My first job is to make sure I don't push the wrong button and undo everything everybody's
worked on this morning.
This is Seth Shapiro from the United States.
I can hear you.
I can hear now.
Alright good morning everyone.
We'll start shortly.
Good morning your honor.
Good morning.
Too many screens.
Okay.
On an omnibus hearing date I wouldn't take appearances, it would take too long.
But today since it's limited parties I think it's worthwhile.
Let me start with those who are in the courtroom.
Let me have appearances.
Good morning your honor.
Richard Katowicz, Haynes-Aboone, proposed counsel for the debtors and debtors in possession
with me as my partner Richard Anigan.
Good morning.
Good morning your honor Felicia Ginkol-Shots, PC, proposed counsel to the debtors as well.
Thank you.
Good morning.
Good morning your honor.
Robert Stark, I'm here with Mr. Jonas and Mr. Owlett from Brown-Brednick.
Also Mr. Stoltz from the Genova-Burns.
The gang's back.
Alright.
The gang's back.
Proposed counsel for the official committee of unsecured creditors.
Welcome.
Good morning.
Good morning your honor.
Jeff Sponder and Lauren Bielski from the office of the United States trustee.
Alright good morning.
Ms. Dalton, how are you?
Good morning your honor.
Carol Walton of course did not appear on behalf of George Giroux on the Giroux matter.
Alright.
Thank you.
Good morning your honor.
Edward Schnitzer from Montgomery, McCracken, Walker and Rose on behalf of Samuel Bank-Nefreed.
Good morning.
Good morning your honor.
Brian Gluckstein along with James Bromley from Sullivan and Cromwell on behalf of the
FTX Trading and Affiliated Netters.
Thank you.
Good morning.
Good morning your honor.
Joshua Dorchak with me, Matthew Ziegler, Morgan Lewis and Bakia Zabalpi on behalf of Angela
Barkhouse and Tony Shukla who are the joint provisional liquidators of the emergent FTX
entity.
Great.
Emergent Fidelity Technologies Limited.
Thank you.
Mouthful.
Good morning your honor.
To raise jarredy and with me is Caitlin Walsh from Mintz-Levon on behalf of Defendant Merrick's
Capital Markets Limited, formerly known as ED&F Capital Markets Limited.
Great.
Thank you.
Those who are appearing remotely, if anyone wants to enter appearance, during the course
of the hearing if you're appearing remotely and wish to be heard just use the hand raise
function.
I'll do my best with my law clerks to spot you and have you be heard.
Let me start.
Mr. Jero, I see you.
Your hand raised.
I think you need your speaker on.
I'm still not hearing.
I hope it's, I don't know if it's on my end.
We can hear you, Judge.
Okay.
Well, this may be problematic, I don't know if it's Gero or Jero, my apologies, but I'm
not hearing you.
I hear others on remote.
Let me go back to others and let's see if it's yours or on our end.
Mr. Sarota, good morning.
Good morning your honor.
Michael Sarota, Cold Shots PC, co-counsel for the Deggers.
And I see Mr. Susberg, good morning.
Good morning your honor, Joshua Susberg, Cochran Ellis, proposed counsel to the Deggers.
I would like, if your honor is okay with it, to provide a brief status update at the outset
and I appreciate your honor entertaining a remote appearance.
Thank you.
Not a problem.
I'll get you when we're ready to start.
Mr. Adler.
Good morning your honor.
David Adler from the Porter and Inglis.
With me on the phone, I believe is also Lisa Bovdahl.
We are proposed efficiency counsel for the official committee.
Alright, thank you.
Good morning.
Mr. Pasquale, if I'm pronouncing it correct?
You are your honor, thank you.
Ken Pasquale for the official committee of unsecured creditors in the FTX trading case.
I'm with the firm of Paul Hastings.
Great, thank you.
Good morning.
Ms. Koski Apopper, I know I'm butchering that.
You actually got it exactly right, your honor.
I'm Jen Koski, Chapman Pepper, on behalf of the ad hoc committee of the loyalty account
holders.
Alright, great.
And Ms. Parlin?
Good morning your honor.
Barbara Parlin, holiday night for Silvergate Bank.
Thank you.
Alright, I think I've demonstrated why we won't do that again on the bus days.
Alright, so.
Your honor, this is Mr. Shapiro.
I, Steph Shapiro, we are not appearing in the adversary proceeding on behalf of the
United States today, as we are not a party to that proceeding, but I did file a notice
of appearance in the main case and I am here to answer whatever questions the court might
have about the notice of asset seizure that we filed last week in the main bankruptcy.
Thank you.
Good, I'm glad to have your appearance.
I certainly think it's going to be relevant.
Alright, Mr. Jarrow, you want to try it again?
Good morning your honor.
I am appearing with audio via remote, the phone and on video on the computer.
Thank you.
Alright, thank you.
Mr. Banker?
Good morning your honor, David Banker, my company is cracking on behalf of the family
of our deceased, Mr. Schmitzer has already appeared in person and he is now admitted
to the court.
Thank you, your honor.
Alright, thank you.
And I think I have everyone.
Alright.
Let's see.
Now let me turn back to Mr. Suspert.
We can start with the status since we are here on the second hearing in this case.
Thank you your honor and again for the record Joshua Suspert from Corcoran Alice.
If I could ask your honor to share the presenter role with Mr. Jacobson from my firm, we can
put the slides on the screen.
Alright Maria.
Sure.
Easier said than done.
You're setting up an easel, Josh.
The modern marvels of technology.
Well, with about 150 remote appearances, it's hard to find people.
Mr. Jacobson, you want to raise your hand?
There he is.
Alright Mr. Jacobson has presenter status, he needs to share it on his end.
And your honor, as you mentioned, today was supposed to be our omnibus second day hearing.
Unfortunately, fortunately and not criticizing, but it took several weeks for the committee
to ultimately be appointed and that was not until December 21st.
And obviously we want to get off to a good start with our committee.
They need some time to digest some of the relief that has been sought.
Some will take more time than others.
The goal here is to be as consensual as possible, which I'll talk about.
And as a result, we moved the hearing today and look to the relief that we were seeking
next week and will likely be seeking another hearing from your honor for certain relief
that I'll get to in a moment.
Mr. Jacobson, if you could share the slides.
My apologies, your honor.
The Zoom is still calling me that the host is disabled participants screen sharing when
I try and share my screen.
Alright, we need to take a break.
Do you want to see if we have Andrew?
Our apologies, we're just going to take a couple minute break and get our IT person
up here.
Alright, we are ready to go.
See material up on the screen.
Mr. Susberg, it's your podium.
Thank you, your honor.
Again, for the record, Joshua Susberg, Kirkland and Ellis wanted to provide the court with
a brief status update as well as a preview of some items in our syllabus and schedules
that I think are appropriately served up best in a live conversation.
And that's the roadmap as you'll see on slide two.
And we'll get through this fairly quickly so that we can get to the proposed agenda
items which there are two and Mr. Canowitz will be handing those for the company.
So progress since the first day hearing, your honor.
Looking at slide four.
I think this is important.
We talked at the first day hearing about the PAP 4 and obviously we filed a Chapter 11
plan on a standalone basis on the very first day of the case.
But the thesis all along has been that Mollison Company, our proposed investment bank, will
run a comprehensive marketing process for all, substantially all, or some of the company's
assets.
And that process is well underway.
As you see on the slide, 106 different parties, both internationally and here domestically,
have been contacted and are at various stages signing confidentiality agreements and ultimately
getting access to information.
And as we note at the bottom of the slide, we do intend to file a motion seeking approval
of bidding procedures so that we have a very strict and robust process that people can
understand and look to as we market these assets.
But importantly, and as I'll come back to in the context of committee discussions, it
will be incumbent upon the company to demonstrate from an overall business perspective that
there is in fact a potential standalone option.
And the only way in which we'll be able to assess a truly value maximizing path forward
is to understand the viability of that standalone and be able to compare it to the results of
the auction process.
Hence the need for bidding procedures and hence the need for a lot of work on the company
side together with the committee.
And that will all come in due course.
On the next slide, Your Honor, and true to our word, we filed a motion a couple of weeks
after the filing to return money that is in the wallet function at the company.
We believe based on the terms of use that the proceeds and the dollars and the currency
in those wallets is the customers.
And as a result, our focus is on clients and getting those clients back their money.
And we filed that motion to put a stake in the ground.
We are closely coordinating with the committee and there are some diligence items that are
important to navigate including a preference analysis assessment and making sure that we're
holding onto funds that otherwise should not be leaving the system.
And so while we very much would like to have this heard on an expedited basis, we absolutely
respect the committee's right to better understand this, the ordinary course reconciliation and
the like.
And it may be more difficult than we expected to make certain distributions and not fully
turn on this function.
So we are going to continue to work through this with the committee with the goal of being
before Your Honor as quickly as possible so that we can put money back into clients' pockets.
And we understand that there have been some objections to this motion.
We will address those in due course.
I think they can all be reconciled and we're going to work with all deliberate speed to
get this up and running, Your Honor, with the committee's support.
Next slide briefly, just wanted to note we filed several second day motions as well as
retention applications.
Many of those will be heard next week.
Others will be adjourned dependent upon the committee's diligence and where they stand
as far as the relief is concerned.
But I did want to make sure to note for Your Honor what's to come.
There are some issues where we may have a tussle or two with the United States Trustee
that we are prepared to move forward on all the relief that we've sought, again, on an
expedited basis.
As I mentioned on the next slide, the United States Trustee appointed the Client Committee
on December 21st.
Nine individual clients appointed to the committee.
The committee went and quickly retained professionals, as you'll see on the next slide.
And the committee is being represented by Brown-Rovnik and three, Alamantis and Mr.
Adler, who I apologize, I forgot his logo on this slide.
Mr. Stark, who I know the court is familiar with, I go back a long time with Mr. Stark.
And we've had our fair share of disputes and disagreements, but there's never been a time
where I haven't been able to get to a resolution with Mr. Stark.
And we talk about this case being different than Voyager and Celsius and FTX.
And I think true to his word, Mr. Stark is committed to working with us to make that
a reality.
And I am happy to have him on the other side, again, someone I know, respect, admire, and
consider a friend.
And we look forward to working with the committee professionals as well as the committee, because
I will note it was important for our management team to be able to sit with the creditors
committee at the outset here.
And so the committee, again, appointed on December 21st, we had an in-person meeting
this past Friday at my office.
The entire committee was there, all of their professionals, I mean, by all accounts, everyone
who was there thought it was a very good, constructive meeting.
And it's the beginning of what we consider a very, very important relationship, unlike
a typical committee-fetter relationship, because of what's at stake and how these cases work.
And at the end of the day, we're serving our clients and they sit on this committee.
So looking forward to working with Mr. Stark and the team, and three, but we know extremely
well, that by Mr. Meiji and, of course, Mr. Appel.
