American court hearing recordings and interviews - Season 6. Episode 6. February 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 New Jersey, USA #crypto

Episode Date: April 30, 2023

Please consider making a donation if this hearing audio is valuable to you.

here. All right. Okay, good morning, everyone. This is Judge Kaplan. We will start our hearing on Blockby. As always, for those who wish to be heard, if I haven't called upon you, please use the raise hand function. And I will do my best to spot you. And we already have somebody already. Let me turn to Dentors' Council, Ms. O'Keeke. Good morning, Your Honor. Christina Kike of Kirkland and Alice on behalf of the debtors. Donna, we have two matters on today's agenda, an update on the wallet motion and an update on the emergent proceeding.

We would propose to proceed in that order if that's okay with Your Honor. That's fine. I thought it would, and I agree with Debtors Council, I thought it would be important since we're not hearing the wallet motion and there's been always a stir to have an update for those who are interested in its disposition. So please feel free to go ahead. Thank you, Your Honor. Your Honor, we filed the wallet motion early on in these cases

because we believe that the cryptocurrency that was in customer's wallet accounts before the platform pause belongs to customers and should be returned to them. We received a host of objections to the requested relief. Most of the objectors, including the ad hoc group, believe that they should be treated as if the cryptocurrency was in wallet as of the platform pause because they attempted to move cryptocurrency to the wallet after the platform pause. We don't agree with their position, and it would not be possible to grant the relief that they are seeking. Separately, we've been working with the UCC to respond to their diligence request regarding the wallet account.

As we sit here today, the UCC is also not on board with releasing all of the cryptocurrency that was in the wallets as of the platform pause, because they believe that some of that cryptocurrency could be subject to preferences. Your Honor, the debtors do not believe that transfers to wallet in the 90 days prior to the filing our preferences, but that topic creates another legal issue that, depending on what happens with the case going forward, may or may not be one that people want to litigate. The UCC like us wants to get funds to clients as quickly as possible and may ultimately be supportive of releasing some portion of the wallet fund's customers

once they complete their diligence. But that process is ongoing. So where we stand today is that we are providing diligence to the ad hoc group, deferred 10031 and the UCC. The ad hoc group and Deferred 131 sent us a list of approximately 60 questions that they want answers to in writing. And we have compiled written answers that we plan to send to them and the UCC later today. We are also working through the UCC's request for additional data, so they have the granular detail on potential preference exposure.

So, Your Honor, once everyone has all the information they need, we are going to try to work this out amicably, and if we can't, we'll see these related issues up for Your Honor in advance of our confirmation hearing. Your Honor, but the debtor's position is that the motion on file is not the right vehicle to address all of the nuances that have been raised by the ad hoc group and the UCC's positions. So we have decided that, you know, instead of keeping people in suspense, we are going to withdraw the wallet motion without prejudice. and if there's no agreement after diligence is complete,

the questions raised will be teed up for the court in a more direct way that gets to the specific answers to the specific questions that all parties will need answered in order for us to propose a plan and hopefully confirm it. So I'll pause there to answer any questions. I'm sure counsel for the committee and the ad hoc group will also want to weigh in. All right. Thank you, Ms. O'Keekeke. Let me turn to First Counsel for the committee.

Do you wish to weigh in? Yes, Your Honor. This is Kenneth O'Lead of Brown-Rudnik for the committee. Your Honor, the committee continues to believe that wallet funds belong to wallet holders subject to potential holdbacks for preference claims. As Ms. O'Keekeekee reference, one of the main issues is who is a wallet customer. And because there aren't enough funds in the wallet accounts to pay out both the pre-November 10th and the post-November 10th people, that's just a blocking issue that has to be resolved before the wallet funds can be released. Our understanding is that it's just not practicable based on the debtor systems to do a partial withdrawal like the committee supported in our earlier filings.

So we understand that this is a very important issue for people. Every day that goes by that people are separated from their money compounds the damage. And cryptocurrency is volatile. People may want to be able to trade their positions, and we recognize that this being frozen hurts their ability to do that. So the committee is going to continue to explore all ways to get these blocking issues resolved. as quickly as possible. And the committee continues to support the release of wallet funds to walled holders that are not subject to potential preference holdbacks.

