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October 20, 2022 – The Court hearing the Celsius Network cases took "under submission" motions for (i) approval of the bidding procedures for the Debtors' proposed sale of their assets and (ii) to appoint an official preferred equity committee at a hearing held Thursday.
The Debtors told the Court that a revised proposed bidding procedures order extends some deadlines, including setting the bid deadline for two days after the filing of an examiner's report, with the report expected to be filed on December 10, 2022.
The revised proposed order also allows for different bid structures, notably including the ability to place bids in cash and equity of the Debtors, reorganized Debtors or other entities.
Additionally, the revised bidding procedures would provide more transparency for regulatory entities by identifying bidders and allowing those authorities to listen in on auction proceedings. All bidders will be required to identify themselves in connection with this provision.
Judge Martin Glenn also told the parties to expect any bidding procedures order, if approved (with an order to come "hopefully by early next week"), to call for the appointment of a consumer privacy ombudsman to help in the process of drafting any asset purchase agreements.
Glenn also questioned U.S. Trustee counsel Shara Cornell about her client's objection to the bidding procedures motion, expressing concern about the impact any delays in the sale process requested as part of the objection could have on the Debtors' financial situation.
“It becomes a very serious issue for the Debtor to fund this operation,” Glenn said. “When we get to 2023, it becomes important. I think this case needs to move forward as quickly as possible… There are lots of professionals who are working on this, whose meters are running. How long do you want to put this off?”
Cornell said the Debtors' have changed their view on how to fund the cases since they were filed earlier this year. She argued that the Debtors initially stated that funding for operations would come from the Debtors' cryptocurrency mining business, but they are now leaning on the potential sale proceeds to cover those costs.
Cornell further pointed out that the Debtors do not have a stalking horse bidder in place or any bid protections.
"This is not a traditional melting ice cube situation," Cornell said.
However, Glenn said the official committee of unsecured creditors is still pushing for a two-pronged approach, including a standalone Plan and an asset sale, meaning there may not even ultimately be a sale.
"As I understand it, there is still a standalone Plan," Glenn said.
Sale and Objection Background
On September 13, 2022, the U.S. Trustee objected to the proposed bidding procedures [Docket No. 1047] arguing that (i) it is unclear what assets the Debtors are looking to sell (particularly focusing on ambiguity around the Debtors' crypto mining assets), (ii) that any sales should wait until after an examiner's report and (iii) a privacy ombudsman should be appointed.
On September 29, 2022, the Debtors filed a motion seeking approval of (i) the bidding procedures for a potential sale of substantially all of their assets, (ii) selection of a stalking horse bidder (none yet, and any bid protections would be included in a stalking horse agreement) and (iii) a timetable that would culminate in a November 18th auction and a November 28th sale hearing for their retail platform assets* and a December 8th auction and December 20th sale hearing for their remaining assets [Docket No. 929].
*The retail platform assets include any cryptocurrencies or digital assets held by the Debtors (to the extent that they comprise property of the estate). The remaining assets will include the Retail Platform Assets to the extent that that the Retail Platform Assets are not sold at the first Sale Hearing.
Preferred Equity Committee Motion
Although holding off on a ruling on the committee appointment motion in order to receive further feedback on a related motion to file certain customer information under seal, Glenn repeatedly told Dennis Dunne, counsel for series B preferred equityholders, that Dunne's "constituency is very well represented" in the Debtors' cases, including by Dunne himself.
Gregory Pesce, counsel for the official committee of unsecured creditors, echoed the judge's sentiments, arguing that one of two members of a special committee formed in the cases “was literally appointed by preferred equity," and that preferred equity holders “are very able to pay the fees [associated with their work on the cases]. They do not need to pass them onto the estate.”
Dunne told the Court that appointment of a dedicated preferred equity committee is necessary, in part, because the UCC is challenging the original agreement that proceeds of a GK8 sale go to preferred equity, which has "received nothing to date," including dividend payments.
