Can the Celsius Trustee Claw Back Withdrawals Made by Celsius Account Holders?

As a bankruptcy attorney, one of the most contentious and complicated issues in the realm of bankruptcy law is the concept of "preference" and the trustee's ability to "claw back" funds transferred to creditors before the bankruptcy filing. The recent case of Celsius Network, a cryptocurrency lending platform that filed for Chapter 11 bankruptcy on July 13, 2022, brings this issue into sharp focus. Celsius account holders who withdrew substantial amounts of funds in the weeks and months leading up to the bankruptcy filing now face the possibility that these funds could be reclaimed by the bankruptcy trustee. To understand whether the Celsius trustee can actually claw back these withdrawals, we must closely examine the relevant provisions of the U.S. Bankruptcy Code, particularly 11 U.S. Code § 547 (b), which governs preferential transfers.

The Legal Framework: 11 U.S. Code § 547 (b)

The trustee's power to avoid or "claw back" certain transfers is codified in 11 U.S. Code § 547 (b). Under this section, the trustee may avoid any transfer of an interest of the debtor in property if the following conditions are met:

1. **The transfer is made to or for the benefit of a creditor.**

2. **The transfer is made for or on account of an antecedent debt owed by the debtor before the transfer was made.**

3. **The transfer is made while the debtor was insolvent.**

4. **The transfer is made on or within 90 days before the date of the filing of the bankruptcy petition (or within one year if the creditor is an insider).**

5. **The transfer enables the creditor to receive more than they would have received in a Chapter 7 liquidation case if the transfer had not been made.**

If these conditions are satisfied, the trustee has the authority to reclaim the transferred funds and redistribute them according to the bankruptcy estate's priorities.

Given this legal framework, the question arises: Can the Celsius trustee actually claw back withdrawals made by Celsius account holders? The answer is "yes," but with certain limitations.

Insolvency and the 90-Day Lookback Period

The first critical factor is whether the transfer occurred while Celsius was insolvent. Insolvency, in bankruptcy terms, means that the debtor's liabilities exceed its assets. By May 2022, following the collapse of the Terra stablecoin (UST), Celsius was widely regarded as insolvent. The insolvency of Celsius during this period is significant because any withdrawals made while the company was insolvent and within 90 days of the bankruptcy filing (i.e., after April 14, 2022) are potentially subject to clawback.

For instance, if a Celsius account holder withdrew $150,000 from their account on June 1, 2022, this withdrawal falls squarely within the 90-day lookback period before the July 13, 2022, bankruptcy filing. Under 11 U.S. Code § 547 (b), this transfer is considered a preferential payment, as it was made to satisfy an antecedent debt (the obligation to repay the depositor) while Celsius was insolvent. Moreover, this transfer likely allowed the creditor to receive more than they would have under a Chapter 7 liquidation scenario, where assets are typically distributed on a pro-rata basis, resulting in lower recoveries for creditors.

Threshold for Clawback: $100,000

However, it's important to note that the Celsius trustee has set a practical threshold for clawback actions. Withdrawals of $100,000 or less are not being pursued for recovery. This decision likely reflects the cost-benefit analysis of pursuing smaller claims versus the administrative burden and legal expenses associated with such actions. Consequently, if an account holder withdrew $99,000 from Celsius during the lookback period, they would not be subject to clawback, even if all other criteria under 11 U.S. Code § 547 (b) are met.

Timing of Withdrawals and Due Diligence

The timing of the withdrawal is another crucial factor. Withdrawals made more than 90 days before the bankruptcy filing are generally outside the reach of the trustee's clawback powers, unless the recipient is an insider of the debtor. For example, if an account holder withdrew $250,000 on April 10, 2022—91 days before the filing—they would not be subject to clawback, as the transfer occurred just outside the 90-day lookback window.

Furthermore, due diligence by account holders plays a role in determining whether they should have anticipated the impending insolvency of Celsius. By late 2021, there were numerous red flags about Celsius itself. By 2022, there were many signs indicating the financial instability of Celsius, including investigations by state attorneys general and reports from analysts like Dirty Bubble Media. A savvy investor, particularly one advised by a competent attorney, would have recognized the risks and considered withdrawing their funds before the 90-day period began; that is, when it was clear that Celsius would face regulatory scrutiny. Unfortunately, many account holders did not act on these warnings (this is probably because they simply didn’t know about the investigations), and those who withdrew funds within the lookback period are now at serious risk of clawback.

The Trustee's Role and Adversary Proceedings

When Celsius filed for Chapter 11 bankruptcy, a trustee was appointed by the U.S. Bankruptcy Court in the Southern District of New York. The trustee's primary role in a Chapter 11 case is to reorganize the debtor's business obligations, debts, and assets to enable the business to emerge from bankruptcy and continue operations. Part of this role involves recovering assets for the bankruptcy estate, which may include initiating adversary proceedings to claw back preferential transfers.

An adversary proceeding is essentially a lawsuit filed within the bankruptcy court to recover transfers that meet the criteria under 11 U.S. Code § 547 (b). However, the trustee cannot feasibly sue every Celsius account holder who withdrew funds during the 90-day lookback period. Therefore, the trustee has chosen to focus on larger withdrawals, particularly those exceeding $100,000, to maximize the recovery for the estate.

Navigating the Risks of Clawback

In conclusion, the Celsius trustee does have the authority to claw back withdrawals made by account holders within the 90-day lookback period before the bankruptcy filing, provided that these withdrawals meet the criteria under 11 U.S. Code § 547 (b). Account holders who withdrew $100,000 or more during this period are particularly vulnerable to such actions. As a bankruptcy attorney, it is crucial to advise clients on the risks associated with preferential transfers and the importance of timely due diligence when dealing with financially distressed entities. The Celsius case serves as a stark reminder of the complexities and potential pitfalls in the intersection of cryptocurrency and bankruptcy law.