Legal fees increase at crypto bankruptcy

Investment bank B Riley is so determined to convince the battered Bitcoin-Miner Core Scientific to avoid a bankruptcy application that it has offered up to $ 72 million in new financing to prevent the company from applying for a legally monitored restructuring according to Chapter 11

"Insolvency is not a solution and would not do the investors of the company," wrote B. Riley in a letter in early December. "It will destroy value for the company's shareholders, reduce potential reclaims for the company's lenders, exhaust its limited resources and create massive uncertainty for all of his stakeholders."

Core Scientific still registered bankruptcy last week. Nevertheless, B Riley's dislike should be understandable. A number of players have succumbed to the ongoing crypto winter, including FTX, Blockfi, Voyager Digital and Celsius, whereby the customer accounts are largely frozen. The new legal questions about the possession of digital assets, the persistent problems in the industry and the advisory character of the US bankruptcy proceedings have so far prevented none of the large companies from leaving judicial protection. The costs are piling up and the account holders notice.

lawyers, bankers and other consultants in the Celsius case, which began in July, recently submitted detailed fees of $ 53 million at the New York Federal Rec is a total of $ 53 million. In accordance with the US law, these official advisors are paid these so-called "administrative costs", subject to judicial approval, from the "estate" or the company, which of course affects the reclaims of the account holder.

Law firm involved, including Kirkland & Ellis and White & Case, which are the usual power packages for corporate and private equity insolvencies, are involved in Celsius and have top lawyers that charge more than $ 1,800 per hour. (This could remain a bargain because top lawyers in FTX bankruptcy at Sullivan & Cromwell demand more than $ 2,000 per hour).

frustrated Celsius account holder turns to Twitter to complain about the costs and slow progress. "It's a lot of money," admitted a top lawyer in that case.

Celsius said that it reduced the annual work and operating costs of more than 60 percent or around $ 100 million during the procedure, but its liquidity remains questioned, since the majority of his "traditional sources of income" was eliminated according to court files.

A management consultant stated in the hearing before the insolvency court that the sale of stable coins worth $ 18 million would enable Celsius to survive another month beyond his March estimate of the exhausted liquidity.

Legal and operational problems with crypto bankruptcy forced Celsius and his creditors to hire a large number of experts. In addition to Kirkland & Ellis, it has set specialized legal advisors from Latham and Watkins and Akin Gump. An official committee of unsecured creditors has also hired a consultant, elementus, as a "blockchain forensic consultant".

The bankruptcy court has also approved an independent “examiner” to examine the incidents that have led to bankruptcy. The examiner herself commissioned a law firm and a financial expert for whom Celsius paid the invoice.

The sensitive legal issues that Celsius has to decide in court includes the solution whether account holders who have awarded their cryptos on the platform to earn high interest rates, simply belong to the pool of unsecured believers or otherwise have certain demands on certain crypto assets. A judgment on this matter will determine whether the company can sell stable coins worth $ 18 million.

crypto lenders and exchanges have almost no way to avoid bankruptcy if they are confronted with a bank run on customer deposits. The court is uniquely positioned in order to bring order to the process of determining assets and the determination of a restructuring plan.

But there are hardly any opportunities for a fast process in which all sides - company management, account holder, investors - get a voice in court. The persistent chaos in the industry did not help to maintain prices for cryptocurrencies, while the accounts are frozen, which further frustrated the customers.

Nancy Rapaport, a law professor at the University of Nevada, says that players are often inexperienced and dependent on the judgment of their expensive advisors.

fee worries have not remained completely unchallenged in the Celsius case. Christopher Sontchi, a former bankruptcy judge, appointed the court as a so -called "fee auditor" in order to examine the expenses for professional service companies. Sontchi will invoice his time with $ 1,500 per hour.

sujeet.indap@ft.com