Okay, good morning everyone. This is Judge Kaplan. Hope everyone is doing well. This
is the BlockFi Inc. Matters. And I appreciate everybody's participation through Zoom remotely.
For those who wish to be heard at any point in time, if I haven't called on you, please
use the raise hand function. And either I or my law clerks will make sure we spot you
and give you the opportunity to speak. I've received correspondence from on behalf of
the committee regarding the exclusivity motion. I expect that we'll be talking about the process.
I see both Mr. Susberg and Mr. Stark have raised their hands, anxious to get involved.
Let's have at it, so to speak. Good morning, gentlemen. Let me start with Mr. Susberg.
Yes, thank you, Your Honor. Joshua Susberg from Kirkland and Alice on behalf of the debtors.
I think the agenda today is relatively straightforward, save for what I think is straightforward,
our exclusivity extension. This is our first exclusivity extension. And it's a modest one
at that, Your Honor. As you've seen in our reply, we asked for an extension of the filing
deadline by 48 days and the solicitation deadline by 73 days. So that would be extensions to
May 15th and August 11th, respectively. And we laid out in our reply, it's on page 4,
the schedule that we're seeking to adhere to, which includes the filing of a plan no later
than May 15th. And then working our way through all the statutory deadlines and the like to
get to the deadline we propose in August, which we admit is aggressive. But it's one
that we want to move forward with. And we have been doing a tremendous amount of work
to be in a position to resolve many complex issues, notwithstanding the commentary from
the committee. And we laid this out for the committee on April 10th. And we noted in our
papers there was an 88-page deck. Mr. Renzi walked through it. We had a conversation about
the schedule. And we had a back and forth. And, you know, Your Honor, I've been doing
this 20 years. I know there's people on this phone that have been doing it a lot longer.
The way it works with exclusivity, you have up to 18 and 20 months for filing a plan and
for soliciting. The debtor proposes six months or nine months. The committee comes back.
We reach agreement on the days. We were within 11 days of each other. Mr. Stark wanted the
end of July. We wanted the middle of August, like we suggested. And then we got the pleading
seeking to terminate exclusivity on our first request. This is not something that I've ever
seen. And the reality is, Your Honor, that there's more to this than meets the eye. And,
you know, notwithstanding all the back and forth in the objection that Mr. Stark filed,
comes down to one sentence in his pleading. It's paragraph 28, where he makes a comment
about the debtors can file a plan that seeks to confirm over the objection of creditors
with releases in the plan. And we want to file our own plan. And the reality is that's
what this is all about. This is all about Mr. Stark pre-adjudicating before we even file
a plan what our plan is going to include and what it's going to say. And what I would tell
you, Your Honor, we are continuing the investigation. Kirkland analysis handling an investigation
at the direction of our independent directors, Jennifer Hill and Scott Vogel. As you know,
the committee is conducting an investigation. And as we sit here today, that investigation
is ongoing. There are more depositions. We have more document requests from the committee.
And we are going to make determinations and decisions when it is complete. But there is
no world in which we should be terminating exclusivity at the first request. I think
we have demonstrated cause more than sufficiently in the 32 bullets that we laid out on pages
3 through 5 in our pleadings. And I know Your Honor mentioned Mr. Stark's letter from yesterday.
I will admit that we did take the bait a bit from the committee when they asked us what
our evidentiary record would be. We submitted declarations for Mr. Renzi and Ms. Pulo. And
obviously we will take guidance from Your Honor. I think those declarations are unnecessary.
I think Your Honor can decide this on the papers. Again, it's a first exclusivity extension.
We were talking about 11 days. This is about Mr. Stark and the committee trying to make
a point that I'm not sure is ringing hollow. It is ringing hollow. And I think we are going
to work over the next couple of months to pursue and ultimately confirm a plan that's
in the best interest of our stakeholders. And we are not going to pre-adjudicate anything,
especially because investigations and the like are not complete. So we would submit,
Your Honor, unless you want to handle it differently. I'm hopeful that we can move forward on the
pleadings here today and get our exclusivity extension and really start building the consensus
that we need, which we thought had started, admittedly, on April 10th. I know it will
continue. And I'm hopeful we can put some of this aside and really move this forward
for the benefit of the customers of this estate.
All right. Thank you, Mr. Susberg. Mr. Stark, let me hear from you.
Thank you, Your Honor. Can Your Honor hear me okay?
Yes, I can.
Thank you. I do have a presentation. Maybe it's a little longer than Mr. Susberg's. But
I do appreciate the things that he says. And as I think Mr. Susberg said to me, said in
open court, we have a relationship that goes over many cases, and I respect the man. And
I think he is an honest and good lawyer. So what I'm about to say is not a reflection
of anything other than the fact that I accept him as his word, and I always have, but we
will continue to work in good faith. But we have an issue. And there has been pleadings
that have been filed that admittedly, maybe from us, and I think probably they admit as
well, raises the rhetorical level considerably high. And so I think, Your Honor, it's worth
spending a couple of minutes to talk about that. The reply says, hey, wait a second.
We had, we moved a lot from our original request, and there was a meeting and the schedule was
presented and it gets a little personal towards me, but I said, hey, maybe we can talk about
this. I want to think about it. We didn't agree to anything, despite what they said.
