Good morning, everyone. This is Judge Kaplan, and I'll start this morning's hearing on
Block by Inc. et al. We have a limited number of attorneys in the courtroom, as well as
counsel and parties appearing remotely. To the extent parties who are appearing remotely
wish to be heard or to use the raise hand function. Let me turn to debtors counsel.
Good morning. Good morning, Your Honor. Mike Slade from Kirkland-Elst for the debtors.
All right. I think we are ready to proceed this morning on the wallet withdrawal motion.
We're finally there. Yes. I have some slides that I intend to use to guide the presentation
and my approach on it. Absolutely. There wouldn't be oral argument
these days without a PowerPoint. Mr. Jacobson, do we have those on?
They're also available on the Crowell Block by website for folks that are participating
in the hearing over Zoom and would like to follow along.
For the benefit of all, my intention is to hear from the debtor first, let them prosecute
their emotion, hear from those who are supporting the debtor, and then to the objectors. And
then of course, I'm sure there's always a reply.
Yes. Thank you, Your Honor. And Ms. Kofsky, my opposing counsel, I just want to thank
her. We were able to work out a set of agreed stipulated facts that are on the docket at
docket number 842. Those facts, along with the amended declaration of Amit Chila, which
is on the docket at 822 plus the exhibits, those constitute the factual record for this
particular hearing by agreement. And we have agreed there won't be any witness cross-examination
at this hearing. We're ready to proceed to argument.
Makes sense. Thank you.
So thank you, Your Honor. And as you noted, we are here at log last for the wallet withdrawal
motion. And the particular issue being addressed today is whether post platform pause actions
were effective to give those clients rights against assets in the custodial omnibus wallets.
We believe that they are not. And the relief that the debtors are requesting today is supported
by the official committee of unsecured creditors and also what we believe to be the aptly named
ad hoc committee of actual wallet holders, which is represented by the Reed Smith firm.
And during our argument today, I refer to them as the Reed Smith ad hoc group. And Your
Honor, the motion follows a familiar pattern in the Block 5 bankruptcy case.
Trying to advance the slides. I can click through it.
Okay. Next slide. The relief that we're seeking is pretty simple. Block 5 wants to give people
their assets back. And we want to give them back their assets as quickly as possible.
But the process for effectuating this pretty simple goal has become very complicated and
challenging. And today we are going to debate the consequences of very small details about
Block 5's infrastructure, the terms of service, and how they work together. Next slide. Block
5 filed this motion because there are specific tokens that are worth about $297 million that
are sitting in the custodial omnibus wallets at BitGo and Fireblocks. And those tokens
were deposited or moved to the custodial omnibus wallets at the direction of specific clients
for requests before the platform pause time stamp on November 10th at 8.15 p.m. Eastern
time. Under Block 5's terms of service, Block 5 did not have the right to use or rehypothecate
those assets because they were in those particular custodial omnibus wallets. And Block 5 did
not do so. The tokens in those particular omnibus wallets are the property of the clients
that directed them into those particular wallets before the platform pause. And we want those
assets to go back to those clients because they are not property of the estate. And it
is undisputed that the actual tokens that are in those custodial omnibus wallets were
all deposited or moved there by Block 5 clients as a result of transactions before the platform
pause time stamp. My opposing counsel, which I'm going to call the Troutman Ad Hoc Group,
it is their position that they have an equal right to the coins that were moved to those
custodial omnibus wallets at the direction of other clients before the platform pause.
Their clients sought to remove assets from Block 5's estate after the platform pause.
If you could flip to slide four. Between the platform pause time stamp, your
honor, on November 10th at 8.15 p.m. and the petition date, about 48,000 clients clicked
buttons on the Block 5 user interface. 48,000 clients in an effort to transfer about $375
million of cryptocurrency from their Block 5 interest accounts, which I'll call the
BIA accounts, into the custodial omnibus wallets. And the members of the Troutman Ad Hoc Group
are among the 48,000 clients that did that. It is not disputed that no cryptocurrency
ever moved as a result of the buttons pushed after November 10th at 8.15 Eastern time,
period. Nothing moved. And even though the only tokens that are in the custodial omnibus
wallets reflect other clients' activities, the Troutman Ad Hoc Group thinks that they
have rights to those assets, too. And we respectfully disagree with their position. And to articulate
why, I want to step back, way back, and talk specifically about the two products at issue.
And Rob, if you could turn to slide five. So Block 5 offered several different products.
But the two that are at issue here, Your Honor, are the Block 5 wallet product and the Block
5 interest account. Cryptocurrency assets that are on the Block 5 platform have to be
in one or the other. They cannot be in both. And just by the nature of the way the products
work, it is not possible for assets to be moved from one of the accounts to the other
at just the push of a button. Slide six. Block 5 maintains the omnibus wallet accounts at
Bitco and Fireblocks for the wallet product. And Your Honor, I think you can think of the
Bitco and Fireblocks accounts. They're like safes that are held by Block 5. Block 5 has
the private keys, and Block 5 has the ability to access these particular coins through the
Bitco or the Fireblocks software. And they're omnibus accounts by coin. So the Bitcoin that's
placed in the Block 5 wallet product by customers is put into the omnibus wallet account. And
the same with Ethereum put into the Block 5 custodial wallet product by customers. Cryptocurrency
that's housed in the Block 5 wallet product, it does not move outside the custodial omnibus
wallets until and unless directed by the customer. And the terms of service are very explicit
about this. The terms of service say that the title to the cryptocurrency in the Block
5 wallet shall at all times remain with you and shall not transfer to Block 5, and that
Block 5 shall not sell, transfer, load, hypothecate, or otherwise alienate cryptocurrency held
in the Block 5 wallet unless specifically instructed. So let me just clarify. All cryptocurrency
held by Block 5 that was deposited by customers went through Bitco. Initially. Initially.
Yes. Then placed in the various omnibus wallets. So it went into Bitco. And then if a customer
said, I want this to be in the interest bearing account, then it was moved to the rehypothecatable
wallets. If they did not, it stayed in the custodial account. Now there are two sets
of those on it. One is at Bitco and one is at Fireblocks. But those are custodial wallets
that have to, the coins have to sit in those accounts. They do not go to the B account.
They do not earn interest. And they cannot be used for Block 5's revenue generating
activities. And that's actually the opposite of the coins that go into the B or Block 5
interest accounts. And that's on slide seven. They are the opposite of the custodial accounts.
The point of the interest product is that by directing the deposit of cryptocurrency
into the B account, you're giving title and control over the tokens to Block 5 for use
in Block 5's revenue generating activities. And cryptocurrency that's placed into the
B accounts earns interest. So of course Block 5 has to do something with those coins. Otherwise
it would have no way to generate the money to pay the interest. And the terms of service
again are very explicit about this. They say that Block 5 has the right if you direct your
coins into the B product without further notice to pledge, re-pledge, hypothecate, re-hypothecate,
sell, lend, otherwise transfer with all attendant rights of ownership for any period of time
and without Block 5 retaining possession and control, a like amount of cryptocurrency.
Those are very clear in the Block 5 BIA terms of service. And my colleagues on the other
side admit this in their reply brief that when you put, when you direct assets into
the B product, you are giving title to those assets away from yourself and to Block 5.
And you acknowledge in the BIA terms that with respect to assets used by Block 5 pursuant
to the BIA terms, you will not be able to exercise rights of ownership. So your honor,
as Block 5 told everyone it was going to do, Block 5 did in fact re-hypothecate and lend
currency placed by customers into the B accounts over to third parties to earn yield. Now Block
5 did keep a buffer on hand at any one time to try to have liquidity available to meet
customer withdrawals. But the whole business model was to lend cryptocurrency that was
deposited into the BIA accounts to third parties to earn yield. Block 5 was a crypto lending
business and it did exactly what it told customers it was going to do. Now those loans in large
part were freely callable and they were callable far in advance of Block 5's obligations to
its clients. And the system that Block 5 had in place worked for years because Block 5
could call back loans to customers quicker than it would need to in order to satisfy
withdrawal requests. And that's why Block 5 was in fact able to satisfy customer requests
prior to November 9th of 2022 at all times. It was able to satisfy those faster than it
was required to in terms of service. But in our view, based on the nature of the Block
5 interest account, it does not make sense to assert that if customer A pushed a button
seeking to transfer assets in the interest account to the wallet account to assert that
it happened immediately and therefore there were coins in the omnibus custody audio accounts
reflecting customer A's direction. That's not how the system worked. By definition,
the movement of assets could not happen immediately because the asset transfers were manual. They
were manual for a number of reasons. One is that the company deliberately divorced the
user interface from the external actual assets in order to reduce opportunities for security
breaches. But more practically, there might not have been assets available for immediate
movement from BIA to wallet precisely because of the nature of the product. Customers had
allowed the assets in BIA to be lent to third parties, rehypothecated, and large portions
of them were. So Block 5 might not even have possession of the assets to be able to move
them from BIA to wallet. So if you move slide to slide 8, the reality is that the assets
held for the Block 5 wallet product were in segregated wallets at BitGo and FireBlock.
So Block 5 did not use to generate revenue. The assets in the interest accounts were in
fact rehypothecated for revenue generated activities. They were not commingled. And
for one to be moved from one to the other, you actually have to move them from one to
the other. So now I want to move to the November situation and talk about exactly what happened
in January. Let's turn to slide 9. So as I talked about previously, throughout Block
5's history, it had been able to process customer withdrawal requests in the ordinary
course. Just an example, in June when Celsius shut its doors, Block 5 was able to process
all customer withdrawal requests. And Voyager, when it shut down its doors in July of 2022,
Block 5 kept right on trucking. As prices reduced and the crypto market struggled a
little bit between June and November of 2022, some clients decided that crypto was too risky.
They wanted to pull their assets out of Block 5 and it processed billions of dollars in
customer withdrawals. But that said, as the market has shown in the summer, the cryptocurrency
market is very sensitive to market feedback. A single news article can have a huge impact
on customer behavior. Tweets can kill or spike value at any moment. You go to the next slide,
Rob. Crypto Twitter, your honor, is nonstop, as I know you have experienced. I'm sure people
are listening right now. And what I'm saying, for some reason I probably can't figure out,
is probably moving the price of some cryptocurrency. But what happened in November of 2022 is pretty
straightforward. Negative news caused a run on the bank at FTX. That's what happened.
