American court hearing recordings and interviews - Season 6. Episode 8. April 19, 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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Okay, good morning, everyone. This is Judge Kaplan. Hope everyone is doing well. This is the BlockFi Inc. matters. And I appreciate everybody's participation through Zoom remotely. For those who wish to be heard at any point in time, if I haven't called on you, please use the Raise Hand function. And either I are my law clerks will make sure we spot you and give you the opportunity to speak.

I've received correspondence from on behalf of the committee regarding the exclusivity motion. I expect that we'll be talking about the process. I see both Mr. Sussberg and Mr. Stark have raised our hands, anxious to get involved. Let's have at it, so to speak. Good morning, gentlemen. Let me start with Mr. Sussberg. Yes, thank you, Your Honor. Joshua Sussberg from Kirkland and Alice on behalf of the debtors.

I think the agenda today is relatively straightforward, save for what I think is straightforward, our exclusivity extension. This is our first exclusivity extension. And it's a modest one at that, Your Honor. As you've seen in our reply, we asked for an extension of the filing deadline by 48 days and the solicitation deadline by 73 days. So that would be extensions to May 15th and August 11th, respectively. And we laid out in our reply, it's on page four, the schedule that we're seeking to adhere to, which includes the filing of a plan no later than May 15th. And then working our way through all the statutory deadlines and the like to get to the deadline we proposed in August,

which we admit is aggressive, but it's one that we want to move forward with. And we have been doing a tremendous amount of work to be in a position to resolve many complex issues, notwithstanding the commentary from the committee. And we laid this out for the committee on April 10th, and we noted in our papers there was an 88, page deck. Mr. Renzi walked through it. We had a conversation about the schedule, and we had a back and forth. And, you know, Your Honor, I've been doing this 20 years. I know there's people on this phone that have been doing it a lot longer. The way it works with exclusivity, you have up to 18 and 20 months for filing a plan and for soliciting. The debtor proposes six months or nine months.

The committee comes back. We reach agreement on the days. We were within 11 days of each other. Mr. Stark wanted the end of July. We wanted the middle of August, like we suggested, and then we got the pleading seeking to terminate exclusivity on our first request. This is not something that I've ever seen. And the reality is, Your Honor, that there's more to this than meets the eye. And, you know, notwithstanding all the back and forth in the objection that Mr. Stark filed comes down to one sentence in his pleading, it's paragraph 28,

where he makes a comment about the debtors can file a plan that seeks to confirm over the objection of creditors with releases in the plan. And we want to file our own plan. And the reality is that's what this is all about. This is all about Mr. Stark pre-adjudicating before we even file a plan what our plan is going to include and what it's going to say. And what I would tell you, Your Honor, we are continuing the investigation. Kirkland and Ellis is handling an investigation at the direction. of our independent directors, Jennifer Hill and Scott Vogel. As you know, the committee is conducting an investigation. And as we sit here today, that investigation is ongoing. There are more depositions.

We have more document requests from the committee. And we are going to make determinations and decisions when it is complete. But there is no world in which we should be terminating exclusivity at the first request. I think we have demonstrated cause more than sufficiently in the 30, two bullets that we laid out on pages three through five in our pleadings. And I know your honor mentioned Mr. Stark's letter from yesterday. I will admit that we did take the bait a bit from the committee when they asked us what our evidentiary record would be. We submitted declarations from Mr. Renzi and Ms. Pulo. And obviously, we'll take guidance from your honor. I think those declarations are unnecessary. I think your honor can decide this on the papers. Again, it's a first

exclusivity extension. We were talking about 11 days. This is about Mr. Stark and the committee trying to make a point that I'm not sure is ringing hollow. It is ringing hollow. And I think we are going to work over the next couple of months to pursue and ultimately confirm a plan that's in the best interest of our stakeholders. And we're not going to pre-adjudicate anything, especially because investigations and the like are not complete. So we would submit, Your Honor, unless you want to handle it differently. I'm hopeful that we can move forward on the pleadings here today and get our exclusivity extension and really start building the consensus that we need, which we thought had started, admittedly, on April 10th. I know it will continue,

and I'm hopeful we can put some of this aside and really move this forward for the benefit of the customers of this estate. All right. Thank you, Mr. Sussberg. Mr. Stark, let me hear for you. Thank you, Your Honor. Can you already hear me? Yes, I can. Thank you. I do have a presentation. It gets a little longer than Mr. Sussberg's, but I do appreciate the things that he says. And as I think Mr. Sussberg said to me, said in open court, we have a relationship that goes over many cases, and I respect the man, and I think he is an honest and good lawyer. So what I'm about to say is not a reflection of anything other than the fact that I accept him on his word, and I always have that we will continue to work in good faith. But we have an issue.

and there's been pleadings that have been filed that admittedly maybe from us, and I think probably they admit as well, raises the rhetorical level considerably high. And so I think, Your Honor, it's worth spending a couple of minutes to talk about that. The reply says, hey, wait a second, we had, we moved a lot from our original request, and there was a meeting, and the schedule was presented, and it gets a little personal towards me, but I should have said, hey, maybe we can talk about this. I want to think about it. We didn't agree to anything, despite what they said. And it really kind of presents this as the committee picking a fight. And I don't think that's fair. And I want to unpack that.

