How Genesis Solved the Dollarization Cap Dilemma for Crypto Creditors
In the wave of “crypto winter” bankruptcy cases, the valuation of crypto creditors’ claims has become a key issue. Virtually all crypto debtors “dollarized” claims and capped crypto claims at petition date values. Genesis Global (“Genesis”), however, took a different approach by obtaining court approval of a Chapter 11 plan that provided “in-kind” recoveries without capping claims at their petition date values. Because some crypto prices (like Bitcoin) nearly tripled after the petition date, this issue significantly affected recoveries for crypto creditors. How was Genesis able to do it? In seeking approval of its plan, Genesis argued that (i) the Plan satisfied Section 502(b) of the Bankruptcy Code, because it allocated value to creditors on the basis of petition date values, (ii) even if there were a cap, the objecting party (Digital Currency Group (“DCG”), the corporate parent of Genesis), could not invoke Section 502(b) because it had not objected to crypto claims as required by the plain language of the Bankruptcy Code and prior orders of the court and in any event had no standing because it would never recover on account of its equity given the existence of more than $11 billion in allowed subordinated government penalty claims. In addition, Genesis argued that the plan constituted an amendment and reinstatement of the relevant loan agreements. The cornerstone of the plan was a framework (known as the Distribution Principles) negotiated among US dollar and crypto creditors that allocated value among US dollar and crypto creditors. Importantly, the Distribution Principles use the petition date value of a claim as a starting point to determine the allocation of recoveries among creditors, but does not cap the recoveries as of that petition date value. And critically, these principles allow for maximum in-kind recoveries in the cryptocurrency that the claims are denominated in, resulting in recovery of a portion of the appreciation in the value of cryptocurrency since the filing date. The plan was coupled with a settlement with the New York Attorney General (“NYAG”) that granted the NYAG a claim equal to the difference between (i) the total amount of allowed general unsecured claims, with the total loan values calculated based on the value of the loaned digital assets as of the date of distributions and (ii) value actually distributed to those creditors pursuant to the plan, providing a dollar-for-dollar reduction in the NYAG claim for all distributions to creditors. The NYAG further agreed to subordinate its claim, direct any proceeds received by NYAG to the creditors and use Genesis as the payment agent, in accordance with the Distribution Principles. Thus, if the court capped claims at the petition date values, creditors would receive the full in-kind value of their claim through the NYAG claim. The court approved the settlement reasoning that the settlement would provide restitution to creditors and make them as whole as possible on their contractual rights through in-kind distributions. In May 2024, the bankruptcy court confirmed the plan, relying on the argument that DCG, the debtors’ sole equityholder, lacked standing to object to the plan. The court reasoned that DCG had no economic stake in the plan given the debtors’ insolvency and at least $11 billion in governmental claims that would have to be paid out before equity interests. DCG did not appeal. The plan went effective in August 2024, when BTC creditors received 51% of their in-kind, coin-for-coin value (166% of their petition date value), ETH creditors received 66% of their in-kind, coin-for-coin value (153% of their petition date value), and US dollar creditors received 100% of their in-kind and petition date value. In contrast, other cases like Celsius, Voyager and FTX focused on dollarization of crypto claims and capping crypto recoveries at their petition date dollar values. This approach forced crypto creditors to subsidize recoveries for US dollar creditors. Although the facts of each case are distinct, Genesis presents a novel interpretation of what it means for a creditor to be paid in full under the Bankruptcy Code. Further distributions are expected to be made from the proceeds of litigation and settlements pursuant to the plan. |
