American court hearing recordings and interviews - Season 6. Episode 23. February 6, 2024. 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: February 12, 2024

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Our calendar, I'll wait for everybody to change their screens. Judge Kaplan, and we'll hear the few block-by matters we have on for the agenda. Check your video. Excuse me? Video. Oh, video went off. All right there. I'm back.

All right. Just playing games. Okay. So, let me – I have the agenda. Let me turn to debtors' counsel and see what matters they wish to address first. Mr. Allette, good morning. Good morning, Your Honor. For the record, Kenneth Allett of Brown Rudnick for the plan administrator and the wind down debtors.

We have two matters going forward today, the motion for approval of the three-era settlement, and I should note the agenda does not include the U.S. trustee's objection to the ceiling motion, so we are prepared to address that, and I see the U.S. Trustee is on the line, and our apologies for not including that on the agenda. My partner, Tristan Axelrod, will be handling all matters related to three arrows, and we have the 14th omnibus objection going forward on the papers. But first, if Your Honor would let me, we'd like to give a little bit of a status update on the case.

MR. Yes, please. MR. So, if – as creditors may be aware – on January 31st, we announced the beginning of the first intern distribution. Stepping back, the plan administrator, the Oversight Committee, and the joint provisional liquidators have all had the overriding goal of returning as much money to block by customers as quickly as possible. We've heard some stories from customers of the impact that the inability to get this money has had on their lives.

One creditor, for example, has told me that they sold their house and were moving and put the money in BlockFi for the time being while they look for a house. And needless to say, they have not been able to get a new house. So we've been focused on returning money to people as quickly as possible. There were a couple blockers in place before we could do so. Blockify systems required that we complete wallet distributions. before we could do distributions on unsecured claims, the difference between now and BlockVi's previous systems being that we have to be able to distribute portions of a claim.

That required reworking the structure of Blockby's systems, and as practical matter required us to be able to close down the wallet product before we could do so. We're pleased to announce that the wallet product has been closed down following the withdrawal of over half a billion dollars worth of crypto assets from the wallet accounts. The remaining wallet funds will be liquidated cash and the cash sent out to those wallet folders.

Next, we had to reconcile enough claims that we could be ready to begin distributions. There was a vast number of claims filed in this case. And as you would expect for a company that had a primarily individual customer base, not a lot of people were experts in filling out bankruptcy claim forms. And they shouldn't be. Hopefully this is their one and only bankruptcy experience. But the required reserves that would have been needed to be kept at the beginning of the process would have been enormous.

And that would have significantly impacted our ability to get out distributions. And the three-arrow settlement, which my partner, Tristan Axelaw, will address, was one of those key blockers, a very large claim against lending LLC, which is a relatively small estate. And finally, we needed to have certainty over the claims pool. Every claimant who filed a proof of claim needs the opportunity to come before your honor. if we disagree with that claim, but we needed to know the maximum that they could recover so that we could keep reserves. And through the capping motion, we've been able to ensure

that for every single claim filed, we have a maximum amount of that that claim can be allowed at. In most cases, we believe that if that amount is more than the scheduled claim, that ultimately the claim should only be allowed at the scheduled amount. But by By using the capping motion, we were able to ensure that people could get distributions now while preserving those claimants right to come before your honor at a later date. And so from the beginning of the wind down process, Moe Meiji, the plan administrator set a very aggressive schedule with plan for distributions in January. And Your Honor may have expressed a little skepticism if we could hit that, but we were very pleased

that distributions did start going out on January 31st. I want to give a little context on how distributions are going out so that creditors can have an understanding of what to expect. Because we're using BlockFi's existing systems, we wanted to take a phased approach to make sure that we're doing something new here. We wanted to make sure it worked well. And so we began with on January 31, a small population

convenience class claims so that we could test the systems with small dollar those tests went very well and so we're going to be expanding the process first a larger group of convenience class claims we're then going to move to scheduled claims where a claimant did not file proof of claim so we have an undisputed claim amount we know exactly what they're owed and that there's no dispute and And then we're going to move to allowed claims. We expect to file a notice with your honor sometime in February of all the claims that we have reconciled and deemed under the plan to be allowable claims that should be entitled to