Next section, Your Honor, is a preview of our schedules and statements.
We are filing sole prison schedules on the 11th of January.
And my style, as I told Mr. Stark yesterday, is not to bury a bunch of information in thousands
of pages and have people go on a treasure trove hunt to try to find what they may or
may not think is important.
And so today, Your Honor, I wanted to preview for you and for everyone else, I've previewed
this for Mr. Stark, some items related to insiders in the SOPAs and the schedules.
And I think it's important because, as we've seen in some of the other crypto cases, these
issues can become lightning rods, and it sure did in Celsius.
This case, as we've said, is unlike any of those other cases, and we are a completely
transparent operation and want to walk, Your Honor, through exactly what happened and how
insiders were treated and what went on.
On the next slide, I think it's just helpful to level set.
So this was the January to November timeframe.
And again, remember, the company had a settlement, a historic settlement with the SEC back on
Valentine's Day of last year, and that was then followed by the Terra Luna collapse,
which we spent a lot of time talking about, and then the Celsius and Voyager pausing of
withdrawals, which created mass confusion and obviously contagion throughout the industry.
In order to avoid having to halt withdrawals, right, BlockFi entered into an agreement with
FTX where FTX, on a junior basis, backstopped all of our client withdrawals.
And as you'll see, that led us to the ability to process more than $3 billion of withdrawals
between June 1st when everyone else was pausing their systems and the filing of these cases.
The issue and the problem was FTX-related and the now known fraud of FTX.
FTX got into a liquidity crunch.
Its native token fell off the planet Earth, and it filed the bankruptcy on the 10th, and
BlockFi was not long after.
On the next slide, and I think this is important, and obviously people can spend time with this.
This will be in our schedules and statements, and again, this is a preview.
But the management team at this company deployed their personal assets on the platform to trade,
like all other clients, earn interest or store currencies.
And what we decided to do in an effort to be completely transparent is put the name
of each executive and show the activity in their accounts on the BlockFi system each
month through to the file.
And I want to note, and I don't necessarily ever like to read anything, but the quote
at the bottom is incredibly important.
No member of the BlockFi management team withdrew any cryptocurrency from the platform after
October 14th, 2022, and no member of BlockFi's management team made a withdrawal greater
than.2 BTC in value at any time after August 17th, 2022.
Now, for those not familiar with Bitcoin, I think the way to conceptualize this is Bitcoin
was trading at $20,000,.2 BTC would be less than $4,000.
And I think the important takeaway here is that there was no situation where insiders
were pulling money off the platform on the eve of or anywhere near this bankruptcy file.
And that is super important.
One other note, and we have a footnote on this slide to this point, but in April of
2022, you'll see a rather large withdrawal by Mr. Prince, the CEO and founder, that was
to pay taxes.
And it makes sense, it was in April, the effectuated April 15th tax payment, but we wanted to be
crystal clear with the activity and how everything else worked.
The rest of the chart, when we talk about October and August, shows balances decreasing
because of the value of BTC.
As you see on the slide, how much it went down over the course of the year.
Next slide, just briefly.
I mentioned this before, but all of 2022, this company processed $7.7 billion of withdrawals
and from June 1st through the platform pause, again, when all the other cryptocurrencies
that failed were pausing withdrawals causing mass contagion, we processed $3.3 billion
of withdrawals.
And to put this all in context, as we say at the top of the page, the management team's
withdrawals are a tenth of 1% of the $7.7 billion in withdrawals.
So this is not the Celsius case where management extracted value on the eve of the file.
Next slide.
This, again, we talked about this crypto winner, FTX, and the fraud that was FTX.
Same thing happened, and I experienced it directly in the Voyager case where FTX stepped
in to try to save Voyager, only really to try to save itself.
But this was a deal that allowed us the ability to process withdrawals for customers all summer
in a very confused marketplace.
Again, this was a $400 million backstop on a junior basis that, again, allowed us to
process those withdrawals.
I mention this because on the next slide, the impact of the FTX transaction was significant
on the executives, the employees, and the shareholders.
The only way to raise money at the time was on a junior basis to protect the clients.
The company was, in fact, pursuing equity raises and could have pursued senior capital
on a secure basis, but it did the safest and the most viable thing, and it took the FTX
money, which would ultimately lead, as your honor knows, to a potential FTX transaction.
Importantly, though, the company needed to get stabilized after the FTX infusion, and
it created massive uncertainty amongst the employees.
And you see the 20% reduction in force, and you'll understand as we talk about it the
value that was lost for this executive team on pieces of paper from an equity standpoint
when this company had been valued at $6 to $8 billion just a couple months before all
of this.
And so it became important to implement a compensation structure that kept people at
the company so we could facilitate what we thought would be an FTX acquisition here in
2023.
And therefore, as you'll see the next bullet, in July of 22, the board of directors approved
really a three-prong strategy to help retain key employees.
In the next slide, we'll see each of the three prompts.
First, I just think it's worth noting that many employees had paid out of their own pockets
or otherwise got financing for shares or options that were all rendered worthless by the FTX
transaction.
So, prong one was to make these people whole, and in some instances, grow stuff for retention.
Number two, the board approved the retention program, as you see on the slide, offered
an opportunity to earn cash payments.
Because remember, most of these employees had been compensated in stock or options prior
to the FTX transaction.
And so up to 50% of their base salary could be earned if they not only stayed at the company
but met certain company-wide goals.
And as we note on the bottom, and I think this is important, that retention program
will discontinue.
No payments were made to insiders nor will any be made, and no insiders are included
in our proposed court motion, which the committee is in the process of building.
And number three, Your Honor, blocked by historically timed raises of compensation with capital
markets activity.
But because of the impact on the FTX transaction from a personal standpoint on all these employees,
increases in base salaries to ensure that people were maintained and stayed in their
seats became necessary.
And so as you'll see on the next slide, the first column is the equity, both vested and
unvested, that was lost at the time of the FTX transaction.
And some of the numbers are obviously staggering.
And it's unfortunate, but this is the reality in which we live.
We have a second column of 2023 retention payments that were put in place as part of
the FTX stabilization post the summer transaction.
None of these payments will be made.
And then we have a slide and a column talking about salary changes following the FTX transaction,
again, to help ensure that we retain critical employees.
And as noted at the bottom, the curve that we are seeking approval of has absolutely
no insiders included.
That was by design.
Okay, slide 17.
And Your Honor, you'll remember this timeline.
We had attached it to Mr. Renzi's first day declaration.
And I think this will be helpful in putting the last part of our SOFA schedule preview
into appropriate context.
And some of this I've covered and I won't rehash, but this timeline starts with blocked
by success and growth back in 2018 through mid-2022 and the crypto winter, if you will,
that led to the FTX rescue transaction and then ultimately the filing of these cases.
And again, I want to use this as a preview for the court and other parties in interest
as they're going to see in our schedules and statements certain litigation settlement
payments.
And I think this timeline, which we'll overlay, will help illustrate those litigation payments
and the settlement.
Because the terms of the litigation settlement that I'm talking about are confidential, I'm
going to refer to the counterparty for the settlement as counterparty A. We will share
copies with the committee.
Obviously, we'll share copies with the United States trustee, but for public purposes and
because of confidentiality, Raymond's included in our settlement agreements.
For today, we will call it counterparty A.
As this timeline demonstrates, blocked by successfully raised capital via four different
rounds of preferred equity financing.
And in July 2021, for example, blocked by series A offering was valued at 3.8 billion.
And as we'll talk about and as I mentioned to your honor before, in January of 2022,
blocked by received a $6 to $8 billion third party indicative valuation.
Now, as is typical for companies like blocked by, many of the blocked by executives and
employees have been compensated heavily in equity.
And that equity obviously appeared to be extremely valuable, especially when you attach a $6
to $8 billion valuation.
So in this context, as again is typical, several different investors approach the company,
including counterparty A, and they approach several members of the management team and
offer different transaction structures to provide blocked by executives and employees
with liquidity in exchange for their equity upside.
And as your honor is familiar, this is common for early stage companies like blocked by
and can ultimately be a win-win for both sides.
So investors here like counterparty A are betting that the company will go public or
be sold.
And so they propose to employees that they take some of their equity off the table in
exchange for liquidity, thus acquiring the equity at a material discount.
So if the company IPO's or is sold, the counterparty stands to make a significant profit.
And the employees in turn can reduce their exposure and get some early liquidity.
And as a result, they're willing to suffer a discount that's demanded by the investor.
And so these types of private security contracts are entered into directly between the employee
and the company, and that's important.
So as we note, and you'll see on the slide, starting at the end of 2021 and then in March
and April of 22, blocked by board of directors approve certain current and former blocked
by execs entering into the first set of private security contracts with counterparty A. And
we call these on the slide PFCs on the timeline.
In the private security contracts, counterparty A promise to make immediate payments to the
relevant individuals in exchange for some of their future rights to payment in the event
of an IPO or sale.
And as I mentioned, the first of these agreements were entered into in November of 2021.
Again, this appeared to be a win-win for all.
And this was effectively an employee benefit from the company standpoint because the company
facilitated its employees getting value for their equity and taking some of their assets
off the table.
And at the time it appeared the employees were transacting at a material discount.
In January 2022, again, a major investment bank indicated a $6 to $8 billion valuation
for the company.
At the same time, blocked by was seeking to raise additional capital through the series
S for first financing that actually never was effectuated.
More blocked by's current and former employees negotiated PFCs with counterparty A through
April of 2022.
And we'll see that on the next clip.
And notably and obviously all of these transactions predated the contagion or anyone's knowledge
of what was going to happen in this industry and that ultimately caused blocked by its
liquidity issues and the bankruptcy bias.
Now everything changed as we demonstrate on this slide in May of 2022 when a material
downturn in the crypto market began.
The collapse of three arrows capital as we talked about with your honor and we're generally
the crypto winner caused contagion that nobody had understood or ever predicted across the
sector and led to material withdrawals that we were able to weather through because of
the XTX backstop.
That sector contagion as we talked about really began in May with the Luna collapse.
And although blocked by didn't have any direct exposure to Luna, as everybody else started
pausing their platforms, blocked by had immediate requests and massive withdrawals and it was
industry wide and no one was free from it.
The deterioration of the sector had an impact obviously on blocked by's equity value and
counterparty A's investment which had been made at the end of 2021 and in March and April
of 2022.
To be very clear and I think this is super important, counterparty A's recourse against
the blocked by executives was contractually limited to blocked by shares themselves.
The counterparty A had no buy of a claim against anyone or the employees but it certainly couldn't
sue its contractual party because it had agreed it had no recourse against it.
And so what happened in June of 2022?
Counterparty came to block by and threatened to bring unfounded claims against the company
directly.
Generally and in our view seeking to use expensive burdensome litigation to recoup the value
of counterparty A's unsuccessful investment.