But we're going to need to get the issue teed up of exactly who the wallet holders are as quickly as possible. Has the committee identified potential holdbacks yet, or are you in the process of doing that, targeting specific wallet holders and those that may have received preferences. We have received diligence from the debtors that gives us a general understanding of the potential universe of claims. The issue is that there's millions of transactions that have to be sorted through. And the committee has been looking to see our understanding of the debtor systems is you can

is probably possible to turn distributions on for specific parties but not others. It has to be 100%. So we've been trying to identify the customers that would have no preference exposure and that funds could be entirely released. That said, if the post-November 10th customers are considered wallet holders, it just aren't enough funds for everybody about partial distributions, would be required, and our understanding is that just as impossible. We have a general sense of the potential magnitude of the preference claims,

but there are certain issues that we have not been able to filter out at this time, like the 7,575 diminutive cap. We have not removed those sorts of transactions from our data set yet. All right. Thank you. Ms. Koski, A-pop, for the ad hoc. Do you want to be heard? Yes, John, I thank you. Good morning, Descoxy for the Ad Hoc Committee of Wallet account holders. Like Ms. Sarkis, we believe that wallet funds, assets and wallet belong to the wallet customers, and not to the estate. But as Ms. Salat said, there's a real important dating issue.

there as to whether the transfers that occurred while the better allowed users to continue the transfer efforts from BIA to wallet, whether those should be recognized as part of the wallet universe. We certainly said this issue with Ms. O2's characterization that these transfers will be attempt, but there is a platform-wide pause. We don't think this acts are consistent. We look forward to receiving answers to the questions that we pose. This is definitely an important meeting issue,

and while we hope that a consensual resolution is going to reach, of course the Ad hoc committee reserves its right to bring its own motion to put these matters before the court in order to get them resolved. We absolutely believe that wallet assets to the greatest extent possible need to be returned to customers as soon as possible, but they need to be returned to the right customers and the right proportion. All right. I appreciate your input. Thank you. Ms. O'Kike, I guess I'm inclined to want to keep my thumb on the process and the parties.

Our next date that we have, omnibus date, is March 13th. I think that would be appropriate to have, since there will be information supplied this week. maybe we can have another update on the 13th. But from what I'm hearing, the court should go ahead and Mark has withdrawn the current motion, just for clarity for all parties. Is that correct? Yes, correct, Your Honor. We're happy to provide an update at the next omnibus hearing.

Great. So we'll do that for 313 at 10 o'clock. Does anyone else wish to be heard on the status? of the now withdrawn wallet motion. All right. Then, thank you. I appreciate all of your input. Let's move forward to the only other status matter is O'Keeke,

which would be on the pending litigation with Emergent. Yes, Your Honor. I believe my co-counsel, Ms. Chavez, is going to provide an update on that. All right. Ms. Chavez, good morning. Yes, good morning, Your Honor. Jordan Chavez on behalf of the debtors, and as Mr. O'K. mentioned, we did want to provide just a brief status update on the emergent adversary.

On February 3rd, Emergent filed its own bankruptcy case in the District of Delaware, and on February 16th, Block 5 filed a motion to dismiss Emergent's case, which is currently set for hearing on March 15th. We recognize the automatic stay is in place until such time when Emergent may no longer be a debtor or this day is lifted. And so we are continuing to coordinate with the parties involved and submitted a stipulation and scheduling order to Your Honor, extending Merrick's deadline to answer or otherwise respond in the adversary to March 15th,

which, Your Honor, entered at docket number 59, and will, of course, continue to keep the court apprised of the status of the emerging case. So my understanding from what I've read and heard, this a pending motion in Delaware correct to dismiss the emergent proceeding? Yes, Your Honor. We filed it last week at docket number 32 in the emergent case. Okay. All right.

Does anyone wish to? Thank you, counsel. Does anybody wish to be heard otherwise on this? Mr. Dorchak? There you are. Good morning. Good morning. If I may just quickly, then.

Josh Woodoichick on behalf of the joint provisional liquidators of the emerging F.TX and the end by Florida, Morgan Lewis, is also proposed counsel to the emerging passage chapter 11 debtor. After an accurate recital is the current state of affairs in that chapter 11 case. We look to opposing the motion to dismiss. And I just want to say to the record that we disagree with a lot of the characterizations made in the motion to dismiss about what the Chief D.L have done so far, including the JPM's papers, Your Honor's Court, and about those things along the way, this reminds me the merits of the motion. And because there wasn't more commentary from counsel, I don't have to say anything further at this point, I think.

