45B, which was filed at docket number 770.
And I saw that I've had an opportunity to review the debtor's, Mr. Renzi's, declaration
support of the motion, as well as the opposition filed by the U.S. Trustee, I think, earlier
this morning.
And let me then turn to the debtor.
And if you want to address the opposition or where we go from here.
Thank you, Your Honor.
So, Your Honor, we filed the declaration of Mr. Renzi in support of the motion at docket
number 784.
Mr. Renzi is on the line.
So if Your Honor has any questions for him or anyone wants to cross him, he's available.
But otherwise, we would offer his declaration as his direct testimony.
All right.
Any objection?
Good afternoon, Mr. Renzi.
I see you there.
Any objection to the declaration coming in as direct testimony?
In lieu of direct testimony.
Thank you.
All right.
Continue on.
Thank you, Your Honor.
Your Honor, since the commencement of these cases, the debtor's three main banking partners,
Silvergate Bank, Silicon Valley Bank, and Signature Bank have collapsed.
The debtors had 38 of their 43 pre-petition bank accounts with those three banks.
And the remaining five accounts were dormant accounts with Union Bank, BCB Bank, and FOMO
Pay that the debtors closed shortly following the petition date at the request of the U.S.
trustee.
The debtors were able to navigate these bank failures and successfully protect the debtor's
cash.
And the debtors have worked closely with the U.S. trustee and the committee to find
a safe depository for their funds.
Over the past month, the debtors and the committee have collectively reached out to over 50 banks
in an effort to open new accounts and authorize depositories for the district of New Jersey
and to ensure compliance with section 345 of the Bankruptcy Code.
The process to find new banking partners has been challenging.
Many banks are refusing to offer services to crypto companies given the uncertain regulatory
environment.
While the debtors have been successful in establishing new accounts at Webster Bank,
Western Alliance Bank, and PPAC Gladstone Bank, each of which is an authorized depository
in the district of New Jersey, none of those banks to date have been able to secure surety
bonds and or express the willingness to post securities to satisfy section 345B of the
Bankruptcy Code.
Your Honor, the U.S. trustee notified the debtors yesterday that First Citizens, which
acquired SBB Bridge Bank, has recently signed an authorized depository agreement and has
agreed to post collateral to protect funds in the district of New Jersey.
However, the debtors have reached out to First Citizens multiple times and immediately following
our call with the U.S. trustee yesterday, but have still not received a response and
or confirmation from First Citizens that they are going to collateralize the debtors' funds
in this case.
While we are hopeful that First Citizens will be able to procure a surety bond and are post
collateral, they have not done so to date.
And the debtors need to protect their cash now.
They need the flexibility of having multiple options to secure their cash given the risks
associated with non-diversification at this time.
Your Honor, the debtors take seriously the U.S. trustee's motion to compel the debtors
to comply with section 345B, but the reality is we have not been able to do so given the
turmoil in the banking system.
So we're seeking flexibility after having carefully evaluated our options to safeguard
funds in three different ways.
One is an insured cash sweep program with Western Bank or another authorized depository
for an amount up to $125 million.
The second is through one or more money market funds that only invest in U.S. government
obligations and or U.S. government obligations themselves in an amount up to $275 million,
either with Webster Bank or another authorized depository.
And the third is at First Citizens to the extent that they are able to post collateral
and or secure a security bond as the U.S. trustee has alluded to.
Your Honor, the debtors submit that cause exists to modify the 345B requirements.
The money market funds that the debtors intend to invest in are highly rated money market
funds which invest in U.S. treasury bills, notes and other obligations issued or guaranteed
by the U.S. government, its agents or instrumentalities.
And the ICS funds by function of inclusion in that program will be fully insured.
They will be held across multiple banks in amounts covered by FDI insurance, thus posing
no risk with respect to the debtors' funds.
Your Honor, even if some of these banks that are in the ICS program are not authorized
depositories, we believe that the structure of the program provides protection by virtue
of the FDI insurance alone and that this obviates the need for any additional insurance or collateral
to protect the debtors' funds.
Your Honor, the debtors believe that these are safe options for holding the debtors'
cash and in light of the potential harm to the debtors' estates, if a bank where they
are holding funds above the FDIC limit fails, the debtors believe that the relief requested
is reasonable and appropriate.