The theories that were articulated at the time and this predates my involvement but
it's been conveyed to me that the theories were vague but generally suggesting that blocked
by should have disclosed more information about the damage to its business caused by
sector contagion than it otherwise did.
And the counterparty theorized without evidence that blocked by knew more than it did earlier
than it did.
That blocked by had to assess the threats from counterparty A and at the same time it
entered into the STX transaction to backstop those customer withdrawals.
Now the transaction with STX remember was hugely helpful to blocked by clients but destructive
to equity holders.
STX agreed on that $400 million junior loan but essentially backstopping the company and
wiping out the millions and hundreds of millions of dollars in proposed equity value that existed
just a few months before.
And as a result of that STX transaction STX had appointed an observer to block by board
of directors.
And from STX's perspective what STX said both publicly and privately and I was witness
to this in multiple different arenas a key benefit of the deal with blocked by from STX
perspective was stabilizing not only blocked by but the sector more broadly.
And that was STX's goal and Sanpain has stated it over and over again he wanted to be the
white knight to try to save the industry when in reality he was someone in a much darker
place trying to save himself.
But that being said the board observer was very concerned that mitigation around this
issue with counterparty would be distracting and potentially impair our ability to not
only stabilize the business close to $400 million junior funding but affect the STX
transaction.
And as a result with the money funded from the STX transaction the board considered ways
in which a settlement could be effectuated with counterparty given that the lawsuit itself
could cause harm both to the business and to the employees and at the same time drain
resources of the company.
So as a result the threats from counterparty were resolved in a confidential settlement
agreement that we note was entered into on August 23rd 2022.
It was between counterparty block by and each of the executives that were involved.
The settlement was brought to and approved by block by then board of directors including
disinterested directors at the time.
The claims that were advanced as I mentioned your honor were directed against block by
and that block by had allegedly provided misleading information or not enough information.
We all disagree and dispute we thought these claims were specious but again counterparty
had no recourse against the individuals and all they could do was make noise.
Due to the structure of the settlement certain payments your honor were rooted through the
executives and ultimately made to counterparty.
The payments also created tax liabilities for the executives even though they did not
keep the funds.
So as you'll see on this slide and it's essential to understand this the recipients
name on this slide did not keep any funds.
The company agreed to make these settlement payments in some instances directly to the
employee but the employee then would pay the taxes associated with the amounts and then
distribute the rest to counterparty bank.
So when the schedules are filed on Wednesday there will be a spreadsheet of all payments
made and some of those payments will have the numbers on this slide and will say litigation
settlement.
The executives again themselves were mere conduits of those payments to fulfill a settlement
were blocked by settle claims made by counterparty A.
And suffice it to say we the team at Hayes and Boone and Cole shops and now together
with the committee will be looking at all recourse we have with respect to the approximately
15 million dollars of payments that were made to counterparty A and rest assured your honor
that we will do everything we can to make sure these states are whole and spared from
specious litigation claims.
But I did think this was important enough to spend a few minutes walking the court through
walking our stakeholders through and what is giving everybody a preview of what would
otherwise be buried in schedules and statements.
We think this is incredibly important.
We think this case is different.
We think this management team is different and case in point I think up spending the
time being transparent and laying out that there really is nothing for people to see
when you understand that feel that the onion was important from our perspective.
And again I appreciate your honor allowing me to time and to appear via remotely.
Thank you.
Bear with me.
Mr. Sussberg is there anything additional on the status you wish to say before I go
to others in and outside of the courtroom.
That is all your honor.
Thank you.
Okay great.
Thank you.
And we'll take down the slide.
Thank you.
All right.
Let me turn to counsel who are in the present.
Committee counsel wish to be heard on the status.
I did have a few remarks I wanted to make.
Mr. Sussberg stole a little bit of my thunder but then he went off into a whole lot of really
interesting things that I don't have anything to comment on about now as I'm learning about
them.
As we all are.
Can I have a few minutes please?
Absolutely.
Just to give you our perspective.
Yes.
Thank you.
I'm going to hand over to the proposed counsel to the official committee of unsecured creditors.
And I do want to thank Mr. Sussberg and I'll talk a little bit more about him and their
approach in a minute.
But I do think that's helpful.
I'm thankful for it.
As Mr. Sussberg said and put on the slide on December 21, so just before the holiday
week, the official committee of unsecured creditors was appointed.
We do have nine individuals.
They are thoughtful, intelligent individuals with real life experiences.
They're sophisticated on all matters related to crypto.
I'm learning an awful lot from the time that we haven't had a lot of time together but
they're very good at teaching and I'm learning an awful lot from them already.
And they're varied.
They were varied in their investments in terms of the currencies that they invested in and
the kinds of accounts they had at BlockFi.
So they're a good representative group and they are working awfully hard.
And I wanted to give your honor and frankly, if you'll allow me to use the bully pulpit,
all those who are listening in, we have a good representative, hardworking, intelligent
committee and we're working well together.
And I'll continue to update the court if there's any issues but I don't anticipate any looking
at this group as I have already.
We have an attitude or an approach to this case and again, not only for your honor but
for everyone who is listening.
We're in a new industry here.
We're in a new industry for bankruptcy here but there have been a couple of crypto platform
bankruptcies that are prelude for what we're doing here at BlockFi and we've studied them
and we've learned from them.
Some are good, some are not so good.
One of the lessons that we've learned is that financial platforms as a general matter, perhaps
cryptocurrency specific today, don't age well in bankruptcy like a fine line.
They can be over-processed.
And so moving thoughtfully, diligently but quickly, being aware of the cost, being aware
of the burden, being decisive and being efficient with the court's resources and the Chapter
11 resources may be more at a premium here than in any other normal bankruptcy case that
we would deal with and that is a very significant part of our theme which is whichever path
we're going on, be thoughtful and diligent about it but then make a decision and go with
it because people are losing money by delay and we don't intend to be stuck.
We met with the company as Mr. Suspick said on Friday.
We had a full day meeting with them.
It's good old-fashioned bankruptcy where everybody saw the whites of each other's eyes and we
had a very frank and very constructive conversation with the management team, the professional
team.
It was a good kickoff meeting.
And they shared a great deal of information with us and they have since that and they're
clearly being well advised.
Some of the best in the business are on the block by side and I have very strong personal
relationships with these individuals.
I've worked with them as Mr. Suspick said in a number of cases and as true to our past
experiences together we're talking the way that we're supposed to in Chapter 11 and
we're learning.
And the executive team shares, seems to share our view, thoughtful, diligent, quick, efficient,
decisive, let's not sit stuck in Chapter 11.
So we all seem to share that view and that was a theme that was replete to our meeting
on Friday and ever since.
We're going to have our disagreements.
That's why we have a V that divides us.
And we're going to try to minimize them.
We have a shared agreement amongst the professionals and the clients that if we extrapolate litigation
and fight over everything that's not going to be consistent with a thematic approach,
shared thematic approach to this Chapter 11 case.
So we're going to try to resolve things where we can.
When we have disagreements we're going to do it in a very professional, fair, and orderly
manner so that we get things resolved.
And I think you saw from Mr. Susford today the transparency idea that is carried through
already.
For the customers who are listening in, again forgive me your honor for seizing the bully
pulpit, but if you allow me just to say a few things for those who are listening.
There are many of you, many of them, and they've lost enormous amounts of money.
And I'm aware, not only from my committee but from others, that very significant portions
of people's own personal savings, retirement accounts, and wealth has gone away.
That is a profound responsibility on this committee and we acknowledge it.
We live it every day, full-time job.
And we're going to do everything we can to get people their money back as soon and as
large in dollar quantum as possible, not without getting stuck in the mud, being decisive and
being efficient and keeping costs down and driving this case forward to get people their
maximum money.
We hired M3 and Elementus, you saw on the screen.
They are experts as financial advisors and in this particular industry space.
They're working very, very hard to learn everything they can, how we got here, where we're going.
That's very unclear to me right now where we're going.
And how soon and cost efficiently can we get there.
So we're deeply, already working deeply on that with the company.
We're going to be communicating with the customers.
We've already set up a Twitter account.
That one's a little new to me so I'm going to learn from this.
We've set up the website.
We're going to be delivering information to the customer group overall.
It's their money.
We're going to be talking to them.
And we want to deliver not only information as we can, confidentiality restrictions are
very important, we're going to honor them scrupulously, but if we can get information
out, we will.
We'll do it timely and we'll try to be as insightful as we can so that the customer
community generally understands what's happening in this case and how it's moving forward.
And we're always ready to speak one on one with any customer who can call us 24-7 and
we'll respond promptly.
And we're going to answer all questions.
With that, Your Honor, I just open up for any questions Your Honor may have for us,
but we intend to move this case quickly with the other folks on the other side of the aisle
in a very consensual way and try to get to resolution as Mr. Sussberg said.
We obviously have a lot to do.
Thank you, Mr. Stark.
Your comments were especially important for those that aren't here today.
I wanted to address very briefly that the Court is in receipt probably of two to three
dozen individual objections that have been filed by customers and with many of them related
motions for appearances.
We have done our best besides the obvious.
I read everything and I'm trying to make that clear to all who filed pleadings.
They get read.
They get read by me.
They get read by my law clerks.
We are doing our best to direct individual customers to the committee now that it's been
formed.
We're also cognizant that there's an ad hoc committee that's been formed with respect
to certain issues.
And I'm hoping between those two committees and counsel representing those committees
that the concerns and issues that have been raised are often repetitive, same forms and
same briefs and arguments can be addressed and supported by counsel so that the Court
need not endeavor to allow individual appearances.
As much as I look forward to having individual customers share their views, their concerns,
their arguments, at this juncture I'm asking that it be done on a written platform.
They're obviously transparent.
They are welcome to watch and engage and engage with counsel for the committees.
But it would just be problematic, I think, for all of us to allow a disruption as far
as the court proceedings in having multiple dozens of individuals present views that are
shared by those that can represent their views to the court.
So not really for your benefit but for those here as well.
But for those that are watching, I'd like the customers to understand that the Court
is certainly weighing all of the information that's been provided to the Court subject
to arguments that go back and forth.
But at this juncture I'm not authorizing any individual appearances separate apart from
actual pending motion practice or adversary proceedings where parties of course are, their
arguments are going to be entertained.
So with that, I don't know Mr. Stark, is there anything else you want to add at this juncture?
Two things only, that we are solicitous of that if there are customers out there who
are in fact interested in filing pleadings to be heard by the Court.
It might be better if they just call us first.
We would be very honored to receive those calls and see if we can be helpful and in
turn help the Court if that's responsive.
No I think that's the best approach and that's what we've been trying to urge them to do.
And second, I think I may have misstepped on something earlier if you'll allow me to
correct the record.
Yes, go ahead.
I was just wondering earlier about returning people's money to them in sort of quantum
and dollar amount.
I meant value.
It may be in certain respects that returning people in kind is better for tax and other
purposes so I just want to make sure the record is clear on that.
