American court hearing recordings and interviews - Season 6. Episode 5. January 27, 2023. In re BlockFi Inc. et al., chapter 11 bankruptcy case no. 2022-19361, audio of hearing held in the BlockFi bankruptcy proceedings pending in New Jersey, USA #crypto

Episode Date: April 30, 2023

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operation and as always should you need to be heard please use the raise hand function and I will be sure and my staff will be sure to spotlight you this is the block fie ink matter we have just what I anticipate is essentially a report it seems that you all met all of my expectations as far as productivity and efficiency and have reached certain resolutions. I'm going to turn to debtors' counsel, Mr. Sussberg, and I ask that you update the court as to what resolutions have been reached and what remains out there.

Yes, Your Honor, and thank you for the record, Joshua Sussberg from Kirkland Ellis on behalf of Block Fye. First and foremost, I want to thank Your Honor for the statutes. conference on Monday and the setting of the hearing on Friday and Monday because I think that's really something that spurred everybody into action. We did something a bit unorthodox for all of us, and I know I could speak for Mr. Stark when I say this. We actually had principals and advisors on a call on Tuesday.

I had a depositions that actually went forward on Wednesday, but we were able to cancel the remaining depositions because we worked collectively and collaboratively to reach an agreement on both the curb as well as the molest retention. So we have a complete agreement on all sides. And as you've seen, the United States trustee withdrew its objection after reviewing the terms of the settlement. And Mr. Howell will walk the court through the proposed order that we reviewed with the parties and believe everyone has signed off on.

So I did, again, want to take the court and obviously want to thank the committee and the block by team for everybody working collaboratively. These are difficult circumstances and not everyone's always going to agree, but here the process really worked the way it's supposed to work. And kudos to the professionals involved for helping everybody get to a good solution. I think we feel comfortable that the KERP will serve its intended purpose, and I think we convey for the committee and its members some of the thinking behind that, which is frankly what led to a productive resolution.

So thank you, Your Honor, for that. I did want to address one brief issue before I turn it over to Mr. Howell. It's been a source of some unrest on the Blockby side, and it was in the media, and unfortunately, it was reported inaccurately. And I'll start by saying that I always tell my kids that we have pencils that have erasers on them for a reason, and all humans make mistakes. I know I certainly make several, probably each and every day. And what happened here was purely a mistake. And I know Mr. Stark, and I know Mr. Meiji, and I know everyone involved here. And again, while we may not always agree on everything,

I know these people to be of the utmost integrity. And there was nothing nefarious in my view that went on here. But as Your Honor, I think is aware, there was an affidavit from Mr. Meiji filed on January 24th at 12, 10 a.m. And that document was redacted, but it was incorrectly redacted, and this goes beyond my knowledge base, but someone was able to access the document that was posted and copy the data underneath the redactions. Later that afternoon, there was a motion to seal the document, which probably got people out there in the universe looking at the document and peeling away the redactions. And then we had an unfortunate CNBC story that broke.

And that story is wrong. The story said there are secret financials that weren't otherwise relayed and conveyed in our sofas and our schedules. And I want to be very clear, there are no such secret financials. The financials that we reported are entirely accurate.

In fact, Block 5 numbers showed a net exposure, whereas the ones in the M3 declaration showed a gross. And so when Block 5 made the loan to Alameda that was the source of and older reporting, prior to the Robinson shares that Your Honor is well aware of being pledged, the pledged collateral was FTT coins. And as everybody who's familiar with FTX knows, the FTT collateral was marked down to zero.

And the gap that remained was just the Alameda loan. And so the gap in the M3 presentation looks bigger because it shows the gross exposure and add together assets and liabilities. And both numbers are accurate. Again, no secret financials. It just depends on the corresponding footnotes. I will also note that the CNBC article inaccurately reported some management compensation that is outstanding.