And it really kind of presents this as the committee picking a fight. And I don't think
that's fair. And I want to unpack that. And I will at the end of my presentation, because
I do believe this is a status conference. And I do believe that we are, and I will make
a proposal procedurally about how to advance, but we're not, as I understand it, going to
be taking evidence today. And we, of course, would reserve that right. So let me just unpack
it a little bit and then hopefully move, seek to, okay, where do we go from here? Which
I know that's always Your Honor's request of all counsel. So I'd like to make a proposal
on that. Before we filed the objection, there was a meeting and there were conversations.
And I did call debtors council. Now, Mr. Suspick, I spoke with Mr. Canoed's beforehand and I
said, I don't want to file this objection. I want to talk. And we spent some time talking
to our respective clients. And the decision was no, go ahead and file your objection.
Okay, so we filed the objection. I assume we would continue to talk thereafter. It went,
you know, it zigzagged to what I now read as a fairly heavily handed rhetorical position.
We have sort of two points that are going on underneath this. The first is the need
for speed. And I want to spend a minute or two because it's not only us talking, three
of us talking right now. It's also a lot of people listening to what we're talking about
right now. So I'd like to say a few things on speed. And then let's talk about that underlying
substantive issue because it's enormous. And the pleading kind of masks the substance with
very heavy handed rhetoric. And I think we need to talk substance at this moment. On
the need for speed, I want anybody who's reading the debtor's motion and reply papers, there's
sort of this imperialistic kind of tone and it comes right off the shelf from every other
chapter 11 case. Hey, we get exclusivity because that's de rigueur. We get it because we ask
for it. Paces are big. We get it and move it forward. There's no real, there's iteratives,
but it doesn't really say anything substantively about progress. But I understand that's what
we do in most cases. But this is not most cases. In this case, we don't have banks,
hedge funds, arbitrageurs, landlords, trade vendors, companies. In this case, the creditors
are people, individuals, moms and pops, many of whom have lost their life savings. And
Your Honor, I know has received a number of communications from some of these people.
At the last hearing, I got up and said, please don't call chambers anymore. Call me. So Your
Honor can only imagine how many you're receiving because I'm receiving more. But the stories
are frightfully terrible. And I take that very, very seriously as does the committee.
We will not allow these people to get processed in the usual course. We don't believe that's
appropriate given the circumstances of this particular case. I can't explain four months
from now why we can't get something done. I've been saying for quite a while now, we
want to plan on file that we can agree to before there are leaves on the trees and there
are already leaves on the trees. And I can't explain the delay. It is the debtor's job
in a case as personal as this one to say an open court in a much better way than the pro
forma ipsa dixit that's been filed already, why it takes four more months, why the separation
from money is so important. Not for me to do. Second, this case is burning money. It's
clear it's burning money. And yes, this little contested matter is burning money. But there's
a rule, Your Honor, and I learned it when I was in college. It's called Parkinson's
Law. Maybe Your Honor knows this. Work will always expand to fill the time allotted. And
in bankruptcy, Parkinson's Law is visited in the millions and the tens of millions,
monthly two months, because most of us are on an hourly time basis. And these are not
small law firms involved here. But we don't normally have to talk about Parkinson's Law
in bankruptcy cases because we have a dip loan. And dip loans have budgets and milestones,
base controls and near term maturities. And so debbers have to move quickly because the
secured lender is demanded. And those are the rules of engagement in every case. But
not so here. Because what the company did the minutes before bankruptcy is they sold
all the crypto that was domestic. And they've been sitting on 250 plus million dollars in
US currency sitting in a bank account. And no one is tethering the expenditures to that
money. So that makes it my job and in turn Your Honor's oversight job to make sure that
the falling knife of cost is accounted for every single day, week and month of burn,
because that's what these moms and pops deserve. And I don't agree with the 38 iteratives about
how hard this case is that there's oh so much work to do. I do not agree that that is a
accurate narrative of what's going on in this case. This is no business. There is no enterprise
to rehabilitate. There is no business that will be organized. There is nothing viable
or feasible here to come out. There's an M&A process for the platform that is a bundle
of sticks to be sold. Okay. And that process is concluding. Then we have the cash, some
cryptocurrency assets. We have some loans and JB interests in mining companies. We have
the FTX claim. We have pauses of action. Those are the things you shove into a liquidation
trust and give the creditors control of their own fate because we have no secure debt. We
just have unsecured creditors here. They can choose for themselves what and how they want
to handle all those things and how they want to resolve claims and causes of action as
they see fit. If your honor, these issues that have been presented, we have to coordinate
with the JPOs. We have my investigations, which is pretty much wrapping up. We have
intercompany issues. We have the wallet issues. Those are all manufactured complexity. It's
resolved and it's a slow walk. And I'll tell your honor, I'll prove it the point this way.
If your honor were to lift exclusivity today, I could have a plan on file in 10 days, maybe
even sooner. And I feel very, very confident that that plan would be widely accepted by
all creditor classes, would settle out for remaining issues that are out there like wallets
and stuff like that, and would be conformable in June. And that gets us to what's lying
beneath the surface. What is this dispute about? Your honor is probably not used to
seeing the kind of leadings now, at least to the fly, and how personal it got. So quick
it got so personal. Maybe I prompted it by my own rhetoric. I don't know. But it went
from slow to really fast, really quick. So there's got to be something going on beneath
the surface. And in fact, it's not the count, except in this respect. It's not May 15th.
If your honor were to set the deadline tomorrow for filing a plan, they'd have a plan on file.
They already have a plan on file. They filed it on the first days of the case. It's the
solicitation deadline. That's the hard one. Usually you get two months. They want three.