And I will at the end of my presentation, because I do believe this is a status conference. And I do believe that we are, and I will make a proposal procedurally about how to advance, but we're not, as I understand it, going to be taking evidence today. And we, of course, would reserve that right. So let me just unpack it a little bit and then hopefully move C to, okay, where do we go from here? Which I know that's always your honors request of all counsel. So I'd like to make a proposal on that. Before we filed the objection, there was a meeting and there were conversations.

And I did call debtors counsel. I'm Mr. Sussberg. I spoke with Mr. Cannonowitz beforehand. And I said, I don't want to file this objection. want to talk. And we spent some time talking to our respective clients, and the decision was, no, go ahead and file your objection. Okay, so we filed the objection.

I assumed we would continue to talk thereafter. It went, you know, it zigzagged to what I now read as a... 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. Fairly heavily handed rhetorical position. We have sort of two points that are, that are, going on underneath this. The first is the need for speed, and I want to spend a minute or two because it's not only us talking, three of us talking right now. It's also a lot of people listening to what we're talking about right now. So I'd like to say a few things on speed.

And then let's talk about that underlying substantive issue because it's enormous. And the pleading kind of masks the substance with very heavy-handed rhetoric, and I think we need to talk to substance at this moment. On the need for speed, I want anybody who's reading the debtor's motion and the reply papers, there's sort of this imperialistic kind of tone, and it comes right off the shelf from every other Chapter 11 case, hey, we get exclusivity because that's derogor. We get it because we ask for it. Paces are big. We get it and move it forward. There's no real, there's iteratives, but it doesn't really say anything substantively about progress. But I understand that's what we do

in most cases, but this is not most cases. In this case, we don't have banks, hedge funds, arbitrageors, landlords, trade vendors, companies. In this case, the creditors are people, individuals, moms and pops, many of whom have lost their life savings. And Your Honor, I know, has received a number of communications from some of these people. At the last hearing, I got up and said, please don't call Chambers anymore, call me. So, Your Honor can only imagine how many you're receiving because I'm receiving more. But the stories are frightfully terrible. And I take that very, very seriously.

As does the committee, we will not allow these people to get processed in the usual course. We don't believe that's appropriate given the circumstances of this particular case. I can't explain four months from now why we can't get something done. I've been saying for quite a while now, we want to plan on file that we can agree. to before there are leaves on the trees and there are already leaves on the trees. And I can't explain the delay. It is the debtor's job in a case as personal as this one to say an open court in a much better way than the pro forma ipsidixis that's been filed already.

Why it takes four more months. Why the separation from money is so important, not for me to do. Second, this case is burning money. It's clear it's first. And yes, this little contested matter is burning money. But there's a rule, Your Honor, and I learned it when I was in college. It's called Parkinson's Law. Maybe Your Honor knows this.

Work will always expand to fill the time allotted. And in bankruptcy, Parkinson's Law is visited in the millions and the tens of millions, monthly, two months, because most of us are an hourly time basis, and these are not small law firms involved here. But we don't normally have to talk about Parkinson's law in bankruptcy cases because we have a diplo. And diploons have budgets and milestones, case controls, and near-term maturities. And so debbers have to move quickly because the secured lender is demanded, and those are the rules of engagement in every case. But not so here, because what the company did the minutes before bankruptcy is they sold all the crypto that was domestic.

And they've been sitting on $250 plus million in U.S. currency sitting in a bank account, and no one is tethering the expenditures to that money. So that makes it my job, and in turn, Your Honor's oversight job, to make sure that the falling knife of cost is accounted for every single day, week, and month of burn, because that's what these moms and pops deserve. Okay? And I don't agree with the 38 iteratives about how hard this case is that there's so much work to do.

I do not agree that that is a accurate narrative of what's going on in this case. This is no business. There is no enterprise to rehabilitate. There is no business that will be organized. There is nothing viable or feasible here to come out. There's an M&A process for the platform. That is a bundle of sticks to be. sold.

Okay. And that process is concluding. Then we have the cash, some cryptocurrency assets, we have some loans and JV interests in mining companies. We have the FTCS claim and we have causes of action. Those are the things you shove into a liquidation trust and give the creditors control of their own fate because we have no secured debt. We just have unsecured creditors here.

They can choose for themselves what and how they want to handle all those things and how they want to resolve claims and causes of action as they see fit. If your honor, these issues that have been presented, we have to coordinate with the JPS, we have my investigation, which is pretty much wrapping up, we have intercompany issues, we have the wallet issues. Those are all manufactured complexity. It's resolved and it's a slow walk. And I'll tell your honor, I'll prove it the point this way. If Your Honor were to lift exclusivity today, I could have a plan on file in 10 days, maybe even sooner, and I feel very, very confident that that plan would be widely accepted by all creditor classes, would settle out for the remaining issues that are out there like

wallets and stuff like that, and would be confirmable in June. And that gets us to what's lying beneath the surface. What is this dispute about? Your Honor is probably not used to seeing the kind of. kind of pleadings now, at least to reply, and how personal it got. So quick, it got so personal. Maybe I prompted it by my own rhetoric. I don't know. But it went from slow to really fast, really quick. So there's got to be something going on beneath the surface. And in fact, it's not the calendar, except in this respect. It's not May 15th, right? If Your Honor were to set the

deadline tomorrow for filing a plan, they'd have a plan on file. They already have a plan on file. They filed them the first days of the case. It's the solicitation deadline. That's the hard one. Usually you get two months, they want three. And they put in an affidavit about, well, in this case, for some reason, unlike any other case that any of us are involved in, they need an extra month here. But let's just talk about mid-August for second from a different vantage point, okay? I didn't fall off the turn up truck yesterday. I know what plan they're going to file. Okay.