receive distributions in either the amount asserted or that have been on previous on of the subjections that have been modified by our court. So, as of yesterday, we've released 150,000 accounts for distribution. Our goal is to have it all accounts with either a scheduled claim or an allowed claim open in the month of February, as claims become allowed subsequent to that point, largely from omnibus objections being granted by your honor or by other orders that we would open up distributions at that time. We will be reserving for all those distributions in advance so that everybody who is receiving digital assets as part of their distribution will receive those

at the same price point. So as we all know, digital assets can fluctuate considerably in value. We will be using the same value for Bitcoin distributions that go out yesterday as go out at the end of February. We're going to be doing all of the rebalancing at once at one price point that we can use for everybody, so that nobody is prejudiced by when in the process they get their distributions. And similarly, we are reserving for disputed claims in kind such that those people will not be prejudiced either. The initial distributions are below the ranges that we hope and expect to reach, because we're using the assets that are currently on hand with a relatively substantial

reserve, both for disputed claims and for future litigation. With the, if the court approves a three-hour settlement, that will release some of our litigation reserve as well. It can be rolled into a future distribution, and as litigation matters are concluded, any unused portion of the litigation budget can be rolled into. to a future distribution. And similarly as claims are reconciled and ultimately allowed, any portion of the disputed claims reserve

will go back into the pot for future distribution. So that's where we are with distributions. Our hope is that as additional money comes in or is released from our existing reserves, that we will be able to announce distributions in the future. As we announced on the 31st, the distribution ranges are approximately 21 to 26% for BlockFi Inc, which are U.S.-based BIA accounts,

35 to 41% for BlockFi International, which is essentially every kind of account held by account holders outside the United States, and 37, 43% for BlockFi lending, which is U.S.-based collateral accounts, people who posted Bitcoin. or theory. You've finally broken loose from work. Three friends, one tea time, and then the text. Honey, there's water in the basement. Not exactly how you pictured your Saturday.

That's when you call us, Cincinnati Insurance. We always answer the call, because real protection means showing up, even when things are in the rough. Cincinnati Insurance, let us make your bad day better. Find an agent at CINFIN.com. for crypto take out a loan and block by private clients. Is that the anticipated range or with the range for these current distributions? That is the range for the current distributions.

There is a little bit of uncertainty because the rebalancing had not yet been completed. We'll announce the exact distribution percentages once we open up non-convenants class. distributions. All right, thank you. And so the other two major matters are three arrows, capital, and FDX. Three arrows, as the court is aware, we've reached a settlement subject to your honor's approval that my partner, Tristan Axel-Warad, will be presenting. Assuming that is approved, we will be able to open up those lending distributions.

I should note that the 37 to 43 percent range assumes that the free arrow settlement will be approved. If it's not approved, we will obvious or require a much more substantial dispute and claims reserved there. For FTX, as I'm sure by creditors have seen FTX announced recently that it is, to use their exact phrase, they're optimistic that they will be able to hit 100% distributions. That is not a promise, that is not a guarantee, but they are quite hopeful that they will be able to reach that, which given that the largest remaining asset that has not been monetized of BlockFi is the claims

against FTX is very positive, it's very positive news for BlockFi customers. That said, the important caveats there are, first, nothing is guaranteed until it's guaranteed. The FDX debtors have not promised 100% distributions. and we do not have 100% distributions in our bank account. Second, FTCS's plan is a dollarization plan. FDX expects to send out dollars. So for any allowed claim that Blocki ultimately has, we expect that that 100% means that ultimately

we may receive 100% of the dollarized value. But unfortunately does not mean that we will recover 100% of the cost crypto assets pledged by Block 5 for, unfortunately, the same reason that customers, in this case, must use the petition date value of their claims. But good for the goose is good for the gander, so to speak. Yes, Your Honor. And I should also note that 100 percent distributions doesn't necessarily mean 100 percent

distributions upfront. Yet the ex-debtors were very clear that they've got quite a lot of wood to chop, including monetizing their assets and that they have a very substantial claims pool that they expect from Jack to. So even if they hit 100%, when those distributions come in, it isn't known at this time. We also last Thursday had a mediation with FFTX, presided over by Judge Goldblatt. The mediation was productive and were continued to discuss with FDX, but we don't. have anything that we can announce at this time. If we do have something to announce, we'll announce that as quickly as possible. And with that, unless your Honor has any questions,

I will turn over the Three Arrow's Matters to my partner, Tristan Axelot. MR. No, thank you, Mr. Olland. I think it's been important to get that outlook and status report with respect to distributions. I know there are anxious creditors. both chambers and your firm have been receiving calls and emails. And the sooner we can start these distributions, I'm pleased to hear that they did begin in the month of January and that the – they will continue through February. I think that's a good sign. Mr. Axelrod, let's address the 3A settlement and also the ceiling motion.

