Creditors of the bankrupt cryptocurrency lending firm BlockFi filed fresh court documents on May 15, 2023, to protest the company’s new restructuring plan. The creditors accused BlockFi of intentionally prolonging the legal proceedings for its benefit.
BlockFi presented its Chapter 11 reorganization plan to the United States Bankruptcy Court in Trenton, New Jersey, on May 12, 2023. In the plan, the company acknowledged that selling BlockFi may not generate sufficient funds to repay its top 50 creditors, who are owed nearly $1.3 billion.
BlockFi’s creditors, represented by the legal firm Brown Rudnick, claimed that the company sold approximately $240 million worth of cryptocurrency before declaring bankruptcy in late November 2022. The creditors pointed out that this sale occurred during a significant market downturn following the collapse of FTX.
The creditors further highlighted that liquidating most of the domestic cryptocurrency holdings in November 2022 was an unfavorable decision as it resulted in losses exceeding $100 million in the subsequent months. They also emphasized that the sale had unnecessary tax consequences and that the proceeds were unrelated to the company’s bankruptcy.
According to the creditors:
“Selling $240 million in cryptocurrency was never rationally related to bankruptcy funding needs, given that no reasonable estimate would peg the costs of this bankruptcy at $240 million.”
Additionally, the creditors revealed that BlockFi used $22.5 million from customer funds to acquire a $30 million insurance policy. They noted that this was done after the company liquidated its digital assets and before it declared bankruptcy.
The BlockFi creditors also added that the company utilized $22.5 million from customer funds to acquire a $30 million insurance policy. The creditors claimed this occurred after BlockFi liquidated its digital assets before declaring bankruptcy.
They urged the court to swiftly conclude the case by transferring the estate assets to new management, stating that this proposal conflicts with the debtors’ agenda.
In a separate development, BlockFi reached an agreement in March 2023 to reimburse its California clients with a total amount exceeding $100,000. The reimbursement was intended for borrowers who continued to repay loans despite a trading suspension imposed on November 10, 2022.
The Department of Financial Protection and Innovation (DFPI), California’s financial oversight body, conducted an investigation and found that at least 111 borrowers in California collectively repaid approximately $103,471 between November 11, 2022, and November 22, 2022, during the trading suspension period. The agency alleged that BlockFi failed to provide timely notice to borrowers that they could stop repaying their loans.
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