And we've had lots of conversations among counsel. Again, I talked to counsel before I filed my objection. We've had conversations since. Okay. There is misalignment on a very significant issue in this case. And we'll talk about that in a second. Okay. The plan that I believe they intend to file will be vigorously opposed by the

committee. We don't see how that plan confirms. We won't get an accept, parent-accepting class. We don't think it will be good faith. We don't think it'll be fair and equitable. We've got a whole bunch of other things that we're thinking about here. And we're setting up for a very ugly case, which means that we don't get to pick up, according to his schedule, until mid-August, assuming that we're successful in blowing up that plan, and then we don't get out until Halloween. Meanwhile, we've incurred tens of millions of dollars of additional incremental cost. And that's terrible. That's terrible. So I reached out to opposing counsel. I made several different proposals to try to obviate this matter right now, this dispute right now. But I made

this proposal, which I thought was fair and in the middle. I said, Your Honor's Bridge Order on exclusivity. didn't have a date certain. It says, we will have exclusivity, we'll automatically bridge until you're on our schedule a hearing. And at that hearing, there'll be a final order on the motion, and you automatically bridge to that date. I said, let's all agree just to hold off that hearing for a little bit of time. Let's talk.

Let's put some oxygen into our respective positions and talk it through and see if you can find common ground, as opposed to going immediately to the fight. I got a voicemail message back midday yesterday. Nope, we're not talking. Let's get on with the fight. That's why we're having this dispute, you know. That's what's going on.

I want to talk. I want to share perspective. They want exclusivity in their positioning, not unlike another case that Toronto may have been dealing with yesterday, on injunctions and controls and rights. And we want the ability to talk as opposed to being held in the gulag for a while and have to be essentially be extorted by time and cost runs to giving in on something we feel very strongly about. And that's a bad dynamic.

I wanted in this presentation, Your Honor, to not want to talk about the issue, the big issue in the dispute. I wanted to measure my words because maybe Pollyanna-ish. I thought if you're on a found my proposal is acceptable, put the hearing out for the end of the month, let's see if we can't talk it through, is try to find some common ground before we went and talking with each other. I didn't want to put it out in the public right now. We have a very active community,

and one that is watching everything we say and talking amongst themselves about. I didn't necessarily think feeding the fire was a good idea. I'm happy to talk about it further, because I think Mr. Susberg kind of alluded to it, but I think I'm going to hold my tongue at this moment, perhaps on the rebuttal, if Your Honor, asked him Mr. Susper, prompts me, we can talk about it further. My proposal stands here on, I think the right answer for this case, before we go ahead and go hammer and Tom, go into tens of millions of dollars of expense

of mom-and-pop money over something that seems awfully parochial, and not necessarily what the creditors want. We should talk. But if we can't make a resolution on talking, then I'd rather have the trial now at exclusivity and put it all on the table for everyone to see and the creditors to realize so that your honor can make a decision before we incur all that expense

and take this case all the way out to Halloween. I think that's the proper staging of how we end the Blockfight case and make it unlike Voyager and Celsius, Lord knows FDNs. You want to have any questions for me at this point? No, thank you, Mr. Stark. Let me go back to Mr. Susberg and hear from his comment. Any response?

Yeah, I have a few, Your Honor. Thank you. Joshua Susberg, Kirkland and Ellis. You know, as I've told Mr. Stark before, none of this is personal. We're all trying to get to the right answer. But the one thing he said that demonstrates that exclusivity and an extension is critical here, is he said, and he hasn't even seen a plan from the debtors,

he said there is no plan that the debtors will propose that he will recommend his constituents agree to. And that is the posture that he's taken. And the commentary that has come back as far as trying to bridge the gap here in a conversation is give the committee a consent and veto right over the filing of a plan, which is effectively the same as terminating exclusivity. And I'm reminded of the Dow Corning case because it's cited in Mr. Stark's pleading. And the one thing that stuck out to me was the chaos factor that the courts allude to in Dow Corning. This is our first exclusivity request extension. We are asking on April 19th today to have a deadline of May 15th to file a plan.

We intend to share that plan with the committee in the next week or so and then get it on file. And then we'll move forward with that plan. And just like all Chapter 11 plans, this is no different, notwithstanding the constituencies. There are differences in the case, I admit, but just like in Voyager, where we build consensus, not only with individuals, but with the committee. And just like we're doing in Celsius, this is exactly the same. This is about a leverage play by Mr. Stark to try to thwart the cases and increase and enhance an agenda that he has, that he doesn't even know what our document sets.