Now if the FTX's disclosures to the world had been accurate, if it had been a real company
and maintained assets one to one, that wouldn't have mattered. Because customers would have
been able to withdraw their cryptocurrency as FTX had represented they would have been
able to. Unfortunately, it was a massive fraud and it failed. And Block 5 was collateral
damage. And all of this played out over a week in November of 2022. Next slide. On November
6th, the CEO of Binance, which is one of the largest players, tweeted that he was going
to sell all of his position in FTT when a major player with a large position in a cryptocurrency
says it's going to liquidate its entire position. Obviously, the price moves materially. And
Binance continued to tweet about FTX. And you can go to the next slide. Customers continued
to react and there were huge customer withdrawals. $6 billion in just a couple of days. And on
November 8th, FTX ceased customer withdrawals. But the situation was still unclear. Okay?
Block 5 didn't exactly know what was going to happen. Because Binance announced the next
day that it was going to acquire FTX and stop the slide. Nobody knew what was going to happen.
But the situation calmed down for at least a short amount of time. Then the situation
flipped again. Next slide. The next day, on November 9th, the CEO of Binance changed his
mind and he tweeted out as a result of corporate due diligence as the result of latest news
reports regarding mishandled customer funds and alleged U.S. agency investigations. We
have decided that we will not pursue the potential acquisition of FTX.com. Now, that caused a
massive run on the bank at FTX and they had to shut down their platform. Block 5 had to
figure out what to do. It tried to get capital elsewhere. FTX had an obligation to provide
capital. It refused to do so. FTX's Alameda had posted additional collateral as your honor
knows from the adversary that was pending in front of the court. Block 5 tried to access
that but was unable to immediately do so. And Block 5 began experiencing its own high
levels of customer withdrawals. And then it had to decide what to do under its own terms
of service. And so the board thought hard about this and Block 5 held out as long as
it could. Go to the next slide. It had two meetings of the board on November 10th of
2022 at 9.30 in the morning. They thought about whether or not they should stop customer
withdrawals and freeze the platform. They decided to wait and see until what happened
later in the day. Next slide. At 3.45 p.m. they had a second board meeting and held that
they really didn't have any alternative because of the level of customer withdrawals and the
liquidity issues that they were facing. It was in the company's best interest to pause
platform activity. So at 8.15 p.m. next slide. Block 5 implemented the platform pause. Block
5 drew a line in the sand. November 10th at 8.15 p.m. to protect and ensure equal treatment
of similarly situated clients. Block 5 took the steps via the true up and batching processes
to honor all trading and withdrawal requests that had been initiated before that time stamp,
8.15 p.m. on November 10th, including requests for transfer, requests for withdrawal, and
requests for trades. If it was if you requested before April 8.15 on April on November 10th,
Block 5 fulfilled that request. But Block 5 stopped all other processing or transaction
requests. And so if you pushed a button on the user interface to request a withdrawal
from the platform, a transfer to the wallet account, or a trade after that time period,
it was not fulfilled. If a client tried to make a loan payment after the platform pause
time stamp, that request was never recognized. And your honor authorized us via your scratch
order, which is a docket 754, to send that money and any future loan payments that the
clients might make back to the clients immediately because those transactions were never processed
and effectuated. No transactions initiated after the platform pause time stamp were completed.
And Block 5 had the right to do this. In fact, this possibility was expressly contemplated
by the terms of service as it had to be. Block 5 had to have put in place processes to protect
clients in a downside scenario. And that's what it did. So let's move to some of those.
Slide 19 shows the general acknowledgment by all users of the platform that they have
to read, agreed and understood the Block 5 terms of service, which were written to protect
the company and clients. The next slide. This is a key term of service, your honor. And
in fact, it's written in not just the general terms of service, it's part of each product,
the wallet product, the BIA product, the BIA product for international client, the private
client terms of service. Every client agrees. So there are since two sets of terms of service.
There's the general and then account specific. There are several sets of terms of service
and basically they apply depending on what you're doing. The general terms apply at all
times. The wallet terms apply when you're to wallet related transactions. The BIA term
applies to BIA term related transactions. And multiple sets of terms might apply depending
on what specifically you are doing. It is more often the case than multiple sets of
terms would apply. And in fact, this specific term was listed multiple places because it
had to be applicable in many different circumstances. And people had to agree that Block 5 might
experience among other things, extreme market conditions or other operational and technical
difficulties which could result in the immediate halt of transfers and withdrawals of cryptocurrency
either temporarily or permanently. And this is a warning and it appears in the terms of
service for all products. And the reason it's there is because Block 5 must take action
in some circumstances to protect customers. I mean, Block 5 was not in a position to satisfy
all demands for withdrawal off the platform. It was not in a position to satisfy the demands
for people to put names in the client property in the client's name in the wallet accounts
because it didn't have control of specific certain enough assets to do so. So the next
slide shows one of the other key terms of service which is in the wallet, the BIA, the
international BIA and others. You know, Block 5 had the right to limit access which can
include temporarily or permanently removing your online assets, restricting your accounts
and or closing your accounts without prior notice to you unless prior notice is required
by law. And there's also a set of terms of service. The next slide in the general terms
of service which generally give Block 5 the right in its sole discretion to suspend use
at any time and without notice to you and to cancel orders or transactions in its discretion.
That's in the general terms of service applicable to every client and every transaction. And
so Block 5's platform pause was announced to clients via Twitter and via Reddit which
are the sources that are most likely to be used by Block 5 clients. And it definitely
was not a secret. In fact, it was publicly reported shortly thereafter. The next slide
shows just some of the public reports. The Bloomberg reported 15 minutes after it happened.
Wall Street Journal reported an hour or two later. Even the leading report in Singapore,
the leading paper in Singapore reported it before anybody woke up the next morning in
Singapore. And it's not disputed what Block 5 actually did as a result of the platform
pause and that's shown in the next slide, slide 24. Block 5 shut down all substantive
transactions as of the platform pause. Users could go onto the platform, they could view
balances and they could click buttons, but no transactions were actually consummated. No substantive
action requested after the platform pause was processed. Now, your honor, FTX's demise
and Block 5's platform pause all happened very fast. And Block 5 could not immediately
turn off a number of the internal and external functions that were part of its system. And
that is what caused some of the communications and some of the objectives to our motion have
cited to the court. The user interface was not able to be turned off immediately. It
was extremely complicated to get that process complete. The user interface remained on and
clients could push buttons to request a transfer. The user interface would change to request
reflected transactions even though they never happened. And users continued to receive automated
emails as they had pre-pause. And all of this happened because of the technical issues involved
in changing the user interface and the related internal functionality, which took a significant
amount of time. Next slide. So Block 5 right after November 10th at 8.15 started working
on disabling the functionality of the platform. And nobody knew right at the beginning how
hard it would be or how long it would take. Along the way Block 5 did take actions to
try to tell people that platform activity was paused. And so let's go to the next slide
and start with this timeline. So November 10th at 8.15 p.m. is when Block 5 implemented
the platform cause and communicated that to the world on the places most likely to be
seen by Block 5 clients. Next slide. The Block 5 engineers immediately started working on
the problem. In years of operations no one had tried to disable functionality. The system
had worked well for years. And at first they didn't know what would be required or how
long it would take. Within about 10 hours they knew it was going to be more complicated
than they feared. So click next slide, Rob. The engineering team, what they did was they
posted what's called an in-app message. Your Honor might have seen these sort of messages
on your phone. You open up an app and it's the first thing that pops up. And these are
warnings. Starting at 12.14 on November 11th any user who accessed Block 5 had to click
on this pop-up message before they clicked on anything else on the platform. This is
the first thing that popped up. And I want to focus on this message a bit. Next slide.
It's a dismissable message. So it was reasonably straightforward to add it to the app. And
it's the first thing that anybody saw. And they explicitly said that given the FTX situation,
Block 5 was not able to operate business as usual and was limiting platform activity immediately
as permitted by its terms. Block 5 did not know how long the pause would last. And after
this time, next slide, to access your Block 5 account at any time after this was posted,
you had to click a button that said got it. Okay, got it. Affirmatively dismissing the
message that platform activity was suspended. And even after this was posted, as I mentioned
earlier, tens of thousands of Block 5 clients still clicked got it and then went and hit
transfer and tried to do transactions on their phone.
Let me just stop you there if I may. The notice, and this is referenced in the pleadings, references
we are limiting platform activity including pausing, client withdrawals. It doesn't reference
transfers. Those are separate activities. It requires, and you may be going into it,
separate functions on the customer interface. So if you're moving from the interest account
to the custodial account, okay, the funds have to be withdrawn from the interest account
and then transferred to the custodial account. So a withdrawal could include a transfer,
a transfer could include a withdrawal. It depends specifically on what you are trying
to do. So a number of the clients, actually the overwhelming majority of the people that
are at issue here, they didn't just say I want to withdraw from the BIA account and
move it to the custodial account. They said I wanted to withdraw altogether. And to do
that, it requires the activities to go from the BIA account through the wallet to the
client's external wallet. So block five position is you cannot initiate a transfer without
actually including a withdrawal. That's right. That's what happens. It physically moves from
the BIA account to somewhere and you can either transfer it to, just transfer it to the interest
account or you can withdraw altogether from the platform. The vast majority of people,
I think we have the number somewhere, we're trying to get off the platform entirely, which
required going through the custodial interest accounts. So where are we? Okay. Next slide.
A few minutes later after this, Block 5 posted a message on its website and it finalized
the ability to send an email to the 650,000 plus clients that were potentially affected
and it sent the same message out to email to every client, whether they're clients that
have assets in wallet, clients that have assets in the BIA account or both. Now disabling
the user functionality was a challenge and Block 5 was still seeing clients click through
the dismissable message and click more buttons trying to withdraw assets off the platform.
And the dismissing, disabling the functionality was taking longer than expected. So then on
November 15th, Block 5 added another message to iPhones and iOS phones notifying people
the transfer was paused. This went up again after you click through the dismissable message.
