Celsius creditors allege 30% less compensation than promised during bankruptcy

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A group of creditors of bankrupt crypto lending firm Celsius, which is facing over $3 billion in claims, is complaining of an allegedly 30% or greater reduction of payments versus what they were promised under the original bankruptcy plan. The reduction is allegedly caused by a rule where only 100 Celsius corporate accounts can receive distributions through the Coinbase exchange.

This rule allegedly forces some creditors to accept cash instead of crypto as payment. Since Bitcoin (BTC) and Ether (ETH) have risen in price significantly since the distribution was agreed upon, this leaves small business creditors with significantly reduced payments versus the top 100 business accounts on Celsius.

Cointelegraph was contacted by a Celsius creditor in Australia who claims to be owed 0.182 BTC and 3.05 ETH under the terms of the bankruptcy. The creditor, who wished to remain anonymous, claimed he was told by the Celsius debtors’ law firm, Kirkland & Ellis, that they would not receive the original amount. Instead, they will receive $15,741 in cash, 36% less than the cryptocurrencies’ market value of $24,552 at the time of publication. By contrast, a top-100 Celsius corporate creditor will get the full amount of crypto promised, the creditor claims.

The creditor provided Cointelegraph with emails between them and a Kirkland & Ellis representative. In the emails, the representative appears to confirm that the creditor will receive a cash payment that is not equivalent to the crypto promised. “I understand the frustration that crypto prices have gone up since your fiat distribution was reserved,” the representative stated, “but if prices had gone down, you would be [also] getting more BTC and ETH.”

The representative allegedly claimed that a Coinbase rule was responsible for the reduced payments, stating:

“Unfortunately, we only have 100 slots for corporate creditors, so those slots were allocated to corporate creditors with the largest claims. Corporate creditors not on that list of 100 have to receive fiat distributions—we have no way to distribute cryptocurrency if Coinbase will not support those distributions. We have no way to make those distributions without a regulatorily compliant distribution partner.”

Email from Kirkland & Ellis. Source: Celsius creditor

Some creditors have sent letters to United States bankruptcy Judge Martin Glenn, who is presiding over the case, to complain about having their payments reduced. Jake and Sheri Faller of Oak Park, California stated that their payments are being reduced by 26%–33% because of the alleged Coinbase rule, which they considered to be unfair, stating, “We […] feel it’s unfair and not equitable that only 100 corporate accounts were selected to receive crypto distribution without any transparency on how those 100 accounts would be chosen, with the rest receiving USD checks and wires.”

Hong Kong resident Hui Ka Hin also complained to Judge Glenn about the decision, stating, “I find myself in a precarious situation where I am forced to accept US Dollar Distribution, instead of crypto (BTH/ ETH) as mentioned in previous docket.” Hin claimed that crypto distribution is allowed in Hong Kong, but for “unknown reasons,” Celsius chose to distribute the funds in U.S. dollars.

Celsius creditor payment calculations

The Celsius bankruptcy plan was confirmed by the Court on Nov. 9. It uses two different sets of crypto prices to determine the amount of money owed to creditors. The first set of prices is determined by the “petition date,” or the date that Celsius filed for bankruptcy, which is July 13, 2022, while the second is the “effective date” for distributions, which is Jan. 31, 2024.

The petition date price for Bitcoin is $19,881, and for Ether it is $1,088.17. There are also petition date prices for other cryptocurrencies, such as Dash (DASH), Dogecoin (DOGE), Pax Gold (PAXG), Uniswap (UNI) and every other altcoin that was carried by Celsius at the time it stopped processing withdrawals.

To determine how much USD creditors are owed, the debtors add up the petition date value of each cryptocurrency held in the creditor’s Celsius account. The result is the dollar amount owed to creditors. 14.9% of this amount is to be paid out in Ionic Digital mining company stock, 6.4% in “illiquid assets recovery” at a future date, and 20.8% is simply not going to be paid out due to Celsius being insolvent at the time of the petition, according to the plan. That leaves 57.9% to be paid out in cash or crypto.

