American court hearing recordings and interviews - Season 6. Episode 9. April 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: May 4, 2023

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45B, which was filed at docket number 770. And I saw that I had an opportunity to review the debtors, Mr. Renzi's declaration in support of the motion, as well as the opposition filed by the U.S. trustee, I think earlier this morning. And let me then turn to the debtor. Yes, true. If you want to address the opposition or where we go from here. Thank you, Your Honor. So, Your Honor, we filed the declaration of Mr. Renzi in support of the motion at docket number 784.

Mr. Renzi is on the line. So if Your Honor has any questions for him or anyone wants to cross him, he's available. But otherwise, we would offer his declaration as his direct testimony. All right. Any objection? Good afternoon. Mr. Renzi, I see you there. Any objection to the declaration coming in as direct testimony in lieu of direct testimony?

Thank you. All right. Continue on. Thank you, Your Honor. Your Honor, since the commencement of these cases, the debtors three main banking partners, Silvergate Bank, Silicon Valley Bank, and Signature Bank have collapsed. The debtors had 38 of their 43 pre-petitioned bank accounts with those three banks. And the remaining five accounts were dormant accounts.

with Union Bank, BCB Bank, and FOMO pay that the debtors closed shortly following the petition date at the request of the U.S. trustee. The debtors were able to navigate these bank failures and successfully protect the debtor's cash, and the debtors have worked closely with the U.S. trustee and the committee to find a safe depository for their funds. Over the past month, the debtors and the committee have collectively reached out to over 50 banks in an effort to open new accounts at authorized depositories for the District of New Jersey and to ensure compliance with Section 345 of the Bankruptcy Code. The process to find new banking partners has been challenging. Many banks are refusing to offer services to crypto companies given the uncertain regulatory environment.

While the debtors have been successful in establishing new accounts at Webster Bank, Western Alliance Bank, and P-PAC Gladstone Bank, each of which is an authorized depository in the district of New Jersey, none of those banks to date have been able to secure surety bonds and or expressed a willingness to post securities to satisfy Section 345B of the Bankruptcy code. Your Honor, the U.S. trustee notified the debtors yesterday that First Citizens, which acquired SVB Bridge Bank, has recently signed an authorized depository agreement and has agreed to post-collateral to protect funds in the District of New Jersey. However, the debtors have reached out to first citizens multiple times and immediately following our call with the U.S. trustee yesterday,

but have still not received a response and or confirmation from first citizens that they are going to collateralize the debtor's funds in this case. While we are hopeful that first citizens will be able to procure a surety bond and or post collateral, they have not done so to date. And the debtors need to protect their cash now. They need the flexibility of having multiple options to secure their cash given the risks associated with non-diversification at this time. Your Honor, the debtors take seriously the U.S. Trustee's motion to compel the debtors to comply with Section 345B, but the reality is we have not been able to do so, given the turmoil in the banking system.

So we're seeking flexibility after having carefully evaluated our options to safeguard funds in three different ways. One is an insured cash sweep program with Western Bank or another authorized deposit for an amount up to $125 million. The second is through one or more money market funds that only invest in U.S. government obligations and or U.S. government obligations themselves in an amount up to $275 million, either with Webster Bank or another authorized depository. And the third is at first citizens to the extent that they are able to pose collateral

and or secure a sure surety bond, as the U.S. trustee has alluded to. Your Honor, the debtors submit that cause exists to modify the 345B requirements. The money market funds that the debtors intend to invest in are highly rated money market funds, which invest in U.S. Treasury bills, notes, and other obligations issued or guaranteed by the U.S. government, its agents or instrumentalities. And the ICS funds, by function of inclusion in that program, will be fully insured. They will be held across multiple banks and amounts covered by FDI insurance, thus posing no risk. with respect to the debtors funds.

