After multiple delays, on June 27th, Celsius Network, LLC and certain of its affiliates as debtors and debtors in possession (collectively, the “Debtors” the “Company” or “Celsius”) filed a disclosure statement to provide creditors and other parties in interest with information regarding the Debtors’ Joint Chapter 11 Plan of Reorganization of Celsius Network LLC and Its Debtor Affiliates (the “Plan”). The court has set the hearing to approve the Disclosure Statement for August 10th.
The Disclosure Statement, which we summarize below, contains projected recoveries for creditors under the scenario of a “NewCo Transaction” and also an alternative “Orderly Wind Down” scenario if the NewCo Transaction cannot be consummated. Additionally, since the filing of the Disclosure Statement the Company has entered into a few settlement agreements which hopefully will pave the way to the end of this case and a recovery for creditors.
The Chapter 11 Bankruptcy Process
A bankruptcy case voluntarily initiated by a company under Chapter 11 of the United States Bankruptcy Code, with the hope or intent to emerge as a going concern, is frequently referred to as a "reorganization" bankruptcy. In Chapter 11 cases, the debtor remains “in possession”, and has the powers and duties often granted to a trustee under other bankruptcy regimes. The debtor may continue to operate its business in the ordinary course; however, for any material transactions such as taking on post-petition debt or the sale of assets outside of the ordinary course of business, bankruptcy court approval is required. During the bankruptcy process, creditors generally cannot proceed with foreclosure or other enforcement actions. This broad, statutory injunction (commonly referred to as the “automatic stay”) aims to give the debtor breathing room to plan an effective reorganization of its business, which will provide the maximum recovery for all stakeholders. Furthermore, in Chapter 11 cases, the debtor has an exclusive period to file and solicit a plan of reorganization. Once a plan is proposed, creditors whose rights are affected are entitled to vote on the plan. If a sufficient number of creditors (often organized into separate “classes” based on the nature and priority of their claims) vote to accept, then the plan may be confirmed by the court so long as it satisfies other legal requirements. Importantly, unless the exclusivity period expires, other parties in interest have no ability to propose a competing plan of reorganization. At this moment in the Celsius case, the Disclosure Statement has been submitted for approval but has not yet been approved by the Bankruptcy Court. Accordingly, the current draft of the Disclosure Statement is subject to revision and may ultimately be rejected by the Court at the upcoming hearing.
NewCo Transaction: Plan Proposed by the Debtors and Creditors Committee
Prior to filing the Plan and Disclosure Statement, the Debtors entered into an agreement with the Fahrenheit Group (“Fahrenheit”), which would allow Fahrenheit to become a plan sponsor with the goal of providing the Debtors with funding and operational expertise. The agreement with Fahrenheit will allow the Debtors to enter into a restructuring transaction with a new company, which the Debtors allege will maximize the recovery for stakeholders. According to the Debtors, if they were to sell all assets (including their cryptocurrency assets) now, the recovery for creditors will be far lower than if a new entity is set up to continue to operate certain aspects of the Debtors’ businesses.
Specifically, the Debtors argue that the Plan provides for “(a) the distribution of a significant amount of the Debtors’ Liquid Cryptocurrency to creditors on or around the Effective Date of the Plan, and (b) the creation of NewCo —a new public-reporting, compliant entity, which will be owned by the Debtors’ customers when the Debtors exit bankruptcy. NewCo will be governed by a board of directors, a majority of which will be appointed by the Debtors’ creditors. NewCo intends to be engaged in two business lines: Mining and Staking.”
Expected Recovery Under NewCo Transaction
Through the NewCo transaction, the Debtors believe that creditors will receive some form of the following three types of distributions: (a) Liquid Cryptocurrency (namely, BTC and/or ETH); (b) NewCo Common Stock; and (c) Litigation Proceeds.
a. Liquid Cryptocurrency
Under the plan, the Debtors will distribute either BTC and/or ETH to creditors. The Debtors have estimated that the total amount of cryptocurrency to be distributed to creditors is approximately $1.98 billion. However, due to price instability, the recovery estimated by the Debtors is subject to change depending on the value of the Cryptocurrency as of the Effective Date. Creditors will receive further details on their distributions in a revised form of disclosure schedules, once the Debtors finalize their agreement with the distribution agent.
