1 00:00:00,000 --> 00:00:10,080 them. All right. Let me have appearances in the Mr. Gerald. You can have it. Is it Gerald? 2 00:00:10,080 --> 00:00:20,840 Your honor. I say that it's Jero as in thorough. All right, Mr. Jero. Good morning. And let 3 00:00:20,840 --> 00:00:25,680 me have other appearances. Good morning, your honor. Jordan Chavez, the Kings and Boone 4 00:00:25,680 --> 00:00:34,800 on behalf of the debtors. All right. Anyone else entering an appearance? Your honor, Mark 5 00:00:34,800 --> 00:00:48,040 Renzi, CRO for the debtors. Good morning, Mr. Renzi. Okay. So we've had briefing, extensive 6 00:00:48,040 --> 00:01:01,400 briefing, which I've read through. I welcome oral argument to supplement the briefing. 7 00:01:01,400 --> 00:01:06,640 The burden here is a shifting burden. We all know that once the proof of claim is allowed, 8 00:01:06,640 --> 00:01:12,720 it's prima facie valid until there's been opposition raised. Then ultimately, Mr. Jero, 9 00:01:12,720 --> 00:01:20,760 the burden rests with you. Let me hear from the debtors. It's the debtors objection initially. 10 00:01:20,760 --> 00:01:27,080 So we'll start with the debtor and then I'll give Mr. Jero you a full opportunity. Thank 11 00:01:27,080 --> 00:01:32,080 you, your honor. Again, Jordan Chavez on behalf of the debtors. I'm addressing the debtors 12 00:01:32,080 --> 00:01:38,360 fourth omnibus objection filed to the claims by the claims filed by Mr. Jero at docket 13 00:01:38,360 --> 00:01:45,560 number 1069, which were followed by his response and cross motion at docket number 1192 and 14 00:01:45,560 --> 00:01:52,700 the debtors reply at docket 1341. As your honor has noted, the debtors viewed as appropriate 15 00:01:52,700 --> 00:01:57,800 to take up the objection first as the first file pleading and because it obviates the 16 00:01:57,800 --> 00:02:03,480 need to address the cross motion. I know your honor has read all of the papers and is fully 17 00:02:03,480 --> 00:02:10,320 aware of the litigious history between blocked by and Mr. Jero. His claims are rather convoluted. 18 00:02:10,320 --> 00:02:16,720 But as we've outlined in our papers, the path to disallowance for these claims is straightforward. 19 00:02:16,720 --> 00:02:22,560 There's no tribal issues of fact here. The only dispute is whether despite the clear 20 00:02:22,560 --> 00:02:29,880 terms of the loan agreement, Mr. Jero is entitled to a claim for 426 Bitcoin against blocked 21 00:02:29,880 --> 00:02:37,040 by and the answer to that question as a resounding no as a matter of law. These matters can be 22 00:02:37,040 --> 00:02:42,120 decided on the papers and I'd like to move for admission of the debtors exhibits and then 23 00:02:42,120 --> 00:02:47,560 just take a few moments to summarize why these claims should be disallowed. Your honor, I'd 24 00:02:47,560 --> 00:02:53,800 like to move for admission of the debtors exhibit a which was attached to the claim 25 00:02:53,800 --> 00:02:59,960 objection and is the Renzi certification as well as debtors exhibits a through e that 26 00:02:59,960 --> 00:03:05,080 were attached to the reply, which is the loan agreement, the email communications between 27 00:03:05,080 --> 00:03:10,320 the parties, the Washburn Declaration, the Owen Declaration and the Jero three notice 28 00:03:10,320 --> 00:03:17,720 of ruling. All right, Mr. Jero, I haven't seen any issues taken with exhibits on either 29 00:03:17,720 --> 00:03:27,120 side that have been presented, so I'm inclined to admit them all. Any objection on your end? 30 00:03:27,120 --> 00:03:32,520 Your honor, I think as long as it's mutual, I will not make any evidentiary objections. 31 00:03:32,520 --> 00:03:38,040 I'd like if that's okay with the other side as well. 32 00:03:38,040 --> 00:03:46,760 All right. Well, I don't see why it shouldn't be mutual. The exhibits, the courts had the 33 00:03:46,760 --> 00:03:52,840 opportunity to review it as a practical matter and they informed the court on the issue. 34 00:03:52,840 --> 00:03:59,800 So we'll admit the exhibits. Both the move and the respondent. Was there someone else 35 00:03:59,800 --> 00:04:04,800 want to be heard? I'm sorry, I interrupted. Oh, no, I interrupted. Sorry, your honor. Thank 36 00:04:04,800 --> 00:04:11,800 you. And for the record, we do not object to Mr. Jero's exhibits either. So for the 37 00:04:11,800 --> 00:04:16,680 reasons that this claim should be disallowed, first and foremost, Mr. Jero is not a creditor 38 00:04:16,680 --> 00:04:23,520 of BlockFi. Mr. Jero is an attorney with a pre-petition loan with BlockFi lending in 39 00:04:23,520 --> 00:04:31,600 which he borrowed $2.27 million and pledged approximately 441 Bitcoin as collateral. The 40 00:04:31,600 --> 00:04:37,760 loan agreement contains a clear loan to value ratio requirement of 70%. That ratio rose 41 00:04:37,760 --> 00:04:43,520 above 70%. BlockFi issued a margin call as it's entitled to do under the terms of the 42 00:04:43,520 --> 00:04:51,080 agreement and Mr. Jero failed to meet that margin call. Then the ratio rose above 80% 43 00:04:51,080 --> 00:04:55,800 and BlockFi immediately liquidated the collateral, which the loan agreement authorizes it to 44 00:04:55,800 --> 00:05:04,040 do. It liquidated 399 Bitcoin to bring their loan back into compliance. The emails between 45 00:05:04,040 --> 00:05:09,320 the two parties, which your honor just admitted, really say it all. They indicate that Jero 46 00:05:09,320 --> 00:05:13,960 knew about this requirement. He understood the terms of the agreement. He thanks BlockFi 47 00:05:13,960 --> 00:05:19,160 for keeping him updated about the liquidations. He inquired about some options to potentially 48 00:05:19,160 --> 00:05:25,200 reverse the liquidation, but nothing was ever agreed to between the parties. He instructs 49 00:05:25,200 --> 00:05:31,960 BlockFi to liquidate any additional necessary collateral to pay off the remainder of his 50 00:05:31,960 --> 00:05:38,840 loan and then return the excess to him, which BlockFi promptly did in March of 2020. Jero 51 00:05:38,840 --> 00:05:43,800 then withdrew the remainder of the Bitcoin, which was approximately 15 Bitcoin from the 52 00:05:43,800 --> 00:05:50,040 platform, which is why as of the petition date, he was not a creditor of BlockFi. Then 53 00:05:50,040 --> 00:05:55,840 30 days later, once the market swung in his favor, he attempted to try and bind BlockFi 54 00:05:55,840 --> 00:06:02,520 in the emails to some agreement that it never made to reverse or reinstate the loan. BlockFi 55 00:06:02,520 --> 00:06:07,640 acted fully within its rights to liquidate the collateral. There was never a loan modification 56 00:06:07,640 --> 00:06:12,520 or other writing signed by the parties, which is what the loan agreement requires to effectuate 57 00:06:12,520 --> 00:06:19,320 any type of modification, reversal or reinstatement. This is why Mr. Jero conjured up the various 58 00:06:19,320 --> 00:06:24,320 arguments he did in his pre-petition state court litigation and then reasserted those 59 00:06:24,320 --> 00:06:29,880 in his proofs of claim. Your honor, these are red herrings to attempt to divert first 60 00:06:29,880 --> 00:06:36,200 the state court and now this court from the reality that Jero has no claim against BlockFi. 