them. All right. Let me have appearances in the Mr. Gerald. You can have it. Is it Gerald?
Your honor. I say that it's Jero as in thorough. All right, Mr. Jero. Good morning. And let
me have other appearances. Good morning, your honor. Jordan Chavez, the Kings and Boone
on behalf of the debtors. All right. Anyone else entering an appearance? Your honor, Mark
Renzi, CRO for the debtors. Good morning, Mr. Renzi. Okay. So we've had briefing, extensive
briefing, which I've read through. I welcome oral argument to supplement the briefing.
The burden here is a shifting burden. We all know that once the proof of claim is allowed,
it's prima facie valid until there's been opposition raised. Then ultimately, Mr. Jero,
the burden rests with you. Let me hear from the debtors. It's the debtors objection initially.
So we'll start with the debtor and then I'll give Mr. Jero you a full opportunity. Thank
you, your honor. Again, Jordan Chavez on behalf of the debtors. I'm addressing the debtors
fourth omnibus objection filed to the claims by the claims filed by Mr. Jero at docket
number 1069, which were followed by his response and cross motion at docket number 1192 and
the debtors reply at docket 1341. As your honor has noted, the debtors viewed as appropriate
to take up the objection first as the first file pleading and because it obviates the
need to address the cross motion. I know your honor has read all of the papers and is fully
aware of the litigious history between blocked by and Mr. Jero. His claims are rather convoluted.
But as we've outlined in our papers, the path to disallowance for these claims is straightforward.
There's no tribal issues of fact here. The only dispute is whether despite the clear
terms of the loan agreement, Mr. Jero is entitled to a claim for 426 Bitcoin against blocked
by and the answer to that question as a resounding no as a matter of law. These matters can be
decided on the papers and I'd like to move for admission of the debtors exhibits and then
just take a few moments to summarize why these claims should be disallowed. Your honor, I'd
like to move for admission of the debtors exhibit a which was attached to the claim
objection and is the Renzi certification as well as debtors exhibits a through e that
were attached to the reply, which is the loan agreement, the email communications between
the parties, the Washburn Declaration, the Owen Declaration and the Jero three notice
of ruling. All right, Mr. Jero, I haven't seen any issues taken with exhibits on either
side that have been presented, so I'm inclined to admit them all. Any objection on your end?
Your honor, I think as long as it's mutual, I will not make any evidentiary objections.
I'd like if that's okay with the other side as well.
All right. Well, I don't see why it shouldn't be mutual. The exhibits, the courts had the
opportunity to review it as a practical matter and they informed the court on the issue.
So we'll admit the exhibits. Both the move and the respondent. Was there someone else
want to be heard? I'm sorry, I interrupted. Oh, no, I interrupted. Sorry, your honor. Thank
you. And for the record, we do not object to Mr. Jero's exhibits either. So for the
reasons that this claim should be disallowed, first and foremost, Mr. Jero is not a creditor
of BlockFi. Mr. Jero is an attorney with a pre-petition loan with BlockFi lending in
which he borrowed $2.27 million and pledged approximately 441 Bitcoin as collateral. The
loan agreement contains a clear loan to value ratio requirement of 70%. That ratio rose
above 70%. BlockFi issued a margin call as it's entitled to do under the terms of the
agreement and Mr. Jero failed to meet that margin call. Then the ratio rose above 80%
and BlockFi immediately liquidated the collateral, which the loan agreement authorizes it to
do. It liquidated 399 Bitcoin to bring their loan back into compliance. The emails between
the two parties, which your honor just admitted, really say it all. They indicate that Jero
knew about this requirement. He understood the terms of the agreement. He thanks BlockFi
for keeping him updated about the liquidations. He inquired about some options to potentially
reverse the liquidation, but nothing was ever agreed to between the parties. He instructs
BlockFi to liquidate any additional necessary collateral to pay off the remainder of his
loan and then return the excess to him, which BlockFi promptly did in March of 2020. Jero
then withdrew the remainder of the Bitcoin, which was approximately 15 Bitcoin from the
platform, which is why as of the petition date, he was not a creditor of BlockFi. Then
30 days later, once the market swung in his favor, he attempted to try and bind BlockFi
in the emails to some agreement that it never made to reverse or reinstate the loan. BlockFi
acted fully within its rights to liquidate the collateral. There was never a loan modification
or other writing signed by the parties, which is what the loan agreement requires to effectuate
any type of modification, reversal or reinstatement. This is why Mr. Jero conjured up the various
arguments he did in his pre-petition state court litigation and then reasserted those
in his proofs of claim. Your honor, these are red herrings to attempt to divert first
the state court and now this court from the reality that Jero has no claim against BlockFi.
