The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s Bahamas liquidators yesterday accused a failed crypto bank’s administrator of “putting the cart before the horse” in an escalating legal battle over a $377.419m claim against the collapsed exchange.

Brian Simms KC, the Lennox Paton senior partner, and the PricewaterhouseCoopers (PwC) accounting duo of Kevin Cambridge and Peter Greaves, argued that the Delaware and New York bankruptcy courts should defer to the Supreme Court and let it rule on Celsius Network’s claim against FTX Digital Markets, the exchange’s Bahamian subsidiary, so as to avoid a jurisdictional battle.

Calling on the Delaware court to adjourn Celsius Network’s bid for a hearing later this week, the trio pointed out that Mohsin Meghji, its litigation administrator, came to The Bahamas and was recognised as the bank’s representative in this nation by Supreme Court justice, Carla Card-Stubbs, on August 13, 2024.

Noting that Celsius has now submitted to Bahamian jurisdiction, they added that this nation’s judicial system is already the primary venue for supervising the liquidation of FTX Digital Markets, the collapsed crypto exchange’s locally-registered affiliate. Thus Mr Simms and the PwC duo asserted that The Bahamas must decide the former crypto bank’s bid to “lift the automatic stay” protecting FTX’s winding-up.

As a result, the trio also argued that it would be “premature” for Mr Meghji and Celsius to press ahead with their bid to persuade the Delaware Bankruptcy Court to remove US legal protections that prevent creditors from filing lawsuits against foreign entities - such as FTX Digital Markets - that are under court supervision in their home country jurisdictions.

“As the court overseeing FTX Digital Markets’ foreign main proceeding in this chapter 15 case, the Bahamas Supreme Court has primary authority over FTX Digital Markets through The Bahamas’ official liquidation,” Mr Simms and the local liquidators argued.

“More specifically, the Bahamas Supreme Court has jurisdiction over the Celsius litigation administrator by virtue of the Celsius proof of debt filed in The Bahamas’ official liquidation and authority to enforce or grant leave from The Bahamas’ stay that protects FTX Digital Markets from litigation outside of The Bahamas’ official liquidation.”

Due to The Bahamas’ “primary authority”, the Bahamian trio told the Delaware Bankruptcy Court that “any attempt to have this court decide whether the chapter 15 stay should be lifted is premature”. Chapter 15 is the protection granted by the US courts to foreign entities against their American creditors, and which was extended to FTX Digital Markets in the aftermath of the crypto exchange’s November 2022 collapse.

Celsius wants the Delaware Bankruptcy Court to lift the Chapter 15 stay so it can initiate legal action against FTX’s Bahamian subsidiary in the southern New York federal bankruptcy court, but the Bahamian liquidators alleged: “By pressing ahead with his motion at this juncture, the Celsius litigation administrator continues to put the cart before the horse.

“The chapter 15 stay, which is the subject of the motion, serves to complement the Bahamas Stay. Because the Bahamas official liquidation is pending in FTX Digital Markets’ centre of main interests, that proceeding should ‘dominate the cross-border aspects of [FTX Digital Markets’] affairs.....

“Moreover, if this court were to lift the chapter 15 stay and permit the preference action to be filed against FTX Digital Markets in the New York Celsius bankruptcy court, such relief would not protect the Celsius liquidation administrator from sanctions in the Bahamas Supreme Court for violating the Bahamas stay,” the Bahamas liquidator trio alleged.

“At the very least, this court should decline to rule on the motion until the Bahamas Supreme Court rules on the Celsius litigation administrator’s pending request for Bahamas stay relief. In his reply, the Celsius litigation administrator makes several erroneous assumptions in support of the unfounded conclusion that the Bahamas Supreme Court will lift The Bahamas stay.”

Celsius, which effectively functioned as a digital assets bank, allowed customers to deposit crypto currencies such as Bitcoin and Ethereum with it. They were then able to pledge these assets as security for loans but Celsius, which in May 2022 had lent a collective $8bn to clients and had $12bn in assets under management, collapsed just two months later and filed for Chapter 11 bankruptcy protection that July.

After emerging from Chapter 11 in January 2024, Mr Meghji is now pursuing former Celsius customers who enjoyed a ‘voidable’ or fraudulent preference through being able to withdraw their assets 90 days or less before the bankruptcy filing. He is asserting that some 538 of these withdrawals were made to accounts in the name of FTX Digital Markets, and is claiming a total $377.419m.

Tribune Business sources, speaking on condition of anonymity, said the FTX Digital Markets liquidators view the Celsius situation as an inconvenience and nuisance, as well as a potential distraction, to the adjudication of claims submitted by creditors and victims ahead of the anticipated post-October 31, 2024, payout once the Chapter 11 reorganisation plan for the crypto exchange’s US subsidiary is approved.

At its core, Celsius’ claim boils down to who the $377.419m should be paid out to - the litigation administrator for the benefit of creditors, or to the customers and others who are original recipients. At the worst, it might delay the return of this sum and force it to be placed in escrow until the rightful destination is determined. Celsius has now lodged its claim for this amount with the FTX Digital Markets liquidation

The failed crypto bank is alleging that its claim would be better dealt with before the New York bankruptcy court, rather than through the Bahamian liquidation process, as some of the transferred assets went to “third parties” who “could not be justly and fairly dealt with” in this nation’s judicial system.

Celsius, in September 4, 2024, legal filings with the Delaware Bankruptcy Court, alleged that the only argument made by the Bahamian liquidators against its position was that it planned to bring the action in the wrong court - New York, and not The Bahamas.

Having now been recognised by the Supreme Court, Mr Meghji asserted: “Pending approval from The Bahamas Supreme Court, the Celsius litigation administrator seeks relief that would simply redirect funds that would be distributed to FTX Digital Markets to creditors in the US. Accordingly, the appropriate venue and jurisdiction in which to file and prosecute the draft complaint is in the US....

“FTX Digital Markets posits a parade of horribles that purportedly will result if the court lifts the automatic stay to permit the Celsius litigation administrator to pursue the customer preference actions in the New York Celsius bankruptcy court. 

“In so doing, FTX Digital Markets severely understates the prejudice the Celsius litigation administrator and Celsius’s creditors will suffer should the stay remain in place. FTX Digital Markets ignores critical factors that support lifting the stay in a way that addresses the interests of all parties involved.”