Thank you, Your Honor. Can you hear me clearly? I can. Thank you. Thank you. The 9019 settlement motion is document number 262. The motion to seal is 263. There was a response from the U.S. trustee to the sealing motion filed at docket number 207. I'd be happy to address that first as it's the contested matter.

I think so. I think it would be appropriate. Okay. Thank you, Your Honor. So our motion stated cause for relief under Section 107. B of the Bankruptcy Code, commercially sensitive confidential research information. The U.S. trustee responded that the public policy precepts underlying Section 107 and the right of access of the public to this type of information trump, essentially our statement of cause under 107B.

We have three arguments that I'll lay out as briefly as I can in response to the United States trustee. The first, very simply, is that no party came forward and asked for a copy of the agreement, either before the U.S. trustee or after. The agreement provides that in the event we in Three Aras Capital see no commercial issue with disclosure of the agreement to an interested party, we can provide it to them, and we would be happy to cooperate with Three Ro's Capital in the event any party does ask. it will probably entail that party signing an NDA, and

we would probably need to be assured that they are not litigating against us or against FDX and trying to back out commercially sensitive, if not privileged information from what they're seeking for most. So

generally, we have made a showing of cause under 107B that Your Honor can see from the record in these cases. There's the disclosure statement, that lays out certainly the importance of recoveries from FTX to recoveries for our creditors, but also the potential cause of action that we have against any number of other parties, some of which have commenced.

And that's preference litigation, it's insurance recoveries, it's a variety of different positive action that we are either contemplating or actively pursuing at this time. There's also a mediation order on this docket that Mr. Alette referenced, and that led to us engaging in mediation with FTX, and in that mediation, going back months now, we've been given, as one might expect, of one of the largest predators in the FTCS proceedings. We've been given confidential mediation privileged information

about FTC's ability to monetize certain assets and its projections for recoveries to predators. And all of that body of litigation, that the importance of FTCX, the information we have about FTCX, feeds into the litigation that we are pursuing now and that claims that are made against the Blockify estates, issues like solvency in connection with preference and fraudulent transfer claims.

Defense is safe harbor, ordinary course, and then most importantly, recoveries for BlockFi and, in fact, 3AC and other FTX creditors figure into 502H claims, and how you would value this avoidance litigation that's going back and forth between BlockFi and FTC and other entities. And all of that basically is determined by confidential information, certainly privileged understanding of the strengths and weaknesses of our claims. But as I just mentioned, very importantly, mediation privileged information about what's going on at FTCX and what we can expect in the future. And as Mr. Alette just mentioned, there's a big deal.

difference between FTX saying, we hope we can pay 100%, and FTCS saying, here's your 100% in cash today, as opposed to over five years when we finished this litigation and monetize this and that asset. So there's a lot of information that we've had to work into our litigation planning that ultimately, I think, has become very clear in the document that we negotiated with three R.O. Capital to settle our disputes with them. We put a lot of work into the creation of a novel settlement framework that aligns Block FIs and Three R's Capitals' incentives as we both go forward with various bodies of litigation, both of us including FTCs, but also others. And it would be hard

not to look at our settlement framework and back out analysis of certain strengths and weaknesses of claims, but also what we believe will happen with FTX based on mediation-privileged information. If that information were to be disclosed, it would, among other things, make settlement far more difficult for BlockFi and Three Arrow's capital. And I'm not sure that I really need to say more about that, given that we just said we're in mediation with FTX. This is the single most important asset to block five, and we don't want to interrupt that process, that mediation, which we believe has been productive. And we also simply don't want to interrupt or prejudice any other litigation that may come