No it's clear and an important issue.
Thank you, thank you counsel.
Counsel.
Thank you your honor.
Richard Canowitz, Hears and Boom proposed counsel for the debtors and debtors in possession.
We have two other items on as well as some other housekeeping to discuss but we could
discuss the housekeeping at the end of the hearing.
I would ask the Court to hear that Jerof lifts a motion first and then we could turn to the
adversary proceeding issues.
That's fine.
Before we get to the Jerof matter let me just make sure with respect to the status conference.
I didn't know if there's any other party that wanted to be heard.
Let me start in the courtroom.
I didn't know if the US trustee, Mr. Sponger, did you wish to be heard on the status?
Thank you your honor.
Jeff Sponger from the office of the US trustee.
Just very briefly your honor just to for the record, United States trustee continues to
discuss with the debtors the final first day orders, the second day motions as well as
the retention applications and we hope to have as much resolved as we can prior to the
next hearings.
All right thank you.
Ms. Koski, APAP.
Good morning your honor Jeff Koski, Chapman Peppers for the ad hoc committee.
I would just add my words to start that if there are individual customers whose interests
are aligned with those of the ad hoc committee, of course they should feel free to reach out
and I'm more than happy to speak with them.
Great and I thank you for your participation.
I think it will be important.
Anyone else remotely wish to be heard on the status?
All right then I think we're ready.
We'll proceed to the Jero stay relief motion.
Let me have appearances for counsel for the movement.
Ms. Dalton.
Carol Horskin-Holton appearing on behalf of the movement, George Jero.
All right and I see Mr. Jero, who's going to be presenting orignal?
Is it you or Mr. Jero?
I am.
You are.
Is Mr. Jero's father counsel?
Yes.
Mr. Jero's father was counsel to him in the California case.
Okay.
Yes, I think you're.
Okay, that's what I wanted to clarify.
Thank you.
Yes, Your Honor.
I will allow Mrs. Nolten to present the argument.
I'm here just in case I'm called upon or if needed.
All right, thank you.
Ms. Nolten, proceed.
Yes, Your Honor.
The debtors' attorneys have filed both an objection and a sub-replied.
And in that, their position is we shouldn't waste the money and the time allowing relief
from the stay for Mr. Jero to go to California to have his case heard because there are hundreds
of thousands of creditors in this case and we should just abide by the claims process.
Unfortunately, I don't know that the claims process would be applicable here.
Mr. Jero, his point is because of the fact that there is a forum selection clause and
a waiver of the right to a jury trial in the contract, he needs to go to the California
court to have that matter decided.
He went to the California court and at the time of the filing of the bankruptcy, there
was a court of appeals order or opinion that granted him the right to have his case heard
in California because to do otherwise would possibly deprive him of his right to a jury
trial as well as some other unwaverable rights that are present in California but not necessarily
present in Delaware or other states.
I understand the argument.
I see that this is an enormous case, obviously, and I heard Mr. Stark, I heard what he said
about having it be economical and efficient and I agree with that to some extent, except
for the fact that this is not an administrative or procedural issue.
This is an issue about waiving his unwaverable right, his absolute right in California to
a jury trial on the issues of his case.
Therefore, I think that it is appropriate to grant him relief from the state in order
to proceed to the Supreme Court of California.
The debtors, when the California court of appeals entered their decision that it was
actually California that should hear the case, the debtors appealed to the Supreme Court
and that's what's pending right now.
But right now, that order from the California court of appeals is the standing order.
That's the decision.
I know that in their survey plot, the debtors submitted hundreds of pages of pleadings.
One noticeably absent one was that order that the California court of appeals provided.
That is already, however, and maybe that's why they didn't submit it, but it's already
in the motion as Exhibit 3, the original motion that we submitted on behalf of Mr. Giroux
has that order in it.
And that indicates that the reason that they wouldn't allow it to be heard in Delaware,
which is what the contract agreed to, is that they weren't convinced by what the debtors
had proposed or had submitted, I should say.
They weren't convinced that it would guarantee that Mr. Giroux would get his right to a jury
trial and would get any of the other unlawful rights, that the debtors hadn't submitted
enough evidence to show that he would get that.
So I understand that we need to be efficient.
I understand that things need to be heard promptly.
But I don't know that having it heard in New Jersey or through this court would make it
more efficient or make it heard more promptly.
On the one hand, the debtors are saying in some of their papers that we should wait.
We should wait until the claims process is done, that it's premature to do this.
On the other hand, they're saying it would take too long to go to California because
you won't be heard in California for a long time.
You can't have it both ways.
One of the reasons Mr. Giroux wanted to file this now was so that he could get started
in California, so that he wouldn't be too late once the process here is completed, and
also so that he wouldn't by going through the claims process, he can't then go to California.
So our position is that despite the fact that there are many, many creditors in this case,
despite the fact that it's going to cost money, it would cost money here.
It would cost money here because the debtors admit it's a disputed claim.
It's going to be a long process.
It's our position that his right to a jury trial and the other unlawful rights is something
that he shouldn't be deprived of just because there are hundreds of thousands of creditors
and because these are procedural matters that weigh against him.
But couldn't each of those 100,000 creditors make the same argument?
Is there a basis for Mr. Giroux to opt out of the claims process that Congress has implemented
under 502, the allowance process?
Isn't this the forum that Congress selected to displace the burden on debtors to litigate
claims issues across the country?
That's what I'm struggling with.
I understand that there are jury rights that have been asserted under state law, California.
There are other substantive rights.
You could point to many claims in this bankruptcy that are bottomed on substantive rights under
state law which are at loggerheads with the scheme implemented under the code.
Yes, Your Honor.
I understand that.
The thing that's different here is that the agreement that exists between BlockFi and
Mr. Giroux has a clause in there, has a jury waiver clause and a form selection clause,
and that makes it Delaware.
And what we're worried about is that in the claims process that you, as the bankruptcy
judge, would have to look at that agreement and have to honor that agreement, whereas
the California court is saying despite that agreement, this should be heard in California.
I don't know if there's a solution to that.
Why would this court come to a different resolution of a conflict of law issue?
Wouldn't that be guided by the applicable law, the statement of law as we apply it to
which is the choice of law?
You would think all courts would reach the same conclusion.
I certainly have, and Ms. Knowlton, you've litigated in front of me often enough, various
state law issues, even outside New Jersey issues.
I know that you can do that, Your Honor.
I'm confident in your ability to do that.
I have been in front of you many times and I've listened to other cases that you've
done.
I think what Mr. Drew was worried about is would you feel compelled to comply with the
agreement that gives it the Delaware forum?
I think if he were confident that you wouldn't, and of course we can't know that until we're
there, but if you were confident that you were going to have the decision made in accordance
with California law, he wouldn't be as concerned about the fact that he's not in California.
I interrupt you.
Do you have anything else?
No.
I wanted to keep it short and sweet because I realize that I'm taking up a lot of time
here.
We'll make sure it's comprehensive.
Thank you, Ms. Knowlton.
I'll give you a chance to respond.
Mr. Canowitz?
Thank you, Your Honor.
For the record, Richard Canowitz, Anzenboom proposed counsel for the debtors and debtors
in possession.
I'll be very quick, Your Honor.
There is no cause to lift the stay, whether it's a three-part test, a 12-part test.
Mr. Jarrow's not a creditor here.
There's no money owed.
He's a creditor in the broadest sense of what's defined as a claim in the bankruptcy code
because he has an unliquidated dispute, something.
We would just ask that Your Honor deny the stay motion.
In fact, I think based on the reply that they filed, they are actually not seeking lift
stay.
They're asking Your Honor to give them certain relief and protection that they're not afforded
to.
We have a supremacy clause.
We have a claims process.
To the extent that Mr. Jarrow wants a distribution from this estate, he needs to file a proof
of claim.
That will impact certain rights that he has.
We will proceed accordingly at that time.
Everything else that he's requesting in his papers is premature, and we ask you not to
grant it.
Thank you.
Thank you, Mr. Canowitz.
Does the committee take a position?
Your Honor, the committee has not considered this matter at this time.
We do not take a position on this.
Let's stay motion.
All right.
Is there any other party in interest taking a position?
Mr. Jarrow, your hand is raised.
You have counsel, but I'll give you some latitude.
Would you want to weigh in?
I think you're still muted.
There you go.
Yes.
Thank you, Your Honor.
I just wanted to note that the distinguishing factor between this claim and other claims
is that the case is already pending.
That is a relevant factor for purposes of the abstention doctrine.
Both abstention doctrines apply to cases that are already pending, and also the rules recognize
that a case that's already pending can be removed and proceeded as an adversarial proceeding.
So that is another distinguishing factor that distinguishes this claim from the other few
disputed claims in this case.
All right.
Thank you.
Ms. Knowles, is there anything else you want to add in response?
No, my voice certainly didn't carry from back there.
No, Your Honor.
Thank you.
All right.
I understand the frustrations of a creditor who's in the midst of litigation having it
halted as a result of a bankruptcy.
But those frustrations are shared in this case by other parties and by creditors who
are also looking to assert their rights even if they hadn't been brought before a court.
I am also cognizant that there is a pending litigation.
I am not hearing a motion for remand if a matter has been removed at this juncture.
I am not addressing abstention issues.
There is certainly a large and significant body of law which addresses both permissive
and mandatory abstention if litigation is brought by removal before the court.
What I have is a, I think Mr. Kennewitz noted, a disputed, unliquidated claim or a potential
claim.
Well, I think the debtor acknowledges that they're disputing a claim and a claim is very
broad but that's all we have at this juncture.
In my view, it would be folly to start lawyers on the path of continuing litigation in other
fora, this may have a bearing down the road, when we're not sure as to potential distributions
in this case.
Certainly resolution of litigation must take into account is this a 100% case, is this
a 5% case.
That's how you decide whether it makes sense to continue litigation or reach a settlement
or even pursue mediation.
We are far removed from that stage in this case and I appreciate all counsel wanting
to get there quickly, so does the court by all means, but we're not there yet to allow
continued litigation which from my understanding, the focal point is simply where it should
be litigated and no court has reached the substance of Mr. Jarrow's claims or the basis
for any defenses and to spend time and money at this juncture on an appellate process focused
on where the case should be litigated, where there is a forum that Congress has put in
place in light of the code for allowance and disallowance of claims and the ability down
the road if I want to punt so to speak and send it out.
Those options remain, but it's far too early and I'm going to deny the motion without
prejudice at this juncture, the motion being for stay relief even with respect to the pending
Supreme Court, California Supreme Court matter.
I am going to direct that Mr. Jarrow in his discretion and in consultation with counsel
decide whether to file a proof of claim and if the claims are filed, we will address those
claims as with all claims through the Section 502 allowance process.
If the litigation is removed to me, God bless, we'll address that when the time arises in
the appropriate fashion with the appropriate body of law that's applicable.
