Celsius’ Third Bankruptcy Hearing Yields Little in the Way of Customer Relief

Crypto lender Celsius Networks' customers still want their money back, but a judge appears to be in no hurry to authorize withdrawals – at least right now.

Much of Thursday's three-hour hearing focused on whether custodial account holders should be able to get their funds back, and which types of custodial account holders qualify. Celsius clients believe any custodial account holder – meaning any customer who deposited their funds in a custody account but retained ownership of the assets, as opposed to Earn and Borrow customers who expected some sort of yield or benefit – should receive their funds.

Celsius maintains that only "pure" custodial account holders are eligible, and not customers who originally deposited funds in the Earn product and later converted to custody.

Read more: Crypto Lender Celsius Faces Another Group of Customers Who Want Their Money Back

The distinction is important because the lender filed for Chapter 11 bankruptcy protection 89 days after it introduced its custodial wallet to customers. Funds transferred 90 days prior to Celsius’ filing for bankruptcy might be subject to clawback under U.S. law.

Celsius depositors were suspicious of the timing of the filing, but a Kirkland & Ellis lawyer, representing Celsius, denied it was intentional, saying there were “no conspiracies.”

Judge Martin Glenn, of the Bankruptcy Court for the Southern District of New York, did not make a ruling on the matter, and tried several times to end the back-and-forth arguments on the subject.

“The judge is kicking the can down the road,” said Erik Mendelson, director of Blockchain Business Development at OneOf, told CoinDesk. “He wants Celsius' proposal and [the Custody account holders'] declaratory judgement request merged and a court date set to resolve this specific issue.”

Another hearing for the ongoing bankruptcy case is scheduled for Sept. 14, 2022, though the judge also suggested a separate session to hash out the differences may be beneficial. There is also a hearing scheduled for Oct. 6, 2022, to discuss the custody account holders. Both Celsius and the custody account holders will make proposals ahead of that discussion.

In addition to the debate over customer funds, attorneys also discussed how much customer information would be made public as the case progresses. Judge Glenn was initially opposed to redacting creditor email addresses and home addresses on the public docket, but softened after hearing arguments from both sides about the cybersecurity risks. No final decision was made.

Celsius also said it expects some amount of cash relief due to the expected return of a $61 million loan, initially believed to be in stablecoins.

“Those funds are expected to come back into the estate in cash as opposed to in coin,” a lawyer for Celsius told the court. “It’s a minor technicality that happens to help out the company’s cash liquidity.”

Read more: Bankrupt Crypto Lender Celsius Now Says It Likely Has Enough Cash to Last Through End of Year

The judge later took aim at Celsius law firm Kirkland & Ellis over the crypto lender's cash and asset management track record when one of Celsius’ lawyers was discussing the company’s “robust” accounting practices.

“The debtors’ transparency on where the crypto is being held is lacking,” Judge Glenn said.

No issues were resolved in Thursday's hearing.