And then on November 17th, it said did the same thing for the Android phones because
this was taking longer than Block 5 expected it to take. On November 18th, Block 5 was
finally able to disable the user functionality and users were no longer able to click on
the transfer button. But again, in the interim between the platform pause timestamp and November
18th, 48,000 clients had clicked buttons saying transfer, next slide, and they had received
automated emails saying transfers valued at $375 million had been completed where they
had not been. And that's why we're here. The people that made those transfers after the
platform pause are saying that they should be treated the same as the clients who physically
had cryptocurrency in the custodial accounts as of the platform pause. And so now I want
to go into a little more detail about the way the business worked before and after the
pause because that shows why these transactions did not happen. And then I try to walk the
court and people watching this hearing through this in a few slides. The back end of Block
5 system is very complex. So go to slide 36. So the direct transactions between Block
5 clients come through the wallet custodial omnibus wallets. Okay, those are the ones
on the left-hand side of the slide. Deposits come into those. When clients choose to move
assets into the rehypothecatable wallets to earn interest, cryptocurrency is in fact moved
from the custodial wallet to the rehypothecatable wallets. And Block 5 then sends that cryptocurrency
to borrowers as indicated at the right-hand side of this slide. And again, this is the
core of the business. We were a cryptocurrency lender and we told the world and all of our
clients that the business was to earn yield on loans to third parties. That was the business.
Next slide. So when customers clicked transfer on their user interface before the platform
pause because they wanted to move assets out of the BIA rehypothecatable wallets, either
to withdraw from Block 5 altogether or to trade them or to just move the coins to the
custodial wallets, nothing immediately happened to any actual assets, nothing. And actually
it was impossible for anything to happen physically until and unless Block 5 employees actually
moved assets. And actually it's not technically feasible to do that anyway given the constraints
and capacity of the blockchain itself. It can't be that you push a button and the assets
immediately move. That's not how it works. Next slide. What happened automatically when
clients hit the buttons was that the user interface changed. If you had five Bitcoin
in your BIA account and you hit transfer two of them to the external wallet, the user interface
would immediately reflect three Bitcoin in the BIA account and two Bitcoin to an external
wallet and you as the clients would get an automated email saying the transaction had
been completed, but it had not been. It was not until after the Block 5 batching and or
true up processes were complete that the client transfer requests are or actually could be
actually effectuated. And in the interim in between these two things, why CLI always had
the rights under its terms of service to pause withdrawals or transfers and or to cancel
transactions. Those are clear parts of the Block 5 terms of service. So let's walk through
this with an illustrative pre-pause transaction. Next slide. So assume that as shown here,
client A hits the button on the Block 5 platform to move 10 Bitcoin from the BIA account to
the wallet, hits transfer and confirm. Go ahead, Rob. Next slide. Client A's user interface
immediately displays 10 less Bitcoin in their BIA account and 10 more Bitcoin in their custodial
wallets. And next slide, client A would immediately receive a fully automated email saying the
transaction had been completed. Next slide. But nothing actually happened until later
steps on the back end. And those steps began when the company's interface collected the
transaction and began consolidating them for review by Block 5's operations and finance
teams. Next slide. So Block 5 had two processes that its employees in finance and operations
performed, one called batching, one called true up. And no physical transactions occur,
no cryptocurrency is moved until one or both of these processes on the back end occur.
What Block 5 does on the back end depends on the nature of all clients' collective requests
on the front end within a specific time period. If all a client is doing is trying to move
assets out of the BIA account and into the custodial wallets without trading them or
moving them off the platform, then that action did not occur until the next day following
the true up. Bless you. But if a client is trying to do something further than that,
if a client is trying to move the assets from their BIA account, ultimately off the platform
entirely to an external wallet, that could happen sooner. But only if the assets went
through what Block 5 calls the batching process in the interim. So I'm going to walk through
those two processes separately. Go to slide 44 in the true up process. The true up process
is critical because Block 5 had an obligation to match what was physically in the custodial
wallets with what was owed to clients who had directed their assets to the custodial
wallets. Block 5 had promised people it was not going to rehypothicate these particular
assets. These assets are in the account and they are yours, not ours. So each day after
clients, one business day after the transfer request, the treasury team looked at the assets
in the accounts and compared those accounts to where clients wanted their assets to be.
And if there was an insufficient amount in the custodial wallets, coins were physically
moved from the BIA to wallets. And if there were not sufficient assets in the BIA and
you needed to go further to clients to call back those assets, Block 5 did that. That
is the true up process. So is it fair to say that the true up process involved a look at
the transaction as an aggregate for the day? Not customer specific, but collectively to
see if there is enough money in one to transfer what was transferred individually into the
other. It is both. You look at individuals and the group as a whole. But a true up was
necessary only if the group as a whole required additional movement of assets from the BIA
accounts to the wallet accounts. And if obviously there is a significant amount of assets that
are moving at any given day, by definition it is going to be required because the purpose
of the process is for the assets in the custodial accounts to match one to one at all times.
So slide 45, assuming the clients have asked to move assets in the hypothetical that I
mentioned earlier from BIA to the wallet, Block 5 actually has to get the assets from
somewhere. So its treasury team takes physical assets from the rehypothecatable wallets and
move them to the custodial wallets so you can match your obligations to clients. Now
depending on the day, as I said, Block 5 may or may not physically possess the coins to
be able to do that in the rehypothecatable wallets. It might have lent those assets to
a third party. That was its business. It lent many, many assets to third parties consistent
with what he told clients. And Block 5 may be able to move existing assets from those
wallets over to the custodial wallets or might have to get those from the borrowers. In the
event, in any event, the process of physically moving assets from BIA to the rehypothecatable
wallets, it's not automatic. It's definitely not immediate. That's not how it works. And
the BIA terms of service, your honor, are completely consistent with this process, but
you have to read the terms of service altogether. Let's go to the next slide, slide 46. So this
is the terms of service, your honor, and these are under the BIA terms of service. It's the
same under the BIA US and non-US terms. Okay? This is under the category of withdrawals,
like 1, 2, and 3. Number 1, you may make a request for a complete withdrawal of principal
from your crypto interest account. That's the BIA account at any time. Any withdrawal
of principal will be transferred instantly to your Block 5 wallet. And any withdrawal
from the wallet is subject to the wallet terms. And then Block 5, number 3, right below it,
Block 5 and our third party partners, as I described before, may experience extreme market
conditions that could result in the immediate halt of transfers and withdrawals of crypto
currency temporarily or permanently. So my colleagues on the other side are trying to
make a meal out of these two words. These two words will be transferred instantly, but
you have to read those words in the context of the full sentence, definitely in the context
of the full paragraph, and in the context of all the terms of service. The first sentence
says that you can make a request for a complete or partial withdrawal of principal from your
BIA account at any time. And the second says that the actual withdrawal of principal, once
that withdrawal happens, will be transferred to your wallet immediately. And then further
wallet transfers out of the system are subject to the wallet terms. But the actual withdrawal
of principal from BIA does not occur immediately, and it could not. And that's because of what
I described before about how Block 5's business actually works. Block 5 has to go physically
to get principal assets from the BIA and move them to wallet, and that does not happen instantly
ever. And so the argument that's being advanced to the other side takes these two words transferred
instantly out of context, and it ignores the rest of the sentence, and it definitely ignores
paragraph number three, BIA term C3, which couldn't be any clearer, in identifying the
situation that Block 5 found itself in on November 10th at 8.15 p.m. There were extreme
market conditions. That's indisputable. And Block 5 decided to immediately halt all withdrawals
and all transfers of cryptocurrency. And so our view is that my friend's argument on the
other side is inconsistent not only with the way Block 5's business worked, but also with
the terms of service. Now, the argument gets even more complicated, your Honor, because
there's a conflation between requests to move assets from BIA to wallet with requests to
move assets from BIA to an external wallet through the custodial wallets. That makes
things even more complicated, and that's what brings into play the so-called batching process.
Okay? And so let's go to the next slide, 47. The batching process reflects what I mentioned
earlier, your Honor. Block 5 set up its system to try to be responsive to clients' requests.
When a client wanted to withdraw assets, Block 5 wanted to be responsive and wanted to be
in a position to do that as quickly as possible, but it certainly, it was not instant. So let's
walk through that process. So when a client wants to take assets off the Block 5 platform
entirely, the process looks a lot like the true-up process that I mentioned earlier with
respect to just withdrawals from BIA and deposits into the custodial accounts. Clients initiate
transfer requests and the interface, in the user interface, those are collected by the
company and the financial operations group, and the user interface immediately reflects
the book entries that assets in the BIA are reduced in the amount requested, but it takes
time to process the transactions. Next slide. Now here, your Honor, because assets are leaving
the platform entirely, the fraud and security team takes the first crack at these particular
requests, and they're done in groups, and that's why they call it batching. Batches
of proposed transactions are sent to the fraud and security team, and they look at them,
and that's the first line of defense. And oftentimes, security issues are flagged, and
those issues actually may require interaction with the clients, but you actually might need
additional information from the clients before you're able to process the particular request.
And so it definitely cannot be the case that when you ask for a withdrawal from your BIA
account that it happened instantly because it has to go through the fraud and security
checks and may require further interaction with the client. But depending on the nature
of the individual batch, what is requested specifically and what is overall requested,
the process can go slow, but it can go fast. Twice a day, the finance team would review
the batches and it would try to process the fraud checks, which depended both on who was
trying to withdraw and what they were trying to get. It might be different if you were
asking for a withdrawal of cryptocurrency or if you were asking for a withdrawal of
cash through a wire or through an ACH. The debtor's systems had in place an 18-hour fraud
check for any crypto withdrawal. It was actually quicker if you wanted to get a cash withdrawal
because of the back end systems. So what happened was that valid requests were sent to the BitGo
account. That was the smaller account that directly interacted with the clients. Those
were where the crypto asset requests were sent once they were validated. The cash requests
were sent to Silvergate for wires or ACH. If Silvergate had enough cash, the cash would
go out the door. If it did not, it had to get the cash either by liquidating the crypto
or getting cash somewhere else. If BitGo had enough crypto in the form of the specific
coin requested to meet the withdrawal request, the whole batch, then once the request passed
the fraud check, it would batch out the crypto to clients. And again, that was only if the
BitGo account had enough, it didn't have to itself go to the other account at Fireblocks
to get crypto to send out the door. So depending on the day, cryptocurrency withdrawal requests
could either be consummated during the batching process if there was a limited number of requests,
depending on what was in the BitGo account to begin with, or it would have to go through
a separate mini true up process where cryptocurrency was physically moved to effectuate the transaction.