At this juncture, the court will enter an order unless debtors counsel wants to submit
any specific form of order.
It's up to you, Your Honor.
I think we have a proposed form of order, but if Your Honor wants to submit, I mean,
enter one by yourself.
I will look at the order, Ms. Knowlton.
Why don't, let me ask, Mr. Kanowitz, why don't you forward a copy again of the proposed order
to Ms. Knowlton.
She and her client can review it.
If there's an issue, we can have a conference call.
Thank you, Your Honor.
All right.
Thank you.
Thank you, Mr. Jarrow.
The next matter, Your Honor, is in fact the, oh, let me just, Mr. Jarrow.
I, do you want to be heard?
Go ahead, very briefly.
You need to unmute yourself.
Your Honor, I was wondering if the non-debtor, Scratch, that did not oppose the motion for
stay relief, I was wondering if the court would entertain allowing the stay to be modified
so that it can, the case can be, Scratch only.
I think Scratch is the agent of, at this juncture, there is no automatic stay as to them.
Correct.
We have not sought to extend the automatic stay, either 362 or 105, to their benefit.
There's no motion in front of you for Mr. Jarrow's request.
If they believe that the stay applies and an abundance of caution they want to make
application, they could do so.
I don't know until they file their papers what they put in there that may be or may
not be prejudicial to the debtors of state.
Well, at this juncture, Mr. Jarrow, you are free to proceed as you think it's appropriate
in consultation with counsel as to Scratch.
It is not a debtor before me.
I think that's the limit of what I can offer you at this juncture.
May we put that in the order denying without prejudice so it would be granting in part,
denying in part without prejudice so that way that the California Supreme Court feels
comfortable proceeding without violating the automatic stay?
Well, there hasn't been a motion for stay relief with that entity, I don't believe.
Oh, Your Honor, this motion did request the stay relief for that entity.
They were served and it is in the papers.
It is in the moving papers, Your Honor.
Mr. Stark?
Your Honor, forgive me.
Yes.
I know that we have, we said we didn't take a position in this.
We can't possibly respond about some litigation that we haven't looked at yet.
It's risky to sort of go ahead and continue a litigation with a co-defendant when one
of your defendants, at least allegedly as a debtor, and I think what I understood Mr.
Cano with saying is those are the risks you assume if you want to do that, but we as the
committee, we cannot without even studying the litigation, understanding it and the impacts
of the estate, support any sort of an order that allows for anything along the side.
I'll be a little bit more blunt than Mr. Cano.
Your Honor, I'm just concerned about any indemnification rights between our agreement with Scratch.
The motion is not clear that they were seeking relief against Scratch.
It was against the debtors, that's why I filed it here.
We would just ask, Your Honor, just to deny the motion as requested and in fact, maybe
now, Your Honor, I revisit my statement, maybe you should enter an order so that we don't
have satellite litigation over the terms and conditions of what should be a very simple
one-page order denying without prejudice the lift of the estate request.
I think you can work on the order.
It'll be fine.
I'm not going to include in the order any provision relative to Scratch.
I think that if the California Supreme Court or Mr. Jarrow wishes to relay this court's
view, I've already given my view, it's in the transcript.
And so you're free to provide a transcript to the California Supreme Court with respect
to my ruling.
Thank you, Your Honor.
All right.
Thank you.
Thank you, Mr. Jarrow.
Thank you, Your Honor.
You're welcome.
All right.
Let's move on to the, I think the only remaining, although significant matter is the pending
turnover motion filed by the debtor with the plethora of opposition that's been filed.
Mr. Kanowitz or?
Your Honor, thank you.
Mr. Hanigan will handle this part of the hearing.
All right.
Thank you.
Good morning again, Mr. Hanigan.
Good morning, Your Honor, for the record, Rick Hanigan with Haynes and Boone, proposed
counsel for Block by Inc, Block by Lending, and Block by International.
Your Honor, I know that you've read all the papers, so I'm not going to address background
facts or the procedural status of this unless you have questions.
Luckily, there are no football games important.
I assume you're aware of this, but the collateral since our December 28th hearing has been seized
by the government.
The collateral consists of approximately 55.2 million shares of Robin Hood Markets, Inc.,
Common Stock, and there's approximately $21 million of cash.
It was all seized by the government from MaRICS on January 4th.
The turnover motion originally sought to protect all the parties who were claiming an interest
in the collateral.
The collateral has now been secured.
We're not sure it's being protected.
Following our December 28th hearing, if you recall, the parties discussed maximizing value
of the property for any and all constituents who may ultimately benefit from the funds
that were seized.
Counsel for Block by, FTX, MaRICS, the emergent JPLs, and also Mr. Bankman-Freed had a discussion.
We discussed having an advisor be appointed to give advice as to maximizing value of the
collateral.
This was somewhat interrupted by the seizure.
We have had discussions with the government concerning whether we should have an advisor
appointed or at least contemplated to give advice as to maximizing the value of the collateral,
which we think that's in the best interest of all parties concerned.
No agreements have been reached.
Discussions are ongoing.
And Block by has reserved all of its rights related to the seizure with respect to actions
of the government.
One of the purposes of today's or the purpose of today's hearing originally was to determine
whether the collateral would remain at MaRICS or whether it would be transferred to a third
party, all subject to this court's jurisdiction, notwithstanding that the government has taken
possession of the collateral, we still believe they're important matters for the court to
consider today.
And what we're asking for today is for the court to retain jurisdiction over the rights
to these disputes as to title, as to rights and priorities in the collateral itself.
We would also ask the court to prohibit the emergent JPLs in their action in Antigua
from furthering, taking further actions that would impact Block by's rights to this collateral.
We would ask that the court prohibit the FTX debtors in their bankruptcy case in Delaware
from taking actions with respect to their stay motion that would impact Block by.
And it was also, we have filed an objection to Mr. Shim's declaration that was filed
by the emergent JPLs in support of their objection, and we would ask that that objection
be sustained.
Your Honor, the worldwide stay order that you entered on November 30th has been treated
as it never existed.
Block by has been measured in not seeking any relief, but it's very concerned that
the worldwide stay order has been disrespected, and if need be, at the appropriate time, we'll
file motions, contempt motions if necessary.
Without this court enforcing the worldwide stay order, there's going to be complete
chaos here, as evidenced by all the objections that have been filed.
In this case, there have been multiple filings in the FTX proceedings.
There's multiple filings in Antigua, and this is all in addition to the actions that
the government has taken and its proceeding with respect to the seizure of the property.
At this point, we've got the following parties who have asserted interest in this collateral
block by, the FTX debtors, the emergent JPLs, the Department of Justice, Mr. Bankman Fried,
and possibly the FTX trading JPLs who have filed a motion in the FTX debtors case, but
not in this case.
Block by, as we said on December 28th, is the only documented creditor of emergent.
We've got a pledge agreement.
We've got a file UCC-1 statement.
Those are presumed to be valid.
The FTX debtors, FTX trading JPLs, Mr. Bankman Fried, they're all tainted with alleged and
admitted fraudulent or criminal activity of Mr. Bankman Fried, Ms. Ellison, and Mr. Wang.
Block by is not.
The emergent JPLs, they're a creation of litigation that was filed after this bankruptcy
proceeding was filed.
The JPL, the Antiguan JPLs for emergent weren't appointed until December the 5th, and their
application for appointment wasn't filed until December the 2nd.
So all of that was after the worldwide stay order was in place.
So these claimants may have rights and assert that the block by interest in the collateral
is invalid.
These are all issues that ultimately need to be decided.
We think they should be decided in one forum.
We believe this court should maintain jurisdiction over that.
We will enter into a stipulation with the government that will allow it to reserve all
of its rights and will reserve all of our rights.
And this court, we believe, is entitled to maintain jurisdiction because this was the
first filed action involving this collateral under the Princess Lyta doctrine.
This court therefore has jurisdiction over the collateral.
We don't see that there would be any prejudice to any of the parties who are claiming an
interest in the collateral from appearing in this court and having this court decide
amongst everyone who is entitled to this in terms of priority, title, etc.
It may be us, it may not be us, but these issues should be decided in one place.
And we submit that this is the court where it should be done.
The court has the right to do this.
It should be the gatekeeper.
It has these powers under Section 105.
It also has inherent powers to conduct proceedings before it in an orderly fashion.
And for these issues to be decided, we don't need to be proceeding in three different forums
in Antigua, in Delaware, and here.
In Antigua, we've got big concerns about due process.
And in Delaware, we were the first filed action.
We've got the direct claim in the collateral and therefore ask that the court maintain
control over the collateral here.
All right.
Would you contemplate, we have a pending adversary proceeding that sensibly seeks turnover.
The United States is not a party.
Would the debtor contemplate or is the debtor contemplating amending the complaint to add
additional parties?
Either, yes, we are.
We need to amend the complaint just because of the actions that have been taken.
We've also sought declaratory relief that BlockFi has priority to the collateral.
And so we would amend that.
There have been, even in the FTX debtor's objection, they said if necessary, they will
quickly intervene in this action.
The emergent JPLs, they can intervene in this action if they want to assert rights in the
collateral with respect to the government.
I think we'll reserve our rights.
We haven't fully analyzed whether they need to be a party to this action.
We know that you have certain authority as set forth in your LTL decision with respect
to actions that have been taken under an alleged police power.
And we continue to analyze those rights as well.
Well, but our complaint needs to be amended at this point.
If we need to modify our schedule because of the addition of new parties, we're more
than happy to do that.
I'm aware of the committee's motion to intervene into the adversary proceeding.
We could talk about that when we get to scheduling or next steps.
Certainly, from the limited notice of seizure that the court was provided with by the Department
of Justice, I believe the position is that the government believes the title to the property
is tied to the date of the criminal activity, which may or may not.
I mean, I'm certainly today not making any rulings on that, but may or may not predate
a pledge agreement.
And clearly in a two-page notice, there is ample room for discussion as to the rights
of third parties in any such property that has been seized.
So it'll be interesting.
And I understand Mr. Shapiro is appearing remotely.
The government is not a party to the pending litigation, but he'll weigh in as appropriate.
But thank you.
Let me hear from then, why don't we turn to counsel for FTX?
Good morning, Your Honor.
Good morning.
For the record, Brian Gluckstein, Solvent and Cromwell for the FTX debtors.
Your Honor, we did file a response to the motion, opposing the actual turnover motion
consistent with the court's scheduling order.
We have not intervened in the adversary proceeding at this point, but appreciate, Your Honor,
hearing me this morning.
By all means.
Your Honor, it was not entirely clear to us what was going to be sought today.
I think from Mr. Anagan's comments, I don't hear the debtors requesting the relief that's
actually contained in the turnover motion, which is to move the shares from what was
in a neutral brokerage to another brokerage account, given the seizure from the United
States government.
We certainly would submit that that relief is not available.
It sounds like what BlockFi is seeking to do is have the court affirm its jurisdiction.