up that could be jarred by inappropriate disclosure of information. This type of relief, the ceiling of confidential litigation-related information, I'm I won't say it's routinely granted in cases as a whole, but very often granted in very large cases where litigation recoveries are critical to creditor recoveries and where there's a huge body of litigation against creditors, each facing unique facts but somewhat similar issues of law. One prominent example was the Puerto Rico adjustment proceedings in the Puerto Rico bankruptcy court case number 17-03-03283. There were the series of sealing orders entered beginning around April 2019 that limited creditor and litigant access to some very confidential documents laying out not just settlement agreements, but settlement strategy and in many cases both. And then very prominent example of a court sealing this type of settlement agreement would be Three Rose Capital's own settlement agreement with Genesis.

In the Genesis case in the Southern District of New York, bankruptcy court case number 23-1063, I believe the United States trustee objected to the ceiling of that agreement for similar reasons, and that objection was overruled. There's an order at docket number 1013 permitting the sealing of the Genesis agreement, substantially for all the reasons we're talking about today. And finally, Your Honor, is a slightly different argument. But worth mentioning here, and my colleague, Mr. Goldberg, will speak as well on this, I'm sure. But Three Arrow's Capital is a debtor in a foreign main proceeding.

It's in liquidation in the British Virgin Islands. The court is very aware of this, that Three Aros Capitals had lots of litigation with sharing some commercial concerns across different bankruptcy estates in the United States and in the British Virgin Islands. sharing some of the concerns that Blockify has today, of course, but differing in scale in many ways. In the British Virgin Islands, that settlement agreements of this nature are subject to limited public view in light of policy of that jurisdiction favoring trustees' ability to seek court direction based on privilege and confidential information. That is Bureau's Capital's concern, among other things, at which we agree. was a worthy concern in which the U.S. courts have repeatedly where foreign main proceedings

are involved and foreign representatives in recognized proceedings are involved, the U.S. courts have repeatedly recognized that foreign policy perspective as valid in justifying the ceiling of agreements in the United States bankruptcy proceedings as an act of, among other things, comedy between the proceedings. There are a number of different opinions. that have been written on this and orders entered very prominently in the made-off bankruptcy proceedings and some of the feeder fund proceedings. So I'll just list a couple. One was Fairfield Century, 714 F3rd 127 at page 140. That's the Second Circuit, 2013. And then only a few months ago in Ray Kinggate Global in the Southern District of New York Bankruptcy Court, case number 19-12853,

There's an order at docket number 73 that followed briefing on this very issue. And so we believe this is an independent basis to grant the motion as well under Chapter 15 and related principles of comedy that interact with Section 107, among other parts of bankruptcy code. So, Your Honor, I could continue to speak on this, but we believe it's a fairly straightforward issue, and unless the courthouse questions, I would yield to the U.S. trustee. All right. But let me, before I press any additional questions, let me hear from Mr. Sponder or Ms. Bilski. Thank you, Your Honor, and good morning. Good morning. As your honor is aware, the United States trustee did file an objection to the motion to seal outside docket 2107.

The wind-down debtors seek to redact and file purported, confidential, and commercially sensitive portions of the settlement agreement and the sealed portions of the 919 motion. The wind-down debtors have the burden to make a specific show. showing that the settlement agreement and the seal portions of the 919 motion fall within the parameters of an exception to Section 107A. In an effort to meet that burden, the wind down debtors set forth in the motion to seal that the wind down debtors in 3AC are parties to various proceedings and litigations, and the specific terms of the settlement agreement may have negative impacts on existing or future litigations.

No other information is provided to support the wind down debtor's burden to establish exception to disclosure except what was set forth at oral argument now which was not included in the in the motion sealing your honor as you know is an extraordinary measure and the interest in secrecy must outweigh the presumption in favor of access the fact of the disclosure of the terms of the settlement agreement may have a negative impact should not be sufficient to carry the wind down debtor's burden to seal the settlement agreement and and the sealed portions of the 19 motion. Without the settlement terms disclosed, parties and interests are unable to assess

whether the settlement should be approved by the court and whether the settlement meets the standards under Rule 1919. According to the settlement motion, the agreement has what appears to be three components. The first one is the grant to three AC of a general unsecured claim against Block 5, but the amount and additional details about the claim were redacted. The second component was completely redacted in the motion and the third component appears to be releases. All of that information should should be included for creditors to review. Your Honor, although the motion to seal provides that the wind down debtors would be filing the settlement agreement with redactions, the entire settlement agreement was filed under seal.