The difficulty that the debtors have faced in finding a home for their funds in strict
compliance with section 345B represents the exact circumstances under which the court
has discretion to provide relief from that section.
The debtors' primary goal is to safeguard all of our funds for the benefit of our clients.
And we believe that we've narrowly tarot the relief to do that.
And that cause exists to grant us limited relief from section 345B.
So, Your Honor, I'm happy to answer any questions.
Otherwise, I would let the U.S. trustee make their argument and ask for time for rebuttal.
All right.
Before I turn to Ms. Bielski, let me ask, we're talking about 125 million in the ICS.
Is that in addition to the 275 or is that included as part of the 275 that was otherwise
referenced as going into the money market funds?
Yes, Your Honor.
So, they overlap.
And I don't think we have not made a determination as to any of these options, right?
I think we're just seeking flexibility.
But the 125 overlaps with the 275.
I think we're just seeking full flexibility to the extent that we need it so that all
the funds can be protected.
So the debtors on hand, we're talking about trying to protect 275 million.
That's correct, Your Honor.
Correct.
So either you can speak to it or Mr. Renzi.
Is it possible in lieu of the money market funds simply to acquire the treasuries directly
as a solution?
Yes, Your Honor.
It is possible, but it's a more complicated process.
Mr. Renzi probably has more detail on what that would entail.
We have spoken with our banking partners about that process.
And I know that it is more complicated than just investing in the money market funds.
But I do think it is feasible.
Mr. Renzi, do you want to touch on it?
Yes.
Good afternoon, Your Honor.
Christine is exactly right.
Ms. Hukiki is exactly right.
I think ultimately what we're trying to do here is we can go back to back against the
treasury directly, but it is fairly cumbersome to do that, meaning that the systems where
you do that are not easy to do.
I think using it through a brokerage account or working with Webster Bank does help facilitate
some of that.
But ultimately, you have to invest in four to eight week securities.
Our view is that if you're invested in a money market account with government securities,
it's one day to clear.
And so just having that flexibility is helpful.
And ultimately, the systems, I don't know if you've gone straight up against the treasury's
interface, it's not the smoothest interface to work with.
So I think that with the assistance of Webster's brokerage account or others, we can go and
buy money market funds that are backed by essentially the government and having those
securities of the government.
And then that provides one day transition if need be.
And so having that flexibility, having that security of the government, and having that
safeguard is really what we think really provides the best option.
And the ICS is just another great option that has been used before.
It seems very straightforward.
And we've been in discussions with Webster about that also.
So both of those solutions are easier than just going straight up against the treasury
and provide the flexibility that I described.
All right.
Thank you.
Ms. Bielski, do you wish to be heard on behalf of the U.S.T.?
Yes, Your Honor.
Thank you.
Lauren Bielski with the Office of the United States Trustee.
Your Honor, I'll just touch on the first issue that you raised with the debtor obtaining
T-bills directly.
We would have no objection to that.
We think that's appropriate under the code.
And I think that the debtor has enough sophisticated professionals that even if the process is
cumbersome, they certainly do that.
But turning to the objection that we filed this morning, Your Honor, and I appreciate
that you read that in advance of the hearing.
And I appreciate that Your Honor is aware of the concerns and the challenges that have
arisen with regards to the banking issue, especially in this case and recently.
And as Your Honor knows, Section 345 obligates the debtors to require from an entity which
holds the state money that they're either invested and have a bond having the features
identified in Section 345B as a certi bond or the deposits of securities consistent with
31 U.S.C.
Section 9303 unless the court orders otherwise.
The debtor represents this court that the certi bonds are no longer available due to
bank volatility and that each of the debtor's banks rejected any proposal to collateralize
the debtor's funds and that this is caused to waive the Section 345 requirements.
Section 345 places the obligation on the debtors to require protections for its money from
the institutions that hold such money.
And while Section 345 does not mention the U.S. Justice Office, the office in its supervisory
role under 28 U.S.C.
Section 586 assists with the protection of debtor's funds by its entry into the uniform
depository agreements.
The U.D.A.s obligate depositories to maintain collateral for bankruptcy funds on deposit
in an amount no less than 115% of the debtor deposits that exceed the FDIC insurance limits.
