please feel free to reach out to us and we'll try to figure out something that is mutually acceptable if the government does shut down on September 3rd. We don't know and I know the court always has a couple of extra weeks of hidden money to keep it going. I don't know if the Department of Justice has that.

But going forward with this, if I were to deny the motion, then there has to be either or another. answer or another motion to withdraw the reference. Clearly, I will resolve whether it's core or non-core as part of my decision, so that won't be hanging out there, so to speak, for the district court. But at this point, is there anything immediate as far as what's going on in the state of Washington or elsewhere that tax timing? No, Your Honor. That was, Your Honor, actually addressed my second point which was that if your honor decides to deny the motion to dismiss and let the proceeding go forward,

we, of course, would work for the opposing counsel to figure out a schedule. But we would ask that the court rule on the core versus non-court issues. I think it's appropriate. The district court has an opportunity to, if we do refile a motion to withdraw the reference, to actually have that before. Absolutely. All right, thank you. Counsel?

The other thing I would raise is that confirmation. order that we've negotiated together with the DOJ and with the debtors has attempted, we think, we think it's really, Your Honor, we'll decide whether it's successful to resolve issues that may arise from confirmation, right, if the committee goes out of existence. So we've... All of those issues, right. Yes, in fact, I can't confirm, for the record, Your Honor, that the United States has negotiated consensual language. I don't know, I can't speak from a... responder in the office of the U.S. trustee, but I can speak for the DAJ criminal

division, civil division, commercial litigation branch, and also been in touch with the tax division. And we have worked out language with both counsel for the debtors and counsel for the committee in connection with what the confirmation order will look like. The impact on Tuesday. Mr. Flonder has other issues. All right. Then thank you all. If the court has any issues or concerns or needs anything else from you as far as submissions we'll reach out for you all. Thanks. Have a safe trip back.

Thank you. Thank you. And we are off. Thank you, Mr. Bernard. All right.