And they put in an affidavit about, well, in this case, for some reason, unlike any
other case that any of us are involved in, they need an extra month here. But let's just
talk about mid-August for a second from a different vantage point. I didn't fall off
the turnip truck yesterday. I know what plan they're going to file. And we've had lots
of conversations among counsel. Again, I talked to counsel before I filed my objection. We've
had conversations since. There is misalignment on a very significant issue in this case.
And we'll talk about that in a second. The plan that I believe they intend to file will
be vigorously opposed by the committee. We don't see how that plan confirms. We won't
get an accepted parent accepting class. We don't think it will be good faith. We don't
think it will be fair and equitable. We've got a whole bunch of other things that we're
thinking about here. And we're setting up for a very ugly case, which means that we
don't get to pick up, according to his schedule, until mid-August, assuming that we're successful
in blowing up that plan. And then we don't get out until Halloween. Meanwhile, we've
incurred tens of millions of dollars of additional incremental cost. And that's terrible. That's
terrible. So I reached out to opposing counsel. I made several different proposals to try
to obviate this matter right now, this dispute right now. But I made this proposal, which
I thought was fair and in the middle. I said, Your Honor's bridge order on exclusivity didn't
have a date certain. It says, exclusivity will automatically bridge until Your Honor
can schedule a hearing. And at that hearing, there'll be a final order on the motion. And
you automatically bridge to that date. I said, let's all agree just to hold off that hearing
for a little bit of time. Let's talk. Let's put some oxygen into our respective positions
and talk it through and see if we can find common ground, as opposed to going immediately
to the fight. I got a voicemail message back midday yesterday. Nope, we're not talking.
Let's get on with the fight. That's why we're having this dispute, Your Honor. That's what's
going on. I want to talk. I want to share perspective. They want exclusivity in their
positioning, not unlike another case that Your Honor may have been dealing with yesterday
on injunctions and controls and rights. And we want the ability to talk, as opposed to
being held in the gulag for a while and have to essentially be extorted by time and cost
funds to giving in on something we feel very strongly about. And that's a bad dynamic.
I wanted in this presentation, Your Honor, to not want to talk about the issue, the big
issue in this case. I wanted to measure my words because maybe Pollyanna-ish. I thought
if we actually, if Your Honor found my proposal acceptable, put the hearing out for the end
of the month, let's see if we can't talk it through, just try to find some common ground
before we went and talk with each other. I didn't want to put it out in the public right
now. We have a very active community and one that is watching everything we say and talking
amongst themselves about. I didn't necessarily think feeding the fire was a good idea. I'm
happy to talk about it further because I think Mr. Susberg kind of alluded to it. But I think
I'm going to hold my tongue at this moment. Perhaps, Your Honor, if Your Honor asks me,
Mr. Susberg prompts me, we can talk about it further. My proposal stands, Your Honor.
I think the right answer for this case, before we go ahead and go hammer and tongue, go into
tens of millions of dollars of expense on mom and pop money over something that seems
awfully parochial and not necessarily what the creditors want, we should talk. But if
we can't make a resolution on talking, then I'd rather have the trial now at exclusivity
and put it all on the table for everyone to see and the creditors to realize so that Your
Honor can make a decision before we incur all that expense and take this case all the
way out to Halloween. I think that's the proper staging of how we end the block-fired case
and make it unlike Voyager and Celsius and Lord knows FDX. You want to have any questions
for me at this point?
Now, thank you, Mr. Stark. Let me go back to Mr. Susberg and hear from his company.
Any response?
Yeah, I have a few, Your Honor. Thank you. Joshua Susberg, Kirkland & Ellis. As I've
told Mr. Stark before, none of this is personal. We're all trying to get to the right answer.
But the one thing he said that demonstrates that exclusivity and an extension is critical
here is he said, and he hasn't even seen a plan from the debtors, he said there is no
plan that the debtors will propose that he will recommend his constituents agree to.
And that is the posture that he's taken. And the commentary that has come back as far as
trying to bridge the gap here in a conversation is give the committee a consent and veto right
over the filing of a plan, which is effectively the same as terminating exclusivity. And I'm
reminded of the Dow Corning case because it's cited in Mr. Stark's pleading. And the one
thing that stuck out to me was the chaos factor that the courts allude to in Dow Corning.
This is our first exclusivity request extension. We are asking on April 19th today to have
a deadline of May 15th to file a plan. We intend to share that plan with the committee
in the next week or so and then get it on file. And then we'll move forward with that
plan. And just like all chapter 11 plans, this is no different, notwithstanding the
constituencies. There are differences in the case, I admit, but just like in Voyager, where
we built consensus, not only with individuals, but with the committee. And just like we're
doing in Celsius, this is exactly the same. This is about a leverage play by Mr. Stark
to try to thwart the cases and increase and enhance an agenda that he has that he doesn't
even know what our document says. And it's all the more reason, Your Honor, that I believe
on the pleadings and on this record and on the factors, because Your Honor has sat here
for four months. And I know you know the complications of this case. It is not a simple case. It
is global. It involves international. It involves U.S. There are wallet issues, not to mention
the fact that we're in the middle of a sale process and we may end up going with a sponsored
deal and there could end up being an auction, all of which needs to play out in the context
of filing a chapter 11 plan. We've worked on the standalone, but it could be that the
sale process makes sense. And then there's dealing with all the regulators and making
sure that they're on board with the plan. We have done this before in similar circumstances.