That was wrong, and it was false. We put out a statement as such. I know that the document on the docket at docket number 363 has been removed. We appreciate the court and crawl doing something. and 388 is a revised declaration from Mr. Meiji that has, in fact, been redacted appropriately. So again, Justice Nefoo, Mr. Stark, and Mr. Meiji called me immediately after realizing this, and I totally understand this can happen at any time, and it's unfortunate, but we're moving out. Understood, and as you said, these things do happen, especially with technology that we're all not necessarily facile with.

Stark, do you want to weigh in? I do, Your Honor. I don't want to... Do you want to hear me, okay? Yes. Thank you. I do want to confirm a couple of things on the record, although I think Mr. Suspert stated the facts on the ground quite well.

This was a late-night drafting, and the redaction, unfortunately did not have the encryption software. We've all seen this encryption issue before where by late-night mistake by somebody lower in the chain on the redaction that the software was not used. We didn't find out about it. The problem of not using the redaction is that it can be reversed engineered and the person inadvertently who files it doesn't realize because of a failure to use the encryption software that they inadvertently

put out there or something that can be reverse engineered. As soon as we found that out, we pulled the plea and we notified chambers, we called Kirkland and Ellis, and told them and replaced it with the encryption with action. But in that intervening window, the CNBC reporter was able to reverse energy pole pleading and reverse engineer it. So we couldn't stop that. All we could do is up to the arrow, which I fully take responsibility for. I think the report, as Mr. Susberg, I think quite aptly said, sensationalize something that's a bit of a law.

And so, but you never want, and so it's kind of fallen for me that an error about that happens in any event. As soon as I figured it out, I found out about it. I called Mr. Susberg, who could not have been more gracious and professional about that. I'm not surprised. That's how he is. But I do think it's important to acknowledge and recognize that that conversation happened in the heat of a very significant battle between our respective clients. So, again, I'm not surprised by the professionalism, but I'm back to back before it. We don't have an issue to resolve, but I do want to acknowledge and be back for it in front of your own.

Thank you, Mr. Stark. I appreciate those comments, and everything I've seen is really, as I've said, matched if not exceeded expectations about the quality and the efforts going on in this case. Mr. Sussberg, I do have a question just before we get into the details. And it was my understanding that the U.S. trustee has, a lack of a better term, signed off on the resolution, the KERP resolution. I thought it was still an open issue on the MOLUS retention. Has something developed that I'm unaware of? In other words, I thought they had until Sunday at certain Sunday afternoon, right before

game start, to file objections. Yes, my understanding is that we are resolved with the U.S. trustee for today. So the objections to the curb and to the sealing of information have been withdrawn. As it relates to MOLUS, we will circulate if we haven't already a copy of the revised MOLUS order to reflect the settlement with the committee, and the U.S. trustee has until someday to object to the molest retention and to the extent there's an objection we will of course respond and then be in a position to deal with it on monday rock all right that that comports with my understanding well that's great let's then proceed and let's hear uh of the uh resolution uh that's been reached uh mr howell

yes uh thank you your honor uh rush howell from kirklin and alice can you hear me okay yes fine thank you okay First, I want to echo Mr. Sussberg's comment and thank the court for its time and assistance in helping us get to the resolution that we've reached, as well as to thank the committee and the Office of the United States trustee for its professionalism and was sometimes a hard-fought battle that led to where we are now. I'll take us through the agenda today briefly, which, of course, we're happy to say is entirely uncontested. And so I'd like to start with the debtor's motion to seal at docket 351 to seal certain confidential information related to Ms. Crowell's declaration in support of the retention program's motions. As Mr. Susberg indicated, all objections to this motion have been withdrawn, and it is highly important to the company and to its employees to keep their personal information confidential.