Certainly there has been an adversary proceeding that's been filed.
There's a schedule to respond to that complaint in the adversary proceeding.
Our view at this point, Your Honor, is that we could have a whole discussion if relief
is put in front of the court, a motion put in front of the court.
As I understand it, there's now no relief before the court today with respect to any
of these stay or jurisdictional related issues.
I think it's fair to say there's a difference of opinion, and I don't think it's just necessarily
between us and BlockFi, as to where the ultimate decisions around interest in property potentially
should be decided.
I think the government has, if you want to add, that might be different for either one
of us.
It certainly seems to us, Your Honor, that at this point, that the seizure by the government
here is a very significant event.
The suggestion that we're just going to proceed to adjudicate rights and interests in property,
that we don't know if the United States government is ever going to release it, in what form
it's going to release it, is it going to still be shares, is it going to be cash, when is
that going to happen?
All of those are discussions that need to take place.
We do agree with Mr. Anakin, and we had a conversation, as he reported last week, about
what seems to be the pressing issue here, which is ensuring that the value is maximized
for creditors.
BlockFi is a very significant creditor in the FTX debtors' bankruptcy cases.
FTX, one of the FTX debtors, is a significant creditor here.
But the question around jurisdiction and venue and all of those issues seems to be putting
a little bit of a cart before the horse, where the government's in possession of the shares,
is in possession of the cash.
We should be, in our view, not litigating, at this point, rights in ultimate distribution
rights in those assets, until we figure out what's going to happen with it.
And so we do think that it makes sense to continue the discussions around how to ensure
that the shares are maximized in value for everybody who has an interest, but to immediately
have this fight around where should evidence effectively be presented and to which court.
I think that is something that all of the parties would need to weigh in on, on appropriate
papers.
There are arguments that there are multiple courts that potentially have jurisdiction.
I'm just not sure that all of those issues should be teed up now when we have some real
gating issues here that have to be addressed, both in terms of ensuring that the asset is
maximized and understanding what the government intends to do.
If BlockFi is intending to challenge the actions of the government, they would need to obviously
bring some sort of process to do that.
Even if they're seeking to return the status quo to where we were a couple of weeks ago,
that would need to play out in front of a board, obviously, of confidence jurisdiction.
So from the FTX debtor's perspective, Your Honor, this is a significant asset.
We disagree with the characterization of BlockFi that we simply have claims against the asset.
The turnover motion and the arguments with respect to the stay that BlockFi have put
forward are all premised on the idea, of course, that BlockFi has the property interest.
It says it has.
And there are a number of gating issues there that we just respectfully disagree with.
Certainly we've asserted the FTX debtors that we have a direct property interest.
And to the extent we're correct about that, Your Honor, the stay obviously in our case
would have attached, which was filed three or so weeks before BlockFi filed this case
here.
So I think all of the arguments that have been put forward, Your Honor, as at least
certainly with respect to the competing claims between BlockFi and FTX, go to the heart of
the merits issue.
Are merits issues ultimately going to have to be resolved at some point?
Presumably, yes, assuming there's an asset to distribute and the government isn't keeping
it or going to argue that it should be applied to some sort of penalty and going to be distributed.
But we think this fight around where potential fight, and perhaps over time, issues will
become clearer and perhaps processes could be agreed upon on what to do with an asset.
But if we're talking about having an immediate fight, we think it's premature.
We think there are gating issues that need to be addressed with the government who is
in possession of the collateral.
They are not appearing, certainly in this adversary proceeding at this point in time.
And we think the parties should take the time to do that before we unnecessarily press ahead
with the jurisdiction.
But let me ask this.
I appreciate the concerns you raised as far as timing and obviously the court, I'm interested
in hearing what the parties think the next step should be.
But until notice of the seizure occurred by the government, there was a pending action
in Delaware court.
And this goes far beyond a turf battle among courts.
We're looking at substantive issues here as to the interest and how best to protect the
creditors, both BlockFi and FTX's creditors in this matter.
But there were efforts taken in the Delaware court by your client, which would seem on
the surface, and I'm going to ask you to explain, offend the automatic stay in this court.
There is no question that I've seen that BlockFi doesn't base its claim as having a leanholder
interest, a security interest in the shares.
Disputed, no doubt, by FTX and by Mr. Bankman Fried and by the JPL in Antigua.
But we're talking about a leanholder interest, a property interest.
And it would seem to me pretty clear under the code that a debtor's leanholder interest,
let's use simplistic analogy.
If BlockFi asserted that it had a mortgage on a commercial office building, certainly
the office building isn't property of the BlockFi estate, but that mortgage is.
In any effort to prevent BlockFi from asserting its rights or any pending action restricting
BlockFi from fixing its rights in its collateral, certainly to me offends the automatic stay
of the debtor in this case.
It's a property interest, a security interest.
Disputed, no doubt.
And whether it's this court or Judge Dorsey or some court in Southern District that decides
it will see.
But I'd like to understand how, and I would pose the same question to the counsel for
the JPLs, how any effort to restrict BlockFi in asserting its collateral interest to determine
those interests, to either prevent this debtor from foreclosing on an interest or to seek
a determination to fix the extent and validity of an interest.
How that doesn't run a loggerheads with the automatic stay.
And it would seem that this court has under 1334 certainly jurisdiction over the debtor's
interest in the collateral, which is that issue here.
And I understand FTS takes a different position, but it seems to be that FTS, their interest
in the collateral is bottomed on potential litigation.
I understand that.
Mr. Bankman-Freed's interest in the collateral, candidly I'm not sure what it's bottomed on.
And I wait to hear that.
The JPL liquidators, they're pursuing their responsibility to protect the interests of
emergence creditors, which to my understanding is BlockFi, and possibly FTS creditors, which
we have two courts here in Delaware and New Jersey protecting those interests.
With this court, and this is a long-winded question, but with this court clearly having
authority and jurisdiction under SEC 28 U.S.C. 1334, and the debtor having a property interest,
albeit disputed, a collateral interest, how are these actions pending another four is
my question, and what's the next step in your view?
Mr. Bankman-Freed.
All right, Your Honor, let me address that.
Mr. Bankman-Freed.
Gave you a mouthful.
Mr. Bankman-Freed.
There is a lot there, so if I could unpack that a little bit.
So be clear.
The motion that we filed in Delaware is not asking at this juncture at all to determine
the merits of any.
What we have asked is to enforce the automatic stay of our debtors, because you're right,
Your Honor.
There's a fundamental disagreement here.
BlockFi has come forward and said we have a collateral interest.
The nature of that collateral interest is not only disputed, the existence of it is
called into question.
And I don't want to argue the facts, Your Honor.
I don't want to be-
Mr. Bankman-Freed.
No, I'm cognizant.
I've read the briefing and I understand the basis.
Mr. Bankman-Freed.
Right, but to be clear, what we have here is BlockFi say we have an interest in collateral
that was granted 24 hours before the FTX debtors filed for bankruptcy.
We have those documents signed by somebody, Ms. Caroline Ellison, who has now pled guilty
to fraud.
We have Mr. Bankman-Freed, who was involved in that process, now contesting whether Ms.
Ellison even had the ability to sign the documents that BlockFi is relying on to create that
interest in property.
Okay, and so BlockFi is absolutely able to argue those points.
And as I stated earlier, Your Honor, I do believe that there are arguments that there
are multiple courts here that could exercise jurisdiction.
We're not suggesting that this court is incapable of hearing these issues.
The problem though, Your Honor, is again, if we're correct, that we have not just some
avoidance claim or fraudulent transfer claim, but if we're correct, that the property that's
now been seized, that BlockFi is claiming is their collateral, was in fact property
of our estate when we filed for bankruptcy in earlier November than BlockFi filed, then
we believe there's an automatic state issue with them filing on the first day of their
case the adversary proceeding here, which Your Honor did not.
That those papers, if we go back to the original complaint and the turnover motion that was
the subject of this morning's hearing, nowhere in those papers does BlockFi disclose the
relationship of what this is about, which is collection of loan that they had outstanding
to Alameda, very significant loan.
And we heard this morning in the debtors update presentation, all of the linkage between FTX
and BlockFi.
And so to suggest that this is just a collateral holder and we're seeking to enforce our collateral,
the facts here are much more complicated than that.
And so, Your Honor, certainly to the extent that the question here is competing state
issues or state violations, we're happy to brief those issues, but I do think there's
just a practical consideration, which ultimately is going to be, is it going to be Your Honor,
is it going to be Judge Dorsey, is it going to be a judge in the Southern District of
New York, potentially as the government has suggested, that it's going to decide the
merits issues.
And it might very well be that the parties can sit down and agree on that ultimately
in terms of putting some process around it.
But I think what our concern from the beginning here was that papers were filed two hours
into the BlockFi case, which was three and a half weeks after the FTX debtors had filed
bankruptcy in Delaware.
We were not named as the defendant in that lawsuit.
We were not even mentioned in that lawsuit.
The issue, of course, now is what do we do about it?
And I think what's getting lost in this, Your Honor, is we're talking about 55 million shares
of stock and 21 million dollars, 21 or so odd million dollars of cash that are in the
possession of the United States government.
We haven't heard anything from the United States government other than the statement
that they filed in this case, and they made a statement on the record in a status conference
in our case last week.
They certainly are in possession of those shares.
We know that.
We know that they are going to safeguard them.
But the issues that Mr. Hannigan started his remarks with at the outset today, I think
when we think about next steps and we think about what should happen, from our perspective,
we should not be having a dispute about jurisdiction this week or next week.
We don't feel the need, frankly, Your Honor, for our motion to go forward in Delaware that's
pending.
If we could all agree that what we're not going to be fighting about right now is jurisdiction,
but what we should do is sit down and talk about how to maximize the value of these assets,
get an understanding from the United States government to the extent they're willing to
discuss with the parties what their intentions are with respect to these assets over the
medium term so that we can get some understanding as to whether the parties can get comfortable
around the process for ensuring both that those assets are maximized and that when it
becomes necessary, we have a see if we can reach some sort of process about what to do.
I certainly don't believe it's in anybody's interest, given that there's nobody's going
to get possession of these assets in the immediate term, that seems clear, to be having the sorts
of debates around who filed first, whose stay might be implicated, and what should we do
about it, because from our perspective, that's not really in anybody's best interest.
Fair enough.
Thank you.
Let me hear from counsel approaching the podium.
Thank you, Your Honor.
Josh Widorchak of Morgan Lewis again for the Joint Provisional Liquidators of Emergent.
I think everyone agrees, Your Honor, that the actual relief sought in the motion is
mooted or futile or something like that, and I don't need to address it.
Am I correct on that?
No, Your Honor.
We don't agree that it's mooted.
We believe it's frustrated and maybe delayed, but it's not mooted.
Okay.
In that case, I'll start by saying this, Your Honor.