And it's all the more reason, Your Honor, that I believe on the pleadings and on this record and on the factors, because Your Honor has sat here for four months, and I know you know the complications of this case. It is not a simple case. It is global. It involves international. It involves U.S. There are wallet issues, not to mention the fact that we're in the middle of a sale process. And we may end up going with a sponsored deal. And there could end up being an auction, all of which needs to play out in the context of final.

a Chapter 11 plan. We've worked on the standalone, but it could be that the sale process makes sense. And then they're dealing with all the regulators and making sure that they're on board with the plan. We have done this before in similar circumstances. We know what's involved, and it absolutely merits and warrants. A modest, again, a very modest exclusivity extension. We did not come in here and ask for the sun and the moon and the stars. We asked to get a plan on file by the middle of May and then to proceed down a path as quickly as we can. And if we can beat those dates and if solicitation goes faster, by all means, we're going to pursue that. We are not looking to draw this out for the sake of drawing it out. That is unfair. And I hope every single customer

knows that I mean what I said on the first day of this case. It is our job to deliver people back their money. And that's exactly what we're going to do. But we're going to do it in a thoughtful manner and a not a chaotic matter consistent with doubt for me. And I would submit, Your Honor, again, that you can decide this today on these pleadings, but we obviously will do whatever Your Honor recommends as far as moving this forward. Mr. Stark? Your Honor, this is where I do part company with Mr. Susberg on a personal level. This is not a leverage play.

And by the way, it's not Mr. Stark's decision. This is the committee's decision. I'm active committee. I have an active client. I prefer if my opposing counsel would actually refer to my client as opposed to making this all personal about me. Your Honor knows me. This isn't my first rodeo. I've been doing this for nearly 30 years. I've had a little more experience than Mr. Susberg doing the only committee works, so I don't really appreciate that.

What's happening, Your Honor, it's not a leverage play. Quite the opposite. My proposal is, let's talk to one another. Let's not jam a litigation at this moment. but I'm not an idiot. I sat in the room. I've seen the plan they filed and I've talked to these people. I know what plan they're going to file.

Mr. Sussberg even said it. He's conducting his own investigation and he's going and talking to independent directors that he installed in this company and we've done the investigation ourselves and we have views about what the plan should look like in contravention to what we've been told. right? It's not like I'm making this stuff up. I said, let's talk. Let's go into a room and see if we can't figure this out. But no, you don't get to have exclusivity because possession's nine-tenths of the law and you don't get to use the cost and the burden and the time delay on people who are desperate to extort what you want without a rational conversation. That is wrongful. And if that's the position that debtor wants to take, then we rely upon the jurisprudies that says we want to have tried.

State and open court. Let's have that. And that's where we are, Your Honor, but I don't appreciate if this is anything personal or anything like that. We just don't agree with their positioning, and we want to talk about it instead of litigating it. It wasn't the decision of mine to move this hearing this way. All right. Before I start addressing the issues, is there anyone else who wishes to be heard on this? All right. I don't see anybody with a raised hand. Probably yesterday, towards the end of a nine-hour-plus hearing, was not the right time to read a letter requesting another evidentiary hearing. It's certainly, I'm not sure whether I would be receptive yesterday. I've had the time to consider the issue over the evening and listening to the arguments. I don't view any of this as personal. This is zealous advocacy on each side with Mr. Stark trying to protect the committee and the clients and the customers and Mr. Susberg in his venue, in his way of also trying to protect.

the customers. It's a difference as to what's the best pathway. I will say that I believe the professionals in this case have acted as such professionals. You've kept most of the issues out of my court to date, which has been tremendous because it does preserve. I'm not saying there aren't dollars being spent in this case. There are. Every case of this magnitude and complexity, and it has complexities involved, generates, unfortunately, litigation and time-consuming discovery and investigations. I am pleased that the committee, through Mr. Stark, efforts and his colleagues, have pursued their investigation and done so without running to the court on every issue. and working with the debtors council and other council in trying to resolve issues so that I refer to this case almost as my stealth cryptocurrency case,

because I don't see a lot of what I know is going on, looking at all the records, looking at what's on what's on the docket. I know the communications, I know the discussions by and among the professionals. I know the investigation that's being taken. And because of that and that effort to try by all the professionals to reduce the administrative burdens, I am leery of moving forward with an evidentiary hearing on a first-time exclusivity request extension, when the result, if the committee is successful, will be competing plans, which have their own inherent administrative cost and burdens. The estate does not benefit from necessarily, from competing plans. There may come a point where there has to be when negotiations simply are at an impasse.

or where the plans are just unacceptable. But my concern is that we go down a path of spending, what I view is wasted dollars and efforts fighting over weeks. I've seen in Celsius, I've seen in Voyager, you all have more experience in these cases, the complexities and the stop and goes of the process, We see confirm plans that are suddenly on hold

because not all the ducks were in order with stays in place and then appeals to district courts and circuits we see a very active regulatory scheme in which just from reading the papers we understand the SEC pursuing regulatory actions against exchanges and platforms which adds to the complexity in trying to find an exit strategy for this debtor, BlockFi.

That's appropriate. I agree wholeheartedly with Mr. Stark that speed is important, the interest of these customers are important, and this needs to move forward. I guess where I differ respectfully, Mr. Stark, is the idea that we just have the trial now. because I don't believe on exclusivity because I don't think we limit the trial there that's just the first trial and then we have a trial with competing plans and competing disclosure statements and let alone two different proponents of plans trying to come to terms with regulatory issues international issues liquidation issues I've read the two declarations that were filed. Ms. Pula, which speaks from Crowell, as to a timing, and Mr. Renzi's declaration, which, frankly, and it's no disrespect to Mr. Renzi, he outlines everything that's going on,

I can look at the docket and get 80% of the content of the declaration just by looking at the docket, because it shows the activity of the debtor and the committee in this case. These declarations aren't dispositive. I want to turn to Mr. Stark and ask, is there, and my preference in all candor is to decide this on papers rather than evidentiary hearings, which necessarily involve discovery, argument, court time. are there declarations or additional affidavits you think would be dispositive that you would like to submit for my consideration in response to the declarations? I don't want necessarily to leave it to the declarations or the last word, although I think you can address it in argument, but what would be your preference? Well, Your Honor, apologies if I ask, if I can't directly answer the question or I can, but I think I want to get to the place where I think your Honor is more inclined to go.