So unless Your Honor has any questions, we ask that motion, be granted, and I can turn to the retention program's motion, which would be the last item on the docket. Well, before we do that, there's the committee's motion docketed 311, which is referenced in the agenda, which essentially sought redaction of their pleadings in opposition to the curb. Are we treating those in the same fashion? In other words, is the court being asked to grant their motion to redact and to seal? Well, the U.S. trustee has withdrawn objections to any of those motions. I do think it's moved with respect to the, for instance, the declaration that won't be put into the evidentiary record on behalf of part of the retention program's motion. But yes, all of that should remain under seal. Well, that's fine. For our records and for the docket, I want to reflect that the motions are granted,

and that ensures that the documents remain sealed and not either returned or unsealed. So we'll then mark as well the committee's motion to seal a docket 311 is granted. And Mr. Sponder, Ms. Bielski, who was ever weighing in, you'll let me, you'll advise if the U.S. trustee is taking or has any additional concerns as we go along. Good morning to both of you. Thank you, Your Honor. Yes, we will advise. All right, thank you.

Mr. Hal, please continue. Thank you, Your Honor. So turning to the debtor's motion for entry of an order approving the debtors retention programs and granting related relief, we're pleased to say that we've reached the settlement with the official committee of unsecured creditors, and that that settlement also allowed the United States trustee

to resolve and withdraw its objection. And as Mr. Sussberg said, it's not for right now, but that that settlement with the official committee also addressed the molest issues, as was just discussed. But the debtors have proposed two retention programs, one key employee retention program for KERP and one targeted retention program for TIRP. And in support of those motions, I'd like to now offer two supporting declarations. One from the Better's Chief People Officer, Megan Kroll, that's a docket 350,

and the other from Josephine Gartrell, a senior director at Willis Powers Watson, and that is at docket 349. Your Honor, Matt, you heard? Yes, please. The committee most assuredly does not object to the admission of those declarations. I only ask, if we can, it's sort of a first evidentiary issue kind of matter where I ask, the court is for going forward contested matters. There's sort of a rule that what we admit in one contested matter is not necessarily applicable

in the next contested matter. So we have to worry about things like that. We haven't sort of gone through any declarations with that in mind. It's just sort of the normal rules of the road as I understand them, if your honor is willing to agree with that. I don't have any issue with that approach. We're limiting the evidence to the discrete motions that are before the court. Parties reserve their rights.

Obviously, for impeachment purposes down the road, what's in a file sworn declaration will retain its relevance. But for purposes of today, the court understands that, given the consensual nature of the resolution, they're being offered for purpose of support of the resolution itself. Thank you, Your Honor. You're welcome. And unless I hear another objection, the court will accept the declarations into evidence. Thank you, Your Honor. So as laid out in the declarations as well as in our pleadings, both of these,

plans, the curb and the turf are retention plans and neither includes any of the debtors insiders. These are sound exercises of the debtors, this judgment and justified based on the facts and circumstances of these cases. And in the end, I'll come to the specific alterations that were made as a result of the settlement. But I did want to say, Your Honor, that in particular, the facts and circumstances of this case are somewhat remarkable. These employees have faced a remarkable storm of events over the past year that have created

attrition already and high risk of further attrition. These employees have already seen three major downsizing events since last January, including a reduction of force of nearly two-thirds of the total workforce immediately preceding the petition date. Most of these employees have legacy retention. payments that were wiped out by the filing of the bankruptcy, and all of them had lost equity in the company. In short, this was a perfect mix for potential attrition, and unfortunately the debtors have seen that attrition, including 11 exits since the petition date alone, nearly 10% of the remaining workforce.

So against that backdrop, it's essential that the debtors institute these retention programs to keep critical workers with the company. Now anyone reviewing Ms. Provol's declaration or frankly anyone listening to Ms. Crowell's deposition would recognize the depth of effort that went into designing these programs and the depth of knowledge and passion that she and her team brought to understanding the debtor's workforce and making sure the right skeleton crew remain to go forward.

And these employees that are part of these retention programs are critical to the better success, no matter what to path forward, whether that be through a sales process, a standalone reorganization, or otherwise. And when I say success, I mean maximizing recoveries to stakeholders, here, of course, critically to the block by customers or clients, as they call them. And so I'm happy to walk through the Dana Factors, Your Honor, but I thought, given it's uncontested, I would move through quickly. That support is laid out in the declarations as well as in our motion and in our reply.