And the debtors would respectfully request that your honor disallow these claims in their
entirety. All right. Is that it at this point on your end? Yes, your honor. I'd see the
podium to Mr. Jero for his position. Thank you. Mr. Jero. Good morning, your honor. Good
morning. I'm a self-represented creditor attorney and practicing in the law of California. And
I practice law with my father over here. We have a little real estate practice, just him
and I. Your honor, I have a presentation prepared, but I want to prioritize your questions. So
please feel free at any time to ask questions. And I don't need to read any of the prepared
remarks. If you just want to address your questions, we could do that if you'd like.
No, I never hesitate in asking questions. I'd rather hear from you and be able to listen
and glean if there's any issues that I've missed. So feel free and the presentation
is fine. Sure. Absolutely. Your honor. Is it possible if I was share my screen to show
the documents? Let me ask those who know far better than I how to do it. You should be
able to do it now. Oh, great. Thank you. All right. Oh, OK. I was informed by my Zoom software
that it would require relaunching the Zoom. So I will not I will for convenience of the
court and the parties, I will not relaunch the Zoom. Instead, I would rather proceed
perhaps with with an oral. I'll make primarily an oral presentation if that's fine. That's
fine. OK, very good. When BlockFi was applying for its California Finance Lender License,
BlockFi was informed multiple times in writing that it cannot under California Financial
Code Section 22009 retain possession of Bitcoin securing its loans. If does the does your
honor have the exhibits available in front? Yes, you could just create site. Do you want
to have number? Sure. Tab number, tab number 14. All right. And for everyone's reference,
this is these certification of George J. Jarreau, which attaches the proof of claim as exhibit
a, I believe, or exhibit one. And this is attachment 14 to the proof of claim. This
is a copy of BlockFi's Finance Lender License. The license states in part that pursuant to
the California financing law, that BlockFi may engage in the business of finance lender
as defined in said law. That is a incorporation by reference of the next page in tab 14, which
is financial code section 22009. This statute defines the business of a finance lender and
in relevant part, it states a finance lender includes any person engaged in the business
of making consumer loans or making commercial loans. The business of making commercial loans
or commercial loans may include lending money and taking in the name of the lender or in
any other name in whole or in part, a security for a loan, any contract or obligation involving
the forfeiture of rights in or to personal property, comma, the use and possession of
which property is retained by other than the mortgagee or lender, et cetera. That language
of exclusion, use and possession of which property is retained by other than the mortgagee
or lender, that language is not mere surplussage. That language, language of exclusion, conditions
and limits the general grant of authority, which is made with the word may, which is
permissive, but the phrase other than is not permissive. The phrase other than construed
in the statute as a whole only can arrive at one reasonable construction, which is that
a lender may either have a security interest in personal property or use and possession,
use or possession, excuse me, of personal property. It cannot have both at the same
time. The finance lender cannot have a security interest and use or possession of the property.
Of course, Bitcoin constitutes personal property. I don't think there's any dispute about that.
It's certainly not real property and it certainly is property. Now, BlockFi was informed of
this prohibition and I will refer the court to tab number six, please. And for everyone's
reference, each tab refers to an attachment to the proof of claim. So this would be attachment
number six. On the third page of this tab, which has a base number of 24, the second
sentence that's typewritten in this application, it says in accordance with California financial
code section 2209, which is a typo, they meant to say 2209, BlockFi will take in the name
of the lender in part a security for the loan, possession of each borrower's assets. That
is an incorrect interpretation of the law because the lender is not allowed to take
possession of the borrower's assets. The lender is allowed to take a security interest in
personal property, which the lender does not use or possess. Now, this could have been
an innocent misunderstanding, but after two admonitions from the Department of Business
Oversight, which is now known as the California Department of Financial Protection and Innovation,
the admonitions are present in tab seven. That's a letter dated March 28th. At the bottom,
the last paragraph on the first page of that tab, the collateral must remain with the borrower.
Your response indicated here the department quotes BlockFi. And the next page on the top
of the page, it says, this date stamps 27. This is not allowed under the California Financing
Law, CFL for short. The collateral must remain with the borrower. Moreover, the applicant
cannot hold the borrower's digital assets as collateral. Based upon the business plan
and explanation provided, the applicant is conducting or will be conducting activities
not authorized by the California Financing Law. That was the second admonition. The third
admonition was in tab eight, which is a letter dated April 6th, which once again contains
a substantially similar admonition at the bottom of the first page. This handwritten
no on the left margin, that's the way I received the documents directly from the Department
of Business Oversight. Perhaps the person at the department indicated that this requirement
was not fulfilled. Tab number nine, if your honor is so inclined, because I know I'm moving
a little quickly, but I want to get to the most shocking exhibits. This is a letter dated
April 10th, which once again has a similar admonition that BlockFi cannot possess collateral
securing its loans. And here in the last paragraph, the department sets forth California section
22009 in its entirety. Then on the next paragraph, the department says your email, referring
to BlockFi's email dated April 10th, 2018, indicates reference to a different law, which
was the Uniform Commercial Code, as we will see in the next attachment. And not the California
Financial Code. Quote, I do understand your confusion. However, we have obtained legal
counsel and the laws of the California Commercial Code do not apply or trump the laws under
the California Financial Code. Therefore, the business plan and method of operation
are not allowed under the California Financing Law. The collateral must remain with the borrower.