Look, I've now made my argument. I believe that the debtors, if they want to go down a path that we perceive will be war, I think that before we incurred the expense and the time delay, they should come in answer to the community for it. but I understand Your Honor's views on that. I respect it. And I suppose we have a legal right to press the evidentiary point. But I understand Your Honor's ruling and I respect it. And so therefore, if 80% of what Your Honor feels confident in rendering the ruling on is from the docket itself and is not going to be reliant on the declarations in any way, shape, and form,

then it would not be a good advocate's role, I think, to get in the way of where the judge is inclined to go, and let's just move forward. But as long as the record is clear, when and if we find ourselves back in the future back to a moment that I've presaged at this moment, and we may. You won't hit me too hard, Your Honor, if I said, I told you so. I was just going to say you reserve the right to have it I told you so moment. I get it in other cases. with respect.

Always with respect. And I appreciate, is there other argument that either side wishes to make? Well, sorry with you, Mr. Sussberg, anything you wish to add to what you've already laid out before the court or in the papers? No, Your Honor.

We appreciate the court taking the time today. And I just do want to mention that, you know, Mr. Stark is pre-assuming an outcome. It's our job to work together to try to avoid that. We will get them drafts of documentation, and Mr. Stark and I have already talked about sitting down and seeing how we can reach middle ground. We've done it many, many times before.

I'm hopeful that we will do it yet again. So thank you. All right. Thank you, Mr. Sussberg, Mr. Stark. I'm looking forward to that phone call, and we'll have a meal, and hopefully we can find some common ground. But I respect your honest decision today.

And thank you. And, Mr. Stark, I want to definitely express my appreciation for the professionalism. Yes, when we have lawyers who are very knowledgeable about both substance and procedure and know their way around a courtroom, but that's one thing. but to recognize expediency for the benefit of their clients is more of a rarity, and I appreciate those efforts. I made my judgment and my ruling, which will be to grant the extensions, primarily because of the limited nature of the extension,

with a proviso that it would have to be extraordinary, there have to be an extraordinary event to deviate from it. going forward if something were to go awry. I don't foreclose that, but certainly I take Mr. Susberg and the debtor's position at face value that this can proceed along the time frame that's been laid out in the documents. I anticipate that there's going to be pushback from the committee and maybe other parties in interest. There's an ad hoc committee. There's other creditors involved. That's part and parcel of the process. In gauging whether or not to extend exclusivity, the court recognizes that there are

built into the code by Congress leverage points. The debtors exclusivity is a tool. The commit the requirements for voting and confirming a plan are creditors tools. Congress built in a pathway for extensions. They've limited since going back to 2005. We're not going to approach the caps on the extensions. We're talking about a plan being filed somewhere in early May. and a process that will take us into the summer. The good news is I have relatively few travel plans in July and August, so I won't be holding you all up, and I will make the court available. It is important that the parties start the negotiation process yesterday,

and we'll get into that when we discuss the status of the wallets and other matters. I'm extending exclusivity because I do agree that the case, even though Mrs. Stark may question the level of complexity,

the unusual nature of the cryptocurrency cases is evident just from what we see going on in FTX and Celsius in Voyager. What we see going on with issues as to property of the state ownership

how to handle the regulatory issues, international aspects, those complexities. A liquidation is not necessarily complex, but the best way to do so to maximize returns can be. And I want this process to go forward with all eyes wide open, especially in light of the pending sale process, that all the parties were able to identify the best pathway forward to maximize the return. to the creditors because the request extension is minimal compared to what may be the norm in Chapter 11 I'm going to approve it but hold the debtor to the pot the task fire to their feet of the phrase goes I don't need to do so as much as I know mr. Stark and other redhawks and and everyone else will as well the court is open

to assist if in any way through any point a neutral would assist in trying to reach an accord if there is a gap. Again, we're assuming a lot. Maybe communication by strong professionals, we won't have such a huge gap. So I will enter the order based on the pleading submitted, based primarily on what the court can take judicial notice of with respect to the docket and we'll move forward and I appreciate the advocacy involved in the professionalism do we want to turn to thank you your honor mr. Sussberg or how do we move on to other agenda items

yeah I think we should proceed with the agenda we can move to agenda item two and I and then we have some status conference items to be heard So I'm going to leave it to the rest of the team to pick that up. All right. Who will be taking the mantle? Good morning, Your Honor. Jordan Chavez on behalf of the debtors. I'll be addressing the second item on the agenda, which is the debtor's motion for an order authorizing the debtors to direct scratch to return the post-possed payments made by retail clients, which we filed at docket number 559.

I set forth in the motion, Your Honor, the U.S.-based retail client loans. are serviced by Scratch Services LLC, pursuant to a sub-servicing agreement that was executed between the parties back in 2018. When a U.S. retail client would make a loan payment, Scratch would service the loan payment and coordinate with BlockFi to allow BlockFi to then apply the payment to the balance on the loan.