My clients have no legal or practical ability to move these shares that everyone is fighting
over or to freeze these shares that everyone is fighting over to do anything with them.
So the relief, we can't do anything about it unless the situation changes, and that's
been true since the government took the share.
So actually turning them over to someone we can't do, so I'll just leave it at that now.
That's enough on that subject.
You can't do it because they've been seized.
Right.
Okay.
I just wanted to clarify.
Not because we don't want to.
The most important thing I think I need to address is the idea that even though the government
is taking the shares, there's some lingering wrongdoing going on out there.
I certainly have to address what I think was irresponsible over the weekend accusations
that my clients have been sort of serially violating the automatic stay and acting in
contempt of Your Honor, including some comments you made at the last hearing.
So I need to address that right away.
The easiest way to explain it, I think, is to tell you what's going on in Antigua.
So the joint provisional liquidators were appointed on December 5th, and the order that
appoints them, which is on the record, says that the purposes of the provisional liquidators
appointment are to investigate the respondents' affairs and to preserve the value of the respondents'
assets for the benefit of those entitled to them, pending the determination of the petition
to wind up with a respond.
So the task of the JPLs is to investigate what happened and to figure out how to amass
the assets of the company for the benefit of whoever is entitled to them.
There's no predetermination of who's entitled to the benefit of these shares or who owns
them.
So while they're being appointed, the JPLs have never asked the Antigua court to make
any decision whatsoever about who owns these shares or who should get the value of these
shares.
As we said the last time we were before you, we're still trying to investigate what even
happened.
And we have not been sneaking around in the Caribbean behind your back, Your Honor, trying
to get some advantage over the BlockFi estate when it comes to these shares.
I hope you believe that me when I'm saying that.
What's been going on since we were appointed is there was an attack on the authority of
the JPLs, brought in the first instance by Samuel Bank and Fried, and then BlockFi joined
that attack to try and sort of kick my clients off the job.
And we responded to that.
It was purely defensive.
And again, the shares were not at issue.
The shares were in the background, but there has been no activity in Antigua about these
shares.
And the hearing that's scheduled toward the end of January is to get a wind-up order out
of the judge.
Again, it doesn't predetermine anything about whose shares these are.
So my clients are fiduciaries.
What is sought in the wind-up order?
What relief is sought in the wind-up order?
The wind-up order is sought to conclude, to give the joint provisional liquidators the
authority to administer the estate for the benefit of the stakeholders.
And the creditors, who we have to first figure out who those are, right?
And we're done.
We're holding this asset to the extent we're holding it.
The government's holding it.
But our ownership of this asset in the hands of these fiduciaries is for the benefit of
whoever's entitled to it.
And we've never asked for a ruling on who's entitled to these shares away from this court.
Now, we have questions about where the best forum to do it is, and we've said that out
there, but we have not taken any affirmative action anywhere to get some other judge besides
you to decide this issue.
But in order to effectuate the wind-up, do you not need to take steps to determine the
extent and validity of either FTX's interest or BlockFi's interest?
So there is a competing proceeding going on in another forum, which affects the rights
of this debtor.
And I'm not speaking for the FTX debtor, but it would seem to be parallel in assets.
We have potentially three, if not four, different venues deciding everybody's respective interests.
Of course, the estate can't be administered until these issues are decided.
The JPLs in Antigua, as I said, have not been asking that judge, just as I feel BlockFi's
counsel sort of implied, we're down there trying to take this decision away from you.
We haven't asked that judge to make that decision.
We came up here as soon as the counsel for the JPLs came up here and contacted all the
counsel for the parties in interest.
Our view was that we should talk about a sort of efficient way for everyone to get their
claims on the table and hash this all out.
We also agreed with various people that have said we want the value of the shares to be
preserved.
We did the opposite of trying to get this decided back down in the Caribbean when nobody
was looking.
We came up here and said to Marek, our custodian, because we do own the shares technically,
Your Honor, we asked our custodian to freeze the shares, not to give them to us so we could
go off and do something with them, to freeze them so that we could talk to the parties
in interest.
And that was happening.
Now, the government has changed the playing field a little bit, but we haven't changed
our attitude, which is that we probably should talk about how to work this out.
So that always has been our position.
I just want this court to know that there hasn't been any funny business going on.
It's almost done.
There was a complaint about a little clause in the order that the judge in Antigua put
in for BlockFi to, if they want to appear at this hearing, which they're welcome to
do at the end of January, to provide the court with a summary of the position, sort of why
they are here.
I understand that that's a local procedural thing that's common in every case.
It's not an attempt to keep BlockFi out of the court in Antigua.
They're welcome to come down there and say whatever they want.
And just as a practical matter, Your Honor, we are aware that even if we did go to the
judge in Antigua and get that judge to say, OK, the shares belong to so-and-so, that we
may have to come up here and contend with all the other judges up here who may have
a different opinion.
And so it wouldn't even have worked if that was our plan.
I just want to make that clear.
So if you ask me what we should do next, I'm going to say the same thing I said before,
which is we think that there seems to be the government seizing the shares has caused a
sort of reset of some sort.
OK.
If it means that certain people should be implicated into this case, fair enough.
We had already asked for more time to respond in this case because we're trying to figure
out what's going on.
So it seems like the party should continue to talk about that.
If there are rival forms, I don't know.
It eventually gets litigated if it can't be negotiated.
But besides the issue of making the shares have their maximum value, which maybe requires
an advisor, a very practical issue, I don't think there's a legal issue that requires
anything more than some cooperation.
There is no legal issue at all that needs to be cited in the near term.
I don't think that the JPL is going forward with getting a winding up order would necessarily
change anything.
It certainly isn't going to somehow simultaneously decide the outcome of the shares, which of
course even the judge in Antigua can't convince the government to do anything with it.
No threat.
So would it make sense to carve out from any wind up order steps to determine, fix to an
extent, the validity of any interest in it?
I can't speak for the judge.
Well, no, I'm throwing that out there.
But it's in my mind perfectly possible that the judge in Antigua would be open to these
key issues disputed amongst a bunch of people up in the United States.
But maybe that issue should get decided there.
And then the effects of that issue are folded into the winding up order.
But I don't think the judge would be against that.
But of course, I can't read the judge's mind, Your Honor.
We're actually getting a new judge.
The judge that we have heard the case so far is going off the rolls or whatever the expression
is, and a new judge will be coming in.
But either way, Your Honor, there's nothing that interesting going on in Antigua, to put
it that way.
So that's the main point I wanted to make.
Otherwise, I believe that the motion should be denied because my clients can't be compelled
to turn over something when they literally cannot do that.
And that we all get some extra time to talk and see if a lot of people can work out a
lot of these procedural issues.
My sympathies to the new judge coming in, just very briefly.
I know my law clerks are cringing at the thought of me asking this, but the real important
question is it Antigua or Antigua?
Antigua.
That's what the lawyers at Antigua call it.
Even that's going to be disputed.
Maybe so.
I'm not taking a position on it myself.
But definitely the Commonwealth community uses Antigua and Antigua.
Fair enough.
Thank you, counsel.
Thank you.
Let me, before I get, thank you.
Is there any other appearances?
Council?
Thank you, Your Honor.
Edward Schnitzer from Montgomery-McCracken on behalf of Samuel Bankman Fried.
Your Honor, as other people have already stated, we believe the motion is moot because of the
seizure.
While the seizure was unexpected from our perspective, it did happen.
It has been effectuated.
So if you just simply look at what the relief that was requested in the motion, as well
as the proposed order, it really can't be granted because the shares in stock are no
longer in the possession of Merrick's.
I actually agree with FTX counsel, and maybe the one time only in this case that I will
agree with FTX counsel.
But as they said, basically, the arguments advance and relief sought earlier today that
you heard was not what was set forth in the motion and it should be denied.
Your Honor, as you saw in our papers, we responded because the motion was going forward, not
withstanding this, so we needed to make our point with respect to the standard for preliminary
injunction.
We do not think it's met.
I put that forth in our papers.
I believe the JPL has also put that forth.
I won't burden you with repeating what we put forth in our papers.
The only thing I wanted to add, Your Honor, is in part of their presentation, they said
our position was tainted by the fraud of Mr. Bankman Fried and Ms. Ellison.
I just wanted to make two points, Your Honor.
First of all, I do want to remind everybody, and Your Honor, I believe you effectively
stated this before, it's alleged fraud of Mr. Bankman Fried.
He's been accused.
He has his right in court.
We will see what happens.
Ms. Ellison, on the other hand, has by guilty.
I believe there is a difference there.
Lastly, Your Honor, I know you asked, so I thought I would answer the question you asked,
what is Mr. Bankman Fried's interest?
He is the 90 percent shareholder of Emergent.
I don't believe anyone's disputing that.
So my understanding of how things work in Antigua or Antigua, I'm not sure either of
pronunciation, my understanding of how things work there are similar to how things work
here in that after creditors, if there are any creditors get paid, the interest in a
company do belong to equity.
So that is Mr. Bankman Fried's interest.
It is contingent at this point, although I believe almost everyone's interest here is
contingent because they would actually have to prove they are a creditor.
All right.
Thank you.
Thank you, Your Honor.
Counsel for the Committee.
Good morning, Your Honor.
Kenneth Ouellette, Brown-Rudnick, proposed counsel for the Committee.
The Committee supports the debtors today.
Our view is that there were two things sought in the turnover motion.
There is the demand to turnover, which it is what it is today.
But there was also a request to enjoin the transfer of use of the collateral pending
the court's resolution of the adversary proceeding.
That is of great importance to the Committee.
The Committee does not want these shares going anywhere.
Mr. Bankman Fried's counsel is in the courtroom.
You can imagine the view of the Committee on Mr. Bankman Fried having any say in where
these shares go.
Beyond that, Your Honor, we'll leave it to the debtors, but we wanted to register that
we joined the debtors in this motion.
All right.
Thank you.
Mr. Shapiro, I'm going to...
Oh, before I turn to Mr. Shapiro, counsel for...
Somebody probably wants out, but go ahead.
Thank you, Your Honor.
Yes, we would like out.
We represent Marikson.
I really don't have much more to add to what the counsel today has said, but as you recall,
when we had the hearing before you on the 28th, I made very clear that Marik's had froze
this account on November 10th.
It made very clear to all of the interested parties that these assets would not be moved
unless and until a court ordered otherwise.
And we did get that order by the warrant of seizure on December 30th.
We made all of the parties aware of that warrant before the government actually seized the
assets.
But on January 4, Marik's fully complied with that warrant and everything is now in the
hands of the government.
And I do think what we talked about on the conference on the 28th of December was everybody's
interest in the next step should be to maximize the value of those assets.
And I would request that we be let out of this case since we no longer are a stakeholder,
and the motion should be denied.
All right.
Thank you.
Thank you, Your Honor.
I'd like to turn to Mr. Shapiro.
Good morning.
Yeah, it's still morning.