The funds at issue in this motion referred to by the debtors as the remaining funds are
the funds that were held by Silicon Valley Bridge Bank which was then acquired by First
Citizens Bank where the funds remain.
At the time of acquisition, First Citizens Bank was not a party to a U.D.A. but our office
has been working with them and as of April 25th, First Citizens Bank executed a U.D.A.
That means they have agreed to protect debtor's funds as required under the U.D.A. and the
next step to open an account with the Federal Reserve Bank is underway.
Based on past experience, this can be done in 48 hours and then the collateral can be
pledged.
As counsel indicated and relayed this information to them yesterday, the debtors still are seeking
the waiver from the court today.
Counsel also mentioned that Webster Bank is an approved depository having signed a U.D.A.
but if Webster Bank is unwilling to either obtain sturdy bonds or collateralize, then
they would be noncompliant under the U.D.A.
The U.S. trustee has concerns regarding the proposed alternatives, the insured cash fee
program and the money market fund and does not believe they are acceptable because they
do not allow for the necessary monitoring, oversight, reporting and ability to safeguard
the funds.
So while we believe the court to deny the motion because cause has not been established
and because the ICS program and money market fund are unacceptable alternatives, at the
very least in light of the progress that has been made with First Citizens Bank, relief
under this motion should be delayed for just a very short window, Your Honor, to give First
Citizens an opportunity to pledge the necessary collateral.
Thank you, Your Honor.
All right.
Thank you.
Ms. O'Keeke, any response?
Yes, Your Honor.
Thank you.
Your Honor, again, we have reached out to First Citizens.
We've contacted them several times.
They have been nonresponsive, at least to the company in terms of collateralization
or surety bonds.
And again, we remain hopeful that that happens.
But that being said, just taking SVB, they were also an authorized depository for the
District of New Jersey at the time that they went under and they had not pledged any collateral.
So I don't know sitting here today that we know for sure whether First Citizens is going
to be able to satisfy their obligations under the UDA.
As we've said, the three new bank accounts that we've opened, none of those banks have
been able to secure surety bonds.
And so while I don't question Ms. Bilsky's statements, we just don't know sitting here
today whether they're going to be successful or not.
And the debtors currently have funds sitting that are not protected.
We believe what we propose provides more protection than what we currently have.
And we believe we've established cause to utilize these mechanisms.
We would, of course, work with the UCC and the US trustee before actually moving funds
to identify any Martin Market funds or the ICS banks that we were going to use.
But we're requesting flexibility given the financial turmoil right now.
I think having all our funds in one bank, even if First Citizens is able to collateralize,
is probably not the best option just given everything going on.
And so we would respectfully request approval of the motion.
Your Honor, if I may, or Ms. Sokigye, if I may, I'll just note that in terms of bank
accounts, we do not have an account for international entities at FCD.
So that's another issue that we would have.
So I know it's technical, but it's something that we don't have a solution for international
banks, and we're responsible for those entities also.
So let me clarify then.
You're saying that if First Citizens Bank was collateralized and signed the VA, but
if the arrangements with the Federal Reserve have been made and they're collateralized,
you still cannot keep international funds there?
Your Honor, we do not have a bank account set up at FCD for the international entity.
So we would have to go through the KYC process to do that, and then have them agree to post-collateral
or a surety bond for that to work.
And I think that's just additional time that we're concerned about.
We have international accounts open at Webster Bank, and we would be able to effectuate that
much more quickly.
And it just heightens the point that Ms. Sokigye had just stated.
I just wanted to make sure you were also aware of that too.
Thank you.
Your Honor, and one point just to add on that.
You may recall that in kind of all this turmoil, the debtors transferred money out of signature
to a Haynes-Boone account, and that is international money, which we are not able to move anywhere
right now because we don't have an international bank account other than at Webster, and Webster
has not been able to collateralize or secure a surety bond.
And so there is an urgent need for this relief, as I think we've laid out for you.
Can those funds be transferred into the proposed money market funds?
Yes, Your Honor.
All right.
Thank you.
Ms. Blosky.
Thank you, Your Honor.
This is the first we're hearing about any concerns with regards to international funds
held in a national account or the issues that Mr. Benji just raised.
So we have not had a chance to review that.
But I would say too that the ability to get the T-bonds, the T-bills is still there.