To the extent the court approves the motion to seal, the wind down debtor should be required to file the settlement agreement with redactions, and the 19 motion should be revised to at least sit forth the terms of the settlement. Going into the argument from today, Your Honor, as to no party came forward to receive a copy of the agreement, well, that's the whole point. Parties shouldn't have to come forward to receive copies of the agreement. The agreement should be filed on the docket for parties to review. So I don't see that being an issue. And as to capture 15 in comedy, again, that wasn't set forth anywhere in any of the motions. I don't believe that that should be taken into account here, Your Honor.

What we have here is we have, in simple terms, we have a settlement agreement. And the terms should be disclosed. Parties and interests should be able to review that and understand that. Thank you, Your Honor. Thank you, Mr. Sponder. Mr. Altsarad, do you have any response?

And let me ask this question. Just out of curiosity, I understand the plan administrator has broad rights under the confirmed plan to prosecute and compromise any in all claims. Do you know offhand, or does anybody on the call offhand, does the plan administrator need court approval in order to compromise claims? My instance says no.

The plan administrator does not need court approval to compromise claims. With the claim of this size, we felt it prudent to inform the court and parties that we have reached a resolution, In part, because reaching this resolution allowed us to make distributions to creditors, and we felt it was good news. But the straightforward answer, Your Honor, is no.

We had no obligation to provide notice the agreement at all to any creditors. And therefore, there was no requirement to place a settlement on the docket, the terms, the specific terms. Correct, Your Honor. Any other issues you wish to raise, Mr. Exelov? Your Honor, I would rest on my argument. and just reiterate that FTCX is of critical importance here, and we would not do anything that jeopardizes the mediation and the negotiations we're having with FDX

or that discloses mediation-privileged information, including, frankly, pointing out in our motions that that's what we're redacting here. It's very sensitive. We think things are going productively now, but we're being appropriately cautious in light of the interests of our constituents. All right, thank you.

Mr. Sponder, anything else on your end? No, Your Honor, thank you. Your Honor, may I briefly be heard? Yes, Mr. Goldberg. Thank you, Your Honor. For the record, Adam Goldberg of Lathman-Lockens on behalf of the joint liquidators of Three Arrows Capital. Mr. Axelrod gave very fulsome argument, and I don't intend to repeat any of his points. They were very well made, and certainly joined in the arguments regarding comedy and the

nature of the BVI proceedings. I would simply rise to electronically to add, Your Honor, that disclosure of the terms of the settlement are not only an issue of comedy and confidentiality as it relates to the BVI proceedings, but they are of commercial sensitivity and importance to the three errors of state as for similar reasons that Mr. Axelrod explained as the Block Fy estate. Your Honor, you may recall that we put before the court our motion for judicial court. nation back over the summer and the fall, which was at docket number 1623. And among other things disclosed in that motion that we had asserted claims against FTCS on behalf of the three errors of state in an asserted amount of approximately $120 million.

Those claims remain subject to ongoing investigation and potential for litigation or negotiations and the disclosure of the terms of this settlement, just as with the disclosure of the terms of the settlement that we've reached in the Genesis case could adversely impact those proceedings with FTCS and potentially with other parties that are not public that are subject to suits or potential suits by the three errors of state. And that was really what I wanted to add to Mr. Axelrod's remarks. Thank you, Ron. All right, thank you. I am going to sustain the motion, grant the motion and overrule the trustees' objections. I understand the concern raised regarding transparency obviously transparency with respect to the judicial

process is a paramount importance both to the U.S. trustee and to this court but this court has to balance the needs and of the estate as a whole the creditor body in particular and it makes little sense in fact it's counterintuitive to require the disclosure of settlement details which would have the effect to prejudice the interest of this debtor and other parties going forward with respect to settlement strategies the strengths and weaknesses of claims and defenses as well as the various parties, views on factual issues that are tied to pending claims such as solvency issues and, say, Harbor issues, and potential recoveries, to prejudice the interest of all these