It just depended on the day. Like for example, my colleagues on the other side found one
time that this had happened where there was a same day withdrawal request that actually
was processed. And it was processed because this was in July of 2022, I believe. And it
was processed because there was an intraday batching system that BlockFi was able to effectuate.
The process was certainly not instant and the process was done exactly consistently
with the BlockFi terms. So if you go to slide 50, Rob, the bottom line is that no withdrawal
request, whether it was a withdrawal from BIA to the custodial wallet or withdrawal
from BIA to the external wallet through the custodial product, none of them were instant.
Every single one of them had to go through BlockFi's back end systems. And that was
not, that was true for every transaction before the program pause period. Now let's talk about
the attempted post pause transactions. Let's go to slide 51. So my friends on the other
side are arguing that because they clicked transfer and confirm on the user interface
during the eight day period between November 10th at 8.15 p.m. Eastern and November 18th
when we shut down the system, as did 48,000 people trying to move $375 million dollars
for cryptocurrency, their argument is that they click the buttons as they could have
done pre-pause. Next slide. The user interface as it had done pre-pause displayed the transaction
had been completed. Next slide. And as had occurred pre-pause, they received an automated
email saying the transaction had been completed. And in fact, as had happened pre-pause, next
slide, BlockFi's system had internally collected the transfer requests for review by the team.
But BlockFi did not and could not conduct any of the back end processes after the platform
pause. Doing so would not have treated clients fairly and would certainly have not treated
them equally given that other clients had assets in the custodial omnibus accounts that
were attributable to that. And actually moving more cryptocurrency from BIA to the custodial
wallets would be unfair to the remaining clients that were at BIA. The argument being made
by my opponents is that clicking the button saying transfer creates an ownership interest
in assets that were already in the custodial omnibus accounts because other clients had
directed those assets to be there. But that can't be right in our view. The assets that
are in those custodial accounts, they belong to those other clients. And I want to end
by kind of just level setting on the current state of affairs. And you can go to slide
58, Rob. So sitting here today, we have about 297 million, when you round up, of cryptocurrency
that is sitting in the omnibus custodial wallet accounts at Bitgo and Fireblocks. And that
matches almost to the dollar. The wallet claims that are attributable to those clients who
had assets in the product as of the platform pause. And separately, we have about $1, $2
billion in claims for clients who as of the pause had directed clients to the BIA product
and permitted BlockFi through the terms that we went through to rehypothicate and lend
those assets out to a third party in order to earn yield. Those are assets that BlockFi
had title to, not the individual clients. Now, when we read the initial objection, we
actually weren't clear. And we thought that what they were asking was for assets to actually
be physically moved from the rehypothicatable wallets over to the custodial wallets to address
the post-pause requests. And the supplemental objection, in my view, clarifies what they
originally requested when I read them to be saying now. Next slide. Is that because they
clicked the transfer and confirm buttons between November 10th at 8.15 and November 18th, they
have an equal claim to the assets that are in the custodial wallet accounts, even though
no assets were actually moved to the custodial wallet accounts on account of their button
clicking? We don't agree with their theory, but the effect would be, of course, to just
more than double amount of the wallet claims against the same pool of assets sitting in
the custodial wallet accounts. Next slide. That result would materially reduce the recovery
to wallet holders, but more practically for purposes of the motion that we filed. It would
make it impossible for us to do what we want to do, which is to give wallet customers whose
assets BlockFi held in trust without the right to rehypothic those assets, we want to give
those people their money back. And so, next slide. What we're asking the court to do is
overrule the objections and allow the debtors to do what we've been trying to do since the
motion was filed. There is a pool of cryptocurrency in the custodial wallet accounts that was
directed there by specific customers and placed there by BlockFi employees on the premise
that those specific assets belong to those specific customers. BlockFi promised to give
those coins back to the clients, and that's what we want to do. And as your honor knows,
time is often the enemy of a creditor and bankruptcy, and we've been trying to get these
assets out the door to these people for some time. Funds on hand at the company, they're
sitting in accounts. Obviously, they're targets for all sorts of potential creditors, so I
don't blame anybody for trying to get at those assets. They are sitting there, and we are
taking the position that that is not property of the state. We want that assets to go out
the door. Largely, this is an inter-creditor fight about who gets those particular assets,
your honor. Our position is that it's pretty clear. It's the people who put those assets
there in the first place on the premise that the debtors wouldn't have a right to move
them. The Creditor's Committee is reserving their right to pursue preferences depending
on when those assets were moved to the custodial accounts. They're suggesting there might be
clawbacks from the wallet, and there's a suggestion in the other side that the wallet account
isn't big enough. Maybe there should be more assets in the wallet account. But what that
highlights, your honor, is the fundamental reality. A line in the sand had to be drawn
by the debtors' pre-petition, and it has to be drawn here by the court. And the publicly
announced platform pause is clearly the most logical and rational route to an expedient
process that enables client recoveries, and it is the only one that's consistent with
both the way BlockFi actually conducted its business and BlockFi's terms of service. So
unless your honor has any questions, that all I have for now, subject to rebuttal.
No, not at this time. Thank you.
Thank you, your honor.
I'll hear from the committee.
Good morning, your honor. Kenneth Allett of Brown-Rudnick for the official committee.
We agree with the relief that the debtors are seeking here, but we come at it from a
little bit of a different perspective. Every single one of BlockFi's customers was promised
their money back and is entitled to their money back. The issue is it's just not there.
And that's why we're here today, because BlockFi does not have the money to meet all
of its promises to return money to its customers. And so the role of this bankruptcy is to resolve
those competing entitlements to funds in the fairest and most equitable way, consistent
with the bankruptcy code. And so we view this less as a question of contractual interpretation
as what actually happened and what was BlockFi actually able to do. So it's undisputed that
there are sufficient funds segregated for the pre-pause wallet holders. If no additional
funds come into the wallet, those people can be paid in full, they can recover their property,
and they don't have to further deal with this bankruptcy.
Subject to potential clawback.
Correct, your honor. And as we note, it's not them being in the wallet that's the issue
with potential clawbacks, it's it coming out of the VIA accounts. So from our perspective,
like I said, the debtors have talked about the contractual and notice issues, but we
don't actually see that as relevant, because I think the debtors have the better of that
argument. But even if they don't, what that means is the debtors breached their contracts,
and they've breached a lot of contracts, unfortunately. Every VIA account holder was
entitled to withdraw all of their funds in full, and they're not going to be able to
get that. And that's, as a result, the question is, do you have an unsecured claim, or do
you have something else? And we analogize this in our response to a bank check. Block,
even if BlockFi sent a message saying, we're going to pay you, they sent a check. But BlockFi
didn't actually move any money on the back end. And that, in our view, is what's determinative.
Because even if BlockFi was obligated, as the paragraph on 46 of debtors, slide deck
said, even if BlockFi was obligated to immediately transfer funds, it didn't. That's a promise,
and it breached its promise. But that is nothing more than an unsecured claim. Companies headed
into bankruptcy all the time write checks, trying to pay people that aren't honored.
And as we note in our papers, when the funds actually transfer with a check is when the
check is honored. And here, these transfer requests were never honored. So BlockFi may
have breached its contracts, but the remedy is a breach of contract claim. The funds that
were segregated pre-petition are not BlockFi's property. Those were owned by the pre-pause
wallet holders. And so it cannot be the case that BlockFi's breach of its contractual obligations
made it so that pre-pause wallet holders lost their entitlement to property that they had.
BlockFi wasn't entitled to take that property pre-pause. If BlockFi had taken property from
the wallets to use as it saw fit, there might be much more significant claims in this case.
But there's no indication that it did that. And we don't challenge anybody's for trying
to get their money back. Like we said, everybody was owed their money back. At the time of
the pause, the automatic stay had not come into effect, and everybody was entitled to
do their best to try and get paid. And we don't challenge anybody for doing that. Tens
of thousands of people did. Mr. Slade noted some aspects of what was happening, but the
story with FTX and Al-Maeda research began even earlier on November 2nd when, as the
debtors noted in their first day declaration, certain balance sheets leaked of Al-Maeda
research, which was the debtor's counterparty there. Ultimately today, we're here because
BlockFi just doesn't have the money that it needs to have to be able to pay everybody
in full. It made a number of contractual promises, and every day in a bankruptcy court, contractual
promises are not honored. It's why you're in bankruptcy. It's not that anybody wasn't
owed their money. The money just isn't there today. And so as of the pause date, BlockFi
did announce it was halting withdrawals. I think that it's a fair reading of how the
BIA accounts work, that if you're taking money out and putting it into a wallet, or you're
taking it off the platform entirely, you're getting paid on an unsecured claim. That sounds
like a withdrawal to me, but in our view, you don't need to dance in the head of the
pin of all these contractual arguments. You don't need to look at what notice was actually
provided because at the end of the day, even if BlockFi was not entitled to an actual platform
pause, it did. But BlockFi stopped honoring withdrawals, stopped honoring transfers, stopped
honoring everything because it knew that at that moment, it didn't have the funds it
needed to satisfy debts in the ordinary course. And so that's why we're here today, Your
Honor. That's why we've been here since November. And unfortunately, that means that certain
BIA account holders are not going to get paid in full. But unfortunately, absent some fairly
substantial recoveries, none of them are going to get paid in full. And what we have to do
here is to do what's fairest and equitable for all BIA account holders, both those who
opted to withdraw their funds after platform pause date and those who didn't. And so, Your
Honor, we'd request that you find that the platform pause transfers did not give customers
a right to wallet funds that had not been segregated for their benefit.