Your Honor, even if some of these banks that are in the ICS program are not authorized depositories, we believe that the structure of the program provides protection by virtue of the FDA insurance alone, and that this obviates the need for any additional insurance or collateral to protect the debtor's funds. Your Honor, the debtors believe that these are safe options for holding the debtor's cash, and in light of the potential harm to the debtors of states, if a bank where they are holding funds above the FDIC limit fails, the debtors believe that the relief requested is reasonable and appropriate. The difficulty that the debtors have faced in finding a home for their funds in strict compliance with Section 345B represents the exact circumstances under which the court has discretion to provide relief from that section. The debtor's primary goal is to safeguard all of our funds for the benefit of our clients, and we believe that we've narrowly tarot the relief to do that,

and that cause exists to grant us limited relief from Section 345B. So, Your Honor, I'm happy to answer any questions. Otherwise, I would let the U.S. trustee make their argument and ask for time for a rebuttal. All right. Before I turn to Ms. Bielski, let me ask, we're talking about, $125 million in the ICS, is that in addition to the 274 or is that included as part of the 275 that was otherwise references going into the money market funds? Yes, Your Honor.

So they overlap, and I don't think we have not made a determination as to any of these options, right? I think we're just seeking flexibility, but the 125 overlaps with the 275, I think we're just seeking, full flexibility, you know, to the extent that we need it, so that all the funds can be protected. So the debtors on hand, we're talking about trying to protect $275 million. Correct, Your Honor. And either you can speak to it or Mr. Renzi. Is it possible in lieu of the money market fund simply to acquire. the treasuries directly as a solution?

Yes, Your Honor. It is possible, but it's a more complicated process. Mr. Renzi probably has more detail onto what that would entail. We have spoken with our banking partners about that process, and I know that it is more complicated than just investing in the money market funds, but I do think it is feasible. Mr. Renzi, do you want to touch on it? Yes, good morning, Your Honor.

Christine is exactly right, and so Kiki's exactly right. I think ultimately what we're trying to do here is we can go back to back against the Treasury directly, but it is fairly cumbersome to do that, you know, meaning that the systems where you do that are not easy to do. I think using it through a brokerage account or working with, you know, Webster Bank does help facilitate some of that. But ultimately, you have to invest in four to eight-week securities. Our view is that if you're invested in a money market account

that's with government securities, it's one day to clear. And so just having that flexibility is helpful. And ultimately, you know, the systems, I don't know if you've gone straight up against the Treasury's, you know, interface. It's not the smoothest interface to work with. So I think that, you know, with the assistance of Webster's, you know, brokerage account or others, we can go and buy, you know, money market funds that are backed by, you know,

essentially the government and having, you know, those securities of the government. And then that provides one day, one day transition, if need be. And so having that flexibility, having that security of the government, and having that the safeguard is really what we think, you know, really provides, you know, the best option. And the ICS is just another great option that has been used before. It seems very straightforward, and we've been in discussions with Webster about that also. So both of those solutions are easier than just going straight up against the Treasury. and provide the flexibility that I describe. All right, thank you.

Ms. Bilski, do you wish to be heard on behalf of the U.S.T? Yes, Your Honor. Thank you. Lauren Bielski with the Office of the United States trustee. Your Honor, I'll just touch on the first issue that you raised with the debtor obtaining T-bills directly. We would have no objection to that. We think that's appropriate under the code. And I think that the debtor has enough sophisticated professionals that, even if the process is cumbersome, that they certainly do that.

But turning to the, I guess, the objection that we filed this morning, Your Honor, and I appreciate that you read that in advance the hearing. And I appreciate that Your Honor is aware of the concerns and the challenges that have arisen with regards to the banking issues, especially in this case and recently. And as Your Honor knows, Section 345 obligates the debtors to require from an entity which holds a state money that they're either invested and have a bond, having the features identified in such. 345B, a surity bond, or the deposits of security is consistent with 31 U.S.C. Section 9303, unless the court orders otherwise. The debtor represents this court that the surety bonds are no longer available due to bank volatility, and that each of the debtor's banks rejected any proposal to collateralize the debtor's funds, and that this is caused to waive the Section 345 requirements. But Section 345 places the obligation on the debtor,

to require protections for its money from the institutions that hold such money. And while Section 345 does not mention the U.S. Justice's Office, the office in its supervisory role, under 28 U.S.C. Section 586, assists with the protection of debtors funds by its entry into the Uniform Depository Agreements. The UDAs obligate depositories to maintain collateral for bankruptcy funds on deposit in an amount no less than 115 percent, of the debtor deposits that exceed the FDIC insurance limits. The funds at issue in this motion referred to by the debtors as the remaining funds are the funds that were held by Silicon Valley Bridge Bank, which was then acquired by First Citizens Bank where the funds remain.