b. NewCo Common Stock
Additionally, the NewCo transaction aims to provide certain creditors with a distribution of NewCo common stock. The Debtors intend to list NewCo stocks on NASDAQ. Therefore, once the creditors receive their NewCo common stock distributions, they can (a) hold their shares in NewCo, or (b) easily sell their stake in NewCo via a liquid public marketplace. The creditors entitled to NewCo stock will receive their pro rata share of stock regardless of whether they voted to accept the Plan, reject the Plan, or abstained from voting on the Plan altogether. Holders that vote to accept the plan may indicate a preference to receive a greater share of the NewCo common stock in lieu of their share of the “Liquid Cryptocurrency”. Alternatively, creditors entitled to NewCo stock that vote to accept the Plan may request to receive a greater share of Liquid Cryptocurrency distribution in lieu of their NewCo Common stock.
c. Litigation Proceeds
The Litigation Proceeds represent certain anticipated rights to litigation claims that the Debtors have against third parties including former executives of the Debtors. The Debtors will establish a Litigation Administrator and a Litigation Recovery Account. The Legal Administrator will litigate against former directors of Celsius including Alex Mashinsky, and Shalomi Daniel Leon. Additionally, the Litigation Administrator will also pursue the claims that the Debtors have against third parties. The potential litigation proceeds have not been valued while calculating the estimated recovery under the NewCo transaction anticipated by the Plan. As such, the litigation proceeds are supplemental to any projected recoveries for the holders of the claims entitled to a share of the litigation proceeds.
Orderly Wind Down: A Backup Plan
In the event that the NewCo transaction is not approved by the creditors, the Debtors have proposed an alternative, which they are calling the “Orderly Wind Down Plan.” The Orderly Wind Down plan will be conducted on the terms set forth in the Backup Plan Sponsor Agreement that the Debtors have negotiated with the Backup Plan Sponsor. The Backup Plan Sponsor is the Blockchain Recovery Investment Consortium, which includes Van Eck Absolute Return Advisers Corporation and GXD Labs LLC (collectively, “BRIC”). Alternatively, the backup plan may be on terms that provide a better recovery to the Debtors’ creditors than the Backup Plan Sponsor Agreement, which terms may utilize a different Backup Plan Sponsor than BRIC
The BRIC transaction anticipates providing recoveries to creditors in the following ways: “(a) 100 percent of the equity interests in a publicly traded mining business with a potential management contract with GXD Labs LLC; (b) a Liquid Cryptocurrency distribution on or as soon as practicable after the Effective Date; and (c) a timely monetization of the remaining assets of the Debtors’ Estates and subsequent Liquid Cryptocurrency distributions to creditors from the proceeds thereof, likely through the creation of a liquidating trust. Exhibit A provides for the estimated recovery under the Orderly Wind Down Plan.
Who is eligible to vote on the Plan?
The Debtors’ Plan categorizes various creditors who are entitled to receive distributions into different “classes”. Whether a Creditor is eligible to vote on the Plan is contingent on which class they belong to. This system of voting is allowable pursuant to section 1122 of the Bankruptcy Code. There are 16 classes in total. Pursuant to the Debtors’ current proposed Plan, the classes that are eligible to vote are Class 2, Class 4, Class 5, Class A, Class 7, Class 8, and Class 9. (the “voting classes”). The next section explains what these classes are and what type of claims and interests are in that particular class.
Types of Voting Classes: What Class do I belong to?
The following Classes will be permitted to vote on the approval of the plan:
Class 2 - Retail Borrower Deposit Claims
Retail Borrowers are the account holders that have borrowed money from the Debtors. As a Retail Borrower, to be able to borrow from the Debtors, the creditors had to deposit cryptocurrency with the Debtors. Creditors in this class have claims against the cryptocurrency that they transferred to the Debtors while borrowing from the Debtors. Therefore, if you deposited Crypto Currency with the debtors, and in exchange, borrowed money from the Debtors, your claim will likely fall within Class 2.
Class 4 - Convenience Claims
A Creditor will have a convenience claim if the aggregate monetary value of the claims of such creditor is greater than $10 and less than or equal to $5000. Creditors also have the option to opt for Convenience Claims even if they exceed the threshold. Therefore, if the total monetary value of your claim is more than $10, but less than $5,000, your claim will likely fall within Class 4.
Class 5 - General Earn Claims
Class 6A - General Custody Claim
Creditors that have a general custody claim are creditors that used the Debtors’ services to store cryptocurrency on the Debtors’ platform. The General Custody Claims class covers all the cryptocurrency that is not eligible for withdrawal under the Custody Settlement Order issued by the Bankruptcy Court in March, which approved a settlement agreement giving Celsius custody account holders the right to receive 72.5% of their crypto-based claims. Therefore, if you had deposited cryptocurrency with Celsius, and your cryptocurrency was not eligible for withdrawal under the Custody Settlement Order, your claim will likely fall within Class 6A.