All right. Thank you, Council. Anyone else on behalf of the debtor in support of the
debtor's motion? Mr. Gwyn, I see your hand raised. I think you need to, you're on mute.
Can you hear me?
Oh, we can.
Thank you, Your Honor. Good morning. Kirk Gwyn from Reed Smith on behalf of the ad hoc
group of actual wallet holders who are identified by name in footnote two of our response in
support of the motion to stock at item number 826. Our clients had assets in the wallet
accounts prior to the platform pause. Neither the debtors nor the Troutman ad hoc group
deny that our clients own their assets in the wallet accounts. The Troutman ad hoc group,
however, seeks to share in the assets of the actual wallet holders. As a matter of law,
Your Honor, there's no basis for the Troutman ad hoc group to request or for the court to
grant the Troutman group an interest in assets that belong to someone else, here, the actual
wallet holders. The Troutman group's assertion of a right to someone else's property is itself
based on a fiction. There's no factual dispute that the Troutman group's BIA assets remained
in the BIA. That is all the court needs to know to determine that the Troutman group
has no interest in other clients' assets in the wallet account. What does not matter,
and I see this largely the way committee council does, Your Honor, what does not matter is
the notice, whether any notice was given or what it in fact said. What also does not matter
here are the terms of conditions with respect to the Troutman group or the terms of service.
Why are those, the notice and the terms and conditions of service, irrelevant as applicable
to the Troutman group? Because at bottom, at the end of the day, none of their assets
were transferred to the wallet accounts. So even assuming that the Troutman group is right
about the notice or the terms of service, or both, and I'm not saying they are, but
even if they were right about both of those things, the bottom line is their assets were
never moved to the wallet account. So as committee council said, at most, the Troutman group has
a breach of contract claim against the debtor because their assets were not transferred
to the wallet account. But what the Troutman group does not have is the right to share
in the assets of clients that were transferred to the wallet account and are indisputably
property of clients like the ad hoc group of actual wallet holders. As the Supreme Court
recognized in 1962 in the Pearlman case, quote, the Bankruptcy Act does not authorize a trustee
to distribute other people's property among the bankrupt's creditors, close quote. The
same is true under the Bankruptcy Code. So for those reasons, Your Honor, the ad hoc
group of actual wallet holders respectfully requested the court grant the motion, which
was filed on December 19th of 2022, and permit the debtors to do what the Bankruptcy Code
already permits, to return the actual wallet holder's property to those actual wallet holders.
And that's all I have, Your Honor, unless you have questions for me.
No, thank you, Mr. Gwynne.
Thank you, Your Honor.
Is there anyone else in support of the motion? All right, let me turn to Miskowski. Good
morning, Miskowski.
Good morning, Your Honor.
Sorry, I've got a lot of paper here.
Good morning, Your Honor. Deb Kovsky, Troutman Pepper for the Ad Hoc Committee of Wallet
Account Holders. I don't have a fancy PowerPoint presentation like the debtors, and unlike
the estate, I don't have nine lawyers present here. My clients don't have a virtually unlimited
war chest, they've just got me. The members of the Ad Hoc Committee are just ordinary
customers of BlockFi. They're not wealthy, they're not well-financed, they're just trying
to get fair treatment by the debtors to whom they entrusted their digital assets.
As Mr. Slate alluded to at bottom, this is really a dispute over the allocation of non-estate
assets. The question before the court is, at what point did a BlockFi customer who clicked
the button to transfer out of BIA, who instantly stopped accruing interest on those assets
in the BlockFi system, who received an automated email set up by BlockFi confirming that in
fact the transfer had occurred, at what point did they legally leave BIA and acquire the
right to look instead to whatever digital assets are sitting in the commingled omnibus
custodial wallet reserves? And I think it's important to note here that the debtors really
have no skin in the game. The official committee definitely has no skin in the game. This is
about assets that are not property of the estate. If the debtor's motion is granted,
no digital assets return to the estate. If the ad hoc committee's objection is sustained
and the ad hoc members' valid transfers are recognized, there's no increase in claims
against the estate. And let's walk through the math. The debtors have said there's about
three, and I'm going to use round numbers because I can do math in my head that way,
there's about $300 million worth of digital assets in the custodial wallet reserves. There's
about $300 million of, about $300 million reflected in the pre-November 10, 8.15 p.m.
wallet accounts. About $375 million reflected in the post-November 10, 8.15 p.m. wallet
accounts. So if the debtor's motion is granted, there's about $375 million in claims against
the estate. If the ad hoc committee's objection is sustained, there would be some kind of
allocation of wallet assets, and then there would be a $375 million deficiency that could
be asserted as claims against the estate. So from the perspective of the estates, this
is a complete wash. It's really especially perplexing to the ad hoc committee that the
official committee has spent so much time and energy opposing the ad hoc committee on
this matter when it has zero impact whatsoever on the official committee's actual constituents.
The official committee doesn't have a roving commission to do what it perceives as equity.
It has a mandate to represent the interests of unsecured creditors, and importantly, those
interests are completely unaffected here. It was also kind of surprising and disappointing
that the committee chose to argue preference issues in its reply briefs since the parties
had decided and agreed that those issues, if they come up, would be deferred for another
day and that the only issue before the court today is whether the transfers out of BIA
and into wallet actually happened. And with respect to that issue, as Mr. Slade indicated,
there's really no dispute as to the key facts. The transfer button remained live in the user
interface well after November 10th at 8.15 p.m. The debtors did not shut it down. BlockFi
did not pause those transfers in the user interface, did not pause the cessation of interest, did
not pause all of the things that the customer could do and all of the immediate impacts
that those actions had. All that BlockFi did was make the back end decision to stop truing
up the wallet reserves. So when the customer clicked transfer, their BIA account balance
was immediately debited and their wallet account balance was immediately credited. Interest
immediately stopped accruing in the debtor's storm system, which is described in Mr. Chilla's
declaration. An automated email confirming the transfer was sent by the debtor's system,
and then the debtors failed to add any digital assets to the wallet reserves on account of
those actions. But here's the important part. When a customer transferred out of the BIA
program and into the wallet program, his right to tap the existing assets in the custodial
wallet reserves wasn't dependent on the debtors first putting more assets into the reserves
on account of that transfer. And that is crystal clear from all of the facts that Mr. Slade
just ran us through. First of all, the debtors chose to design their system so that all that
a customer had to do to exit BIA and stop earning interest was click the transfer button.
They didn't have to design it that way. They could have built in a delay. They could have
tied the cessation of interest, the consideration for the grant of title to those digital assets
to some other event. The debtors could have had the automated email say transfer pending.
They didn't do those things. They chose to make it instantaneous. BlockFi chose to agree
with its customers in terms of service that BlockFi drafted that the transfer of principal
out of BIA would happen instantly. In fact, customers' ability to make those transfers
out of BIA instantly was part of what the official committee described in one of its
briefs as BlockFi's best in class customer protections.
But notwithstanding that the app reflects instantaneous movement, the terms of service
provided that it would not necessarily be instantaneous. Isn't that correct?
No, that's not correct, Your Honor. The terms of service say that it absolutely...
Let's say...
Well, I mean, portions of it say that there can be up to a seven-day delay in certain
situations.
Well, Your Honor, actually, let me clarify that because you asked Mr. Slate a question
and I think his answer may have been a little bit confusing. I think you said, can you have
a transfer... I think you said you can't initiate a transfer without a withdrawal. Is that correct?
And I believe my colleague on the other side said, yes, that's correct. But actually, that's
exactly wrong. If you look at paragraph 50 of the stipulated facts that were filed on
the docket, it says that following the launch of BlockFi's wallet product, customers could
no longer withdraw eligible digital assets directly from BIA to an external wallet. Instead,
as set forth in the BlockFi US BIA terms of service and BlockFi non-US BIA terms of service,
digital assets had to first be transferred from BIAs to customer wallet accounts. Now,
that first step, the transfer from BIA to a customer wallet account, that's instant.
That's discussed right there in the BIA terms of service. Then if you go to the wallet terms
of service, if you want to actually withdraw off the platform altogether, there could be
up to a seven-day delay. That's in a separate set of terms of service. And that's once you're
already in wallet, then you can request your transfer off the platform. And that can be...
It depends on how quickly the debtors were able to process it. It could be same day,
it could be a couple of days, it could be up to seven days.
So you're saying withdrawals are not necessarily instantaneous?
Correct. Absolutely. Yes. A withdrawal off of the platform by the terms of service, and
everybody agrees that was not instantaneous. Not even... It was not necessarily... It was
not instantaneous. But the inter-account transfer from BIA to wallet, the terms of service are
very clear. It happened instantly. And the debtors would like the court to believe that
instantly in that context actually means, well, after we perform all of our backend
true-up processes or batching processes, then we'll instantly transfer you out of BIA and
into wallet. That completely negates any possible sensible understanding of the word instantly.
That word instantly doesn't belong there if in fact the transfer out of BIA and into wallet
was something that could take a day, two days, even three days if it was a holiday weekend
and the true-up process wasn't run until the next Monday.
Now, I didn't question too much your adversaries. I don't want to be fair to you, but I do have
a question. Sure.
Overall, let me say I accept your views of what instantaneous should mean and the impact
and the difference and the distinction between transfer and withdrawal. The Black-5 general
terms, at least what's been presented to me as part of the record, provides that Black-5
reserves the right to refuse service, terminate relationships, and cancel orders or transactions
in its discretion. If at the end of the day, it retained the ability to cancel what may
have been an instantaneous transaction, what difference does it make?
Couldn't they, when they initiated the pause and even after the fact, go back and say,
we are canceling in order to level the playing field? It may give rise to claims. Maybe they're
doing so improperly, which would create a general unsecured claim. It's a breach of
contract if they cancel without a basis, but they reserve the right to cancel. So how does
that comport with what you're saying as far as your entitlement?
Well, Your Honor, first of all, they didn't cancel the transfers. That didn't happen.
All they did was fail to put enough assets into the reserves to cover everybody's transfers
in full. That's not a cancellation of the transfer. It is a breach of contract, but
it's not a cancellation of the transfer. It just means that people are going to have
to take a haircut.
