Crypto Customers Don’t Own Their Deposits with Celsius Network, Judge Glenn Says
Applying ordinary contract law, New York judge rules that customers are bound by contracts they haven’t read.
Not having read and appreciated the significance of the fine print in their account agreements, crypto customers are learning by the thousands that they have nothing but unsecured claims after depositing their coins with Celsius Network LLC.
Bankruptcy Judge Martin Glenn of New York ruled that the unambiguous terms of customers’ contracts gave ownership of customers’ coins to Celsius, the chapter 11 debtor. Judge Glenn’s January 4 opinion is significant because he holds under New York law that a cryptic reference to the terms of a contract on a website or on a phone will bind customers.
The Earn Accounts
Together with affiliates, Celsius called itself “one of the largest and most sophisticated cryptocurrency based finance platforms in the world[, providing] financial services to institutional, corporate, and retail clients across more than 100 countries.”
On the chapter 11 filing in July, Celsius’ customers held cryptocurrency assets worth about $4.2 billion in what the debtor called Earn Accounts. However, the debtor claimed that the assets in the Earn Accounts belonged to Celsuis, not to the customers, and were estate property.
The debtor filed a motion asking Judge Glenn to declare as a general principle that property deposited by customers in the Earn Accounts were estate property. To pay costs of operating the chapter 11 case, the motion also sought permission to sell about $18 million in a type of cryptocurrency known as stablecoins that was held in Earn Accounts.
Judge Glenn was tasked with deciding who owns the assets in the Earn Accounts. His decision turned on the latest iteration of the Terms of Service governing the Earn Accounts.
In the voluminous Terms of Service, customers were told that they were granting the debtor “all right and title” to their coins, including “ownership rights.” It went on to say that the debtor could pledge, sell or lend customers’ deposits.
The Terms of Service went on to say, “You will not be able to exercise rights of ownership.” If the debtor were to go bankrupt, the Terms of Service said that customers may not have any legal remedies other than rights as a creditor.
Ordinary Contract Rules Govern
Judge Glenn recognized no special rules for contracts pertaining to cryptocurrencies. Citing the Second Circuit, he said, “A contract requires an offer and acceptance thereof (mutual assent), consideration, and an intent to be bound.”
“These requirements are not different for electronic contracts, and courts have adapted traditional principles of contract formation to fit the digital era,” Judge Glenn said, again citing the Second Circuit.
Because customers have a “passive role in negotiating many electronic contracts,” Judge Glenn said that “the issue of mutual assent often turns on whether a consumer should have been aware that they were being bound by the relevant terms,” again citing the Second Circuit.
Focusing on the Celsius Earn Accounts, Judge Glenn explained how the contracts were made in a so-called clickwrap agreement. Basically, customers clicked a button saying they accepted the terms, without necessarily having actually seen the terms of the contract.
“Clickwrap contracts are routinely enforced under New York law,” Judge Glenn said, citing district court opinions in New York.
The sixth version made the transfer of ownership explicit, but the change became binding on existing customers, for reasons Judge Glenn explained.
Limitations on the Ruling
Judge Glenn explained what he held and did not hold. The decision, he said, means that deposits in the Earn Accounts were “presumptively property of the estate and not property of the Account Holders.” To defeat the presumption, he left the door open for customers to argue in the claims allowance process that the facts in their particular cases were different. He also did not preclude customers from alleging “breach of contract, fraud or other theories of liability.”
The decision regarding Earn Accounts, Judge Glenn said, “does not determine the ownership of assets in the Debtors’ Custody Program, Withhold Accounts, or Borrow Program or whether any individual Account Holder has valid defenses to the contract between Account Holders and the Debtors.”
Judge Glenn ended the opinion by granting authority for the debtor to sell $18 million in stablecoins to finance the debtor’s operations in chapter 11.
In re Celsius Network LLC, 22-10964 (Bankr. S.D.N.Y. Jan. 4, 2023)
In re Celsius Network LLC