We know what's involved and it absolutely merits and warrants a modest, again, a very
modest exclusivity extension. We did not come in here and ask for the sun and the moon and
the stars. We asked to get a plan on file by the middle of May and then to proceed down
a path as quickly as we can. And if we can beat those dates and if solicitation goes
faster, by all means, we're going to pursue that. We are not looking to draw this out
for the sake of drawing it out. That is unfair. And I hope every single customer knows that
I mean what I said on the first day of this case. It is our job to deliver people back
their money. And that's exactly what we're going to do. But we're going to do it in a
thoughtful manner and not a chaotic matter consistent with doubt warning. And I would
submit, Your Honor, again, that you can decide this today on these pleadings, but we obviously
will do whatever Your Honor recommends as far as moving this forward.
Mr. Stark. Your Honor, I don't this is where I do part company with Mr. Suspett on a personal
level. This is not a leverage play. And by the way, it's not Mr. Stark's decisions. This
is the committee's decision. I have an active committee. I have an active client. And I
prefer if my client if my opposing counsel actually refer to my client as opposed to
making this all personal about me. Your Honor knows me. This isn't my first rodeo. I've
been doing this for nearly 30 years. I had a little more experience than Mr. Suspett
doing only committee work. So I don't really appreciate that. What's happening, Your Honor,
it's not a leverage play. Quite the opposite. My proposal is let's talk to one another.
Let's not jam litigation at this moment. But I'm not an idiot. I sat in the room. I've
seen the plan they filed and I've talked to these people. I know what plan they're going
to file. Mr. Suspett even said he's conducting his own investigation and he's going and talking
to independent directors that he installed in this company. And we've done the investigation
ourselves and we have views about what the plan should look like in contravention to
what we've been told. Right. It's not like I'm making this stuff up. I said, let's talk.
Let's go into a room and see if we can figure this out. But no, you don't get to have exclusivity
because possession is not intense with the law and you don't get to use the cost and
the burden and the time delay on people who are desperate to extort what you want without
a rational conversation. That is wrongful. And if that's the position the debtor wants
to take, then we rely upon the jurors' release that says we want to have trial, say, to an
open court. Let's have that. And that's where we are, Your Honor, but I don't appreciate
that this is anything personal or anything like that. We just don't agree with their
positioning and we want to talk about it instead of litigating it. It wasn't the decision of
mine to move this hearing this way. All right. Before I start addressing the issues, is there
anyone else who wishes to be heard on this? All right. I don't see anybody with a raised
hand. Probably yesterday, towards the end of a nine-hour-plus hearing, was not the right
time to read a letter requesting another evidentiary hearing. It certainly, I'm not sure whether
I would be receptive yesterday. I've had the time to consider the issue over the evening
and listening to the arguments. I don't view any of this as personal. This is zealous advocacy
on each side, with Mr. Stark trying to protect the committee and the clients and the customers
and Mr. Susberg in his way of also trying to protect the customers. It's a difference
as to what's the best pathway. I will say that I believe the professionals in this case
have acted as such, professionals. You've kept most of the issues out of my court to
date, which has been tremendous because it does preserve. I'm not saying there aren't
dollars being spent in this case. There are. Every case of this magnitude and complexity,
and it has complexities involved, generates, unfortunately, litigation and time-consuming
discovery and investigations. I am pleased that the committee, through Mr. Stark's efforts
and his colleagues, have pursued their investigation and done so without running to the court on
every issue and working with the debtors council and other council in trying to resolve issues.
I refer to this case almost as my stealth cryptocurrency case because I don't see a
lot of what I know is going on, looking at all the records, looking at what's on the
docket. I know the communications. I know the discussions by and among the professionals.
I know the investigation that's being taken. And because of that and that effort to try
by all the professionals to reduce the administrative burdens, I am leery of moving forward with
an evidentiary hearing on a first-time exclusivity request extension when the result, if the
committee is successful, will be competing plans which have their own inherent administrative
costs and burdens. The estate does not benefit from necessarily from competing plans. There
may come a point where there has to be when negotiations simply are at an impasse or where
the plans are just unacceptable. But my concern is that we go down a path of spending what
I view as wasted dollars and efforts fighting over weeks. I've seen in Celsius, I've seen
in Voyager, you all have more experience in these cases, the complexities and the stop
and goes of the processes. We see confirmed plans that are suddenly on hold because not
all the ducks were in order. We're stays in place. And then appeals to district courts
and circuits. We see a very active regulatory scheme in which just from reading the papers,
we understand the SEC pursuing regulatory actions against exchanges and platforms which
adds to the complexity in trying to find an exit strategy for this debtor, BlockFi. That's
appropriate. I agree a wholeheartedly with Mr. Stark that speed is important. The interest
of these customers are important and this needs to move forward. I guess where I differ
respectfully Mr. Stark is the idea that we just have the trial now because I don't believe
on exclusivity because I don't think we limit the trial there. That's just the first trial.
And then we have a trial with competing plans and competing disclosure statements. And let
alone two different proponents of plans trying to come to terms with regulatory issues, international
issues, liquidation issues. I've read the two declarations that were filed. Ms. Pula
which speaks from Crowell as to a timing and Mr. Renzi's declaration which frankly, and
it's no disrespect to Mr. Renzi, he outlines everything that's going on. I can look at
the docket and get 80% of the content of the declaration just by looking at the docket
because it shows the activity of the debtor and the committee in this case. These declarations
aren't dispositive. I want to turn to Mr. Stark and ask, is there, and my preference
in all candor is to decide this on papers rather than evidentiary hearings which necessarily
involve discovery, argument, court time. Are there declarations or additional affidavits
you think would be dispositive that you would like to submit for my consideration in response
to the declarations? I don't want necessarily to leave the declaration as the last word
although I think you can address it in argument but what would be your preference?