Applicant cannot hold the borrower's digital assets as collateral based on the business
plan provided it's not allowed. Let's in fact see that email dated April 10th and find
out what was said. And that is an attachment 10. Oh, I'm attachment 10. Yes, attachment
10. Attachment 10 is actually an email chain. So the first email here, well, let's actually
go sequentially here. Let's go to the third, I'm sorry, the fourth page. The fourth page
or the fifth page under attachment 10. I will paraphrase. Essentially, what has happened
was that on April 10th, 2018, an attorney for BlockFi working on behalf of Monat Phelps,
a law firm in California, perhaps they are also present on the East Coast, was attempting
to explain why he believes that the language that we saw earlier, which we, which I posit
is not mere surplusage, because we must give effect to every clause and every word if possible,
that he claims that that language is a vestige. That's a quote, a vestige of the law, meaning
that he's essentially arguing that the legislature should have or intended to repeal the language
and that it should be ignored. Essentially, there is a reference made to the Uniform Commercial
Code's provisions that allow a secured party to secure or to perfect their security interest
in collateral by taking possession of the collateral. However, that code section, which
is Uniform Commercial Code section 9-313, under official comment 7, that code section
says that it does not create a right to take possession. Furthermore, the Uniform Commercial
Code has an express reverse preemption provision. And why do I call it a reverse preemption
provision? It expressly states that it does not authorize or validate any provision that
violates another substantive law. And here, the substantive law is a statutory law. Now,
if I could refer this court to the first page of Exhibit 10, Tab 10, I'm sorry, Attachment
10, I meant to say. After the letter that we saw from April 10th, BlockFi sends an email
on April 11th. And in the introduction, it says, the phone call we had yesterday was
extremely useful. So after the letter, or on the same day as the April 10th letter,
there was a phone call. Then in the paragraph entitled, Updated Business Plan, with an underscore
underneath it, BlockFi says that now it has revised its business plan. And as part of
their underwriting, they will prescribe value. This is the second paragraph under Updated
Business Plan, Bates Stamp, page 35. And under the Updated Business Plan subheading, the
second paragraph, it says, BlockFi lending will make one year loans. I'm going to skip
over some language here. As part of our underwriting, we will prescribe value to commercial and
consumer applicants holdings of cryptocurrencies which they possess. In other words, BlockFi
has now updated its application to say that the borrower will possess the digital assets
securing the loan. They were admonished that they cannot retain use and possession. They
sent an email. They had a phone call. They updated their business plan in writing. This
was the last update of their business plan that I have seen. And although I did not receive
these documents from BlockFi, because BlockFi would not provide me with these documents,
BlockFi has admitted in other pleadings that these are genuine. They are directly from
the Department of Business Oversight. And this was the last written update to the application.
I will move now to attachment 11, tab 11. This is a request for interpretive opinion.
The Commissioner of the District of Staten has a point to issue specific rulings in writing.
And there is a regulatory section that defines that authority. It is for this Court's reference.
You don't need to look into this. It is title 10 of the California Code of Regulation, section
250.12, subregulation A. And in part, this regulation states that a request for an interpretive
opinion shall be made in writing. It shall fully set forth the questions presented in
the particular facts and circumstances upon which the opinion is requested. Each interpretive
opinion, determination, or specific ruling is applicable only to the transaction identified
in the request, therefore, and may not be relied upon in connection with any other transaction.