61 00:06:36,200 --> 00:06:39,880 And the debtors would respectfully request that your honor disallow these claims in their 62 00:06:39,880 --> 00:06:49,960 entirety. All right. Is that it at this point on your end? Yes, your honor. I'd see the 63 00:06:49,960 --> 00:07:00,160 podium to Mr. Jero for his position. Thank you. Mr. Jero. Good morning, your honor. Good 64 00:07:00,160 --> 00:07:07,680 morning. I'm a self-represented creditor attorney and practicing in the law of California. And 65 00:07:07,680 --> 00:07:13,960 I practice law with my father over here. We have a little real estate practice, just him 66 00:07:13,960 --> 00:07:21,960 and I. Your honor, I have a presentation prepared, but I want to prioritize your questions. So 67 00:07:21,960 --> 00:07:28,160 please feel free at any time to ask questions. And I don't need to read any of the prepared 68 00:07:28,160 --> 00:07:32,440 remarks. If you just want to address your questions, we could do that if you'd like. 69 00:07:32,440 --> 00:07:42,000 No, I never hesitate in asking questions. I'd rather hear from you and be able to listen 70 00:07:42,000 --> 00:07:48,240 and glean if there's any issues that I've missed. So feel free and the presentation 71 00:07:48,240 --> 00:07:54,000 is fine. Sure. Absolutely. Your honor. Is it possible if I was share my screen to show 72 00:07:54,000 --> 00:08:02,000 the documents? Let me ask those who know far better than I how to do it. You should be 73 00:08:02,000 --> 00:08:27,600 able to do it now. Oh, great. Thank you. All right. Oh, OK. I was informed by my Zoom software 74 00:08:27,600 --> 00:08:34,840 that it would require relaunching the Zoom. So I will not I will for convenience of the 75 00:08:34,840 --> 00:08:40,020 court and the parties, I will not relaunch the Zoom. Instead, I would rather proceed 76 00:08:40,020 --> 00:08:50,480 perhaps with with an oral. I'll make primarily an oral presentation if that's fine. That's 77 00:08:50,480 --> 00:09:01,800 fine. OK, very good. When BlockFi was applying for its California Finance Lender License, 78 00:09:01,800 --> 00:09:08,440 BlockFi was informed multiple times in writing that it cannot under California Financial 79 00:09:08,440 --> 00:09:21,360 Code Section 22009 retain possession of Bitcoin securing its loans. If does the does your 80 00:09:21,360 --> 00:09:28,720 honor have the exhibits available in front? Yes, you could just create site. Do you want 81 00:09:28,720 --> 00:09:35,740 to have number? Sure. Tab number, tab number 14. All right. And for everyone's reference, 82 00:09:35,740 --> 00:09:42,320 this is these certification of George J. Jarreau, which attaches the proof of claim as exhibit 83 00:09:42,320 --> 00:09:48,720 a, I believe, or exhibit one. And this is attachment 14 to the proof of claim. This 84 00:09:48,720 --> 00:09:56,920 is a copy of BlockFi's Finance Lender License. The license states in part that pursuant to 85 00:09:56,920 --> 00:10:05,240 the California financing law, that BlockFi may engage in the business of finance lender 86 00:10:05,240 --> 00:10:15,360 as defined in said law. That is a incorporation by reference of the next page in tab 14, which 87 00:10:15,360 --> 00:10:26,800 is financial code section 22009. This statute defines the business of a finance lender and 88 00:10:26,800 --> 00:10:31,400 in relevant part, it states a finance lender includes any person engaged in the business 89 00:10:31,400 --> 00:10:36,960 of making consumer loans or making commercial loans. The business of making commercial loans 90 00:10:36,960 --> 00:10:43,360 or commercial loans may include lending money and taking in the name of the lender or in 91 00:10:43,360 --> 00:10:50,200 any other name in whole or in part, a security for a loan, any contract or obligation involving 92 00:10:50,200 --> 00:10:56,160 the forfeiture of rights in or to personal property, comma, the use and possession of 93 00:10:56,160 --> 00:11:08,200 which property is retained by other than the mortgagee or lender, et cetera. That language 94 00:11:08,200 --> 00:11:14,720 of exclusion, use and possession of which property is retained by other than the mortgagee 95 00:11:14,720 --> 00:11:25,080 or lender, that language is not mere surplussage. That language, language of exclusion, conditions 96 00:11:25,080 --> 00:11:31,080 and limits the general grant of authority, which is made with the word may, which is 97 00:11:31,080 --> 00:11:40,040 permissive, but the phrase other than is not permissive. The phrase other than construed 98 00:11:40,040 --> 00:11:47,800 in the statute as a whole only can arrive at one reasonable construction, which is that 99 00:11:47,800 --> 00:11:56,960 a lender may either have a security interest in personal property or use and possession, 100 00:11:56,960 --> 00:12:04,440 use or possession, excuse me, of personal property. It cannot have both at the same 101 00:12:04,440 --> 00:12:14,600 time. The finance lender cannot have a security interest and use or possession of the property. 102 00:12:14,600 --> 00:12:19,360 Of course, Bitcoin constitutes personal property. I don't think there's any dispute about that. 103 00:12:19,360 --> 00:12:25,760 It's certainly not real property and it certainly is property. Now, BlockFi was informed of 104 00:12:25,760 --> 00:12:38,200 this prohibition and I will refer the court to tab number six, please. And for everyone's 105 00:12:38,200 --> 00:12:42,920 reference, each tab refers to an attachment to the proof of claim. So this would be attachment 106 00:12:42,920 --> 00:12:56,560 number six. On the third page of this tab, which has a base number of 24, the second 107 00:12:56,560 --> 00:13:01,600 sentence that's typewritten in this application, it says in accordance with California financial 108 00:13:01,600 --> 00:13:09,040 code section 2209, which is a typo, they meant to say 2209, BlockFi will take in the name 109 00:13:09,040 --> 00:13:15,320 of the lender in part a security for the loan, possession of each borrower's assets. That 110 00:13:15,320 --> 00:13:20,040 is an incorrect interpretation of the law because the lender is not allowed to take 111 00:13:20,040 --> 00:13:24,760 possession of the borrower's assets. The lender is allowed to take a security interest in 112 00:13:24,760 --> 00:13:31,080 personal property, which the lender does not use or possess. Now, this could have been 113 00:13:31,080 --> 00:13:37,200 an innocent misunderstanding, but after two admonitions from the Department of Business 114 00:13:37,200 --> 00:13:43,240 Oversight, which is now known as the California Department of Financial Protection and Innovation, 115 00:13:43,240 --> 00:13:51,880 the admonitions are present in tab seven. That's a letter dated March 28th. At the bottom, 116 00:13:51,880 --> 00:13:57,040 the last paragraph on the first page of that tab, the collateral must remain with the borrower. 117 00:13:57,040 --> 00:14:03,960 Your response indicated here the department quotes BlockFi. And the next page on the top 118 00:14:03,960 --> 00:14:10,440 of the page, it says, this date stamps 27. This is not allowed under the California Financing 119 00:14:10,440 --> 00:14:16,000 Law, CFL for short. The collateral must remain with the borrower. Moreover, the applicant 120 00:14:16,000 --> 00:14:20,620 cannot hold the borrower's digital assets as collateral. Based upon the business plan 121 00:14:20,620 --> 00:14:25,120 and explanation provided, the applicant is conducting or will be conducting activities 122 00:14:25,120 --> 00:14:31,880 not authorized by the California Financing Law. That was the second admonition. The third 123 00:14:31,880 --> 00:14:42,560 admonition was in tab eight, which is a letter dated April 6th, which once again contains 124 00:14:42,560 --> 00:14:48,720 a substantially similar admonition at the bottom of the first page. This handwritten 125 00:14:48,720 --> 00:14:55,680 no on the left margin, that's the way I received the documents directly from the Department 126 00:14:55,680 --> 00:15:04,280 of Business Oversight. Perhaps the person at the department indicated that this requirement 127 00:15:04,280 --> 00:15:12,760 was not fulfilled. Tab number nine, if your honor is so inclined, because I know I'm moving 128 00:15:12,760 --> 00:15:20,040 a little quickly, but I want to get to the most shocking exhibits. This is a letter dated 129 00:15:20,040 --> 00:15:26,840 April 10th, which once again has a similar admonition that BlockFi cannot possess collateral 130 00:15:26,840 --> 00:15:36,040 securing its loans. And here in the last paragraph, the department sets forth California section 131 00:15:36,040 --> 00:15:47,380 22009 in its entirety. Then on the next paragraph, the department says your email, referring 132 00:15:47,380 --> 00:15:55,160 to BlockFi's email dated April 10th, 2018, indicates reference to a different law, which 133 00:15:55,160 --> 00:16:01,640 was the Uniform Commercial Code, as we will see in the next attachment. And not the California 134 00:16:01,640 --> 00:16:07,160 Financial Code. Quote, I do understand your confusion. However, we have obtained legal 135 00:16:07,160 --> 00:16:12,460 counsel and the laws of the California Commercial Code do not apply or trump the laws under 136 00:16:12,460 --> 00:16:17,680 the California Financial Code. Therefore, the business plan and method of operation 137 00:16:17,680 --> 00:16:23,920 are not allowed under the California Financing Law. The collateral must remain with the borrower. 