And again, we've been told by First Citizens Bank that they're moving toward, well, we're
working with them to get the account open with the Federal Reserve Bank and that they're
prepared to collateralize.
And at the very least, if we can allow a few days for that process to happen and the debtor
could also start working on obtaining the T-bills directly, I think that would be certainly
an acceptable solution for the very short term.
All right.
Thank you, Mr. Renzi.
You want to, you had your hand raised again?
Yes.
I mean, we've sent a few emails in regards to some of the details here to the U.S. Trustee.
I actually did it myself directly.
And I think ultimately my concern is just I want to make sure that we're doing everything
possible to do this as quickly as possible to protect these funds.
And my concern is just given the nature of the industry that as Ms. O'Keej went through,
we went through a number of banks to get to where we are.
And it was cumbersome to open up new accounts, as you can imagine.
And at the end of the day, I just want to deliver results for the company and for our
system altogether.
And to do that quickly is important so that we can protect these assets.
So that's all I would add, Your Honor.
All right.
Mr. Wilrod?
Thank you, Your Honor.
Before I begin, I believe this is my first appearance before Your Honor.
And our counsel, Genova Burns, will be filing a ProHoc VJ application shortly.
I'd just ask that I be permitted to speak pending that.
Welcome to New Jersey remotely.
Thank you very much.
I think we're in general agreement.
The committee is in general agreement with the debtors and the United States Trustee
as to the importance of safeguarding these funds.
I don't think it's been stated, but this is not an operating company and this is a large
volume of cash that is expected to be a very significant source of distribution to creditors.
If shorty or collateralization is not available, then it is available, excuse me, then our
preference would be to keep the money where it is.
But our citizens is not here today to say that that's a possibility.
And it sounds like there's more digging to be done on that front.
We and our representatives have spoken with the debtors over the last few days about the
options on the table.
Based on our discussions about the ICS and money market accounts, we were able to get
comfortable with those options.
I don't, I suspect we could also get comfortable with purchasing treasury bills directly as
well.
But glad to hear on the record the commitment of the debtors to continue discussing these
options before any money does move.
And that's our primary request at this point.
We don't object to the debtors having some optionality, particularly at this moment,
based on facts that seems to be in flux, and we look forward to participating in discussions
as things seem to be developing.
That's all I have, Your Honor.
Thank you.
All right.
Thank you.
Thank you all.
I think it's important to adhere as closely as possible with the statutory requirements
set forth in the code in section 345.
But I recognize that flexibility is needed in this situation, and most importantly, it's
a task of all of us, the debtor, the committee, the UST, and the court, to do what it can
to preserve the funds for the benefit of creditors.
I'm going to give my ruling, but ask that parties think it can be tweaked, not to hesitate
to raise their hand.
I'm going to direct the debtor to use the debtor's best efforts and good faith to transfer
the funds to First Citizens Bank once they have confirmed collateralization.
And that has to be done no later than Monday, close of business Monday.
In other words, it gives two full days on top of the time that's already been undertaken
to get that done.
If not, if for whatever reasons they cannot confirm collateralization, I'm going to authorize
that all the money be transferred into the money market funds.
I'm not comfortable with the ICS sweep.
I agree and concur with the US trustee concerns regarding the essentially the accounting for
it and the monitoring of all of the accounts.
And there's no reason not to just move all of the funds into the money market accounts.
They are accessible.
Now, if the debtor wants to substitute for either of those alternatives, purchasing the
treasuries directly, I don't think anyone can complain about that option.
But I understand the obstacles and the burdens and the time commitment in doing so.
But either way, I don't want to be in a position where this goes past close of business Monday
without us taking the steps to protect the funds.
But I'm open to suggestions if anybody wants to tweak that pathway.
And you can consider it and discuss it.
If you need, I'm available tomorrow as well on a quick phone call if something has to
be tweaked in order to satisfy everyone's concerns and expectations.
Your proposal works for the debtors.
I think it makes sense.
And as we said, we're happy to continue working with the US trustee and the UCC on these issues.
Anyone else?
I appreciate your honor's ruling as well, and we would also like the opportunity to
talk with people in my office about any particular tweaking, as your honor mentioned, if we could
bring that to the debtors council attention first.
And then if there are any issues, if we could bring that to your honor as well, we would
appreciate that.
And everybody knows where to find me.