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The Bankruptcy Protector

Aug. 1, 2022

Chapter 15 – A Useful Tool for Protecting and Preserving Assets in Cryptocurrency Insolvency Proceedings

By Gary M. Freedman

In February 2022, I wrote a blog article entitled Cross-Border Bankruptcy Cases: Chapter 15 of the Bankruptcy Code and Parameters of a Discovery Tool. Since the publication of that article, there have been approximately 40 chapter 15 filings in the United States Bankruptcy Courts throughout the country. Two of those cases, Samba v. Int’l Petro. Prods. and Additives Co. (In re Black Gold S.A.R.L.), 635 B.R. 517 (9th Cir. BAP 2022) and Zawawi v. Diss (In re Zawawi), 2022 WL 596836 (M.D. Fla. Feb. 28, 2022), as discussed in the blog, Two Recent Chapter 15 Cases Clarify Just How Low the Bar is for Recognition (available at https://www.faegredrinker.com/en/insights/publications/2022/3/two-recent-chapter-15-cases-clarify-just-how-low-the-bar-is-for-recognition, last visited July 27, 2022), demonstrate just that, where two reviewing courts reversed bankruptcy courts’ determinations that the requirements of section 1517(a) of the Bankruptcy Code had not been met, and allowing the chapter 15 proceedings to continue.

Given the recent downturn in the cryptocurrency markets and the bankruptcy filings emanating from this downturn, the use of chapter 15 for cryptocurrency related companies instituting foreign insolvency proceedings remains a useful tool to protect assets within the United States. For example, on July 6, 2022, Voyager Digital, a New-York based cryptocurrency firm filed for chapter 11 relief in the U.S. Bankruptcy Court for the Southern District of New York. But this was after it had sent a notice of default to Three Arrows Capital – a Singapore-based cryptocurrency hedge fund – for failing to make payments on loans described as 15,250 bitcoin and $350 million U.S. dollar coin (totaling approximately $650 million). As a result of this and apparently other significant debt, Three Arrows Capital initiated an insolvency proceeding in the British Virgin Islands and then, on July 1, 2022, commenced a chapter 15 proceeding in the Southern District of New York, seeking to recognize the British Virgin Islands insolvency proceedings. In addition to the Voyager Digital debt, it also came to light that Three Arrows owes $2.36 billion to Genesis Pacific Pte. Ltd., an affiliate of Genesis Global Trading Inc., which bills itself as the world's largest digital-asset lender.  

While the cryptocurrency dominoes continue to fall from the recent downturn in that industry (see Celsius), on July 12, 2022, Bankruptcy Judge Martin, overseeing Three Arrows chapter 15 proceeding, entered an order freezing Three Arrows’ assets, at a time when Three Arrows’ principals had disappeared (although they have recently resurfaced). The Three Arrows’ chapter 15 proceeding should provide a viable platform for discovery, including of its recent reappearing principals, while those entities left holding the bag attempt to figure out exactly what transpired at Three Arrows and attempt to trace and recover its assets.

As may be apparent, chapter 15 proceedings remain a viable tool for recognition of foreign insolvency proceedings, including those insolvency proceedings involving entities in the cryptocurrency business.

Nelson Mullins attorneys are experienced in handling bankruptcy matters of all sizes and are well equipped to advise debtors, trustees, purchasers, professionals, and other stakeholders on both the legal and practical aspects of any number of issues that arise in a bankruptcy case, including chapter 15 cases and leveraging the firm’s growing cryptocurrency practice when those issues intersect with insolvency and restructuring issues.



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