Now, when the platform paused on November 10th, subsequently all the activities related to the platform, were paused, including the retail loans and any payments made there too, and they were placed into administrative forbearance, so there were no margin calls or liquidations that have taken place since the platform pause. Nevertheless, it was impossible for Blockby or Scratch to prevent parties from sending payments to scratch, to try and make payment on their retail loans. The payments have largely slowed down since more parties have become aware of the administrative forbearance and these Chapter 11 cases. However, at the moment, Scratch is holding over

half a million dollars in post-poss payments, which necessitated the motion before Your Honor today. And at the time of the motion, the specific amount Scratch was holding was $585,100. And again, those payments have largely slowed down since the case has progressed, but Scratch has received some additional payments and is now holding $596,670.77. So we filed a revised proposed order on the docket yesterday at docket number 746 to reflect the new amount. And both the original and the revised proposed order provide that if Scratch were to receive additional payments after the order would to be entered if Your Honor grants the motion, then Scratch would notify the debtors of those payments, and the debtors can then direct scratch to also return any subsequent payments that were made to scratch. There were no objections that were filed, Your Honor, to the motion.

I did want to clarify for the record that there were some cryptocurrency news outlets that had reported that the payments were going to be returned to residents in one particular state. However, Your Honor, the motion and the relief requested in it and the proposed order encompasses all payments made by U.S. retail loan clients after the POD Nationwide. So the half a million dollar amount will be returned to all residents, regardless of which state they are located in. Unless Your Honor has any questions, I would ask that Your Honor, grant the motion. Thank you, Ms. Chavez. I've read the proposed order and needless to say, there's been no objection to the relief, nor should there be. It is surprising that a lender has to work so hard to not take payments.

You don't normally see this. But I will enter the orders to allow the money to go back as well as payments that are collected in the future. I think it makes absolute sense. Thank you. Thank you, Your Honor. I'll also be addressing the next item on the agenda, which is item number three, the debtor's first omnibus objection to claims, which has filed it. I'm sorry.

As far as the proposed order that came with the notice of filing is document 746, is that the order that can be entered or are we going to be getting a new one? Yes, Your Honor. That order can be entered, but we're happy to submit a copy to Chambers, if Your Honor prefers. I think it's always clear to send it directly to chambers. Sure. We'll do that following the hearing.

Thank you, Your Honor. Thank you. Now, as to the objection? Yes, Your Honor. We followed the objection at docket number 573, which was accompanied by a certification of CRO Mark Renzi that we attached as Exhibit A, and I would ask that, Your Honor, admit the exhibit into evidence. So admitted.

Thank you. For the record, as Your Honor, and as properly aware, this hearing was adjourned from April 11th to April 19th, so I did want to state on the record that we did serve the claimant with a notice of the adjournment at docket number 684. The claim numbers that were filed that were included in the objection are claim number 1363, which was filed for a hundred million dollar secured claim against all of the debtors, and then claim number 1649 and 3217 assert a secured $2.2 trillion claim. against BlockFi Inc. So the basis for the objection is that the debtors have no record at all of this account holder with the name and address that were provided in the claim, and no documentation supported a valid claim against the debtors, let alone a secured claim for such an exorbitant amount. The debtors did reach out to the claim that multiple times as we set forth in the objection to try and get more information and more documentation to try and support the claim. I think on more.

one particular date March 2nd, we did receive some documentation from the claimant, but it was largely non-responsive and duplicative of what was already attached to the claims. We did explain the claim objection process as the claimant is pro se, and including that they could file a formal response by the deadline and attend this hearing if they desired to defend their objection. No timely response was filed to the objection by the deadline, and the claimant has not amended or withdrawn the claims. With all of that, Your Honor, I would respectfully request that the court

sustain the objection and enter the proposed order that was attached to the objection and disallow the claims in their entirety. Is there anyone who wishes to be heard on this? All right. Mr. Allette? Yes, good morning, Your Honor. The committee fully supports this objection, as you might expect. We just wanted to note that claims like this are extremely serious.

It's a $2.2 trillion claim, which had the debtors not timely addressed it, would have prevented any sort of distributions due to the massive reserves that would be required. And so we just urge the court to enter the order, and we'd urge claimants not to submit such claims in the future. Actually, you beat me to the punch. Thank you, Mr. Allent. I was going to give an admonition. Not only does this cost the estate and all proper claimants' time and money and having to address,

I think claimants are well advised to look at the references to Title 18 and bankruptcy fraud when filing claims and realize that there can be a consequence in research. for this pathway. Thank you. The motion is granted. Thank you, Your Honor. That's all for me today, so I will turn it over to my co-counsel and the U.S. trustee to address the status conference. Thank you. All right, thank you. Good morning, Your Honor. Cristina Keeke of Kirkland and Ellis on behalf of the debtors. I think it makes sense for me to provide just a brief update on the debtor's cash position,

which kind of relates to the U.S. Trustee's motion to compare to the tell the debtors to comply with Section 345, if that's all right with your honor. Yes, please. So, Your Honor, while the debtors have opened up several new bank accounts at authorized depositories, those banks continue to struggle to obtain surety bonds. My understanding from conversations with the banks is that the surety bond market has essentially dried up in the wake of the collapse of Silicon Valley Bank and Signature Bank. and I know that other debtors are struggling also to obtain surety bonds.