Well, they're saying they're not honoring any activity that took place post pause. So
if we accept that the customer's initiation through the app was a transaction and their
refusal to honor it in light of their pause, isn't that's not a cancel? That's not a cancellation?
Your Honor, it's hard to see how it is because they didn't reverse. I mean, they came to
this court to ask to be able to cancel those transfers, to ask to be able to reverse them.
Clearly, they haven't done it yet. If my clients go into their apps and they pull up, what
assets do I have? It shows right there in wallet, in the wallet account that they have
their assets in the wallet program.
So is my granting approval authorization the last step necessary for them to cancel consistent
with the terms of the general terms of agreement?
I don't know that I don't actually know whether it is or not, but clearly the debtors felt
that they needed the court's permission to do it since they asked for it. And in addition,
although this wasn't briefed or argued, I would suggest that the debtors should not
be able as a contractual matter to exercise their discretion in an entirely arbitrary
and inequitable way, which would be the case if they decided to choose winners and losers
between similarly situated customers. That the customer who transferred, who all they
did was click the button to say transfer at 814 PM to make that customer the winner who
gets 100% recovery out of the wallet reserves. And the person who transferred two minutes
later at 816 PM gets nothing.
I think there are going to be winners and losers, unfortunately, when there's not enough
funds.
Your Honor, there are going to be winners and losers because there are not enough funds
because the debtors do not have enough assets to pay everyone in full. But that doesn't
mean treating similarly situated customers differently. The debtors did not halt the
transfers from be it's a wallet until days after November 10th. They did not revert.
They didn't change anything about the system. They deliberately set up their system so that
the architecture essentially pushed people out of BIA the minute they clicked transfer.
The whole consideration, and this was discussed a lot in the Celsius case, the consideration
for customers' grant of right and title to their digital assets to BlockFi, the whole
thing that gave BlockFi the right to rehypothecate was the earning of rewards, the earning of
interest. And BlockFi designed its system so you hit transfer, interest ceases immediately.
You are now no longer in that interest earning relationship. So I started to think about
it like sitting in a swivel chair. So if you're swiveled this way and you're looking at BIA,
your account's pointing at BIA, you've got risk. You've granted title to BlockFi. And
in return, you're getting interest. You're getting rewards. You click transfer immediately
you swivel this way. You no longer get interest. You no longer get those benefits. But instead
you have the right to tap the assets over here that are in the reserve.
But what if you swivel and you're transferring more than you have and the app is letting
you do so? The user interface doesn't stop you. You've transferred more coins than what
you have. There's some error. We know there are bank errors. We know there are lots of
errors in using apps. But it allowed you to do so. Your position on behalf of the ad hoc
committee is that, wait, it's still a valid transfer. And we have, actually what I think
you're saying is you have a title interest in those coins, in what, a legal interest
in what's in that account. But it could be a mistake. It doesn't, the general terms of
agreement allow for, and all it is, essentially a look at that transaction before it becomes
unreversible. Not necessarily, Your Honor. Well, first,
there's been no suggestion that there were any errors or that even the errors of that
type could occur. But there really wasn't the necessity to check and make sure that
the amount that you had in BIA was the actual amount that you transferred to wallet. That
doesn't seem to have been part of either the batching process or the truett process. There
were fraud checks. But it goes to whether the transaction itself
could ever be reversible, cancelable, or termitable by BlockFi. And you're saying they can't once
the swivel took place. Once the customer used the user interface and completed it on the
app. I think that's right, Your Honor. Once the
customer said, I no longer want to be in this risky relationship with BlockFi. I no longer
want to be in this unregistered security. I want to do what the terms of service say
I can do and push the button and be out instantly. Now, that doesn't mean that I'm going to recover
in full. Because you know what? The debtors could screw up. The debtors might not have
reserved enough in that customer wallet reserve. And in fact, that happened multiple times.
Even just in the 90 days leading up to November 10th. On at least five different occasions,
even after running their truett process where they were trying to have a one-to-one match
plus a one-to-five percent buffer, the debtors still fell short. One day by almost $4 million.
So yeah, if I can swivel this way, it doesn't mean I'm necessarily going to get paid in
full. And if I transfer out immediately off of the platform, that may leave even greater
of a deficiency. But all that's necessary to transfer off the platform is there have
to be enough assets there for me to take. Not that there had to have been assets that
were transferred in specifically for me. The true up process, the process of moving assets
from BIA to the customer wallet reserves was completely decoupled from the legal transfers
from BIA to wallet and in many cases from wallet to an external account. And that's
exactly what Mr. Slade was describing. These were decoupled and independent processes.
And there was a true up process afterwards. The debtors tried to make sure that there
was enough assets, that there were enough assets in the custody reserves. Often they
failed. But what would have happened on a day that there was a $4 million shortfall
in the custody reserve wallets? And let's say that was the day the block by fall for
bankruptcy and everything was frozen. Everybody, you know, let's say that we showed $300 million
of wallet accounts that the debtors agreed. Yes, that's the right amount. Those are the
transfers that we validated. We ran through up processes. But oops, this was the day we
had the $4 million shortfall. What happens then? I would submit that the right answer
is there's an allocation of the assets in the wallet reserves among all of the customers
that said, I want out of BIA, just like the terms of service said I could. All they had
to do was click that transfer button to say, I'm out. They stopped accruing interest. If
the debtors had really intended for customers to remain in BIA until there was an actual
transfer of assets from BIA into the wallet reserve on account of their specific request,
then why didn't they continue to accrue interest until that happened? Sometimes that true up
process was as much as three days later. They only did the true up on business days. So
if there was a holiday weekend, that's three days of interest that BlockFi was shorting
customers. I'm not assuming that BlockFi was cheating its customers. I'm assuming that
BlockFi built its architecture to reflect the legal reality, which is that once you
click that button, you're no longer in BIA. Doesn't mean you're going to recover in full.
The wallet reserve may not be fully funded. That happens. It happened multiple times before
the pause. It certainly happened by the petition date. But that doesn't mean that customers
who exited BIA don't have the right to swivel this way and look to that undifferentiated
mass of assets that, by the way, do not get allocated to any particular customer. And
in fact, some of them didn't even end up there. If you look at Mr. Chilla's declaration,
didn't even end up there as a result of customers transferring from BIA into wallet because
the BitGo custodial wallets were also used as the on-ramp for all assets onto the platform.
Some of those were just deposits that were coming in from outside. So you have this large
undifferentiated mass of unallocated assets in a reserve. They're commingled not with
the, they're not commingled with the rehypothecated wallets, I want to be clear, but they're commingled
with each other. You can't point to any asset in there and say that belongs to a particular
customer. All you can say is, I've exited BIA, I've swiveled over here, I'm looking
at the wallet reserve, I have a right and title to look there. Sorry, that was a very
long answer to your honor's question.
No, that's fine.
Okay. So there were a few things that I just wanted to make sure that I covered. Just to
clarify a few things that were discussed in Mr. Slade's presentation. I think we may
have covered some of these.
That's fine.
Oh, I do want to point out that also the response that the committee's argument that this is
really like Blackfy saying the check is in the mail. I think that's really an apposite
to this type of platform and this type of architecture because this is really much more
like going into your banking app and then transferring money from a CD or a money market
account to your checking account. And yes, the bank may at some point have to move things
around on the back end, but you don't have to wait to be able to take cash out of the
ATM. You can do that immediately. And I think that's probably a closer analogy than the
check is in the mail. This is digital finance.
Also want to point out that customers, and we covered this in our brief, but just to
call it to the court's attention, customers who transferred out of BIA and into Wallet
could immediately trade the digital assets that they had transferred even before any
trip process had occurred. And in fact, if you look at the trading terms of service,
it says that those transfers, or I'm sorry, that those trades can be settled by book entry.
So the debtors were expressly recognizing that there could be trades in Wallet that
were finalized and settled by book entry without digital assets actually moving. Customers
who transferred out of BIA and into Wallet could immediately get a transfer out of the
wallet reserves and into an external wallet before any true process was performed. And
yes, there had to actually be enough assets in the custodial wallets to make that happen
because you can't transfer what's not there. That's obvious and everyone agrees with that.
But it was often the case that there would be assets there because there were always
assets in the custodial reserves by definition, and BlockFi would just true the balances
up later if necessary. And Mr. Slate's presentation seemed to suggest that the true up always
meant pulling assets from BIA and sending them over to the wallet reserves or maybe
even having to go and call loans and obtain assets elsewhere and send them over to the
wallet reserves. But if you look at Mr. Chilla's declaration and the stipulated facts, in fact,
sometimes the reserves were overfunded. And so assets got released back to the rehypothecated
wallets. So it kind of seems like the debtor's position is almost that, well, if there happened
to be enough assets in the wallet reserve to cover a customer, then okay, fine, the
transfer out of BIA is valid. But if there doesn't happen to be enough there, then you
have to wait until the next true up process runs, perhaps. It's not entirely clear, but
it definitely doesn't make a lot of sense. And it especially doesn't make a lot of sense
because as I've mentioned, there were all of those occasions where even after running
the true up process, there was still a shortfall. And having a shortfall doesn't mean, oh, some
of those customers didn't really exit BIA. It doesn't mean that some of them that exited
BIA now somehow revert back to BIA. It just means there's a deficiency. It's kind of like
being temporarily under-secured. And if everybody had tried to withdraw on the same day, there
would have had to be some kind of a solution, probably an across the board haircut, like
the one that was imposed in Celsius until the recent settlement. And it was discussed
in our papers. And finally, a lot has been said about fairness and equity in support
of the debtor's position. And I think we do need to address that. The ad hoc committee
respectfully submits that it is not fair for the debtors to be able to ignore the plain
language of the terms of service that say that exiting BIA happens instantly. It is
not fair for the debtors now to try to pick winners and losers among their similarly situated
customers, especially with respect to assets that everybody agrees aren't even property
of the estates. It is not fair for the customer who clicked transfer at 8.14 p.m. to recover
100% out of the wallet reserves and the customer who clicked transfer at 8.16 p.m. to get nothing.