At the time of acquisition, First Citizens Bank was not a party to a UDA, but our office has been working with them and as of April 25th, First Citizens Bank executed a UDA. That means they have agreed to protect debtors funds as required, under the UDA and the next step to open an account with the Federal Reserve Bank is underway. Based on past experience, this can be done 48 hours and then the collateral can be pledged. As counsel indicated, we relayed this information to them yesterday, but the debtors still are seeking the waiver from the court today. Council also mentioned that Webster Bank is an approved depository having signed a UDA, but if Webster Bank is unwilling to either obtain the security bonds or collateralize,

then they would be non-compliant under the UDA. The U.S. trustee has concerns regarding the proposed alternatives, the insured cash fee program, and the money market fund, and does not believe they are acceptable because they do not allow for the necessary monitoring, oversight, reporting, and ability to safeguard the funds. So while we believe the court to deny the motion because cause has not been established, and because the ICS program and money market fund are unacceptable alternatives, at the very least, in light of the progress that's been made with First Citizens Bank,

relief under this motion should be delayed for just a very short window, Your Honor, to give First Citizens an opportunity to pledge the necessary collateral. Thank you, Your Honor. All right, thank you. Ms. Okie, any response? Yes, Your Honor, thank you. Your Honor, again, we have reached out to First Citizens. we've contacted them several times.

They have been non-responsive, at least to the company, in terms of collateralization or surety bonds. And again, we remain hopeful that that happens. But that being said, just taking SVB, they were also an authorized depository for the district of New Jersey at the time that they went under, and they had not pledged any collateral. So I don't know sitting here today that we know for sure

whether First Citizens is going to be able to satisfy their obligations under the UDA. As we've said, you know, the three new bank accounts that we've opened, none of those banks have been able to secure surety bonds. And so, while I don't question Ms. Bilski's statements, we just don't know sitting here today whether they're going to be successful or not. And the debtors currently have funds sitting that are, you know, not protected. We believe what we proposed provides more protection than what we currently have,

And we believe we've established cause, you know, to utilize these mechanisms. We would, of course, work with the UCC and the U.S. trustee before, you know, actually moving funds to identify, you know, any market funds or the ICS banks that we were going to use. But we're requesting flexibility given the financial turmoil right now. I think, you know, having all our funds in one bank, even if First Citizens is able to collateralize is probably not the best option, just given everything going on. And so we would respectfully request approval of the motion. Your Honor, if I may or Chris MISOQI, I may. Yes. I also, you know, I'll just note that in terms of bank accounts,

we do not have an account for international, for our international entities at FCD. So, and also that's another issue that we would have. So it's just, I know it's technical, but it's something that, we don't have a solution for international, and we're responsible for those entities also. So let me clarify then. You're saying that if First Citizens Bank was collateralized and they've signed the EVA, but if the arrangements of the Federal Reserve have been made and they're collateralized, you still cannot keep international funds there?

Your Honor, we do not have a bank account set up at FCB for the international entity. So we would have to go through the KYC process to do that, you know, and then have them agree to both collateral or a surety bond for that to work. And I think that's just additional time that we're concerned about. We have international accounts open at Webster Bank. and we would be able to effectuate that much, much more quickly. And it just heightens the point that Ms. O'Keeke had just stated. I just wanted to make sure you are also aware of that.

Thank you. Your Honor, and one point just to add on that, you may recall that in kind of all this turmoil, the debtors transferred money out of signature to a Haynes Boone account, And that is international money, which we are not able to move anywhere right now because we don't have an international bank account other than at Webster. And Webster has not been able to collateralize or secure a surety bond. And so there is an urgent need for this relief, as I think we've laid out for you. Can those funds be transferred into the proposed money market funds? Yes, Your Honor.