Well, Your Honor, apologies if I can't directly answer the question or I can but I think I
want to get to the place where I think Your Honor is more inclined to go. Look, I've now
made my argument. I believe that the debtors, if they want to go down a path that we perceive
will be war, I think that before we incur the expense and the time delay, they should
come in answers in the community for it but I understand Your Honor's views on that. I
respect it and I suppose we have a legal right to press the evidentiary point but I understand
Your Honor's ruling and I respect it and so therefore if 80% of what Your Honor feels
confident in rendering the ruling on is from the docket itself and is not going to be reliant
on the declarations in any way, shape and form, then it would not be a good advocate's
role I think to get in the way of where the judge is inclined to go and let's just move
forward but as long as the record is clear when and if we find ourselves back in the
future back to a moment that I've presaged at this moment, then we may. You won't hit
me too hard, Your Honor, if I said I told you so.
I was just going to say you reserve the right to have an I told you so moment. I get it
in other cases.
With respect.
Always with respect. And I appreciate it. Is there other argument that either side wishes
to make? Well, sorry, Mr. Susberg, anything you wish to add to what you've already laid
out before the court or in the papers?
No, Your Honor, we appreciate the court taking the time today. And I just do want to mention
that, you know, Mr. Stark is pre assuming an outcome. It's our job to work together
to try to avoid that. We will get them drafts of documentation. And Mr. Stark and I had
already talked about sitting down and seeing how we can reach middle ground. We've done
it many, many times before. I'm hopeful that we will do it yet again. So thank you.
All right. Thank you, Mr. Susberg. Mr. Stark.
I'm looking forward to that phone call and we'll have a meal and hopefully we can find
some common ground. But I respect your honor's decision today.
And thank you. And Mr. Stark, I want to definitely express my appreciation for the professionalism.
Yes, when we have lawyers who are very knowledgeable about both substance and procedure and know
their way around a courtroom. But that's one thing. But to recognize expediency for the
benefit of their clients is more of a rarity. And I appreciate those efforts. I made my
judgment and my ruling, which will be to grant the extensions primarily because of the limited
nature of the extension. With a proviso that it would have to be extraordinary, there would
have to be an extraordinary event to deviate from it going forward if something were to
go awry. I don't foreclose that. But certainly I take Mr. Susberg and the debtor's position
at face value that this can proceed along the timeframe that's been laid out in the
documents. I anticipate that there's going to be pushback from the committee and maybe
other parties of interest. There's an ad hoc committee. There's other creditors involved.
That's part and parcel of the process. In gauging whether or not to extend exclusivity,
the court recognizes that there are built into the code by Congress leverage points.
The debtor's exclusivity is a tool. The requirements for voting and confirming a plan are creditors'
tools. Congress built in a pathway for extensions. They've limited since going back to 2005.
We're not going to approach the caps on the extensions. We're talking about a plan being
filed somewhere in early May and a process that will take us into the summer. The good
news is I have relatively few travel plans in July and August, so I won't be holding
you all up. I will make the court available. It is important that the parties start the
negotiation process yesterday. We'll get into that when we discuss the status of the
wallets and other matters. I'm extending exclusivity because I do agree that the case,
even though Mrs. Clark may question the level of complexity, the unusual nature of the cryptocurrency
cases is evident just from what we see going on in FTX and Celsius and Voyager. What we
see going on with issues as to property of the state, ownership, how to handle the regulatory
issues, international aspects, those complexities. A liquidation is not necessarily complex,
but the best way to do so to maximize returns can be. I want this process to go forward
with all eyes wide open, especially in light of the pending sale process, that all the
parties are able to identify the best pathway forward to maximize the returns to the creditors.
Because the request extension is minimal compared to what may be the norm in Chapter 11, I'm
going to approve it, but hold the debtor to the task fire to their feet, however the phrase
goes. I don't need to do so as much as I know Mr. Stark and other ad hocs and everyone else
will as well. The court is open to assist if in any way through at any point a neutral
would assist in trying to reach an accord if there is a gap. Again, we're assuming
a lot, maybe communication by strong professionals, we won't have such a huge gap. So I will
enter the order based on the pleading submitted, based primarily on what the court can take
judicial notice of with respect to the docket and we'll move forward. I appreciate the
advocacy involved in the professionalism. Do we want to turn to Mr. Sussberg or how
do we move on to other agenda items? I think we should proceed with the agenda. We can
move to agenda item 2 and then we have some status conference items to be heard. So I'm
going to leave it to the rest of the team to pick that up.
All right. Who will be taking the mantle? Good morning, your honor. Jordan Chavez on
behalf of the debtors. I'll be addressing the second item on the agenda, which is the
debtor's motion for an order authorizing the debtors to direct scratch to return the post
pause payments made by retail clients, which we filed at docket number 559. I set forth
in the motion, your honor, the US based retail client loans are serviced by scratch services
LLC pursuant to a sub servicing agreement that was executed between the parties back
in 2018 when a US retail client would make a loan payment, scratch would service the
loan payment and coordinate with block five to allow block five to then apply the payment
to the balance on the loan. Now, when the platform paused on November 10th, subsequently
all the activities related to the platform were paused, including the retail loans and
any payments made there too. And they were placed into administrative forbearance. So
there were no margin calls or liquidation that have taken place since the platform pause.