If the debtor's messed up and didn't fully reserve for every customer who transferred
out of BIA, well, it's not the first time that it happened. But it's also not the first
not it's really just one of a long list of bad things that the debtors have done to their
customers. But the answer is not to give everything to one customer and nothing to another. That
would be the opposite of fair and equitable. And if your honor has any further questions,
I'm happy to try to answer them.
I appreciate your time. Thank you, Council.
Council, if you wish to respond.
Yes, Your Honor. Just a few points. First, I just want to commend Ms. Cossey. She's doing
an excellent job advocating for her clients and she does not need an army. She's a one-woman
army and I think she did an excellent job presenting for clients. Just so we're clear,
at the end of the day, the debtor's hope is that we can pay everybody 100 cents on the
dollar. We have to pursue all this litigation against FTX and Alameda, who defrauded the
debtors in order to see whether there's going to be enough assets to pay everybody in full.
But as we're sitting here today, there are not. It's definitely not a wash for the estates.
The reason that we're taking a position on this is pretty clear, is that we need to know
who has an interest in these funds in order to propose and confirm a plan. And without
taking a position on that issue, I'm not really sure what our plan would say. And the fact
that the creditors committee has joined in our position in a case where we agree on nearly
nothing is fairly remarkable. And it actually shows why this position is really pretty clear,
because if there were a real argument for these pool of assets to be accessible to unsecured
generals generally, one would believe that the unsecured creditors committee would be
making that very argument. These are just not the state's assets. These are specific
customers' assets. And assets are there because, as Ms. Kofsky said, people made initial deposits
into the wallet product and just left them there because they did not want them to go
to BIA. Those assets are those customers' assets. And some clients withdrew assets from
their BIA accounts and had them deposited into the wallet accounts. The assets there
today belong to those customers. It wasn't a mess up when BlockFi decided to pause the
platform entirely. BlockFi had to do that. Otherwise, it would be a severe disadvantage
to all clients. It did it precisely because the terms provided for it and the terms provided
for it, and they require it. I don't agree with the position that we're being inconsistent
with the terms and conditions for precisely the reasons that I described. And there's
two reasons. If you look at the ones you relied on, first, withdrawal BIA terms and conditions
one, I would just return to the argument that we had. It is true that a withdrawal of principal
from the BIA account gets immediately moved to the wallet account. But the withdrawal
of principal from the BIA account does not happen in the click of the button ever. But
even if it did, as Your Honor pointed out, two terms down in the same terms of service
that she relies on, it's very clear that we could immediately halt transfers and withdrawals
of cryptocurrency temporarily or permanently, which is exactly what the company did. That's
exactly what BlockFi did. We implemented a pause of all transactions, BIA transfers,
withdrawals, trades, everything stopped at the program pause. A point on interest, just
so we're clear, her clients will get interest through the petition date because they were
in the BIA products. As Mr. Chila pointed out in his amended declaration, some of the
schedules are correct for that period of time. Some of the schedules are incorrect for that
period of time, and we're going to have to amend them. But that was always true. Ms.
Kovsky mentions that you could look at your interest calculation when you open up the
app. But when you did that, this is discussed in the agreed set of facts at paragraph 54,
footnote 15. There was always a pop-up in the app that says, this is an estimate of
your interest. And the reason is because at BlockFi, your interest was always calculated
at the end of the month. And it was very complicated because the display had your dollar calculation
of interest, but it really wasn't calculated until the end of the month's crypto price.
So it was always an estimate. But isn't Ms. Kovsky arguing that the fact that interest,
whenever that calculation is done, would cease on the dollars that were transferred as of
the moment of the transfer on the app, does that reflect that there was an actual transfer
of the funds or the coins in that account as of that moment? In other words, if BlockFi
is not recognizing the entitlement to interest outside of this extraordinary situation that
happened with the pause, why isn't that reflective of when funds are actually transferred?
It's not, precisely because the interest calculation was always, it was automated and then it was
redone at the end of the month manually. And it was often changed based on some of the
items that I just discussed with the court. So it is correct that just like all the other
things about the automated, people got an automated email saying that this transaction
had happened. And at the end of the day, sometimes it did not. And BlockFi had the right under
terms of service to calculate to cancel transactions at any time. And that kind of gets me to my
more general point, which is their argument is essentially that whatever the user interface
says is the truth and is binding on BlockFi and all customers at all times. But that can't
be right for a lot of reasons. One of them, your honor pointed out, what if there's a
hack in the system and there's some, what if somebody hacks into BlockFi system and
says, Mr. Allette has a billion dollars in Ethereum today? I mean, that could happen.
That doesn't mean it's correct. Companies make adjustments to their books all the time
to make sure that their books reflect reality. In fact, that's the whole concept of closing
the books. At the end of the month or at the end of the quarter, you go back and try to
determine whether or not your books reflect reality. And if they don't, then you make
adjustments. Their argument also, again, ignores the terms of service for precisely the reason
that your honor focused on. BlockFi always has the option under its terms of service
to cancel any transaction. BlockFi reserves the right to refuse service, terminate relationships
and cancel orders or transactions in its discretion. That's exactly what we did. And we're asking
your honor for permission to match the user interface for what actually BlockFi did in
reality. Now, if you have any questions, that's all.
No. Thank you. Mr. Kofsky, did you have anything else to add? I know, Mr. Allette, I'll let
you respond. Actually, I did have one other point that
I was going to make. I apologize. They argue about title. I wanted to directly, your honor
asked about that. So they agree that when clients directed the placement of assets at
BlockFi, title transferred to BlockFi, BlockFi owns those assets. So the client can ask to
return the assets that BlockFi has title to. But even if we refuse, that doesn't change
title to the assets. It just gives people a claim against BlockFi. So the customer cannot
legally direct the return of assets over which we have title just by themselves without BlockFi's
cooperation. That might give them a claim. It doesn't say anything about who owns the
assets. That's all. Well, wait. And actually, I'll go to Mr.
Allette. So Mr. Kofsky can respond to any other issues. But would you want to comment
on the argument made that when there's been a transfer of cryptocurrency into the wallet,
even before the batch or the true process, it could be traded?
Okay. So this is also addressed in Mr. Chila's declaration. So there are book entries reflecting
trades when those transactions happen. But they don't happen until after the true up
process. And BlockFi retains the right to cancel transactions for precisely that reason.
That the user interface will immediately reflect the trade. The trade may not actually be possible.
BlockFi processes it on the back end. If it doesn't happen, trade is canceled. So I don't
think that helps Mr. Kofsky's arguments at all. It isn't really germane to specifically
what happened here. But I don't think it's advances for cause very much.
What is, and this probably reflects my meager understanding of cryptocurrency and the process.
But from what you just said, how does that relate to how changes are reflected on the
blockchain when there's been a transfer of currency? If there were trading by a wallet
holder, doesn't that also have to get reflected on the blockchain at some point? And what's
the gap in between?
So this would be my meager understanding of cryptocurrency as well. But I don't think
there's anything that's reflective of the blockchain until at least the back end happens.
Certainly I don't believe there are changes to the blockchain when the button is pushed.
That doesn't happen. Thank you.
Thank you. Mr. Ouellette?
For the record, Kenneth Ouellette of Brown Rudnick for the official committee. I just
wanted to respond to a few of the points Ms. Kofsky made. The first was the question of
what is the committee's skin in the game? And Ms. Kofsky pointed to that in certain
interpretations, this is essentially a wash. It's an inter-creditor issue. And that's
precisely the point, Your Honor. This bankruptcy case, it's 650,000 individuals, a lot of their
life savings. There's significant inter-creditor issues here. And this is not a case where
there's a bottomless well of money to pay lawyers. Every dollar that we spend on attorney's
fees or anything else comes out of these people's life savings. Every day that we delay, it's
another day that these people don't get what's left of their life savings back. And the only
way that a case like this can move forward and reach an end is if everybody's treated
fairly. This is not a case where we can afford sharp elbows of individual creditor groups
trying to advantage themselves over others because at the end of the day, the case will
devolve and nobody wins. And so that's why the committee has a position here. In the
committee's view, and the committee considered this very carefully, the only way to get this
case resolved as quickly and efficiently as possible is for everybody to get what they're
legally entitled to. And for this, this is not a case where there's an operating debtor
to save where maybe it's worth tolerating a few sharp elbows and some people getting
more than they're entitled to to save thousands of jobs or the like. This is a case where
we've got to return people's life savings as in as much as as intact as possible. We
share Mr. Slade's hope that we can get 100 percent, but that's not going to be today.
It's not going to be tomorrow. And it's almost certainly not going to be when a plan is confirmed.
And we've got to get as close to what we've got as possible. And that means that the committee
needs things to go as they should. Everybody has to get what they're entitled to. And that's
why we can't support an effort to invade property that's not the estate's property. And, you
know, it would generate deficiency claims. And so it's a wash of the estate. But it's
a loss because then we're going to have to fight over it. And many of those 650,000 people
are going to come in, delay the process, and quite rightly feel aggrieved. And that's to
the loss of everyone. Next, Ms. Kofsky quoted a few lines from our initial pleading where
we referenced BlockFi's supposed best in class practices. Just to be clear, we're referencing
what BlockFi held itself out to be. That is not the committee taking the decision. And
then two final key points. The debtors' practical ability to reverse one of these transactions,
regardless of what the contract says, the debtors could go back. And if, as Mr. Slade
said, suddenly there's a transaction that says I'm due a billion dollars of Ethereum,
they have the practical ability, even if titled, instantly transferred to me, to go back into
their systems and say, wait a minute, that's not right, undo that. And that goes to what
we said in paragraph 11 of our reply in support of this, that where title transfers depends
on who has things like practical, who has greater control over the funds. And the debtors
have the ability, subject to now that they're in bankruptcy or honors approval, to say these
transactions didn't occur. And that means the title didn't transfer. And last, Ms. Kofsky
pointed to moving money at a bank and wire transfers. And as we all unfortunately learned
in the recent turmoil with Silicon Valley Bank, the fact that your bank has confirmed
a transfer, the fact that you have a federal reference ID for your wire transfer, the fact
that your bank is not yet in FDIC receivership does not necessarily mean that transfer is
going to go through. And with that, Your Honor, we just request that Your Honor find that
the post-pause transfers did not give legal title to the transfer of targets.