138 00:16:23,920 --> 00:16:28,360 Applicant cannot hold the borrower's digital assets as collateral based on the business 139 00:16:28,360 --> 00:16:37,800 plan provided it's not allowed. Let's in fact see that email dated April 10th and find 140 00:16:37,800 --> 00:16:47,360 out what was said. And that is an attachment 10. Oh, I'm attachment 10. Yes, attachment 141 00:16:47,360 --> 00:16:53,120 10. Attachment 10 is actually an email chain. So the first email here, well, let's actually 142 00:16:53,120 --> 00:17:02,200 go sequentially here. Let's go to the third, I'm sorry, the fourth page. The fourth page 143 00:17:02,200 --> 00:17:08,680 or the fifth page under attachment 10. I will paraphrase. Essentially, what has happened 144 00:17:08,680 --> 00:17:18,840 was that on April 10th, 2018, an attorney for BlockFi working on behalf of Monat Phelps, 145 00:17:18,840 --> 00:17:25,280 a law firm in California, perhaps they are also present on the East Coast, was attempting 146 00:17:25,280 --> 00:17:32,720 to explain why he believes that the language that we saw earlier, which we, which I posit 147 00:17:32,720 --> 00:17:39,520 is not mere surplusage, because we must give effect to every clause and every word if possible, 148 00:17:39,520 --> 00:17:49,920 that he claims that that language is a vestige. That's a quote, a vestige of the law, meaning 149 00:17:49,920 --> 00:17:57,440 that he's essentially arguing that the legislature should have or intended to repeal the language 150 00:17:57,440 --> 00:18:03,120 and that it should be ignored. Essentially, there is a reference made to the Uniform Commercial 151 00:18:03,120 --> 00:18:11,080 Code's provisions that allow a secured party to secure or to perfect their security interest 152 00:18:11,080 --> 00:18:17,200 in collateral by taking possession of the collateral. However, that code section, which 153 00:18:17,200 --> 00:18:27,320 is Uniform Commercial Code section 9-313, under official comment 7, that code section 154 00:18:27,320 --> 00:18:35,120 says that it does not create a right to take possession. Furthermore, the Uniform Commercial 155 00:18:35,120 --> 00:18:42,560 Code has an express reverse preemption provision. And why do I call it a reverse preemption 156 00:18:42,560 --> 00:18:48,560 provision? It expressly states that it does not authorize or validate any provision that 157 00:18:48,560 --> 00:18:57,680 violates another substantive law. And here, the substantive law is a statutory law. Now, 158 00:18:57,680 --> 00:19:04,120 if I could refer this court to the first page of Exhibit 10, Tab 10, I'm sorry, Attachment 159 00:19:04,120 --> 00:19:13,120 10, I meant to say. After the letter that we saw from April 10th, BlockFi sends an email 160 00:19:13,120 --> 00:19:18,360 on April 11th. And in the introduction, it says, the phone call we had yesterday was 161 00:19:18,360 --> 00:19:24,080 extremely useful. So after the letter, or on the same day as the April 10th letter, 162 00:19:24,080 --> 00:19:31,040 there was a phone call. Then in the paragraph entitled, Updated Business Plan, with an underscore 163 00:19:31,040 --> 00:19:40,520 underneath it, BlockFi says that now it has revised its business plan. And as part of 164 00:19:40,520 --> 00:19:45,280 their underwriting, they will prescribe value. This is the second paragraph under Updated 165 00:19:45,280 --> 00:19:58,320 Business Plan, Bates Stamp, page 35. And under the Updated Business Plan subheading, the 166 00:19:58,320 --> 00:20:02,800 second paragraph, it says, BlockFi lending will make one year loans. I'm going to skip 167 00:20:02,800 --> 00:20:07,980 over some language here. As part of our underwriting, we will prescribe value to commercial and 168 00:20:07,980 --> 00:20:15,640 consumer applicants holdings of cryptocurrencies which they possess. In other words, BlockFi 169 00:20:15,640 --> 00:20:23,220 has now updated its application to say that the borrower will possess the digital assets 170 00:20:23,220 --> 00:20:30,560 securing the loan. They were admonished that they cannot retain use and possession. They 171 00:20:30,560 --> 00:20:37,880 sent an email. They had a phone call. They updated their business plan in writing. This 172 00:20:37,880 --> 00:20:44,640 was the last update of their business plan that I have seen. And although I did not receive 173 00:20:44,640 --> 00:20:49,440 these documents from BlockFi, because BlockFi would not provide me with these documents, 174 00:20:49,440 --> 00:20:55,520 BlockFi has admitted in other pleadings that these are genuine. They are directly from 175 00:20:55,520 --> 00:21:10,360 the Department of Business Oversight. And this was the last written update to the application. 176 00:21:10,360 --> 00:21:22,800 I will move now to attachment 11, tab 11. This is a request for interpretive opinion. 177 00:21:22,800 --> 00:21:35,960 The Commissioner of the District of Staten has a point to issue specific rulings in writing. 178 00:21:35,960 --> 00:21:42,280 And there is a regulatory section that defines that authority. It is for this Court's reference. 179 00:21:42,280 --> 00:21:48,800 You don't need to look into this. It is title 10 of the California Code of Regulation, section 180 00:21:48,800 --> 00:21:58,800 250.12, subregulation A. And in part, this regulation states that a request for an interpretive 181 00:21:58,800 --> 00:22:03,440 opinion shall be made in writing. It shall fully set forth the questions presented in 182 00:22:03,440 --> 00:22:09,520 the particular facts and circumstances upon which the opinion is requested. Each interpretive 183 00:22:09,520 --> 00:22:15,960 opinion, determination, or specific ruling is applicable only to the transaction identified 184 00:22:15,960 --> 00:22:25,960 in the request, therefore, and may not be relied upon in connection with any other transaction. 185 00:22:25,960 --> 00:22:34,760 According to the request for interpretive opinion, in this request, Attorney Charles Washburn, 186 00:22:34,760 --> 00:22:42,120 on behalf of Minnatt, Phelps, and Phillips, LLP, sets forth the same argument that was 187 00:22:42,120 --> 00:22:48,320 set forth in his email that we saw a few moments ago, which essentially states this language 188 00:22:48,320 --> 00:22:56,920 does not prevent us from taking possession of collateral. He admits that BlockFi is going 189 00:22:56,920 --> 00:23:03,020 to be possessing the collateral. Or in this interpretive opinion, he says that his client 190 00:23:03,020 --> 00:23:11,760 would like to take possession of the collateral. And the part that I would like the Court to 191 00:23:11,760 --> 00:23:33,000 see is on page 8 stamp. Pardon me one moment. I apologize because I had highlighted the 192 00:23:33,000 --> 00:23:39,280 electronic version I was planning on presenting it on the screen for all of us. Okay, 8 stamp 193 00:23:39,280 --> 00:23:48,980 page 44. This is the second full paragraph. It starts with the words in a letter. Okay, 194 00:23:48,980 --> 00:23:54,960 here the attorney for BlockFi is acknowledging actual receipt of that letter dated April 195 00:23:54,960 --> 00:24:02,080 10th, which had the strongest admonition in the series of letters. And he goes on to acknowledge 196 00:24:02,080 --> 00:24:09,240 other admonitions that we did not see in the record. For example, on the second full sentence 197 00:24:09,240 --> 00:24:14,560 starting with other communications from Department of Representatives to BlockFi have similarly 198 00:24:14,560 --> 00:24:19,240 stated that a finance lender may, quote, never hold the assets of California borrowers it 199 00:24:19,240 --> 00:24:26,000 makes loan to under the California finance lender license, end quote. Quote, assets collateral 200 00:24:26,000 --> 00:24:34,160 may not be held by BlockFi or any other third party, end quote. Quote, the collateral, that 201 00:24:34,160 --> 00:24:40,480 word is eligible, has to remain with the borrower. And the California finance lending license 202 00:24:40,480 --> 00:24:46,960 does not permit you to take possession of the collateral. The reason why this is important 203 00:24:46,960 --> 00:24:54,600 is because the attorney for BlockFi is acknowledging actual notice of this prohibition. It's an 204 00:24:54,600 --> 00:25:03,640 implied prohibition, but a prohibition nonetheless. Okay. Now, was the department perfectly correct? 