parties by the disclosure in a situation where, in effect, the plan administrator need not have come before the court in the first place. And more so, even if that weren't in the issue, issue. This information is critical and to compel full disclosure at a point where no party is seeking such information, as being prevented from acquiring such information, also serves no purpose. The manner in which the motion was made, made it clear that parties can get access to the information if they were to take certain steps such as executing an NDA, getting consent to the parties, or if necessary coming before this court. So there are avenues open to parties in interest who are deserving of access to the information without having to imperil the settlements themselves and the benefits and the benefits

necessary, the benefits to the recoveries, which are necessary for the distributions that are anticipated to be made. The Court also respects the issues raised with respect to calmity, and this Court's responsibility to respect the legal process that is ongoing in the far and main proceedings in the BVI. And, again, balancing the policy objectives, it would seem that the goal of respect and comely for foreign proceedings should outweigh the disclosure needs at this point, especially when there are other avenues available. So for the reasons laid out in the arguments, of this Court's ruling, the Court will grant the motion. Let me ask this. The U.S. Trustee did request that in the event the court

does grant the motion to require what the parties had indicated they would do and file redacted versions of the document. Is that problematic, Ms. Ratzelrod? We can speak to the United States trustee about an appropriate redaction, but in principle, I don't believe who would object. then I will direct Mr. Sponder and the – and counsel to continue the discussion, and it will require further redaction. If the – if the – if the parties reaching in past, you can contact the Court and you can have a conference call.

MR. Thank you, Your Honor. MR. All right. Thank you, Mr. Sponder. Thank you, Your Honor. MR. MR.

MR. MR. Right. MR. – not mine. That is document number 2062. It's a motion for cause under Rule 1919 and Section 363B of the Code. There were no objections.

We'd ask that the motion be granted for a cause is stated therein. We believe it's a very good settlement, and I thank the representatives of Fero's Capital, Mr. Goldberg, and its colleagues for that. We would also ask that the court's order, if it's inclined to grant the motion, that it do so today, if not effectively at this hearing, because frankly someone is waiting to press the button and send many, many millions of dollars from the lending the state out to creditors as soon as this order is entered. With that, does anyone wish to be heard as to the underlying merits of the settlement? The court should also probably express its appreciation to the mediator. I believe it was retired judge Drain

who did this rather comprehensively and quickly from what I've been told placing a burden on anyone else who seeks to mediate cases to do it as efficiently but I'm glad to see that the result of his efforts produced a significant settlement

that will benefit this estate I will the court having the benefit of reviewing the redacted information. The court does believe this is certainly a significant settlement and will benefit this bankruptcy estate and will approve the settlement to try to enter the order today, but I will so order the settlement approved from the bench so that you may proceed. push whatever buttons you wish and start further distributions. MR. Many thanks, Your Honor.

MR. Thank you. We also – do we have any other matters on for the calendar that were not held over? MR. Your Honor, there's the 14 – omnibus objection to claims, which I believe your owner indicated that you would hear on the papers. But if, to the extent, Your Honor, has any questions, my co-counsel, Lawrence, will be handling this matter.

All right. No, thank you. I have read the reply submitted on behalf of the plan administrator, as well as the close to 200 different objections that were raised. And I agree that by far, those that have for which there were coherent objections went to the use of the valuation as a petition date for digital currency. Those matters have been addressed previously, as well as in other bankruptcies, and they need not be addressed again. I understand that there were at least two

of the objections which are being adjourned for further response. Is that correct, Ms. system? Yes, Your Honor. At this point, it's actually three that we believe we're going to be adjourning to a later date in February just to have additional time to review. All right. As to the other objections, again, the court has reviewed all of the submissions in advance of this hearing, and the court is going to grant the objections motion in its entirety, except to the extent those three matters are being carried. Thank you, Your Honor. Can you submit a new form of order?

Yes, we'll be submitting a revised proposed order. Then we'll mark that OTPS. Thank you. Anyone else wish to be heard on any pending matter? And I thank you. I think we're done for the morning. I appreciate counsel's arguments and all your efforts. Take care of.

Thank you, Your Honor. Thank you, Your Honor. Thank you, Your Honor.