All right. Thank you. Mr. Gwynne, last comment.
Group of actual wallet holders. Just a few points. One, we are not similarly situated.
Our creditors assets were moved into the wallet account prior to the pause time. So we're
not similarly situated. It doesn't matter whether the terms and conditions say something's
going to be transferred immediately or instantaneously, because at the end of the day, the assets
were not transferred. It's no different than if a debtor promised to make a refund and
to give someone back their property. So we're going to give you back your purchase price.
We'll give you a refund. But then they don't give that person the refund and they file
bankruptcy. That doesn't give the person the right to go to other people who actually got
their money back, got their property back, and say, well, we're entitled to share your
refund. I mean, there's no basis for saying that the creditors are similarly situated
when you were in the wallet before the pause period versus if you're not.
Secondly, you can't decouple transferring a client to the wallet and then their assets
going over later, because the property that is in the wallet account belongs to those
clients whose assets were transferred to that account. You can't just move someone over
to share in other people's property. The debtor has no right to do that. And the Pearlman
case, Your Honor, again is binding on that, that the Bankruptcy Code, the Bankruptcy Act
does not give the debtor the right to use other people's property to pay its creditors.
And that's exactly what the Troutman Group is asking Your Honor to do. So once again,
Your Honor, we would just request a grant to relief request. And it's been almost five
months since the debtor filed the motion. And the clients who are in the wallet account
have always been entitled to get their property back. And there's nothing in the code that
prohibits that. But Your Honor, we request you expressly authorize the debtor to give
the property back to the actual wallet holders. Thank you, Your Honor.
Thank you, Mr. Gwyn. Now, Ms. Kofsky.
Thank you, Your Honor. Deb Kofsky, Troutman Pepper for the Ad Hoc Committee of Wallet
Account Holders. I think one way to think about this, maybe cut through some of the
noise, is to think about pushing the transfer button as being notice to the debtors. That
that was the notice that customers provided that, hey, I don't want to be in BEA anymore.
I'm no longer giving you right and title to my digital assets. I'm out of this program.
And that was the act that terminated the grant of title. Does that mean that the customers
could physically get back their assets to which they now had title? No, of course not.
They needed BlockFi's cooperation. But that doesn't mean that the assets that BlockFi
was holding did not revert back to being under the ownership of the customers who had put
them there in the first place, especially when we're talking about assets that were
all commingled and fungible and dealt with on omnibus net bases.
With respect to my colleague on the other side who spoke about the trading terms of
service, which your honor had questions about, I would just direct your honor to go back
and look at the terms of service themselves. They say really clearly that trades are settled
by book entry. It does not say that settlement is dependent on some other act happening.
Yes, there could be a true uplayer. Yes, there was some risk involved. But the settlement
itself happened by book entry. With respect to the committee's arguments,
this is actually not an inter-creditor issue at all. It's an inter-non-creditor issue.
These are not constituents of the committee. And as I think Mr. Arlott recognized, there's
no impact on the general unsecured creditors or the estates. Whichever way the pot of assets
that are there in the reserves are divided up between non-creditors of the estate has
no impact on the amount of assets available to the estate or available to general unsecured
creditors. And if lawyer fees are really the issue, well, that was the committee's decision
to jump into a fight that doesn't affect their constituents.
And respectfully, there have been no sharp elbows here. The ad hoc committee members
are the ordinary customers, just like all of the rest of them, who many have put their
life savings on the platform. And all they want is to be treated fairly and in accordance
with the terms of service to which they agreed. All they want is what they're entitled to.
Ms. Arlott says we can't allow non-creditors to invade non-estate property. It is completely
baffling that the committee has any position in this matter whatsoever. It simply doesn't
affect their constituents. With respect to the Reed Smith ad hoc committee's
arguments, we are similarly situated to the customers that moved out of BIA prior to the
November 10th tweet. November 10th at 8.15 p.m. wasn't a bright line in terms of anything
that the debtors actually did with respect to those transfers. The inter-account transfers
were not paused. There's no difference between the customer who pushed the button at 8.14
p.m. versus the customer who pushed the button at 8.16 p.m. Both of them told the debtors,
we want out of BIA. We are no longer giving you right and title to our assets. Title reverts
back to us. Now, what do we recover from? We're looking around. And the debtors, sometime
later, not at the moment that the 8.14 button was pushed, that wasn't the moment that assets
all of a sudden magically transferred over to the wallet reserve. Sometime later, maybe
the next day, maybe even later than that, it's not clear. The debtors made the decision,
yeah, we're going to put assets into the reserve for some customers, but not others. We're
not going to chew up the reserves fully to cover all of the notices that we got, that
people were exiting BIA and taking title back to their digital assets. And again, I go back
to the question, what would have happened if the debtors had filed on the day when they
had an almost $4 million shortfall? Some customers recover in full and some customers take a
bigger deficiency. Maybe some customers wouldn't get anything at all out of the wallet reserve.
There's no way to be able to point to an undifferentiated mass of an omnibus wallet and say, this Bitcoin
belongs to that customer, that 8th belongs to this customer. That's not how it works.
And we're in basically exactly the same situation. You have a reserve that has insufficient assets
to cover everybody who exited BIA and some solution has to be found, but it's not property
of the estate. It doesn't impact claims against the estate. It doesn't impact general unsecured
creditors. And further, I think Mr. Slated alluded to a problem with actually being able
to effectuate transfers out of wallet. My understanding is that if the ad hoc committee's position
prevails and there has to be some kind of a pro rata or other allocation of assets that
are available in the wallet reserves right now, BlockFi has the ability to reset the
amounts in customers' accounts and allow them to withdraw, I think, in fairly short order.
So the ad hoc committee is not standing in the way of customers getting back what is
rightfully theirs. The ad hoc committee is fighting for recognition that some of that
is rightfully theirs as well. Thank you.
All right. Thank you, counsel. Mr. Squander or Ms. Bielski, U.S. trustee taking any position
in this? I've got to get the legs moving.
Thank you, Your Honor. Good afternoon. Jeff Sponder from the Office of the United States
Trustee. The United States Trustee is not taking a position on this motion.
All right. Thank you. All right. I want to thank all counsel. Extremely well briefed,
well argued. And I appreciate the civility, the professionalism in reaching an accord
on the stipulated facts in lieu of dragging this out with testimony, which would just
be repetitive of what you have in there as well. It is, the court recognizes the impact
on customers who've waited months to have access to funds that they desperately need.
And it's been too long coming to this, although I think all parties recognize that there had
to be due diligence in trying to identify the issues and resolve certain questions of
fact. In order to try to move this process along for the benefit of customers, all customers,
I am going to issue a ruling. I have the Third Circuit Conference. I'm going to try to
carve out time this Thursday. I'm going to ask you all to note 1030. That seems to be
a break in the Third Circuit program. I'll run up to my hotel room and try to read into
the record a decision. It will be an abbreviated ruling, obviously. It can be supplemented
by proposed findings of fact and law, or at that point not proposed, findings of fact
and conclusions of law as needed to the extent the parties require. But I will issue a ruling
to move this process along as quickly as possible. This Thursday at 1030, my chambers will set
up a webcast. There will be no oral argument. It will simply be to allow me to read a ruling
into the record. All right. Thank you again.
Your Honor, may I address the Court on some ancillary issues?
Sure. Thank you.
Thank you, Your Honor. Richard Cano, it's Hanson Boone, Counsel for the Debtors. Your
Honor, harking back to a while back when we talked about some seizure orders that were
delivered to the debtor pre-bankruptcy out of the state of Washington, in furtherance
of what we advised, Your Honor, on January 9th, I believe, we did transfer the wallet
assets to the government in connection with that seizure order. We still are negotiating
with the government how to return what I would say is a very material amount of posted collateral
and BEA that the government seeks to obtain. Clearly, there's a large amount that's owed
to the debtor on the loan for the posted collateral. We're trying to work off those set-off numbers
and the process of doing so. The government's position is that the stipulation and agreement
between the debtor and the government should be determined by the District Court in Washington,
which issued the seizure order. We're speaking with the Committee about the process to have
that effectuated, whether we actually go there or whether something has to happen in front
of Your Honor to get that done. We're not there yet. We just received the proposed stipulation
from the DOJ the other day. It was a long time coming, as you can imagine. I broached
this issue with you in January. Scroll forward to another seizure warrant and order. This
one issued out of Texas. Much smaller amount. Right now, we're going to turn over from wallet
about $47,000, not the $700,000-plus we previously turned over. And the posted collateral set-off
amounts, we're talking about in the $500,000 range, not the multi-million dollar range
we're talking about in the State of Washington. Again, we're not there with the DOJ on this
seizure order and warrant, but the mechanics will likely be the same. And we're discussing
with the Committee, again, to try to appease the government and also satisfy the state's
interests in this collateral and these loans. And I just wanted to bring to your attention
the fact that we are going to comply with the seizure warrant and the orders so that
we are not held in contempt by transferring the wallet assets to the government wallet.
These transfers are coming out of the BIA account. Well, no. And some of these are sealed,
so I can't get into the details, but some of these customers had wallet. Some of them
had BIA and some of them had posted collateral, which is money given to back their loans,
which then BlockFi holds in separate own wallet accounts, unrelated to BIA and unrelated to
Wallet. So all of that comes into the mix, but what we've only transferred and going
to transfer is the money that's associated with these client identification numbers in
wallet, because it's our view and the government obviously has listened to our view that whatever's
in wallets, not property of the state, so why aren't you complying with the order?
That's what I wanted to clarify. Okay. Thank you, Your Honor.
Thank you. Mr. Rowlett?
Yes, Your Honor. Ms. Kenneth Rowlett, Brown Rodnick for the committee. The committee's
view is that any... We don't have an objection to wallet funds being returned. The committee's
view is that any return of funds on a BIA account or loan account has to come from order
of this court, and to the extent that that needs to be brought to Your Honor's attention,
we intend to do so quickly to ensure that this court gets a chance to review those issues.
Fair enough. Another battle down the road. All right. Thank you all again. We're adjourned.