205 00:25:03,640 --> 00:25:11,000 Well, the statute is our guidepost because what the department says is not necessarily 206 00:25:11,000 --> 00:25:19,320 what this court must accept. This court should independently construe the statute. However, 207 00:25:19,320 --> 00:25:25,300 upon the independent construction of the statute, if this court finds that BlockFi's interpretation 208 00:25:25,300 --> 00:25:33,920 of the statute is unreasonable, then under an authority cited in the briefs, Safeco Insurance, 209 00:25:33,920 --> 00:25:40,680 that it does not matter what the subjective intent of the party was. And that's very common 210 00:25:40,680 --> 00:25:47,800 under these willful provisions imposing civil liability that an objectively unreasonable 211 00:25:47,800 --> 00:25:53,800 construction of a statute means that there was a willful violation of that statute. Here, 212 00:25:53,800 --> 00:26:05,160 of course, we have actual notice of the prohibition. And I think that it's pretty clear that this 213 00:26:05,160 --> 00:26:10,080 was addressed by the executives. Something I should have pointed out in the emails was 214 00:26:10,080 --> 00:26:16,440 that the founders and chief executive, Zach Prince and Florian Marquez, were copied on 215 00:26:16,440 --> 00:26:24,320 the email from Washburn to the department and that Florian copied, Florian Marquez sent 216 00:26:24,320 --> 00:26:30,240 the email to the department updating the business plan. So this was something that the executives 217 00:26:30,240 --> 00:26:36,120 knew about. Florian Marquez, which by the way, there's absolutely nothing personal about 218 00:26:36,120 --> 00:26:40,920 this case. If you ask my opinion, I think that these were just, they were just trying 219 00:26:40,920 --> 00:26:47,360 to do this business uniformly throughout the states and they wanted to, they didn't want 220 00:26:47,360 --> 00:26:54,440 to make a whole change to their business model just for California. But under California 221 00:26:54,440 --> 00:27:01,560 law, the legislature in California has said that this business model was not allowed. 222 00:27:01,560 --> 00:27:22,720 Let's flip now to attachment 13. Let me just stop you. I certainly hope we're not intending 223 00:27:22,720 --> 00:27:29,840 to go through all 31 of them. Absolutely, Your Honor. Yes. So that's my gentle nudge 224 00:27:29,840 --> 00:27:35,880 to that you go to the heart of the arguments because I've read your papers and I understand 225 00:27:35,880 --> 00:27:42,720 all of what you're submitting. Absolutely. And I will in fact, according to my notes, 226 00:27:42,720 --> 00:27:48,680 I only have two more attachments that I'm going to discuss and then I'm going to focus 227 00:27:48,680 --> 00:27:56,920 on the reply. I will, I will try to make it very concise. Thank you, Your Honor. Okay. 228 00:27:56,920 --> 00:28:03,460 At the end of the request for interpretive opinion that we were just looking at, Washburn 229 00:28:03,460 --> 00:28:10,680 says that if the department reaches a preliminary conclusion that block, I cannot retain possession 230 00:28:10,680 --> 00:28:17,880 of collateral, that he be permitted to withdraw the request for interpretive opinion and attachment 231 00:28:17,880 --> 00:28:24,540 13 shows that according to the department of business oversight, that no interpretive 232 00:28:24,540 --> 00:28:33,000 opinion was ever issued and that Washburn did withdraw the interpretive, the request 233 00:28:33,000 --> 00:28:47,660 for interpretive opinion. Okay. Now let's jump to the dispute here. Washburn's declaration 234 00:28:47,660 --> 00:28:53,880 says that he received a phone call from the department and they told him, they said, we 235 00:28:53,880 --> 00:28:57,920 agree with you, but we're not going to issue anything in writing. We're just going to issue 236 00:28:57,920 --> 00:29:13,600 your license. Okay. The enhancing law does provide a safe harbor for a lender that relies 237 00:29:13,600 --> 00:29:22,260 upon a general rule, regulation or specific ruling of the commissioner. And that's financial 238 00:29:22,260 --> 00:29:33,680 code, California financial code section two, two, seven, five, four, two, two, seven, five, 239 00:29:33,680 --> 00:29:40,720 four. And it states in relevant part that quote, any act done or, or omitted in good 240 00:29:40,720 --> 00:29:47,360 faith in conformity with any written general rule, regulation or specific ruling of the 241 00:29:47,360 --> 00:29:54,560 commissioner, end quote, shall not subject the finance lender to liability. That has 242 00:29:54,560 --> 00:30:00,040 a three element test embedded in it. Number one is that there must be a general rule regulation 243 00:30:00,040 --> 00:30:05,000 or specific ruling of the commissioner, which is the product of a quasi legislative or quasi 244 00:30:05,000 --> 00:30:12,760 judicial process. In this case, it's undisputed that there was no quasi legislative or quasi 245 00:30:12,760 --> 00:30:19,320 judicial outcome or no final product of that process. And furthermore, that there was no 246 00:30:19,320 --> 00:30:25,600 writing that authorized the use and possession of collateral. Number two, block five must 247 00:30:25,600 --> 00:30:31,800 act in conformity with the ruling. And as we saw earlier, the license incorporates section 248 00:30:31,800 --> 00:30:38,240 two two zero zero nine, meaning that block fight did not act in conformity with its license. 249 00:30:38,240 --> 00:30:45,880 And number three, the acts must be done in good faith. And I would posit that an act 250 00:30:45,880 --> 00:30:52,520 that is based upon an unreasonable construction of the statute is not an act in good faith 251 00:30:52,520 --> 00:31:02,560 by as a matter of law. Okay. Let's discuss the declaration of Jan Lynn Owen, who impressively 252 00:31:02,560 --> 00:31:10,000 was actually the commissioner at the time that that block five applied for its license. 