So, Your Honor may recall that we had a substantial amount of cash invested in money market funds at Silicon Valley Bank, where the counterparties were BlackRock and Morgan Stanley, and those money market funds were invested in government securities. Following discussions with the U.S. trustee, we converted those money market funds into cash, and that cash was sitting at Silicon Valley Bridge Bank. At the time that we made the conversion, all funds in the Bridge Bank were fully insured when the government took over. But now that deposits have been transferred from the Bridge Bank to First Citizens, FDIC protection has dropped back down to 250,000 K. So given just the inability right now to obtain surety bonds and also the desire to be responsive to the,

U.S. trustees' request. The debtors intend to file a motion in the near term, seeking authority to invest in treasuries that are backed by the U.S. are alternatively to invest in money market funds that are invested in government securities. The debtors continue to believe that money market funds are safe investments because the exposure is to the funds themselves and not the bank, which I think is probably a good thing, just given the uncertainty in the banking industry right now. So with that, I'll turn it over to the U.S. trustee. I know we've been having several conversations to try to find a way to move forward. But unfortunately, just given the banking situation, we have not been able to obtain churny bonds, and we obviously have cash

above FDIC limits. All right. Thank you. It is an issue and a difficulty. Mr. Sponder, or did you want to speak? Thank you, Your Honor. Jeff Sponder from the office of the United States trustee. I appreciate the position, or the United States trustee, I should say, appreciates the position that the debtors find themselves in. However, they still are not complying with 345. And I think it's even worse now, be it that SVB Bridge Bank has gone to first citizens

and has limited back down to the $250,000. With that said, I understand that a motion would be fourth. coming in the near term, what my suggestion would be is that the near term be today, tomorrow, this week, not something that gets, that's waited on, as well as seeking shortening time to get this on the docket and a ruling from your honor, because I don't think we have the ability to move from off of our position that 345 needs to be applied with. Thank you, Your Honor. Thank you. I certainly will schedule it on short in time when the debtor get the motion to us.

Yes, Johnner, we will endeavor to get it on file. It may not be today, but definitely this week. All right. Thank you. We have two other matters. I guess probably the quicker, well, I'll leave it to you. We have an update on the adversary proceeding with respect. to emergent and also the pending wallet motion which is of most interest I think to those who are watching your honor good morning Mike Slade for the debtors can you hear me yes I can thank you your honor I'll give you an update on the wallet motion we have been working with the council for the ad hoc committee and for deferred 1031 and the UCC and we do have a passport

forward, the debtors have provided a substantial amount of diligence on this matter, including answering about 100 questions in writing and providing some data that was requested. I am hopeful that we will be in a position to present this to your honor in the form of a set of stipulated facts that you will be able to hopefully rule on. The parties are going to work on that over the next approximately week. If we are not able to stipulate to certain facts, we have agreed that we will make a witness available for the ad hoc committee to ask questions of so that they could put forth whatever evidence they have on the matters that can't be stipulated to.

The parties have agreed that they will file any supplemental briefs, and that's the debtors, the creditors committee, and the ad hoc committee or deferred 1031 on or before May the 3rd. And then we will present the matter for your honor on May 8th at the next omnibus hearing. Again, the hope is that we're going to be able to stipulate for the relevant facts, or at least minimize to the extent possible any actual evidence that has to be presented to the court. And that's the plan. And we have discussed this, and I believe all parties are in agreement, that that's the path forward. We know that all of the creditors want to get this resolved as quickly as possible, and so do we.

and this is the most streamlined way that we can present the issue to the court. So happy to answer any questions that you have, but that is the plan. I do have a question, but let me first turn to Ms. Kovsky. Thank you, Your Honor. Can you hear me okay? Yes, I can. So the schedule that Mr. Slade described is what we have discussed and what we've agreed to. I think it's important, though, given the widespread interest in this issue and the number of as Mr. Stark put it, the mom and pop investors that this affects, there's been a lot of misinformation

online, a lot of questions about what's going on? Why is this taking so long? What's everybody doing? Why have there been so many delays? We should have had this resolved already. And I wanted to emphasize that the ad hoc committee is committed to trying to get this resolved as quickly as possible. There have been a lot of activities taking place behind the scenes. We have managed to keep this largely out of your Honor's Court, and that was very deliberate, trying to resolve any issues you had ourselves. We did not want to bring you discovery disputes. We did not want to spend money of the estate that we didn't need to. The ad hoc committee, and I'll speak for deferred 1031, as I'm sure Mr. Bessigoff won't mind. We jointly agreed to forego formal discovery in this matter,

even though it's a contested matter, where we would have been entitled to take full-blown formal discovery. Instead, we simply asked a series of questions in plain English and agreed to accept answers on an informal basis. It has unfortunately been an extremely slow process. For example, it took three written requests and almost two months to get an answer to the simple question of, tell us what assets are in wallet. What's actually there? So while we have finally obtained the information that most of the information that we've been seeking from the debtors, I want to make it clear. We're not trying to slow walk this in any way.

The ad hoc committee has always been willing to move expeditiously, but we're entitled to get the information that we need in order to support our objection to what the debtors are seeking to do to their customers. And so that's really the reason for the repeated adjournments and extensions and why this matter hasn't been heard yet. It's really simply we needed to obtain the necessary information to understand how the debtor's processes work behind the scenes. What exactly was happening? What assets are where? And so I wanted to just make it clear to the wallet account holders who are not members of the ad hoc committee, who perhaps have not been able to hear on a periodic basis and get updates about what's been going on, just to help them know we have been working expeditiously to try to get this resolved.