For the next three minutes.
I appreciate that the government is not a named party in the adversary proceeding at
this juncture.
My understanding is that in reading the notice of the seizure that I guess with a pending
or contemplated in rem proceeding that's coexistent with the criminal prosecution of Mr. Bankman
Freed, the government has seized the shares.
It would seem to me that there can be many months and many market changes before the
government gets to the point of whether a forfeiture goes into effect.
And the concern that I have probably shared by every other judge who has these issues
in front of them is that there not be a loss in value of the shares during this time period
until ownership entitlement, whether it be as an owner, as a lien holder, or on the basis
of forfeiture is determined by the appropriate court.
What are your thoughts on working or reaching a consensus with the stakeholders to ensure
that the value for the creditor body, all of the retail and larger institutional creditors
are furthered?
Thank you and good morning, Your Honor.
As I indicated earlier, the United States is not a party to the adversary proceeding
and I'm not appearing in the adversary proceeding but I am here to answer Your Honor's questions
of the court.
And we would greatly appreciate the opportunity to be able to submit a brief in conjunction
with any accusations or allegations against the government before Your Honor rules at
the appropriate time.
In the interim, Your Honor should know that we have been having discussions, confidential
discussions with counsel of the debtors in both this case and the FTX case as well as
others.
And hopefully we would be able to resolve these issues but if we can't, there will
be an appropriate time where Your Honor can hear the arguments of the government as to
why we believe that what the government did was appropriate.
And of course, ultimately, if the matter went forward in New York and the Southern District,
it would be a criminal and or civil asset forfeiture proceeding.
In the interim, as part of the discussions, Your Honor, to answer our question, that issue
that Your Honor has brought up has been the subject of discussions and we haven't reached
a conclusion yet.
So I can't tell Your Honor what that conclusion is but we are talking with counsel of the
parties about how to address Your Honor's concern.
All right.
Thank you, Mr. Shapiro.
Mr. Kanowitz?
Or, we'll miss that.
Andrea?
Let me, so what?
I know going for, Anegean or Anegean?
Anegean.
All right.
Your Honor, a couple of things are really clear.
There's multiple parties claiming interest in this property that likely will be the subject
of some government forfeiture action at some point in the future, whether civil, whether
criminal.
But before that really can go forward, I mean, there needs to be a resolution of the rights
and interests of the parties who are claiming interest in this collateral today.
And it's unworkable that it goes forward in these multiple forms.
We filed the first action.
We think that under the Princess Leighton doctrine it should stay in this court.
We don't know exactly what's going on in Antigua.
I mean, our local counsel there asked that certain provisions of the order that sets
this hearing on January the 27th not be included and that request was rejected.
So we believe, or at least there's some indication to us, that on January 27th the court in Antigua
may be deciding what the rights of BlockFi are pursuant to its pledge agreement with
emergent.
We don't think that should go forward.
Now if the Antiguan court wants to go forward with appointing JPLs in some windup order,
as long as it doesn't impact BlockFi, that's fine with us.
The same in Delaware, as long as they want to go forward with their stay motion to the
extent that it doesn't impact BlockFi's rights in the collateral, that's okay with
us.
But I believe they said they're willing to push off that hearing on January 20th.
We don't think that should go forward on that day.
With respect to Merrick's, we haven't released, BlockFi has claims against Merrick's and
it will continue to assert those claims.
We don't see a point in waiting for resolution of any criminal actions against Mr. Bankman
Fried and the ultimate filing of some type of forfeiture action before some court, hopefully
this one, goes forward and makes some, at least the parties can move forward with whatever
agreements or ultimate fights they have over who's entitled to and what rights and benefits
and priorities we have in the collateral.
And for those purposes, we would ask that the court enter an order that takes control
over this matter and enjoins any action of the emergent JPLs in Antigua to the extent
they're going to affect BlockFi and the same with respect to the action in Delaware.
All right.
Thank you.
I don't see if there's anyone else remotely who wishes to be heard on these issues.
I don't see any hands raised.
All right.
I think all of the stakeholders and the parties have argued well their respective positions.
These are interesting and challenging issues that I'm sure all the judges appreciate having
on their respective plates.
At this juncture, it's clear that this court is not in a position to enter any turnover
order of any type.
The shares are being held by the government pursuant to a warrant of seizure and the government
is not a party to the pending adversary proceeding.
The government wasn't a party to the motion and the government, the US government's actions
changed the landscape for all involved here.
The turnover motion itself is going to be denied without prejudice.
I have a pending adversary proceeding in which I would expect the complaint needs to be amended.
It provides for jurisdiction by this court and this court intends to pursue its jurisdiction
and authority in the pending adversary proceeding.
It is always subject to a consensus, consensual resolution otherwise as to the proper forum
for adjudicating the rights here, but this court has identified a property interest held
by this debtor, subject to dispute but still a property interest under 11 USC section 541A
that is deserving of protection under 11 USC 362A and this court is well equipped, god
that sounds awful, pretentious, this court is equipped to handle the litigation going
forward if it makes sense to the parties and I will certainly afford the parties the opportunity
to brief and argue if such assertion of jurisdiction is inappropriate.
But right now there is a pending adversary proceeding.
There is also a pending order of this court which just implements the statutory rights
under 362A, this court's November 30th, I think it's been referred to as worldwide order,
reinforcing the automatic stay.
The court intends to enforce that order with either the content powers it has or other
authority under section 105 to the extent that there are violations going forward.
The doors are open for parties seeking the appropriate relief from the automatic stay.
The court is cognizant that in this circuit we still view actions taken in violation of
the automatic stay as void ab initio.
I don't believe there is a need to enter an order directing a sister court including an
Antiguan court or Delaware court on what actions they should be taken.
The law is straightforward and if there are actions which are challenged, they can be
challenged in this court or other courts as appropriate.
But at this juncture I think we need to move forward with the adversary proceeding and
motion practice in that adversary proceeding as appropriate to address the needs of the
respective parties.
With respect to the committee's motion to intervene, I'm going to schedule that for
the 17th.
I think that should probably be resolved through a consent order.
And as to other parties' actions going forward, this court is here to address the issues as
needed but there is no specific relief today that I can provide on the pending motion.
So again, the pending motion for turnover is denied without prejudice.
The adversary proceeding continues.
All parties have their respective rights and abilities to make argument wherever you all
want to.
Any questions or concerns?
For the record, Richard Canowitz on behalf of the debtors estate, Your Honor.
No, we will speak with the parties, including the FTX debtors and the JPLs to talk about
how they want to proceed in the adversary proceeding.
We also look forward to talking to them about moving the January 20th hearing or completely
withdrawing that motion.
Just so you know, January 20th is our 341 meeting in this case.
So we're not available that day anyway but we will discuss with them a constructive way
of moving the disputes forward in this court if possible.
And we will also continue talking to the government about the proper way to handle the seizure
and the benefit to the victims.
And let's be clear, I just want to make it clear for the record for everybody.
Block 5 was defrauded by FTX and its affiliates and maybe the insiders of FTX and its affiliates.
We are a victim.
FTX is not a victim.
FTX to the extent that creditors overlap with our creditors are the victims.
And we're here to protect the victims and Mr. Stark and his team are well equipped to
assist or work with us to do that.
But that is our fiduciary duty.
The gamesmanship really needs to stop.
As I said to every counsel and as I said to you, Your Honor, at the first hearing, we
are fiduciaries.
We are here to protect client interests and get them the best value, not to have skirmishes
and litigations and gamesmanship over jurisdiction, automatic stay versus automatic stay or something
else.
So we're going to try to work cooperatively with all the constituents and adversaries
and objectors in this case, in this adversary proceeding and try to craft something that
is sensible, commercial and efficient to have the dispute, as everyone has said, about whether
or not Block 5 has a guarantee and a pledge from eMERGEant and what that means for this
estate.
So we're going to endeavor to do that.
Two other points, just to clean up.
The DOJ has in fact served warrants of seizure on Block 5 for certain customers or clients
who are obligated to the government to turn over property.
So it's customer property that we're holding.
We don't think we need an order from this court to actually comply with those seizure
orders.
Mr. Shapiro is on the phone and we have had communications about those.
They emanate out of the state of Washington and there's about two or three clients of
ours impacted.
It is client money.
It is not property of the estate money.
And we are going to cooperate and do what we need to do through counsel to turn over
that money to the government based on those seizure warrants.
All right.
I wanted to let you know that.
Thank you.
I appreciate it.
And the second thing I think that we need to address housekeeping is further dates.
Right now we have January 17th.
We also have January 30th, but we will need dates, I would believe, in late February and
March subject to any other type of proceeding that needs to be brought before, Your Honor.
We have a February 21 date already included.
You think earlier or?
I think that a little later since we have January 30th.
It could be earlier, but that week, the President's week, is vacation, among other things.
So I think that week is probably not the best week to do it.
Uh-huh.
Are we scheduling an omnibus date, you think?
I think it would be an omnibus date.
We have 1.30.
I am actually away the week of the, the chunk of the week of the 13th through the end.
The best I can offer you all is the week of the sixth or if we're basically eliminating,
well, let me see here.
If we're eliminating the week of the 20th, and the week of, well, the week of the 13th,
I believe, is the President's weekend.
Are we eliminating both those weeks?
I think the President's weekend is the 20th, Your Honor.
That's why I'm saying that week on the 21st is an issue for certain people, I think.
Maria, do you know why we don't have court on the 13th?
Oh, is that Lincoln's birthday?
It is the government.
LTL.
Well, Your Honor, why don't we do this now?
Why don't we caucus the estate parties and get back with chambers?
Because the prior week of the 13th has issues, the week of the 20th has issues, and we don't
know what we're going to need potentially, so maybe we keep the 21st.
So, let's keep the 21st for now.
It looks like the, no, yeah, let's leave it for now.
We're running out of days.
Or I'll have to push something else.
The Third Circuit doesn't rule on LTL.
I have a whole day I can move for them.
So we'll see.
All right.
Then just reach out for chambers.
We will, Your Honor.
I don't believe we have anything else on the agenda.
We thank you for your time.
Thank you.
Mr. Stoltz?
Your Honor, Daniel Stoltz, proposed local council for the committee.
On the motion to intervene, shall we submit an order shortening time listing it for the
17th?
We submitted it without date.
I'll just schedule it.
Let's avoid the paperwork.
And will the order, will Your Honor enter a text order after when objections will be
filed?
Yeah, we'll do that.
We're talking about having it on the 17th, correct?
Correct.
So we'll have objections by, let's see, 17.
Objections by the 16th.
And Your Honor, just so Your Honor knows, the debtor has graciously consented to share
CROL with us.
So both the debtor and the committee will be using one noticing agent so that people
won't get confused.
I think that's great.
All right.
Anybody else wish to be heard on any matters?
All right, folks.
Thank you for your time.
Take care.
Thank you, Your Honor.
Thank you.