All right. Thank you. Ms. Bioski. Thank you, Your Honor. This is the first we're hearing about any concerns with regards to international funds held in national accounts of the issues that Mr. Renge just raised, so we have not had a chance to review that. But I would say, too, that the ability to get the T-Bonds, the T-Bow's is still there. And, again, we've been told by First Citizens Bank that they're moving toward, well, we're working with them to get the account open

with the Federal Reserve Bank and that they're prepared to collateralize. And at the very least, if we can allow a few days for that process to happen and the debtor could also start working on obtaining the T-bills directly, I think that would be certainly an acceptable solution for the very short term. All right. Thank you, Mr. Renzi. You had your hand raised again? Yes, I mean, we've sent a few emails in regards to some of the details here. To the U.S. trustee, I actually did it myself directly.

And I think ultimately my concern is just, I want to make sure that we're doing everything possible to do this as quickly as possible to protect these funds. And my concern is just given the nature of the industry that as Ms. O'KeeJ went through, we went through a number of banks to get to where we are. And it was humbersome to open up new accounts, as you can imagine. And at the end of the day, I just want to deliver results for the company and for our system altogether. And to do that quickly is important so that we can protect these assets. So that's all I would add, Your Honor. All right. Mr. Axelrod? Thank you, Your Honor.

Before I begin, I believe this is my first appearance. before, Your Honor, and our Council, Genova Burns, will be filing a ProHive-Feece application shortly. I'd just ask that I be permitted to speak pending that. Welcome to New Jersey remotely. Thank you very much. I think we're in general agreement. The committee is in general agreement with the debtors and the United States trustee as the importance of safeguarding these funds. I don't think it's been stated, but this is not an operating company, and this is a large volume of cash that is.

expected to be a very significant source of distributions to creditors. If surety or collateralization is not available, then it is available, excuse me, then our preference would be to keep the money where it is. But our citizens is not here today to say that that's a possibility, and it sounds like there's more digging to be done on that front. We and our representatives have spoken with the debtors over the last few days about the options on the table. Based on our discussions about the ICS and money market accounts, we were able to get comfortable with those options. I suspect we could also get comfortable with purchasing treasury bills directly as well.

But glad to hear on the record the commitment of the debtors to continue discussing these options before any money. does move. And that's our primary request at this point. We don't object to the debtors having some optionality, particularly at this moment, based on facts that seems to be in flux. And we look forward to participating in discussions as things seem to be developing. That's all I have, Your Honor. Thank you. Thank you all. I think it's important to adhere as closely as possible with the statutory requirements set forth in the code in Section 345, but I recognize that flexibility is needed in a situation, and most importantly, it's a task of all of us, the debtor, the committee, the U.S.T, and the court to do what it can to preserve the funds for the benefit

of creditors. I'm going to give my ruling, but ask that parties think it can be tweaked. not to hesitate to raise their hand. I'm going to direct the debtor to use the debtor's best efforts and good faith to transfer the funds to First Citizens Bank once they have confirmed collateralization, and that is to be done no later than Monday, close a business Monday. In other words, it gives two full days on top of the time that's already been undertaken to get that done. If not, for whatever reasons, they cannot confirm collateralization, I'm going to authorize that all the money be transferred into the money market funds.

I'm not comfortable with the sweep, the ICS sweep. I agree and concur with the U.S. trustee concerns regarding the essentially accounting for it and the model. of all of the accounts. And there's no reason not to just move all of the funds into the money market accounts. They are accessible. Now, if the debtor wants to substitute for either of those alternatives, purchasing the treasuries directly, I don't think anyone can complain about that option. But I understand the obstacles and the burdens and the time commitment in doing so.

But either way, I don't want to be in a position where this goes past close of business Monday without us taking the steps to protect the funds. But I'm open to suggestions if anybody wants to tweak that pathway. And you can consider it and discuss it. If the court, if you need, I'm available tomorrow as well on a quick phone. phone call if something has to be tweaked in order to satisfy everyone's concerns and expectations. Your Honor, your proposal works for the debtors. I think it makes sense. And as we said, we're happy to continue working with the U.S. trustee and the UCC on these issues.

Anyone else? Under Lauren Bielski, I appreciate Your Honor's ruling as well. And we would also like the opportunity to talk with people in my office about any particular tweaking, as Your Honor mentioned, if we could bring that to generous counsel at first. And then if there are any issues, if we could bring that to Your Honor as well, we would appreciate that. Everybody knows where to find me.