Thank you. Actually, that was the direction of my questions. And I'm aware of some of the complexities inherent in the potential differences from pause dates to potential preferential transfers. But let me ask what may be a naive question. Are there funds held currently now in wallets that are not subject to dispute that can be released to wallet holders, that are not subject to any set-off claims or defenses or any issues as to pause dates, etc.? I apologize if it's not a simple question to answer. Yeah, Mike Slate for the debtors, Your Honor.

I think that depends on the outcome of this motion. If the court agrees with the position of the debtors and the creditors committee that the attempts after the program pause to move assets from the BIA accounts to the wallet, if you agree with us that those are not effective, then the answer to your question is yes. we believe that there will be some funds that, you know, in cooperation with the creditors committee, we are going to be in a position to be able to release. That's a substantially more complicated question if my colleague on the other side, Ms. Kovsky succeeds in her motion.

Then, to be honest, I'm not quite sure what we're going to do, but I believe the answer is that there won't be the ability to release any funds until certainly a plan is confirmed. That's at least my belief sitting here today. Well, thank you. I think customers, wallet holders are entitled to at least to understand and appreciate the realities. Ms. Kovsky, is your hand still up, or was that from before? It is, Your Honor. I just wanted to clarify a couple of points.

Mr. Slade referred to the ad hoc committee's motion. The ad hoc committee doesn't have a motion on file. The debtors filed a motion and bear the burden of proving their entitlement to reverse transfers that actually took place. And that's what they're seeking to do. And the ad hoc committee has objected to that. I also wanted to clarify that the sole issue that we're seeking to have the court determine on May 8th is simply, were those transfers that were made while the system was still operational, were those transfers effective enough? And it sort of goes to the definition, what does transfer mean in this context?

What constitutes a transfer? We're not talking, we're not asking the court to determine, well, if the transfers were effective, where do they get paid out of? What assets are available to satisfy them? Are they subject to potential preference clawback? That's all for another day. this is really the gating issue of did transfers happen? Understood.

Thank you, Ms. Kovsky. Mr. Allette? Thank you, Your Honor. Kenneth O'Lette for Brown-Rodnik record. Just to clarify one key issue, it's the committee's understanding that the debtors can, essentially cannot release portions of a wallet account, which is why if,

the position of the ad hoc group is correct. There are no funds that could be released. Obviously, there would be funds that nobody disputes, even if all of those funds are moved into wallet and there's a large shortfall. The issue is that, to our understanding, the debtors outside the plan construct have the ability to potentially make 100% distributions, but not, for example, to pick a number, 50% distributions over anything aside from zero or 100%. So there's a substantial amount of funds where there is no dispute, but that technical issue prevents those funds from being sent out because, you know, the disputes, the funds that are not in dispute represent less than 100% of an account.

All right. Thank you for that. addition all right that certainly helps it points to how important may 8 will be and what I can expect to have in front of me and of course I will do my best to try to do it the quickest turnaround that the court can achieve let's turn I think to the emergent matter is there an update mr. Kenowitz yes your honor thank you Richard Kanowitz, Haines and Boone, co-counsel to the debtors and debtors in possession. Your Honor, real quick. At docket 738, we submitted to Your Honors for approval, subject to the April 21st deadline for objections. The standstill stipulation, I'll call it,

between emergent debtor, as well as the FDX debtors and the Block 5 debtors. Basically, this was to carve out any and all disputes concerning the liens claims and encumbrances concerning the Robin Hood shares and only the Robin Hood shares. And we spent a lot of time between counsel for the various estates coming to that stipulation and making sure that we captured the right type of procedure as well as subsidence to put on hold pending the criminal prosecution of Sam Van Fried as well as any forfeiture proceedings that arise from that criminal prosecution. So that was put before Judge Dorsey.

and he approved it. He did it under certification of counsel, and that was entered on April 17. So, Your Honor has before the court, subject again to the objection deadline passing on April 21st, and I don't anticipate anybody objecting since we've kept all parties and interest involved in the stipulation step by step, comment by comment, issue by issue, that Your Honor will hopefully approve it, and that will, again, put on hold the Robin Hood issue. As to defendant Merrick's, we are likewise working with them as to a standstill stipulation because we do have a live adversary proceeding against them, and we would like that adversary proceeding to remain on the docket.

We do not know what's going to happen in connection with the, again, prosecution and or forfeiture proceedings. We were first in time from our perspective, and everybody reserves rights, as to what should happen if the forfeiture proceedings don't go forward or there is no conviction. So that's where we are with the emergent matter, Your Honor. Happy to answer any questions if you have. Can you give you the docket number again for the stipulation? I want to make sure my staff. Yes, we did it by application.

It's 738, Your Honor. 738, great. I did speak with Judge Dorsey, coincidentally, and I understood it was coming. So we'll keep an eye out for it and wait for the passage of time. All right, thank you, Mr. Kanoitz. Is there anyone else who wishes to be heard? Right. I'm not seeing anyone.

I thank everyone for their time and effort. And I guess the next date is the May 8th date, unless there's something emerging in between. So be well. Thank you. Thank you, Your Honor. Thank you, Your Honor.