According to the request for interpretive opinion, in this request, Attorney Charles Washburn,
on behalf of Minnatt, Phelps, and Phillips, LLP, sets forth the same argument that was
set forth in his email that we saw a few moments ago, which essentially states this language
does not prevent us from taking possession of collateral. He admits that BlockFi is going
to be possessing the collateral. Or in this interpretive opinion, he says that his client
would like to take possession of the collateral. And the part that I would like the Court to
see is on page 8 stamp. Pardon me one moment. I apologize because I had highlighted the
electronic version I was planning on presenting it on the screen for all of us. Okay, 8 stamp
page 44. This is the second full paragraph. It starts with the words in a letter. Okay,
here the attorney for BlockFi is acknowledging actual receipt of that letter dated April
10th, which had the strongest admonition in the series of letters. And he goes on to acknowledge
other admonitions that we did not see in the record. For example, on the second full sentence
starting with other communications from Department of Representatives to BlockFi have similarly
stated that a finance lender may, quote, never hold the assets of California borrowers it
makes loan to under the California finance lender license, end quote. Quote, assets collateral
may not be held by BlockFi or any other third party, end quote. Quote, the collateral, that
word is eligible, has to remain with the borrower. And the California finance lending license
does not permit you to take possession of the collateral. The reason why this is important
is because the attorney for BlockFi is acknowledging actual notice of this prohibition. It's an
implied prohibition, but a prohibition nonetheless. Okay. Now, was the department perfectly correct?
Well, the statute is our guidepost because what the department says is not necessarily
what this court must accept. This court should independently construe the statute. However,
upon the independent construction of the statute, if this court finds that BlockFi's interpretation
of the statute is unreasonable, then under an authority cited in the briefs, Safeco Insurance,
that it does not matter what the subjective intent of the party was. And that's very common
under these willful provisions imposing civil liability that an objectively unreasonable
construction of a statute means that there was a willful violation of that statute. Here,
of course, we have actual notice of the prohibition. And I think that it's pretty clear that this
was addressed by the executives. Something I should have pointed out in the emails was
that the founders and chief executive, Zach Prince and Florian Marquez, were copied on
the email from Washburn to the department and that Florian copied, Florian Marquez sent
the email to the department updating the business plan. So this was something that the executives
knew about. Florian Marquez, which by the way, there's absolutely nothing personal about
this case. If you ask my opinion, I think that these were just, they were just trying
to do this business uniformly throughout the states and they wanted to, they didn't want
to make a whole change to their business model just for California. But under California
law, the legislature in California has said that this business model was not allowed.
Let's flip now to attachment 13. Let me just stop you. I certainly hope we're not intending
to go through all 31 of them. Absolutely, Your Honor. Yes. So that's my gentle nudge
to that you go to the heart of the arguments because I've read your papers and I understand
all of what you're submitting. Absolutely. And I will in fact, according to my notes,
I only have two more attachments that I'm going to discuss and then I'm going to focus
on the reply. I will, I will try to make it very concise. Thank you, Your Honor. Okay.
At the end of the request for interpretive opinion that we were just looking at, Washburn
says that if the department reaches a preliminary conclusion that block, I cannot retain possession
of collateral, that he be permitted to withdraw the request for interpretive opinion and attachment
13 shows that according to the department of business oversight, that no interpretive
opinion was ever issued and that Washburn did withdraw the interpretive, the request
for interpretive opinion. Okay. Now let's jump to the dispute here. Washburn's declaration
says that he received a phone call from the department and they told him, they said, we
agree with you, but we're not going to issue anything in writing. We're just going to issue
your license. Okay. The enhancing law does provide a safe harbor for a lender that relies
upon a general rule, regulation or specific ruling of the commissioner. And that's financial
code, California financial code section two, two, seven, five, four, two, two, seven, five,
four. And it states in relevant part that quote, any act done or, or omitted in good
faith in conformity with any written general rule, regulation or specific ruling of the
commissioner, end quote, shall not subject the finance lender to liability. That has
a three element test embedded in it. Number one is that there must be a general rule regulation
or specific ruling of the commissioner, which is the product of a quasi legislative or quasi
judicial process. In this case, it's undisputed that there was no quasi legislative or quasi
judicial outcome or no final product of that process. And furthermore, that there was no
writing that authorized the use and possession of collateral. Number two, block five must
act in conformity with the ruling. And as we saw earlier, the license incorporates section
two two zero zero nine, meaning that block fight did not act in conformity with its license.
And number three, the acts must be done in good faith. And I would posit that an act
that is based upon an unreasonable construction of the statute is not an act in good faith
by as a matter of law. Okay. Let's discuss the declaration of Jan Lynn Owen, who impressively
was actually the commissioner at the time that that block five applied for its license.