Dunne also said that the Debtors have been committed since the outset of working with the UCC, which is largely comprised of customers, and no such commitment has been made in respect of working with preferred equity holders.
On September 22, 2022, Series B Preferred Shareholders Community First Partners, LLC, Celsius SPV Investors, LP, Celsius New SPV Investors, LP and CDP Investissements Inc. filed a motion seeking appointment of an official preferred equity committee for the Debtors' Chapter 11 cases [Docket No. 880].
The motion states, "The immediate appointment of an Official Preferred Equity Committee is necessary to ensure adequate representation of the interests of CNL’s preferred equity holders (the 'Equity Holders') in these cases. The Debtors have repeatedly acknowledged that certain fundamental issues exist that need to be addressed in the short term, including, for example, which Debtors are liable with respect to customer claims, the appropriate allocation of any asset sale proceeds and whether the claims of the Debtors’ customers must be determined in United States dollars as of the Petition Date.
The resolution of these issues is necessary to advance any restructuring negotiations. Indeed, the Debtors and the Official Committee of Unsecured Creditors (the 'UCC') have acknowledged as much, and they appear to be well on their way to resolving these key issues. The problem, however, is that the resolution of these critical issues directly affects the recoveries of the Equity Holders. And as the Debtors have made clear from the outset of these cases, they have partnered with the UCC in resolving these issues and are not taking an adverse position.
The Equity Holders urgently require their own fiduciary – with the access, standing and resources equal to those enjoyed by the UCC – to represent their interests. The need for a fiduciary to pursue the Equity Holders’ interests is particularly critical when one considers the practical realities of these cases: there are only two groups of real economic stakeholders – the retail customers and the Equity Holders.
The interests of the customers are being vigorously pursued by the UCC, which is concededly a committee of customers. Not only is the UCC laser focused on maximizing value for the customers, without regard for the Equity Holders, but the Debtors also have made it abundantly clear that the UCC is their partner, and these cases are 'all about the customer.' Thus, there is no stakeholder presently at the table advocating for the interests of the Equity Holders.
The lack of adequate representation of the Equity Holders’ interests is particularly glaring in light of the corporate separateness of the customer-facing entities from the Non-Customer Facing Entities, whose value flows to CNL… The Debtors and the UCC have acknowledged that each of the Debtors is a separate legal entity and recognized the importance of maintaining that corporate separateness and not inappropriately diverting value from one estate for the benefit of another.
And, as further described below, there is meaningful value in the Non-Customer Facing Entities (collectively, the “Excluded Assets”), including value from (i) mining equipment, mined bitcoin, and other assets utilized by the Mining Entities; (ii) CNL’s loan portfolio that is expected to be paid over time and other investments; and (iii) the equity in GK8, a wholly-owned subsidiary of CNL purchased for $115 million with funds invested by certain of the Equity Holders. This value, the Requesting Equity Holders believe, should largely inure to the benefit of the Equity Holders, given that the Non-Customer Facing Entities have no third-party funded debt, and the retail customers are not customers of, and do not have claims against, any of the Non-Customer Facing Entities."
Fee Examiner Appointment
Despite stating at the hearing that he is "not a fan of fee examiners,” Glenn said the Debtors' cases may be different, so he will grant the U.S. Trustee's proposal for appointment of Christopher Sontchi as fee examiner.
The Debtors said at the hearing that they support the U.S. Trustee's proposal to speed up the fee review process. Pesce said the UCC "does not oppose" the request.
Sontchi, a retired bankruptcy judge, commented at the hearing, “I view my role here to keep an eye on costs… In this case, there’s so many moving parts, rabbit holes.”
Sontchi said he would use Katherine Stadler of Godfrey & Kahn, S.C. to help him in the fee examination process.
About the Debtors
According to the Debtors: “Built on the belief that financial services should only do what is in the best interest of the customers and community, Celsius is a blockchain-based platform where membership provides access to curated financial services that are not available through traditional financial institutions.”
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