253 00:31:10,000 --> 00:31:14,040 This declaration was made by her in twenty twenty one while she was working for the same 254 00:31:14,040 --> 00:31:21,160 law firm that represented block five in its application to the to the Department of Business 255 00:31:21,160 --> 00:31:27,380 Oversight, Minnette Phelps and Phillips, LLP. She works for the same law firm that Washburn 256 00:31:27,380 --> 00:31:34,240 works for. And she did not make the declaration in any official capacity. She admitted that 257 00:31:34,240 --> 00:31:40,640 she had no personal knowledge of the block five application. And she says as a matter 258 00:31:40,640 --> 00:31:47,680 of her personal opinion, she says that this is common in commerce and that that I'm that 259 00:31:47,680 --> 00:31:54,840 Mr. Drew is incorrect in his reading of the law. Okay. Now, I will tell you that according 260 00:31:54,840 --> 00:31:59,560 to the Horn Book, which I've which I've referenced and of course, I always have citations, but 261 00:31:59,560 --> 00:32:05,560 I'm going to I'm going to omit the citation here. The Horn Book says that actually commercial 262 00:32:05,560 --> 00:32:10,880 transactions where the letter takes actual possession of the collateral is actually a 263 00:32:10,880 --> 00:32:16,880 a small minority of all commercial transactions. Most of the time when we think about a margin 264 00:32:16,880 --> 00:32:25,480 loan, it's when a bank financial institution or securities dealer is using and by the way, 265 00:32:25,480 --> 00:32:29,920 those are all independent authorizations and block five is not does not qualify as any 266 00:32:29,920 --> 00:32:35,320 of those authorizations. It's undisputed that my loan was made solely pursuant to the California 267 00:32:35,320 --> 00:32:43,040 Financing Law. And those provisions, those are highly regulated transactions. They are 268 00:32:43,040 --> 00:32:51,280 done with less volatile instruments. There are lots of oversight measures, lots of regulators, 269 00:32:51,280 --> 00:32:56,480 lots of statutory provisions that protect in that situation. The California Financing 270 00:32:56,480 --> 00:33:03,400 Law does not have any provisions dealing with a lender's possession of collateral. The 271 00:33:03,400 --> 00:33:10,360 pawnbroker law does. And the pawnbroker law states that under under California law, this 272 00:33:10,360 --> 00:33:16,360 is actually California financial code section two one zero zero zero defines a pawnbroker 273 00:33:16,360 --> 00:33:24,280 as a lender receiving goods to secure a loan. And block fi argued in its reply that the 274 00:33:24,280 --> 00:33:30,680 test for a good is whether something is movable. And I agree. I just believe that Bitcoin is 275 00:33:30,680 --> 00:33:39,060 movable. The reason why I brought up the pawnbroker law is because the statutory structure is 276 00:33:39,060 --> 00:33:45,360 also important to keep in mind when construing the independent independent statutes. The 277 00:33:45,360 --> 00:33:51,440 California pawnbroker law has provisions that protect the bar was it has a statutory right 278 00:33:51,440 --> 00:33:57,160 of redemption for the entire loan term. The loan can therefore not be accelerated. The 279 00:33:57,160 --> 00:34:03,360 collateral cannot be sold before the expiration of the loan term. The California Financing 280 00:34:03,360 --> 00:34:11,720 Law has none of those safeguards. It was not intended to govern or protect a borrower in 281 00:34:11,720 --> 00:34:16,200 the situation where they are giving their possessions to collateral. Now, does the court 282 00:34:16,200 --> 00:34:21,720 have any questions or can I I will if at this time or I could breeze through the rest of 283 00:34:21,720 --> 00:34:26,240 the presentation if you would like. Why don't you breeze through the rest. Yes. And then 284 00:34:26,240 --> 00:34:29,800 if I have questions, I will ask. Thank you. Thank you so much. 285 00:34:29,800 --> 00:34:41,160 The declaration of Jamlin Owen does not qualify for the safe harbor under the California Financing 286 00:34:41,160 --> 00:34:48,960 Law because it was it was a writing that was not a general rule regulation or specific 287 00:34:48,960 --> 00:34:54,200 ruling of the commissioner and it was issued after the foreclosures and therefore block 288 00:34:54,200 --> 00:35:00,560 five could not have conformed in good faith to the writing, meaning that for there to 289 00:35:00,560 --> 00:35:08,980 be a writing that is sufficient that block five could conform with that it would have 290 00:35:08,980 --> 00:35:16,440 to be prospective conformity, not retrospective conformity. I assume that there's no writing 291 00:35:16,440 --> 00:35:21,880 because block five would have produced it if they if they had a writing notably absent 292 00:35:21,880 --> 00:35:27,320 from the record is that the Department of Business Oversight had never issued a writing 293 00:35:27,320 --> 00:35:34,280 people. Well, I've not seen one. I've not seen any writings that justify this this this 294 00:35:34,280 --> 00:35:42,360 deviation from the statute. I'd like to also point out that the reply does not dispute 295 00:35:42,360 --> 00:35:50,680 that block by took possession of the Bitcoin. They do not dispute that block five charged 296 00:35:50,680 --> 00:35:57,360 an unlawful amount by retaining the proceeds from the Bitcoin. The proceeds from the Bitcoin, 297 00:35:57,360 --> 00:36:03,600 which would have been known to the common law is the use of the Bitcoin. The use belongs 298 00:36:03,600 --> 00:36:11,840 to the borrower under the uniform commercial code section nine dash two zero seven sub 299 00:36:11,840 --> 00:36:19,640 section C. Well, let me stop you there. Doesn't nine dash two oh seven have the exception 300 00:36:19,640 --> 00:36:28,960 that if you contract otherwise, and that that section has an exception for consumer goods. 301 00:36:28,960 --> 00:36:35,600 So you'd have to establish that it's a good and that's a consumer good. I saw in your 302 00:36:35,600 --> 00:36:46,400 memorandum only one reference to a case that referred to digital assets as a as a good. 303 00:36:46,400 --> 00:36:51,920 You reference electricity cases which are all over the place for there's half probably 304 00:36:51,920 --> 00:36:58,080 a dozen on each side of the arguments whether electricity is a good. But certainly under 305 00:36:58,080 --> 00:37:05,120 the uniform commercial code, goods exclude investment property, which are securities 306 00:37:05,120 --> 00:37:14,760 certificate or otherwise. And there are more cases and that have argued that cryptocurrency 307 00:37:14,760 --> 00:37:22,320 or securities. There are cases that have argued and take the position that they are general 308 00:37:22,320 --> 00:37:28,560 intangibles and including payment intangibles. But other than the one case you cited, are 309 00:37:28,560 --> 00:37:34,000 there any other cases that suggest that they are a good let alone a consumer good? May 310 00:37:34,000 --> 00:37:39,700 I address those those questions in order? Yes. At first, your honor, you mentioned nine dash 311 00:37:39,700 --> 00:37:46,720 207 can be contractually waived. That is true. Here there was no contractual waiver. The 312 00:37:46,720 --> 00:37:52,520 loan does not allow block fight to lease the Bitcoin. It does not allow block fight to 313 00:37:52,520 --> 00:37:58,000 retain the proceeds from the Bitcoin. It does not allow block fight a charge the proceeds 314 00:37:58,000 --> 00:38:03,280 from the Bitcoin. It does not disclose that there will be a charge of the proceeds from 315 00:38:03,280 --> 00:38:07,400 the Bitcoin, which should be disclosed. It must be disclosed under the Truth in Lending 316 00:38:07,400 --> 00:38:12,680 Act. And if it cannot be known with certainty, it must be estimated. OK, so I would like 317 00:38:12,680 --> 00:38:18,760 to make very clear that that the rule under section nine dash 207 is the operative rule 318 00:38:18,760 --> 00:38:24,940 that we are playing with regarding Bitcoin's categorization under the uniform commercial 319 00:38:24,940 --> 00:38:32,080 code. That is it's an interesting question. It's potentially relevant to the pawnbroker 320 00:38:32,080 --> 00:38:38,040 issue. It does not bear at all under the financing law. The financing laws we saw makes reference 321 00:38:38,040 --> 00:38:42,960 to personal property. And we know that Bitcoin is personal property. Now, whether or not 322 00:38:42,960 --> 00:38:48,880 Bitcoin is a good for purposes of the pawnbroker law, that's an interesting question. And the 323 00:38:48,880 --> 00:38:53,640 reason why is that we know Bitcoin is not a service. We know it's not a security. We 324 00:38:53,640 --> 00:39:00,160 know that it's something that can be actually possessed. It can be actually received. And 325 00:39:00,160 --> 00:39:09,400 the pawnbroker laws are in. If we say that Bitcoin is not a good, then it's it's the 326 00:39:09,400 --> 00:39:13,600 way that a good is defined as it's defined almost as a chosen possession. It's something 327 