Most creditors are being paid in crypto rather than U.S. dollars. This is where the “effective date” prices come in.

The effective date price is $42,973 for BTC and $2,577 for ETH. Of the 57.9% that is to be paid out in cash or crypto, the plan calls for a 50% BTC and 50% ETH distribution to most creditors. To determine how much BTC and ETH are owed to the creditor, the debtors split the dollar amount owed into two halves. The first half is divided by the effective date Bitcoin price and the second half by the effective date Ether price, producing an amount of BTC and ETH to be distributed.

Related: Celsius distributes $2B of crypto to 172K creditors

For example, a Celsius creditor who held 1 BTC and 1 ETH in their account at the time the platform stopped processing withdrawals would have seen their holdings amount to $20,969.17 on the petition date. However, the creditor would only receive 57.9% of that as a cash or crypto payment, or $12,141.15. Half of this, $6,070.58, would be paid out as 0.14 BTC. The other half would be paid out as 2.36 ETH. This is an 86% decrease in BTC and a 135% increase in ETH compared to what the creditor started with.

In terms of dollar value, 1 BTC and 1 ETH had a combined value of $45,550 on the effective date. This implies that our hypothetical creditor missed out on $33,408.85 in gains during the ongoing crypto bull market as bankruptcy proceedings were winding their way through the court system.

Celsius distribution calculations. Source: @abennett YouTube channel

If our hypothetical creditor held a corporate account that was not one of the top-100 asset holders and had not been paid as of March 13, they would have had their capital tied up even longer and missed out on even more gains. The price of Bitcoin on March 13 was $72,665, and ETH was worth $3,980.40. This means that our hypothetical investor missed out on $64,503.85 of gains or an additional $31,095 over what they would have received if they had been paid in crypto.

The creditor who spoke to Cointelegraph about the issue referred to this as “special treatment for some” and claimed that creditors never agreed to this arrangement. The Kirkland representative responded by stating that the plan was agreed to by creditors and that it stipulates payments will be made in U.S. dollars if a regulation-compliant distribution partner cannot be obtained. The Coinbase exchange did not provide a comment by the time of publication.

Celsius debtors’ response

In a document filed with the United States Bankruptcy Court for the Southern District of New York on March 13, Celsius debtors’ attorneys responded to the claims made by corporate account holders outside of the top 100. The debtors confirmed that some creditors will not receive their payments as cryptocurrency, nor will they receive the cash equivalent based on prices prevalent at the time of distribution.

In the document, the debtors claim that the cryptocurrency owed to these creditors has already been sold. As a result, the debtors have purportedly not benefited from the rise in crypto prices in these individual cases and cannot pass on these benefits to creditors, as they stated:

“[The] Debtors sold cryptocurrency on or around January 16, 2024 to ensure that they had enough Cash on hand for Cash distributions. […] The Post-Effective Date Debtors cannot adjust those amounts for market developments except as set forth below.”

If a creditor was initially scheduled to receive crypto but debtors later determined that this wasn’t possible, the crypto will be sold “as close as possible to the expected date of cash distribution,” allowing the creditor to receive recent gains from crypto price increases. However, this practice will not occur for creditors who have been already scheduled for cash distributions. This means that corporate accounts that were not allowed to receive distributions through Coinbase will not receive the increased amount of cash, the document stated.

In the document, Celsius debtors claimed that corporate accounts require a “significantly more demanding” compliance and onboarding process than individual accounts. For this reason, debtors were purportedly unable to obtain a distribution partner to provide accounts to all of Celsius’ corporate creditors. As a result, the debtors had no choice but to sell the cryptocurrency owed to creditors on the effective date, which caused these creditors to miss out on subsequent crypto gains, the document claimed.

This story was updated at 5:51 pm UTC on March 15 to include information about the court filing from Celsius debtors.

Related: Celsius exits bankruptcy, commences return of over $3B to creditors