Class 7 - Withhold Claims
If a creditor attempted to transfer cryptocurrency in jurisdictions where the Debtors did not provide a Custody Program, such transfers were held in “Withhold Accounts”. Withhold Claims comprise all claims arising out of the attempted transfer of cryptocurrency held in Withhold Accounts. Similar to the General Custody Claims class, this class of claims also consists of cryptocurrency that is not eligible for withdrawal under the Custody Settlement Order.
Class 8 - Unsecured Loan Claims
Unsecured Loan Claims are essentially the claims arising out of agreements under which the Debtors are a borrower and which loan is not secured by any lien or any property interest of the Debtors. Therefore, if you lent money to the Debtors without any form of collateral/security, you likely have an Unsecured Loan Claim.
Class 9 - General Unsecured Claim
Put simply, the General Unsecured Claims class consists of all Unsecured Claims that have not been specifically classified by the debtors. The Plan specifically notes that no “Account Holder Claims” will be in this class, thus your claim will only fall into this class if it is unsecured and does not meet the definitions of any other class categorized by the Plan.
How are Claims Valued under the Plan?
All Claims under the plan relating to cryptocurrency associated with the Earn Program and Withhold Accounts — Class 4 Convenience Claims, Class 5 General Earn Claims, and Class 7 Withhold Claims—are valued based on the dollar value of the applicable cryptocurrency that underlies such Claims on the Petition Date.
Projected Recovery Under the NewCo Transaction:
Currently, the Debtors’ Plan anticipates creditor recoveries pursuant to the NewCo Transaction totaling:
§ 86.9% for Holders of Retail Borrower Deposit Claims
§ 70% for Holders of Convenience Claims;
§ 69.7% for Holders of General Earn Claims;
§ 72.5% of the Cryptocurrency coins for Holders of General Custody Claims (creditors who accept the Custody Settlement as described further herein); and
§ 74.2% for Holders of Withhold Claims.
It is crucial to emphasize that the percentages mentioned above are not a definitive representation of the actual amounts’ creditors will receive under the Plan. Rather, they serve as an indication of what the Debtors anticipate the potential recovery to creditors might be if the NewCo transaction is successfully executed. It may be relevant that these numbers are being provided by the Debtors in an effort to obtain approval of the Plan and that the claims are currently not trading near this price. Furthermore, it is important to note that the value of NewCo common stock in the secondary market and the potential “Litigation Proceeds” are subject to uncertainty and cannot be accurately predicted.
Class 2 - Retail Borrower Deposit Claims
Creditors belonging to Class 2 are expected to recover 86.9% of their claims and to receive a combination of cryptocurrency, NewCo Common Stock, and Litigation proceeds. Class 2 claim holders, specifically retail borrowers of Celsius who deposited their cryptocurrency in exchange for a loan, will undergo Set-Off treatment. This means that the amount owed to Celsius will be deducted from their total claim against Celsius. Consequently, Class 2 – Retail Borrower Deposit Claims will not have any outstanding debt to Celsius and will not be required to repay their loan.
After the set-off is applied, these claims may receive a combination of (a) Liquid Cryptocurrency (in the form of BTC and ETH), (b) NewCo Common Stock, and (c) Litigation Proceeds. However, if the post-set-off claims qualify for the Convenience Class Distribution discussed above, the creditors will only receive Liquid Cryptocurrency.
Exhibit B provides an illustrative example demonstrating the potential recoveries that an account holder with a Retail Borrower Deposit Claim might receive for their Retail Borrower Claim if the NewCo Transaction is successfully completed.
Class 4 — Convenience Claims.
Creditors belonging to Class 4 are expected to recover 70% of their claims. Holders of claims in this class will receive their recovery in the form of Liquid Cryptocurrency. Exhibit C provides a reference to understand the treatment outlined by the Plan for holders of Convenience Claims, including their rights and instructions for voting to accept or reject the Plan.
Class 5 — General Earn Claims.
Creditors belonging to the General Earn Claim are expected to recover 69.7% Of their claims. Class 5 Creditors will receive Liquid Cryptocurrency, NewCo Common Stock, and Litigation Proceeds. Creditors in Class 5 will be categorized as “Unsecured Claim Distribution Consideration recipients”. As a result, they will receive a combination of the following: (a) Liquid Cryptocurrency (in the form of BTC and/or ETH), (b) NewCo Common Stock, and (c) Litigation Proceeds. Exhibit E below illustrates a potential recovery scenario for holders of General Earn Claims if the NewCo Transaction is successfully executed.