00:39:13,600 --> 00:39:18,240 that could be again. Let me stop you because it's isn't it more than just being a good 328 00:39:18,240 --> 00:39:25,000 doesn't California's regulation or statute. And I'll refer to the business and professionals 329 00:39:25,000 --> 00:39:35,160 code BPC 21627. Doesn't it have to be a tangible, good, tangible personal property? Let me just 330 00:39:35,160 --> 00:39:46,840 back up because when I look through this BPC 21626 defines second refers to secondhand 331 00:39:46,840 --> 00:39:54,120 dealers and it refers to those in whose business includes buying, selling, trading, taking 332 00:39:54,120 --> 00:40:02,440 in pawn and accepting for sale or consignment, tangible personal property. So a secondhand 333 00:40:02,440 --> 00:40:09,120 dealer includes all pawnbrokers, but pawnbrokers aren't all secondhand. All pawnbrokers are 334 00:40:09,120 --> 00:40:13,280 secondhand dealers, but not all secondhand dealers are pawnbrokers. But for secondhand 335 00:40:13,280 --> 00:40:21,400 dealers, it has to be tangible personal property. How is how is digital currency tangible? I 336 00:40:21,400 --> 00:40:27,200 love that question because it shows how learned that your honor is. It's really a good question 337 00:40:27,200 --> 00:40:32,680 because it's a secondhand dealer is very related to a pawnbroker. It's not a secondhand dealer 338 00:40:32,680 --> 00:40:38,360 is not necessarily a pawnbroker. And as pointed out in the memorandum, a pawnbroker is necessarily 339 00:40:38,360 --> 00:40:43,640 a secondhand dealer. I'm not so sure about that. Your honor, the pawnbroker is statutorily 340 00:40:43,640 --> 00:40:50,640 defined and it has a separate statutory definition to a secondhand dealer. Well, I'm in fairness 341 00:40:50,640 --> 00:40:55,360 to you. I'm reading this from the secondhand dealer pawnbroker licensing unit frequently 342 00:40:55,360 --> 00:41:00,520 asked questions put out by the Office of the Attorney General for the California Department 343 00:41:00,520 --> 00:41:08,520 of Justice. And a pawnbroker is also a secondhand dealer, but a secondhand dealer is not a pawnbroker. 344 00:41:08,520 --> 00:41:13,320 And if you read and according to the definition includes pawnbrokers. So we go back to is 345 00:41:13,320 --> 00:41:19,560 there a need for it to be tangible as a pawnbroker? We moved on beyond the UCC and we moved beyond 346 00:41:19,560 --> 00:41:26,120 the financing law. Let's just focus now for the last bit on the pawnbroker element. Yes. 347 00:41:26,120 --> 00:41:30,640 And also if we can before before we conclude, I'd like to also discuss the contract just 348 00:41:30,640 --> 00:41:36,600 a little contractual redemption just a little bit. Your honor, California Financial Code 349 00:41:36,600 --> 00:41:44,100 Section 21000 at Secwitter that contains all of the provisions that have to do with licensing 350 00:41:44,100 --> 00:41:48,880 a pawnbroker defining a pawnbroker and regulating a pawnbroker. The business and professions 351 00:41:48,880 --> 00:41:54,360 code does regulate secondhand dealers, but it does not set forth the licensing provisions. 352 00:41:54,360 --> 00:41:59,200 And I don't believe it's incorporated by reference. I've done extensive research on the statutory 353 00:41:59,200 --> 00:42:05,460 construction and legislative history. Your honor is correct that goods are sometimes 354 00:42:05,460 --> 00:42:10,720 defined as intangible by the legislature. And a good example of that is on the memorandum 355 00:42:10,720 --> 00:42:16,640 of law, which unfortunately came after all of the attachments. But your honor has obviously 356 00:42:16,640 --> 00:42:20,760 read it because I think you referenced it earlier during this oral argument that in 357 00:42:20,760 --> 00:42:27,840 footnote seven, I there are citations to California statutes that define a good as being tangible, 358 00:42:27,840 --> 00:42:32,120 but there are also sections that define goods without reference to tangibility. And the 359 00:42:32,120 --> 00:42:38,280 pawnbroker law defines good. I'm sorry. It does not define good. It does not say tangible. 360 00:42:38,280 --> 00:42:43,560 If the legislature wanted a limited to tangible, tangible personal property, they could have 361 00:42:43,560 --> 00:42:48,160 as your honor just showed with the business and professions code, the legislature is more 362 00:42:48,160 --> 00:42:54,980 than capable of defining a good with reference to tangibility. And the legislature does say 363 00:42:54,980 --> 00:43:01,560 tangible personal property in many different statutory sections. I've checked five different 364 00:43:01,560 --> 00:43:08,760 dictionaries, and only one of those five dictionaries had a reference to tangibility. I believe 365 00:43:08,760 --> 00:43:16,400 even I don't have the definition in front of me, but I even believe that the reason 366 00:43:16,400 --> 00:43:21,920 why I'm citing these old cases is because the language, the word goods, this is actually 367 00:43:21,920 --> 00:43:27,980 a statutory language that's been carried on since since England, this this statute goods 368 00:43:27,980 --> 00:43:33,840 was imported from England. And that's why I'm citing to laws under the common. I'm citing 369 00:43:33,840 --> 00:43:38,580 to the common law, which I think we may assume the common law definition of a good is what 370 00:43:38,580 --> 00:43:46,720 is what the legislature intended without further modification. So I know your honor is the 371 00:43:46,720 --> 00:43:50,520 pond broker laws may be not the strongest argument in your honor's opinion. And I respect 372 00:43:50,520 --> 00:43:56,520 that. And I understand that. But may I talk about the contractual right of redemption? 373 00:43:56,520 --> 00:44:01,560 Is that yes. Okay, let's move on to that. And then I'd like to hear from debtors council. 374 00:44:01,560 --> 00:44:11,720 Absolutely, your honor. Thank you. I appreciate that. The soon after very soon after the liquidations 375 00:44:11,720 --> 00:44:21,120 block fi and I are communicating. And I say, Can I take out a an unsecured loan to buy 376 00:44:21,120 --> 00:44:26,120 back the Bitcoin and block fi says no, we can't do that. We can only reverse the liquidations 377 00:44:26,120 --> 00:44:32,000 if you come up with enough money. This was within days of the liquidation. Now I have 378 00:44:32,000 --> 00:44:39,520 to this is an important note. The standard of review. The burden of persuasion, as your 379 00:44:39,520 --> 00:44:46,600 honor discussed earlier, the underlying burden of persuasion on the on compliance with the 380 00:44:46,600 --> 00:44:53,480 uniform commercial code, chap, Article nine, chapter six, that burden of persuasion is 381 00:44:53,480 --> 00:44:59,520 on block fi under California law. And block fi has not produced any evidence that the 382 00:44:59,520 --> 00:45:04,840 sales actually occurred has not produced any evidence that the that the liquidations were 383 00:45:04,840 --> 00:45:11,900 commercially reasonable. It's I'm for all we know, they accepted the Bitcoin in partial 384 00:45:11,900 --> 00:45:17,480 satisfaction of the loan, which is void on in a commercial transaction. I'm sorry, I'm 385 00:45:17,480 --> 00:45:23,440 sorry, not a commercial transaction in a consumer transaction. Yes, that's right. And why is 386 00:45:23,440 --> 00:45:28,160 this important? It's important because I don't have access to that information. Block fi 387 00:45:28,160 --> 00:45:33,260 should have produced it in its objection, it should have produced it in its reply. For 388 00:45:33,260 --> 00:45:39,360 all we know, there's there's no way of knowing that these these liquidations actually occurred. 