This declaration was made by her in twenty twenty one while she was working for the same
law firm that represented block five in its application to the to the Department of Business
Oversight, Minnette Phelps and Phillips, LLP. She works for the same law firm that Washburn
works for. And she did not make the declaration in any official capacity. She admitted that
she had no personal knowledge of the block five application. And she says as a matter
of her personal opinion, she says that this is common in commerce and that that I'm that
Mr. Drew is incorrect in his reading of the law. Okay. Now, I will tell you that according
to the Horn Book, which I've which I've referenced and of course, I always have citations, but
I'm going to I'm going to omit the citation here. The Horn Book says that actually commercial
transactions where the letter takes actual possession of the collateral is actually a
a small minority of all commercial transactions. Most of the time when we think about a margin
loan, it's when a bank financial institution or securities dealer is using and by the way,
those are all independent authorizations and block five is not does not qualify as any
of those authorizations. It's undisputed that my loan was made solely pursuant to the California
Financing Law. And those provisions, those are highly regulated transactions. They are
done with less volatile instruments. There are lots of oversight measures, lots of regulators,
lots of statutory provisions that protect in that situation. The California Financing
Law does not have any provisions dealing with a lender's possession of collateral. The
pawnbroker law does. And the pawnbroker law states that under under California law, this
is actually California financial code section two one zero zero zero defines a pawnbroker
as a lender receiving goods to secure a loan. And block fi argued in its reply that the
test for a good is whether something is movable. And I agree. I just believe that Bitcoin is
movable. The reason why I brought up the pawnbroker law is because the statutory structure is
also important to keep in mind when construing the independent independent statutes. The
California pawnbroker law has provisions that protect the bar was it has a statutory right
of redemption for the entire loan term. The loan can therefore not be accelerated. The
collateral cannot be sold before the expiration of the loan term. The California Financing
Law has none of those safeguards. It was not intended to govern or protect a borrower in
the situation where they are giving their possessions to collateral. Now, does the court
have any questions or can I I will if at this time or I could breeze through the rest of
the presentation if you would like. Why don't you breeze through the rest. Yes. And then
if I have questions, I will ask. Thank you. Thank you so much.
The declaration of Jamlin Owen does not qualify for the safe harbor under the California Financing
Law because it was it was a writing that was not a general rule regulation or specific
ruling of the commissioner and it was issued after the foreclosures and therefore block
five could not have conformed in good faith to the writing, meaning that for there to
be a writing that is sufficient that block five could conform with that it would have
to be prospective conformity, not retrospective conformity. I assume that there's no writing
because block five would have produced it if they if they had a writing notably absent
from the record is that the Department of Business Oversight had never issued a writing
people. Well, I've not seen one. I've not seen any writings that justify this this this
deviation from the statute. I'd like to also point out that the reply does not dispute
that block by took possession of the Bitcoin. They do not dispute that block five charged
an unlawful amount by retaining the proceeds from the Bitcoin. The proceeds from the Bitcoin,
which would have been known to the common law is the use of the Bitcoin. The use belongs
to the borrower under the uniform commercial code section nine dash two zero seven sub
section C. Well, let me stop you there. Doesn't nine dash two oh seven have the exception
that if you contract otherwise, and that that section has an exception for consumer goods.
So you'd have to establish that it's a good and that's a consumer good. I saw in your
memorandum only one reference to a case that referred to digital assets as a as a good.
You reference electricity cases which are all over the place for there's half probably
a dozen on each side of the arguments whether electricity is a good. But certainly under
the uniform commercial code, goods exclude investment property, which are securities
certificate or otherwise. And there are more cases and that have argued that cryptocurrency
or securities. There are cases that have argued and take the position that they are general
intangibles and including payment intangibles. But other than the one case you cited, are
there any other cases that suggest that they are a good let alone a consumer good? May
I address those those questions in order? Yes. At first, your honor, you mentioned nine dash
207 can be contractually waived. That is true. Here there was no contractual waiver. The
loan does not allow block fight to lease the Bitcoin. It does not allow block fight to
retain the proceeds from the Bitcoin. It does not allow block fight a charge the proceeds
from the Bitcoin. It does not disclose that there will be a charge of the proceeds from
the Bitcoin, which should be disclosed. It must be disclosed under the Truth in Lending
Act. And if it cannot be known with certainty, it must be estimated. OK, so I would like
to make very clear that that the rule under section nine dash 207 is the operative rule
that we are playing with regarding Bitcoin's categorization under the uniform commercial
code. That is it's an interesting question. It's potentially relevant to the pawnbroker
issue. It does not bear at all under the financing law. The financing laws we saw makes reference
to personal property. And we know that Bitcoin is personal property. Now, whether or not
Bitcoin is a good for purposes of the pawnbroker law, that's an interesting question. And the
reason why is that we know Bitcoin is not a service. We know it's not a security. We
know that it's something that can be actually possessed. It can be actually received. And
the pawnbroker laws are in. If we say that Bitcoin is not a good, then it's it's the
way that a good is defined as it's defined almost as a chosen possession. It's something
that could be again. Let me stop you because it's isn't it more than just being a good
doesn't California's regulation or statute. And I'll refer to the business and professionals
code BPC 21627. Doesn't it have to be a tangible, good, tangible personal property? Let me just
back up because when I look through this BPC 21626 defines second refers to secondhand
dealers and it refers to those in whose business includes buying, selling, trading, taking
in pawn and accepting for sale or consignment, tangible personal property. So a secondhand
dealer includes all pawnbrokers, but pawnbrokers aren't all secondhand. All pawnbrokers are
secondhand dealers, but not all secondhand dealers are pawnbrokers. But for secondhand
dealers, it has to be tangible personal property. How is how is digital currency tangible? I
love that question because it shows how learned that your honor is. It's really a good question
because it's a secondhand dealer is very related to a pawnbroker. It's not a secondhand dealer
is not necessarily a pawnbroker. And as pointed out in the memorandum, a pawnbroker is necessarily
a secondhand dealer. I'm not so sure about that. Your honor, the pawnbroker is statutorily
defined and it has a separate statutory definition to a secondhand dealer. Well, I'm in fairness
to you. I'm reading this from the secondhand dealer pawnbroker licensing unit frequently
asked questions put out by the Office of the Attorney General for the California Department
of Justice. And a pawnbroker is also a secondhand dealer, but a secondhand dealer is not a pawnbroker.