Class 6A — General Custody Claims.
Creditors belonging to Class 6A are expected to recover 72% of their claims. Holders of claims in this class will likely receive Liquid Cryptocurrency. As previously stated, the Bankruptcy Court issued a settlement order pertaining to General Custody Claims. Holders of General Custody Claims are given the chance to partake in the Custody Settlement by voting in favor of the Plan. Exhibit D presents a table showcasing a potential recovery scenario under Class 6A.
Class 7 — Withhold Claims.
Account holders who have a "Withhold Account" are likely to have either a Withhold Claim or a Convenience Claim, with the determination dependent on the total amount of their claim. Estimated recovery for Withhold Claims - if the creditors vote to participate in the Settlement Order is 74.2%. Class 7 Creditors will receive Liquid Cryptocurrency, NewCo Common Stock, and Litigation Proceeds. If the value of the claim at issue is less than or equal to $5,000, it will be classified as a Convenience Claim. As previously mentioned, Custody Claims bear similarities to Withhold Claims. Consequently, holders of a Withhold Claim have the opportunity to participate in the Withhold Settlement by voting in favor of the Plan.
By choosing the Withhold Settlement, account holders will be entitled to receive an in-kind distribution equivalent to fifteen percent (15%) of the value of their Withhold Distribution Claims. Moreover, the remaining eighty-five percent (85%) of the Withhold Distribution Claim will be treated as a General Earn Claim. The Plan refers this to as “Treatment A”.
However, in the event that the majority of Class 7 does not vote in favor of accepting the Plan, regardless of an individual's own vote to accept Treatment A or the Withhold Settlement, they will not be granted Treatment A under the Plan. Instead, all Class 7 members, regardless of their vote, will receive Treatment B. Treatment B entails their claim being treated on an equal footing with a General Earn Claim. The table in Exhibit F provides illustrative examples of potential recoveries that a Holder of a Withhold Claim might receive for their Withhold Claim if the NewCo Transaction is completed, based on two scenarios: (a) Class 7 voting to accept the Plan, or (b) Class 7 voting to reject the Plan. Exhibit F provides a summary of the various types of distributions entitled to each voting Class.
Conclusion and Other Settlements
In anticipation of the August 10, 2023 hearing, a number of objections to the Disclosure Statement have been filed. Many of these objections are from individual creditors. Additionally, over the last few weeks, the Debtors have agreed to a number of other settlement agreements which will hopefully pave the way for creditors to be paid in an efficient manner. The Debtors have also requested approval of a proposal aimed at resolving a class action fraud claim against the company and other fraud claims. The claim was filed by the unsecured creditor’s committee on behalf of around 600,000 Celsius customers who alleged they were deceived into depositing their cryptocurrency with Celsius through fraud and misrepresentation. Additionally, many of the proofs of claims filed by creditors listed additional fraud allegations. The proposed settlement suggests that customers can add 5% to their Chapter 11 recovery if they agree to drop claims regarding alleged fraudulent inducement to deposit cryptocurrency with Celsius. The Debtors and the Creditors Committee jointly submitted the settlement motion, stating that it would result in significant cost savings and expedite the return of cryptocurrency to customers. The settlement does not apply to "Custody" account holders who previously reached a separate deal with Celsius. The option to opt out of the settlement and pursue individual proofs of claim against the company is also provided to account holders.
The Debtors have also agreed to a settlement with the Federal Trade Commission.  As part of this settlement, the Debtors have agreed to pay a record $4.7 billion fine. Finally, the Debtors have agreed to a settlement with “Borrow claim holders” who gave cryptocurrency collateral in order to borrow funds. Pursuant to the settlement, such claim holders will be able to receive a portion of the collateral netted against any outstanding cryptocurrency loans, along with shares of NewCo.
Shreyas Kafle, Summer Associate contributed to this article
 These creditors include those with claims classified in the following classes under the Debtors’ proposed Plan: “Retail Borrower claims, Convenience Claims, General Earn Claims, Withhold Claims, Unsecured Loan Claims, General Unsecured Claims”.
 Creditors who have a “General Custody Claim” or “Retail Borrower Deposit Claim” under the Plan will not be classified as holding a Convenience claim.