389 00:45:39,360 --> 00:45:45,240 So when I was approached afterwards asking to give more money or Bitcoin to reverse the 390 00:45:45,240 --> 00:45:53,000 liquidations, we engaged in negotiations. And during the negotiations, I mentioned that 391 00:45:53,000 --> 00:45:58,640 I was I was interested in reinstating the loan at a price of $7500 per Bitcoin, the 392 00:45:58,640 --> 00:46:06,640 ultimate price of Bitcoin at the time of the acceptance of the offer was 7700. And during 393 00:46:06,640 --> 00:46:11,400 that time, I informed block fi that I was engaged in the due diligence phase with a 394 00:46:11,400 --> 00:46:19,040 with another lender. And within about a month thereafter, I accepted the offer. And obviously, 395 00:46:19,040 --> 00:46:26,320 one month is a reasonable amount of time to engage in a due diligence phase with a lender. 396 00:46:26,320 --> 00:46:32,080 Block fi provided the formula for reinstating the loan, I accepted the offer in accordance 397 00:46:32,080 --> 00:46:39,260 with the formula. And soon after that, block fi said that they were not going to honor 398 00:46:39,260 --> 00:46:45,520 the contract to reinstate the loan. And as a result, that's when the litigation ensued. 399 00:46:45,520 --> 00:46:51,120 The price of Bitcoin was not a factor in this other than how it affected the formula for 400 00:46:51,120 --> 00:46:58,760 reinstating the loan. But more importantly, I think that there's something not right about 401 00:46:58,760 --> 00:47:04,280 about the offer to reverse the loan. And it wasn't a modification of the loan contract. 402 00:47:04,280 --> 00:47:10,160 It was a new contract. It was a it was a written modification. And it was signed. It had an 403 00:47:10,160 --> 00:47:15,520 email signature, which is sufficient in our day and age, an email signal, people do not 404 00:47:15,520 --> 00:47:23,000 have to transact business through facsimile anymore. And there was an offer and acceptance 405 00:47:23,000 --> 00:47:30,720 to reinstate the loan. Although the amount of the proof of claim is prima facie valid. 406 00:47:30,720 --> 00:47:39,680 If this court is inclined to specifically specifically per force, that contract to reinstate 407 00:47:39,680 --> 00:47:45,600 the loan, I think that that's what everybody agreed to at that time. And the court would 408 00:47:45,600 --> 00:47:53,900 be justified in overruling the objection to the proof of claim. We have not seen enough 409 00:47:53,900 --> 00:48:01,000 evidence to to negate the prima facie of validity and amounts of the proof of claim. I think 410 00:48:01,000 --> 00:48:05,480 that it was very clear that there was actual notice of the provisions of the law. There's 411 00:48:05,480 --> 00:48:11,400 only one reasonable construction of financial code section two, two zero zero nine. And 412 00:48:11,400 --> 00:48:16,160 if there is another if there is another reasonable construction, I'd like to hear it because 413 00:48:16,160 --> 00:48:20,280 the way that I read the law and I imagine that your honor would read the law as well. 414 00:48:20,280 --> 00:48:26,080 It's it cannot be changed unilaterally by any party to this litigation. It was enacted 415 00:48:26,080 --> 00:48:33,480 many years ago. And that's that's what I request is that this court overrule the objection 416 00:48:33,480 --> 00:48:40,780 and enforce the California financing law and the California. This was not only a violation 417 00:48:40,780 --> 00:48:46,320 of the statutory definition, but a violation of the license, which incorporates the statutory 418 00:48:46,320 --> 00:48:53,680 definition by reference. Any questions before I check my notes in a scramble to see if I've 419 00:48:53,680 --> 00:49:00,480 missed anything? No, not at this junk. Well, let me ask this with respect to whether or 420 00:49:00,480 --> 00:49:11,080 not a modified loan offer was made and accepted. There were no steps afterwards. In other words, 421 00:49:11,080 --> 00:49:16,560 did you put up collateral? Did you follow through? Did either side follow through on 422 00:49:16,560 --> 00:49:24,320 the obligations that would have been required under reinstating or issuing a new loan? Yes, 423 00:49:24,320 --> 00:49:32,680 your honor. I tendered the Bitcoin and a tender is what's required. I did not have a Bitcoin 424 00:49:32,680 --> 00:49:40,000 address to send it to block. I would not provide a Bitcoin address to send it to. That's that 425 00:49:40,000 --> 00:49:47,800 is the state of affairs. By tender, you mean what specifically did you do? Oh, great question. 426 00:49:47,800 --> 00:50:16,880 I refer to that email for the sports reference here. Attachment 16. Beat stamp page 89. 427 00:50:16,880 --> 00:50:22,560 This page, the top email is the one that says I'm in the due diligence phase with the traditional 428 00:50:22,560 --> 00:50:33,120 source of capital. That was May 1st, 2020. The next email block five says that's great 429 00:50:33,120 --> 00:50:38,560 news. Here's the formula to reinstate your loan. Here's an example. The payment would 430 00:50:38,560 --> 00:50:46,760 bring the principal balance. That's under his example. Then the next email, by the way, 431 00:50:46,760 --> 00:50:55,640 that email with the formula was from March 24th, 2020. I apologize. I read the date on 432 00:50:55,640 --> 00:51:00,240 the top of on the header of the page, but that was the date that this was printed. That 433 00:51:00,240 --> 00:51:07,000 was not the date of the email. The date with the formula was from March 24th, 2020. Then 434 00:51:07,000 --> 00:51:14,560 April 27th, 2020. I accepted the offer. I provided the formula. I calculated the amount 435 00:51:14,560 --> 00:51:20,920 of pay down and I said I will send the Bitcoin today. Please confirm block five's Bitcoin 436 00:51:20,920 --> 00:51:29,320 address. That's a tender of performance. So we're addressing the email of May 24th 437 00:51:29,320 --> 00:51:36,080 and your response of April 27th. Correct, your honor. All right. Thank you. Let me hear 438 00:51:36,080 --> 00:51:43,800 Ms. Chavez. Thank you, Mr. Jerome. Thank you, your honor. Thank you, your honor. Mr. Jero 439 00:51:43,800 --> 00:51:51,840 has indicated that his exhibit should be considered shocking, but nothing about this case or the 440 00:51:51,840 --> 00:51:58,240 claims or the exhibits should be shocking, your honor. Mr. Jero is not shocked by the 441 00:51:58,240 --> 00:52:04,320 terms of the private written loan agreement between the parties or block five's exercise 442 00:52:04,320 --> 00:52:09,680 of its rights under that agreement. Nor did he appear shocked in the emails by the liquidation 443 00:52:09,680 --> 00:52:14,560 notices from block five. And again, I would emphasize that this was a private agreement 444 00:52:14,560 --> 00:52:21,040 between sophisticated parties. Jero is not charged with enforcing the laws of California 445 00:52:21,040 --> 00:52:27,020 or any other state. And as the evidence clearly indicates for the license itself, everything 446 00:52:27,020 --> 00:52:32,960 Mr. Jero is relying upon were pre-licensing discussions, but the evidence in the Washburn 447 00:52:32,960 --> 00:52:39,480 declaration, the Owen declaration and Judge Strobel's ruling in Jero three clarify that 448 00:52:39,480 --> 00:52:45,680 the license was in fact issued to block five on August 20th, 2018. The department advised 449 00:52:45,680 --> 00:52:50,720 that it agreed with the block five's analysis of the California lending law, including section 450 00:52:50,720 --> 00:52:56,480 22, two zero zero nine. They made no request for block five to change their business plans 451 00:52:56,480 --> 00:53:01,840 and they did decline to issue a formal interpretive opinion because they already issued the license 452 00:53:01,840 --> 00:53:08,360 and the license was their indication of approval of block five to act as a lender. And the 453 00:53:08,360 --> 00:53:13,160 Jero three ruling, your honor, Judge Strobel says that section 22, zero zero nine does 454 00:53:13,160 --> 00:53:19,040 not explicitly prohibit a finance lender from using or possessing collateral and that the 455 00:53:19,040 --> 00:53:24,480 authority charged with issuing lending licenses like the department may be entitled to deference 456 00:53:24,480 --> 00:53:29,560 of their interpretation of the statute. And we think that interpretation is the correct 457 00:53:29,560 --> 00:53:35,440 interpretation, your honor. Nothing again shocked Mr. Jero other than he was just unhappy 458 00:53:35,440 --> 00:53:40,120 with the outcome here and we can understand that, but he signed a written agreement with 459 00:53:40,120 --> 00:53:45,260 terms that allowed block five to liquidate the collateral when the loan to value ratio 460 00:53:45,260 --> 00:53:52,040 was not in compliance. It's clear what happened here that there was no amendment or modification. 