And if you read and according to the definition includes pawnbrokers. So we go back to is
there a need for it to be tangible as a pawnbroker? We moved on beyond the UCC and we moved beyond
the financing law. Let's just focus now for the last bit on the pawnbroker element. Yes.
And also if we can before before we conclude, I'd like to also discuss the contract just
a little contractual redemption just a little bit. Your honor, California Financial Code
Section 21000 at Secwitter that contains all of the provisions that have to do with licensing
a pawnbroker defining a pawnbroker and regulating a pawnbroker. The business and professions
code does regulate secondhand dealers, but it does not set forth the licensing provisions.
And I don't believe it's incorporated by reference. I've done extensive research on the statutory
construction and legislative history. Your honor is correct that goods are sometimes
defined as intangible by the legislature. And a good example of that is on the memorandum
of law, which unfortunately came after all of the attachments. But your honor has obviously
read it because I think you referenced it earlier during this oral argument that in
footnote seven, I there are citations to California statutes that define a good as being tangible,
but there are also sections that define goods without reference to tangibility. And the
pawnbroker law defines good. I'm sorry. It does not define good. It does not say tangible.
If the legislature wanted a limited to tangible, tangible personal property, they could have
as your honor just showed with the business and professions code, the legislature is more
than capable of defining a good with reference to tangibility. And the legislature does say
tangible personal property in many different statutory sections. I've checked five different
dictionaries, and only one of those five dictionaries had a reference to tangibility. I believe
even I don't have the definition in front of me, but I even believe that the reason
why I'm citing these old cases is because the language, the word goods, this is actually
a statutory language that's been carried on since since England, this this statute goods
was imported from England. And that's why I'm citing to laws under the common. I'm citing
to the common law, which I think we may assume the common law definition of a good is what
is what the legislature intended without further modification. So I know your honor is the
pond broker laws may be not the strongest argument in your honor's opinion. And I respect
that. And I understand that. But may I talk about the contractual right of redemption?
Is that yes. Okay, let's move on to that. And then I'd like to hear from debtors council.
Absolutely, your honor. Thank you. I appreciate that. The soon after very soon after the liquidations
block fi and I are communicating. And I say, Can I take out a an unsecured loan to buy
back the Bitcoin and block fi says no, we can't do that. We can only reverse the liquidations
if you come up with enough money. This was within days of the liquidation. Now I have
to this is an important note. The standard of review. The burden of persuasion, as your
honor discussed earlier, the underlying burden of persuasion on the on compliance with the
uniform commercial code, chap, Article nine, chapter six, that burden of persuasion is
on block fi under California law. And block fi has not produced any evidence that the
sales actually occurred has not produced any evidence that the that the liquidations were
commercially reasonable. It's I'm for all we know, they accepted the Bitcoin in partial
satisfaction of the loan, which is void on in a commercial transaction. I'm sorry, I'm
sorry, not a commercial transaction in a consumer transaction. Yes, that's right. And why is
this important? It's important because I don't have access to that information. Block fi
should have produced it in its objection, it should have produced it in its reply. For
all we know, there's there's no way of knowing that these these liquidations actually occurred.