Thank you. All right. Well, we'll let the issues play out as they progress. Thank you. Thank you, counsel. well it looks like it's going to be a short morning are there any other issues that the debtor or committee wish to bring to the court's attention

uh... Mr. Olett or I see Mr. Stark Your Honor, may I'm trying to do the standing up I have a terrible problem accessing the Zoom today so my apologies I tried to speak earlier and I couldn't do it No problem. You can't be okay? Yes, go ahead, please Mr. Stark And I was raising my hand, ineffectually, as you were asking at the end of the last contested matter, about the wallet matter, does anybody else wish to be heard? And you could have heard me, like, banging my keyboard all the way in New Jersey.

I only want to raise this one point, and this is intended to be procedural, not substantive. As we said in our papers, you know, way back when when we first addressed the whole wallet issue, There's some analysis that needs to get done. Fasual and legal, obviously, Your Honor, asking questions with my partner. I've got some answers, but really it still is a work in progress and applaud the debtor for sort of engaging with us about trying to find a intellectually disciplined, rigorous solution here for a complex problem. The worry that I have from a procedural perspective is withdrawing the motion as a mechanical means to move to the next step.

On a very technical level, we've joined issue as the ad hoc committee in connection with that motion. And in our papers, we said, look, there's a lot of difficult stuff we've got to get through. And the ad hoc committee agreed with that. Not to be very technical, but generally speaking, when you join issue on a matter, it takes consent of all sides to withdraw a motion. But leaving that issue aside for the minute, I don't. want to be in a situation where, because the motion is withdrawn, we now have to start the process over again to find a solution, because I think people are working awfully hard to try to find a solution, and to tee it up in connection with the present contested matter.

So, Your Honor, can deal with it in a, you know, logical way. And I think Your Honor's request to Mr. Kiki about having sort of a carryover status conference for a motion that's been withdrawn kind of reflects the weirdness of the procedural posture. My proposal is instead just put it on a suspense docket. Let's adjourn it. We know we have issues. Let's all continue to kind of work our way through those issues. If we can find a solution where maybe it's a briefing schedule or we'll agree to, maybe it's a discovery matter, I just don't want to be in a situation where if there are discovery disputes, but we don't have a contested matter, that's an odd procedure posture to go in front of your honor. If we want to put

a briefing schedule in place, do we have to file an adversary proceeding to move forward? forward and we're the official committee, we're not the debtor. So one could read the bankruptcy code as saying only debtors can bring these types of matters, not committees. So just to make sure that there's clarity of purpose to get to the next stages in the most efficient way possible, I would propose it the better way, rather than withdrawing the motion, so to speak, it sort of put it by all party's agreement on a suspense docket, and let's keep working under that contested matter.

And as issues mature, if there are any issues, we can then bring it under that contested matter. That was my proposal. Ms. O'Kike, does it make sense to you? I don't think we have an issue necessarily. I just don't think that the motion actually tees up some of the issues that are in dispute. So I think we could work with the various parties to the extent that we're not able to reach consensus on a consensual path forward. But for instance, the ad hoc group is seeking relief that the 375 attempts, transactions are actually in wallet.

And that's just outside the scope of our current motion. And so I don't think procedurally it's the proper means to have that issue decided. But we're happy to continue working with the parties to the extent that we're not able to reach, you know, a consensual resolution to teet these issues up before, Your Honor, which I think is what I try to say maybe inartfully in my opening remarks. All right. Ms. Kovsky? Thank you, Your Honor.

Mr. Jeff Crosky for the ad hoc committee, I think that Mr. Stark's proposal is very sensible. I have no objection to it. I'm not quite certainly understanding that the Csays' points that the status of the wallet transfer is not part of their motion. That was the entire basis of our objection because the motion seeks to reverse transfers that occurred and figuring out the status of those transfers, I think, is the same. squarely within the bounds of that motion.

So I think that it, to the directs point, we provide an appropriate vehicle, at least on that issue, where I think we might have a gap is I understand the committee's desire to figure out potential preference claims and defenses, and I don't think that's been raised in the debtor's motion. But leaving that to the side, fully with respect to the issue of when the status of these wallet transfers, I think it's raised with the way. invention and putting the motion on the suspense pocket makes perfect sense to me. All right, thank you.