461 00:53:52,040 --> 00:53:56,560 Section 22 of the loan agreement expressly states that that was the entire agreement 462 00:53:56,560 --> 00:54:02,600 among the parties and then section 29 provides that any changes would require a writing signed 463 00:54:02,600 --> 00:54:07,880 by the parties and that was not indicated in the emails and the debtors have carried 464 00:54:07,880 --> 00:54:12,800 their burden and it's Mr. Jero's burden to establish that there was some new contract 465 00:54:12,800 --> 00:54:18,320 or new loan originated and he has not done so. The claim that Mr. Jero is asserting is 466 00:54:18,320 --> 00:54:25,020 of a substantial size, which is why the debtors have been proactive in objecting to it to 467 00:54:25,020 --> 00:54:30,960 eliminate the continued use of estate resources to defend against a baseless claim. We respectfully 468 00:54:30,960 --> 00:54:35,640 request that your honor sustain our objection and disallow the claims in their entirety. 469 00:54:35,640 --> 00:54:40,780 If I can answer any questions your honor has, I'm happy to do so, but we believe that your 470 00:54:40,780 --> 00:54:46,600 honor is fully capable of making this decision based off the papers and the arguments today. 471 00:54:46,600 --> 00:54:52,400 Thank you. All right. Thank you, Mrs. Chavez. Mr. Jero last comment. 472 00:54:52,400 --> 00:54:59,560 Oh, you're on mute. Absolutely, your honor. Thank you. I wanted 473 00:54:59,560 --> 00:55:06,040 to just quickly address some of Mr. Chavez's points here. I want to say that deference 474 00:55:06,040 --> 00:55:10,560 requires two things. It requires compliance with the Administrative Procedure Act and 475 00:55:10,560 --> 00:55:16,640 it requires something to defer to. Here there is nothing to defer to. What this is referred 476 00:55:16,640 --> 00:55:22,160 to in California is an underground regulation. An underground regulation is something that's 477 00:55:22,160 --> 00:55:28,480 done in secret and it's actually void. It's not entitled to any deference. Regarding the 478 00:55:28,480 --> 00:55:34,880 size of the claim, this claim simply just represents my Bitcoin. The size of the claim 479 00:55:34,880 --> 00:55:40,320 is much more massive for me than it is for BlockFi and I didn't ask for any damages. 480 00:55:40,320 --> 00:55:46,520 I'm asking for a return of the Bitcoin. I'm asking for a return of the Bitcoin add on 481 00:55:46,520 --> 00:55:53,120 the same treatment that any other debtor in my situation would be entitled to. And lastly, 482 00:55:53,120 --> 00:55:59,720 regarding Jero 3, that tentative ruling expressly states that it is not a final determination. 483 00:55:59,720 --> 00:56:05,080 The tentative ruling is expressly tentative and although it was adopted by the court, 484 00:56:05,080 --> 00:56:11,440 it is not preclusive. I respectfully submit that this court should do its own independent 485 00:56:11,440 --> 00:56:17,680 statutory construction of 22009 and Your Honor will hopefully arrive at the same conclusion. 486 00:56:17,680 --> 00:56:24,800 Thank you, Your Honor. Thank you. So just that we're all working under the same assumption, 487 00:56:24,800 --> 00:56:32,760 if I were to allow the claim for roughly, it has a value roughly of 12 million, I guess, 488 00:56:32,760 --> 00:56:44,280 400 Bitcoin, right? May I make a comment, Your Honor? Yes. The dollar value of the Bitcoin 489 00:56:44,280 --> 00:56:54,400 on the day of the petition was about 6.9 million and the reason why I'm asking for an in-kind 490 00:56:54,400 --> 00:56:58,840 amount is because just because I want to qualify for an in-kind distribution just like everyone 491 00:56:58,840 --> 00:57:07,520 else. So on the day of the petition, Bitcoin was trading at about $16,000 and so you're 492 00:57:07,520 --> 00:57:18,320 seeking 400 coins roughly at that amount. Yes, Your Honor. And I will add that if Your 493 00:57:18,320 --> 00:57:23,480 Honor is inclined to specifically perform the contract for redemption, I will concede 494 00:57:23,480 --> 00:57:29,040 that this court may subtract the principal amount of the loan and the interest accrued 495 00:57:29,040 --> 00:57:34,960 thereon, which would be about $2.5 million. Okay. How, and let me turn to Debtors' Council 496 00:57:34,960 --> 00:57:47,200 under the proposed plan. How are other BlockFi loan obligors being treated? Well, first and 497 00:57:47,200 --> 00:57:53,240 foremost, Your Honor, just would like to emphasize that Mr. Jarreau instructed BlockFi to liquidate 498 00:57:53,240 --> 00:57:57,560 the remaining collateral and pay off his loan. So to give him any type of claim would be 499 00:57:57,560 --> 00:58:03,360 a double recovery because he does not any longer owe a debt to BlockFi and he withdrew 500 00:58:03,360 --> 00:58:07,800 his remaining Bitcoin from the platform. But if he were to have an allowed claim, he'd 501 00:58:07,800 --> 00:58:12,640 be treated as a general unsecured creditor under BlockFi lending, which provides for 502 00:58:12,640 --> 00:58:19,680 a cash distribution, not an in-kind distribution. Right. And I believe, according to the disclosure 503 00:58:19,680 --> 00:58:27,800 statement, the anticipated return is in the range of 30% or so, depending upon future 504 00:58:27,800 --> 00:58:44,000 litigation. Certainly. All right. Okay. Thank you. I will, given the upcoming confirmation 505 00:58:44,000 --> 00:58:50,640 hearings in September and the voting deadlines, I will issue a ruling, at worst a preliminary 506 00:58:50,640 --> 00:58:59,200 ruling at some point next week on both the motion and the cross-motion. I might supplement 507 00:58:59,200 --> 00:59:05,360 it with a more extensive ruling. I will, as I do with all parties, urge the parties to 508 00:59:05,360 --> 00:59:09,920 take that time before I rule because when I rule, there'll be a winner and a loser. 509 00:59:09,920 --> 00:59:16,040 Take the time to see if it makes sense, especially in light of the questions I asked at the end, 510 00:59:16,040 --> 00:59:23,320 whether it makes sense to resolve this matter without the court issuing a ruling. I'll leave 511 00:59:23,320 --> 00:59:31,400 that for you all to consider. I thank you all for your argument. And Mr. Juro, did you 512 00:59:31,400 --> 00:59:38,480 have another question? Yes, Your Honor. Regarding the informal resolution, I would like to say 513 00:59:38,480 --> 00:59:43,080 that I've asked BlockFi to mediate the issue. They do not want to mediate. And therefore 514 00:59:43,080 --> 00:59:48,100 I would ask the court to order this to a mandatory settlement conference so we could have meaningful 515 00:59:48,100 --> 00:59:56,600 settlement discussions. Well, every dollar that I direct BlockFi to expend is coming 516 00:59:56,600 --> 01:00:06,720 out of everyone's pockets, all the other creditors. I am leery of doing that at this juncture. 517 01:00:06,720 --> 01:00:13,560 You certainly start with phone calls on your own. You don't need a neutral. You're all 518 01:00:13,560 --> 01:00:21,800 professionals. And I think you can, by my questions, anticipate the direction or if 519 01:00:21,800 --> 01:00:30,200 not, take into account what the dollars are at stake and try to reach a resolution. If 520 01:00:30,200 --> 01:00:34,160 you need more time, you'll reach out for the court. But I'm not going to direct the mediation 521 01:00:34,160 --> 01:00:42,160 at this point. Thank you all. Court is adjourned. Thank you very much, Your Honor. Thank you.