Nevertheless, it was impossible for block five or scratch to prevent parties from sending
payments to scratch to try and make payment on their retail loans. The payments have largely
slowed down since more parties have become aware of the administrative forbearance and
these chapter 11 cases. However, at the moment, scratch is holding over half a million dollars
in post pause payments, which necessitated the motion before your honor today. And at
the time of the motion, the specific amount scratch was holding was $585,100 and three
cents. And again, those payments have largely slowed down since the case has progressed,
but scratch is now has received some additional payments and is now holding $596,670 and 77
cents. So we filed a revised proposed order on the docket yesterday at docket number 746
to reflect the new amount and both the original and the revised proposed order provide that
scratch were to receive additional payments after the order was to be entered. If your
honor grants the motion, then scratch would notify the debtors of those payments and the
debtors can then direct scratch to also return any subsequent payments that were made to
scratch. There were no objections that were filed, your honor, to the motion. I did want
to clarify for the record that there were some cryptocurrency news outlets that had
reported that the payments were going to be returned to residents in one particular state.
However, your honor, the motion and the relief requested in it and the proposed order encompasses
all payments made by U.S. retail loan clients after the pause nationwide. So the half a
million dollar amount will be returned to all residents, regardless of which state they
are located in. Unless your honor has any questions, I would ask that your honor grant
the motion.
Thank you, Ms. Chavez. I've read the proposed order and needless to say, there's been no
objection to the relief, nor should there be. It is surprising that a lender has to
work so hard to not take payments. You don't normally see this. But I will enter the orders
to allow the money to go back, as well as payments that are collected in the future.
I think it makes absolute sense. Thank you.
Thank you, your honor. I'll also be addressing the next item on the agenda, which is item
number three, the debtor's first omnibus objection to claims.
Let me just
Which filed it.
I'm sorry. As far as the proposed order that came with the notice of filing its document
746, is that the order that can't be entered or are we going to be getting a new one?
Yes, your honor. That order can be entered, but we're happy to submit a copy to chambers
if your honor prefers.
I think it's always clear to send it directly to chambers.
Sure. We'll do that following the hearing. Thank you, your honor.
Thank you. Now as to the objection.
Yes, your honor. We filed the objection at docket number 573, which was accompanied by
a certification of CRO Mark Renzi that we attached as exhibit A, and I would ask that
your honor admit the exhibit into evidence.
So admitted.
Thank you. For the record, as your honor and as properly aware, this hearing was adjourned
from April 11th to April 19th, but I did want to state on the record that we did serve the
claimant with a notice of the adjournment at docket number 684. The claim numbers that
were filed that were included in the objection are claim number 1363, which was filed for
a hundred million dollars secured claim against all of the debtors and then claim numbers
1649 and 3217, a third, a secured 2.2 trillion dollar claim against Box by Inc. So the basis
for the objection is that the debtors have no record at all of this account holder with
the name and address that were provided in the claim and no documentation supported a
valid claim against the debtors, let alone a secured claim for such an exorbitant amount.
The debtors did reach out to the claim that multiple times as we step forth in the objection
to try and get more information and more documentation to try and support the claim. I think on one
particular date, March 2nd, we did receive some documentation from the claimant, but
it was largely non-responsive and duplicative of what was already attached to the claims.
We did explain the claim objection process as the claimant is pro se and including that
they could file a formal response by the deadline and attend this hearing if they desired to
defend their objection. No timely response was filed to the objection by the deadline
and the claimant has not amended or withdrawn the claim. With all of that, Your Honor, I
respectfully request that the court sustain the objection and enter the proposed order
that was attached to the objection and disallow the claims in their entirety.
Is there anyone who wishes to be heard on this? All right. Mr. Ouellette?
Yes. Good morning, Your Honor. The committee fully supports this objection as you might
expect. We just wanted to note that claims like this are extremely serious. It's a $2.2
trillion claim, which had the debtors not timely addressed it, would have prevented
any sort of distributions due to the massive reserves that would be required. We just urge
the court to enter the order and we'd urge claimants not to submit such claims in the
court. Actually, you beat me to the punch. Thank you, Mr. Ouellette. I was going to give
an admonition. Not only does this cost the estate and all proper claimants time and money
and having to address, I think claimants are well advised to look at the references to
Title 18 and bankruptcy fraud when filing claims and realize that there can be a consequence
in reaching for this pathway. Thank you. The motion is granted.
Thank you, Your Honor. That's all for me today. So I will turn it over to my co-counsel
and the U.S. trustee to address the status conference. Thank you.
All right. Thank you. Good morning, Your Honor. Christina Kike of
Kirkland and Ellis on behalf of the debtors. I think it makes sense for me to provide just
a brief update on the debtors' cash position, which kind of relates to the U.S. trustee's
motion to compel the debtors to comply with section 345, if that's all right with Your
Honor. Yes, please.
So, Your Honor, while the debtors have opened up several new bank accounts that authorize
depositories, those banks continue to struggle to obtain surety bonds. My understanding from
conversations with the banks is that the surety bond market has essentially dried up in the
wake of the collapse of Silicon Valley Bank and Signature Bank. And I know that other
debtors are struggling also to obtain surety bonds.