In short, though, the plan was designed to retain the critical employees, which is necessary here while also making sure to make the best effort to control costs. The plan design is consistent with industry standards. The costs are reasonable given the facts and circumstances of this case, and the debtors did an incredible amount of diligence working, frankly, around the clock immediately proceeding to bankruptcy to design these plans and to consult with outside advisors including counsel and Willis Powers Watson. As we've said, we're pleased to have reached this negotiated resolution, and we have provided

a revised order at docket 419 that lays out the salient settlement terms. those terms are as follows. First, the total cost of the plan of both programs was reduced to a total of a maximum of $9.98 million. That amount reflects that bonuses, retention payments to the Tier 1 employees shall be 42.5% of the base salary amount. and with respect to the Tier 2 participants in the retention programs, that amount shall be 9%, which again arrives at a maximum of $9.98 billion. Secondly, there is a change to the timing for the Tier 1 participants. The Tier 2 participants have no change to the timing of their payments,

but the Tier 1 is now payable. one third will be payable upon approval of the retention programs, subject to clawback until the three-month anniversary of that same court approval. The second third will be payable at the earlier of confirmation or sale approval. So the earlier of either confirmation or sale approval on the one hand or the six-month anniversary of court approval of the retention programs. on the other hand, and the final third will be payable at the earlier of either 30 days after emergence or the 12-month anniversary of the court approval date.

Also, one other change to the order is that the debtors may now add a replacement participant to the retention program only with the consent of the committee. those are the changes, those are reflective in the order at 419. So with that, Your Honor, I respectfully request that the better motion be granted. I'm sure he's going to say, you know, it's seven. Michael, you're not on mute. So, Your Honor, with that, I respectfully request the better's motion be granted. Thank you.

Thank you, Mr. Howell. I appreciate the recitation of the changes. let me hear from anyone else who wishes to offer up any comments or concerns. Yes, excuse me, I'll need that we agree with Mr. Powell's recitation of the settlement and that with the settlement we are supportive and the moving from us. All right. I thank the committee and I thank the U.S. trustees' office as well. The objections have been well laid out. and raise concerns, and I think the manner in which it was addressed as far as the sliding scale and the scheduling make sense in the amounts,

I think it offers the debtor and the employees an opportunity to move forward and maximize the estate. All involved were an agreement as to the applicable law and the recitation of the data factors. I'm not going to go through it at this juncture. I'm satisfied that the proposal, as amended and as agreed upon, comports with applicable law with respect to the KERP and the TRP, and I'm happy to approve it going forward. I appreciate, again, the efforts and the professionalism and reaching the compromises.

Thus, I guess we're left with a hearing on Monday. Let me go back before we approach Monday. Will the debtor be submitting final forms of order on these? Yes, we will. You're on. All right. So I'm going to market order to be submitted. the motions to seal will just be more granted. I don't need orders. We'll use the orders that accompanied the motions.

And now, for Monday, my understanding, we have the MOLUS application still pending. We also have the sale and bidding procedures motion, correct? Correct, Your Honor. We've got an objection from the United States trustee on bidding procedures I'm hopeful, maybe even cautiously optimistic, that we can try to reduce the amount of objections from the U.S. trustee, although I'm not sure we'll solve them all. So if we need to, we'll address that Monday.

And then we also have the bar date motion. And as you mentioned, Your Honor, the molest retention to the extent the U.S. trustee has an objection. All right. Slipped my mind, the bar date motion. All right. We are on for 10 o'clock, I believe, Monday. my only considering scheduling is as I've indicated I am participating in a town hall remote seminar for one hour from 12 to 1 you all are welcome to watch

if we're hopefully will be done if not we'll continue on after 1 o'clock depending upon how the arguments go any other issues or concerns that anyone wants to raise Well, thank you. Again, I appreciate the efforts. Thank you all. Take care. We are adjourned.