So when I was approached afterwards asking to give more money or Bitcoin to reverse the
liquidations, we engaged in negotiations. And during the negotiations, I mentioned that
I was I was interested in reinstating the loan at a price of $7500 per Bitcoin, the
ultimate price of Bitcoin at the time of the acceptance of the offer was 7700. And during
that time, I informed block fi that I was engaged in the due diligence phase with a
with another lender. And within about a month thereafter, I accepted the offer. And obviously,
one month is a reasonable amount of time to engage in a due diligence phase with a lender.
Block fi provided the formula for reinstating the loan, I accepted the offer in accordance
with the formula. And soon after that, block fi said that they were not going to honor
the contract to reinstate the loan. And as a result, that's when the litigation ensued.
The price of Bitcoin was not a factor in this other than how it affected the formula for
reinstating the loan. But more importantly, I think that there's something not right about
about the offer to reverse the loan. And it wasn't a modification of the loan contract.
It was a new contract. It was a it was a written modification. And it was signed. It had an
email signature, which is sufficient in our day and age, an email signal, people do not
have to transact business through facsimile anymore. And there was an offer and acceptance
to reinstate the loan. Although the amount of the proof of claim is prima facie valid.
If this court is inclined to specifically specifically per force, that contract to reinstate
the loan, I think that that's what everybody agreed to at that time. And the court would
be justified in overruling the objection to the proof of claim. We have not seen enough
evidence to to negate the prima facie of validity and amounts of the proof of claim. I think
that it was very clear that there was actual notice of the provisions of the law. There's
only one reasonable construction of financial code section two, two zero zero nine. And
if there is another if there is another reasonable construction, I'd like to hear it because
the way that I read the law and I imagine that your honor would read the law as well.
It's it cannot be changed unilaterally by any party to this litigation. It was enacted
many years ago. And that's that's what I request is that this court overrule the objection
and enforce the California financing law and the California. This was not only a violation
of the statutory definition, but a violation of the license, which incorporates the statutory
definition by reference. Any questions before I check my notes in a scramble to see if I've
missed anything? No, not at this junk. Well, let me ask this with respect to whether or
not a modified loan offer was made and accepted. There were no steps afterwards. In other words,
did you put up collateral? Did you follow through? Did either side follow through on
the obligations that would have been required under reinstating or issuing a new loan? Yes,
your honor. I tendered the Bitcoin and a tender is what's required. I did not have a Bitcoin
address to send it to block. I would not provide a Bitcoin address to send it to. That's that
is the state of affairs. By tender, you mean what specifically did you do? Oh, great question.
I refer to that email for the sports reference here. Attachment 16. Beat stamp page 89.
This page, the top email is the one that says I'm in the due diligence phase with the traditional
source of capital. That was May 1st, 2020. The next email block five says that's great
news. Here's the formula to reinstate your loan. Here's an example. The payment would
bring the principal balance. That's under his example. Then the next email, by the way,
that email with the formula was from March 24th, 2020. I apologize. I read the date on
the top of on the header of the page, but that was the date that this was printed. That
was not the date of the email. The date with the formula was from March 24th, 2020. Then
April 27th, 2020. I accepted the offer. I provided the formula. I calculated the amount
of pay down and I said I will send the Bitcoin today. Please confirm block five's Bitcoin
address. That's a tender of performance. So we're addressing the email of May 24th
and your response of April 27th. Correct, your honor. All right. Thank you. Let me hear
Ms. Chavez. Thank you, Mr. Jerome. Thank you, your honor. Thank you, your honor. Mr. Jero
has indicated that his exhibit should be considered shocking, but nothing about this case or the
claims or the exhibits should be shocking, your honor. Mr. Jero is not shocked by the
terms of the private written loan agreement between the parties or block five's exercise
of its rights under that agreement. Nor did he appear shocked in the emails by the liquidation
notices from block five. And again, I would emphasize that this was a private agreement
between sophisticated parties. Jero is not charged with enforcing the laws of California
or any other state. And as the evidence clearly indicates for the license itself, everything
Mr. Jero is relying upon were pre-licensing discussions, but the evidence in the Washburn
declaration, the Owen declaration and Judge Strobel's ruling in Jero three clarify that
the license was in fact issued to block five on August 20th, 2018. The department advised
that it agreed with the block five's analysis of the California lending law, including section
22, two zero zero nine. They made no request for block five to change their business plans
and they did decline to issue a formal interpretive opinion because they already issued the license
and the license was their indication of approval of block five to act as a lender. And the
Jero three ruling, your honor, Judge Strobel says that section 22, zero zero nine does
not explicitly prohibit a finance lender from using or possessing collateral and that the
authority charged with issuing lending licenses like the department may be entitled to deference
of their interpretation of the statute. And we think that interpretation is the correct
interpretation, your honor. Nothing again shocked Mr. Jero other than he was just unhappy
with the outcome here and we can understand that, but he signed a written agreement with
terms that allowed block five to liquidate the collateral when the loan to value ratio
was not in compliance. It's clear what happened here that there was no amendment or modification.