This is not the first. Your Honor, if I could just respond. Yes, go ahead. Your Honor, I just disagree with that characterization. The motion is seeking to release funds that are currently in wallet, and the ad hoc group is seeking that transactions which the debtors don't believe occurred. These are transactions, attempted transfers that were for. effectuated on the user interface, but not on the back end of the systems, are actually in wallet.

And our motion doesn't address that at all. Our motion is seeking to release in full the funds that are currently in wallet based off of our books and records. It's not seeking to have $375 million of attempted transfers deemed to be in wallet. So I just disagree with that characterization that this is teed up in the context of the motion that we filed. Well, understood. Mr. Beskoff? Yeah, thank you, Your Honor. Dan Bessikoff of Loeb and Loeb for Defer 1031 LLC.

I just want to briefly respond to this whole thing about what is and what isn't teed up under the motion. The motion has a whole section, and it was the entire basis of our objection, that seeks to invalidate the transfers of funds into wallet post-November 10. And, you know, the corollary to that is that, you know, if not invalidated, they're valid. And so, you know, certainly it's, it seems to us it's teed up. It seems to be the central issue of the entire dispute. I agree with Ms. Toski, the preference issue is not. It is, you know, not even mentioned once in the motion.

And so, you know, whether anything is teed up under this motion or not, It seems that if we can get to a resolution of all the issues that makes sense to everybody, keeping the motion on track, you know, on suspense, as Mr. Stark, excuse me, suggested, makes sense because, you know, a settlement could certainly fall under this broader umbrella of these issues. All right. Mr. Stark, did you want to be heard again? Very briefly, Ron. Only from the standpoint that we have a nucleus of operative fact.

We all know the issues. Is the transfer effective? Is there preferences? Can you get the money now? Is there the massive of the estate? Parsing what's being and what's out is, to me, a little silly. We have a contested matter. We all have issues that are being thoughtfully advanced in discovery.

Formal and informal. We're working on it. We're talking through. schedule, we're trying to resolve, and yes, probably this thing all needs to be resolved in a settlement format of one way or the other. All I'm talking about, and my entire proposal was, I don't want to be in a weird situation where perhaps Ust.S. Moskowski and Mr. Bessikov reach agreement on something. How do I get it in front of your honor in a weird way because the procedures then changed?

And who are we since we're not a debtor? And if there's discovery disputes, how do we resolve them? all I'm trying to accomplish here without having to file an adversary proceeding and start the clock all over again, which seems awfully wasteful and silly. That's all we're doing. It doesn't really matter if it's in or it's not in because, of course, it's going to be all resolved as part of the same issue that we all know what the issues are. All right. Fair enough. Thank you all. This, as I was going to say, this is not the first time a motion in front of me morphs into more than what was anticipated at the outset. it makes the most sense to keep the motion pending at this juncture simply for status purposes.

So at one point we will put together a briefing schedule, which may indeed include a deadline to file cross motions seeking specific relief that is outside the purview of the current motion. I will carry the debtor's motion and we will mark it for status only March 10th so that I'm sorry March 13th so that it's clear that the court is not going to be reviewing the pending pleadings and the court anticipates a boatload of additional pleadings when the time comes when the issues are crystallized and when potential cross motions for additional relief and they're outside the scope of the initial motion are filed. We can talk about scheduling and that does leave the door open if the court needs to address pending discovery concerns. It's the middle ground between I think what the debtor has proposed and what makes sense for judicial economy. So we will leave it pending in

status for status purposes only. And then hopefully on the 13th, maybe we can start addressing what needs to happen to bring it, to progress the issues, because they are time sensitive and they are important. All right. With that said, I also was hoping we could schedule a new omnibus date, the only date I have right now for Blockby is March 13th. If we want to keep roughly another 30-day date, I would propose April 11th at 10 o'clock. It's a Tuesday. Again, needless to say, it doesn't stop anyone from coming in on shortened time. We'll see what happens with the other motions,

but I just want to have a date out there that we can use to carry matters or to schedule matters. Does anybody have any concerns? I'm for your letters, Your Honor. Great. Thank you. Ms. Kovsky? Sorry, I'm just trying to check the calendar, and I just wanted to make sure that that wasn't conflicting with Passover.

I'm going to get in trouble. I think Passover is the second stock. Oh, yeah, I can do that. All right. All right. All right. Then we're good. Thank you, folks. All right. I appreciate your time and efforts. We're in recess.