So, Your Honor may recall that we had a substantial amount of cash invested in money market funds
at Silicon Valley Bank, where the counterparties were BlackRock and Morgan Stanley. And those
money market funds were invested in government securities.
During discussions with the U.S. trustee, we converted those money market funds into
cash and that cash was sitting at Silicon Valley Bridge Bank. At the time that we made
the conversion, all funds in the bridge bank were fully insured when the government took
over. But now that deposits have been transferred from the bridge bank to First Citizens, FDIC
protection has dropped back down to 250,000K. So, given just the inability right now to
obtain surety bonds and also the desire to be responsive to the U.S. trustee's request,
the debtors intend to file a motion in the near term seeking authority to invest in treasuries
that are backed by the U.S. or alternatively to invest in money market funds that are invested
in government securities. The debtors continue to believe that money market funds are safe
investments because the exposure is to the funds themselves and not the bank, which I
think is probably a good thing just given the uncertainty in the banking industry right
now. So, with that, I'll turn it over to the U.S. trustee. I know we've been having several
conversations to try to find a way to move forward. But unfortunately, just given the
banking situation, we have not been able to obtain surety bonds and we obviously have
cash above FDIC limits. All right. Thank you. It is an issue and a difficulty. Mr. Sponder,
or did you want to speak? Thank you, Your Honor. Jeff Sponder from the
Office of the United States Trustee. I appreciate the position or the United States trustee,
I should say, appreciates the position that the debtors find themselves in. However, they
still are not complying with 345 and I think it's even worse now, be it that SBB Bridge
Bank has gone to First Citizens and has limited back down to the 250,000. With that said,
I understand that a motion would be forthcoming in the near term. What my suggestion would
be is that the near term be today, tomorrow, this week, not something that gets that that's
negotiated on, as well as seeking shortening time to get this on the docket and a ruling
from Your Honor, because I don't think we have the ability to move from off of our position
that 345 needs to be applied with. Thank you, Your Honor.
Thank you. I certainly will schedule it on shortened time when the debtor get the motion
to us. Yes, Your Honor, we will endeavor to get it on file. It may not be today, but definitely
this week. All right. Thank you. We have two other matters. I guess probably the quicker
well, I'll leave it to you. We have an update on the adversary proceeding with respect to
emergent and also the pending wallet motion, which is of most interest, I think, to those
who are watching. Your Honor, good morning. Mike Slade for the debtors. Can you hear me?
Yes, I can. Thank you. Your Honor, I'll give you an update on the wallet motion. We have
been working with the Council for the Ad Hoc Committee and for deferred 1031 and the UCC.
And we do have a path forward. The debtors have provided a substantial amount of diligence
on this matter, including answering about 100 questions in writing and providing some
data that was requested. I am hopeful that we will be in a position to present this to
Your Honor in the form of a set of stipulated facts that you will be able to hopefully rule
on. The parties are going to work on that over the next approximately week. If we are
not able to stipulate to certain facts, we have agreed that we will make a witness available
for the Ad Hoc Committee to ask questions of so that they can, you know, put forth whatever
evidence they have on the matters that can't be stipulated to. The parties have agreed
that they will file any supplemental briefs, and that's the debtors, the creditors committee,
and the Ad Hoc Committee or deferred 1031 on or before May the 3rd. And then we will
present the matter for Your Honor on May the 8th at the next omnibus hearing. Again, the
hope is that we're going to be able to stipulate the relevant facts or at least minimize to
the extent possible any actual evidence that has to be presented to the court. And that's
the plan. And we have discussed this, and I believe all parties are in agreement that
that's the path forward. We know that all of the creditors want to get this resolved
as quickly as possible, and so do we. And this is the most streamlined way that we can
present the issue to the court. So happy to answer any questions that you have, but that
is the plan. I do have a question, but let me first turn to Ms. Koski. Thank you, Your
Honor. Can you hear me okay? Yes, I can. So the schedule that Mr. Slade described is
what we have discussed and what we've agreed to. I think it's important, though, given
the widespread interest in this issue and a number of, as Mr. Stark put it, the mom
and pop investors that this affects. There's been a lot of misinformation online, a lot
of questions about what's going on. Why is this taking so long? What's everybody doing?
Why have there been so many delays? We should have had this resolved already. And I wanted
to emphasize that the ad hoc committee is committed to trying to get this resolved as
quickly as possible. There have been a lot of activities taking place behind the scenes.
We have managed to keep this largely out of your honor's court, and that was very deliberate
trying to resolve any issues we had ourselves. We did not want to bring you discovery disputes.
We did not want to spend money of the estate that we didn't need to. The ad hoc committee
and I'll speak for deferred 1031, as I'll ensure Mr. Bessicault won't mind. We jointly
agreed to forego formal discovery in this matter, even though it's a contested matter
where we would have been entitled to take full blown formal discovery. Instead, we simply
asked a series of questions in plain English and agreed to accept answers on an informal
basis. It has unfortunately been an extremely slow process. For example, it took three written
requests and almost two months to get an answer to the simple question of tell us what assets
are in wallet. What's actually there? So while we have finally obtained the information that
most of the information that we've been seeking from the debtors, I want to make it clear
we're not trying to slow walk this in any way. The ad hoc committee has always been
willing to move expeditiously, but we're entitled to get the information that we need in order
to support our objection to what the debtors are seeking to do to their customers. And
so that that's really the reason for the repeated adjournments and extensions and why this matter
hasn't been heard yet. It's really simply we've needed to obtain the necessary information
to understand how the debtors processes work behind the scenes. What exactly was happening?