Section 22 of the loan agreement expressly states that that was the entire agreement
among the parties and then section 29 provides that any changes would require a writing signed
by the parties and that was not indicated in the emails and the debtors have carried
their burden and it's Mr. Jero's burden to establish that there was some new contract
or new loan originated and he has not done so. The claim that Mr. Jero is asserting is
of a substantial size, which is why the debtors have been proactive in objecting to it to
eliminate the continued use of estate resources to defend against a baseless claim. We respectfully
request that your honor sustain our objection and disallow the claims in their entirety.
If I can answer any questions your honor has, I'm happy to do so, but we believe that your
honor is fully capable of making this decision based off the papers and the arguments today.
Thank you. All right. Thank you, Mrs. Chavez. Mr. Jero last comment.
Oh, you're on mute. Absolutely, your honor. Thank you. I wanted
to just quickly address some of Mr. Chavez's points here. I want to say that deference
requires two things. It requires compliance with the Administrative Procedure Act and
it requires something to defer to. Here there is nothing to defer to. What this is referred
to in California is an underground regulation. An underground regulation is something that's
done in secret and it's actually void. It's not entitled to any deference. Regarding the
size of the claim, this claim simply just represents my Bitcoin. The size of the claim
is much more massive for me than it is for BlockFi and I didn't ask for any damages.
I'm asking for a return of the Bitcoin. I'm asking for a return of the Bitcoin add on
the same treatment that any other debtor in my situation would be entitled to. And lastly,
regarding Jero 3, that tentative ruling expressly states that it is not a final determination.
The tentative ruling is expressly tentative and although it was adopted by the court,
it is not preclusive. I respectfully submit that this court should do its own independent
statutory construction of 22009 and Your Honor will hopefully arrive at the same conclusion.
Thank you, Your Honor. Thank you. So just that we're all working under the same assumption,
if I were to allow the claim for roughly, it has a value roughly of 12 million, I guess,
400 Bitcoin, right? May I make a comment, Your Honor? Yes. The dollar value of the Bitcoin
on the day of the petition was about 6.9 million and the reason why I'm asking for an in-kind
amount is because just because I want to qualify for an in-kind distribution just like everyone
else. So on the day of the petition, Bitcoin was trading at about $16,000 and so you're
seeking 400 coins roughly at that amount. Yes, Your Honor. And I will add that if Your
Honor is inclined to specifically perform the contract for redemption, I will concede
that this court may subtract the principal amount of the loan and the interest accrued
thereon, which would be about $2.5 million. Okay. How, and let me turn to Debtors' Council
under the proposed plan. How are other BlockFi loan obligors being treated? Well, first and
foremost, Your Honor, just would like to emphasize that Mr. Jarreau instructed BlockFi to liquidate
the remaining collateral and pay off his loan. So to give him any type of claim would be
a double recovery because he does not any longer owe a debt to BlockFi and he withdrew
his remaining Bitcoin from the platform. But if he were to have an allowed claim, he'd
be treated as a general unsecured creditor under BlockFi lending, which provides for
a cash distribution, not an in-kind distribution. Right. And I believe, according to the disclosure
statement, the anticipated return is in the range of 30% or so, depending upon future
litigation. Certainly. All right. Okay. Thank you. I will, given the upcoming confirmation
hearings in September and the voting deadlines, I will issue a ruling, at worst a preliminary
ruling at some point next week on both the motion and the cross-motion. I might supplement
it with a more extensive ruling. I will, as I do with all parties, urge the parties to
take that time before I rule because when I rule, there'll be a winner and a loser.
Take the time to see if it makes sense, especially in light of the questions I asked at the end,
whether it makes sense to resolve this matter without the court issuing a ruling. I'll leave
that for you all to consider. I thank you all for your argument. And Mr. Juro, did you
have another question? Yes, Your Honor. Regarding the informal resolution, I would like to say
that I've asked BlockFi to mediate the issue. They do not want to mediate. And therefore
I would ask the court to order this to a mandatory settlement conference so we could have meaningful
settlement discussions. Well, every dollar that I direct BlockFi to expend is coming
out of everyone's pockets, all the other creditors. I am leery of doing that at this juncture.
You certainly start with phone calls on your own. You don't need a neutral. You're all
professionals. And I think you can, by my questions, anticipate the direction or if
not, take into account what the dollars are at stake and try to reach a resolution. If
you need more time, you'll reach out for the court. But I'm not going to direct the mediation
at this point. Thank you all. Court is adjourned. Thank you very much, Your Honor. Thank you.