What assets are where? And so I wanted to just make it clear to the wallet account holders
who are not members of the ad hoc committee who perhaps have not been able to hear on
a periodic basis and get updates about what's been going on. Just tell them that we have
been working expeditiously to try to get this resolved. Thank you. That was the direction
of my questions. And I'm aware of some of the complexities inherent in the potential
differences from pause dates to potential preferential transfers. But let me ask what
may be a naive question. Are there funds held currently now in wallets that are not subject
to dispute that can be released to wallet holders that are not subject to any set off
claims or defenses or any issues as to pause dates, et cetera? I apologize if it's not
a simple question to answer. Yeah. Mike Slade for the debtors, Your Honor. I think that
depends on the outcome of this motion. If the court agrees with the position of the
creditors and the creditors committee that the attempts after the program pause to move
assets from the BIA accounts to the wallet, if you agree with us that those are not effective,
then the answer to your question is yes. We believe that there will be some funds that,
you know, in cooperation with the creditors committee, we are going to be in a position
to be able to release. That's a substantially more complicated question. If my colleague
on the other side, Ms. Kovsky, succeeds in her motion, then to be honest, I'm not quite
sure what we're going to do. But I believe the answer is that there won't be the ability
to release any funds until certainly a plan is confirmed. That's at least my belief sitting
here today. Well, thank you. I think customers, wallet holders are entitled to at least to
understand and appreciate the realities. Ms. Kovsky, is your hand still up or is that from
before? It is, Your Honor. I just wanted to clarify a couple of points. Mr. Slade referred
to the ad hoc committee's motion. The ad hoc committee doesn't have a motion on file. The
creditors filed a motion and bear the burden of proving their entitlement to reverse transfers
that actually took place. And that's what they're seeking to do. And the ad hoc committee
has objected to that. I also wanted to clarify that the sole issue that we're seeking to
have the court determine on May 8th is simply were those transfers that were made while
the system was still operational, were those transfers effective or not? And it sort of
goes to the definite, what does transfer mean in this context? What constitutes a transfer?
We're not asking the court to determine, well, if the transfers were effective, where do
they get paid out of? What assets are available to satisfy them? Are they subject to potential
preference clawback? That's all for another day. This is really the gating issue of did
transfers happen? Understood. Thank you, Ms. Kovsky. Mr. Ouellette? Thank you, Your Honor.
Road Next Record. Just to clarify one key issue, it's the committee's understanding that the
debtors essentially cannot release portions of a wallet account, which is why if the position
of the ad hoc group is correct, there are no funds that could be released. Obviously,
there would be funds that nobody disputes, even if all of those funds are moved into
wallet and there's a large shortfall. The issue is that to our understanding, the debtors
outside the plan construct have the ability to potentially make 100% distributions, but
not, for example, to pick a number of 50% distributions or anything aside from 0 or
100%. There's a substantial amount of funds where there is no dispute, but that technical
issue prevents those funds from being sent out because the funds that are not in dispute
represent less than 100% of an account. All right. Thank you for that addition. All right.
That certainly helps. It points to how important May 8th will be and what I can expect to have
in front of me. And of course, I will do my best to try to do the quickest turnaround
that the court can achieve. Let's turn, I think, to the emergent matter. Is there an
update, Mr. Kanowitz? Yes, Your Honor. Thank you. Richard Kanowitz,
Haynes and Boone, co-counsel to the debtors and debtors in possession. Your Honor, real
quick, at Dock at 738, we submitted to Your Honors for approval subject to the April 21st
deadline for objections, the standstill stipulation, I'll call it, between emergent debtor as
well as the FTX debtors and the block five debtors. Basically, this was to carve out
any and all disputes concerning the liens, claims and encumbrances concerning the Robinhood
shares and only the Robinhood shares. And we spent a lot of time between counsel for
the various estates coming to that stipulation and making sure that we captured the right
type of procedure as well as substantive to put on hold pending the criminal prosecution
of Sam Van Den Vrede as well as any forfeiture proceedings that arise from that criminal
prosecution. So that was put before Judge Dorsey and he approved it. He did it under
certification of counsel and that was entered on April 17th. So Your Honor has before the
court subject again to the objection deadline passing on April 21st and I don't anticipate
anybody objecting since we've kept all parties in interest involved in the stipulation step
by step, comment by comment, issue by issue, that Your Honor will hopefully approve it
and that will again put on hold the Robinhood issue. As to defendant Marix, we are likewise
working with them as to a standstill stipulation because we do have a live adversary proceeding
against them and we would like that adversary proceeding to remain on the docket. We do
not know what's going to happen in connection with the again prosecution and or forfeiture
proceedings. We were first in time from our perspective and everybody reserves rights
as to what should happen if the forfeiture proceedings don't go forward or there is
no conviction. So that's where we are with the emergent matter, Your Honor. Happy to
answer any questions if you have. Can you give me the docket number again for the stipulation?
I want to make sure my staff. Yes, we did it by application. It's 738, Your Honor.
738, great. I did speak with Judge Dorsey coincidentally and I understood it was coming.
So we'll keep an eye out for it and wait for the passage of time. All right. Thank you,
Mr. Hanowitz. Is there anyone else who wishes to be heard? All right. I'm not seeing anyone.
I thank everyone for their time and effort and I guess the next date is the May 8th date
unless there's something emerging in between. So be well. Thank you. Thank you, Your Honor.