In re BlockFi, Inc.
| Docket Number | 22-19361 MBK |
| Decision Date | 29 August 2023 |
| Parties | In Re: BlockFi, Inc. Debtors |
| Court | U.S. Bankruptcy Court — District of New Jersey |
NOT FOR PUBLICATION
Hearing Date: August 17, 2023
Carol L. Knowlton, Esq. Gorski & Knowlton, PC Creditor Michael D. Sirota, Esq. Warran A. Usatine, Esq. Cole Schotz, P.C. Counsel for Debtors and Debtors in Possession
Richard S. Kanowitz, Esq. Kenric D. Kattner, Esq. Counsel for Debtors and Debtors in Possession Joshua A. Sussberg, P.C Christine A. Okike, P.C. Counsel for Debtors and Debtors in Possession
This matter comes before the Court upon George J. Gerro's Response to BlockFi, Inc.'s Fourth Omnibus Objection to Certain Claims (ECF No. 1192) and Cross-Motion for an Order Temporarily Allowing Claim No. 12386 (ECF No. 1192-4). In his motion, movant ("Gerro") asks the Court to overrule BlockFi's objection and allow Proof of Claim No. 12386 in the amount of 426 bitcoin. BlockFi filed a reply to Gerro's objection and opposes Gerro's motion (ECF No. 1342). For reasons discussed, the Court disallows Gerro's claim and, as a result, denies Gerro's Cross-Motion as moot.
The Court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, as amended September 18, 2012, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(B). Venue is proper in this Court pursuant to 28 U.S.C. § 1408.
The Court limits its recitation of the factual and procedural history of this case to information pertinent to the matter presently being decided. BlockFi and Gerro entered into a prepetition lending relationship through which BlockFi Lending LLC issued a series of loans (the "Loans") to Gerro, secured by collateral in the form of bitcoin ("BTC"). The Loan Agreement granted BlockFi a security interest in, among other things, the BTC and proceeds thereof (the "Collateral"). Significantly, the Loan Agreement also contained a specific loan-to-value ("LTV") Ratio requirement that authorized BlockFi to liquidate Collateral with 3 days' notice if the LTV Ratio rose above 70%, and immediately if it rose above 80%.
In March of 2020, BlockFi notified Gerro that-because the price of BTC had dropped- he was required to post additional BTC Collateral to avoid liquidation. Gerro did not respond to BlockFi's margin call, and on March 12, 2020, BlockFi liquidated approximately 399 BTC to bring the loan into compliance with the required LTV Ratio. The parties communicated regarding the liquidation, see Ex. B to BlockFi's Reply, ECF No. 1341, and Gerro ultimately requested a further liquidation to pay off his remaining Loan balance and asked that whatever Collateral remained after the payoff be transferred to his external wallet with immediate confirmation after the trade. Upon Gerro's request, BlockFi then provided Gerro with several options to achieve reinstatement of some or all of the Loans. Gerro responded on March 24, 2020 by indicating he was "in the due diligence phase with a traditional source of capital," id. at 47, and inquired about the formula BlockFi was using to determine the amount Gerro would need to pay in order to reinstate his loan. That same day, BlockFi responded with the formula and gave an example that assumed 426 BTC collateral at 60% LTV Ratio. BlockFi further cautioned that the example was subject to fluctuation, given the volatility of BTC and the need to satisfy the LTV Ratio requirement.
On April 27, 2020-more than 30 days after BlockFi provided the reinstatement information-Gerro responded to BlockFi via email, indicating that he "accept[ed] BlockFi's offer to reverse [his] collateral sales[,]" and he provided his own calculations for the terms of the reinstated loan. Id. BlockFi promptly responded, explaining that-due to the increase in the value of BTC in the month that had transpired since BlockFi's initial email-BlockFi could not offer to reinstate the loan on those terms. Additional communications on that day clarified that-upon Gerro's default on the Loans over 45 days prior-BlockFi had liquidated BTC at a rate of about $5,000 per coin. At the time of the April 27, 2020 communications, BTC was valued much higher, meaning that BlockFi would incur substantial losses if it were to buy the liquidated Collateral back. In other words, BlockFi could not reverse the prior liquidation of the Collateral.
Gerro filed a series of lawsuits against BlockFi in state court (the "State Court Litigation"), which were stayed upon the filing of BlockFi's chapter 11 bankruptcy filing. He then filed Claim Nos. 12386 and 15248 in the bankruptcy case, asserting duplicative claims for the return of the initial 426 BTC he had pledged as Collateral pursuant to the parties' Loan Agreement. When BlockFi objected to Gerro's claims, Gerro filed the response and Cross-Motion that are the subject of the instant Opinion.
Gerro raises multiple arguments in support of his position under the California Financial Code, the California Commercial Code, California pawnbroker laws, and the Uniform Commercial Code. The Court will address each in turn.
Cal. Fin. Code § 22009 (emphasis added).
Gerro points to both the language of California's Financing Law ("CFL") and certain deficiencies in BlockFi's CFL License Application identified by the Department of Business Oversight (the "Department") in an April 18, 2018 letter. See Attachment 9 to Gerro Response 37, ECF No. 1192-3. Specifically, the Department stated at that time that BlockFi "cannot hold the borrower's digital assets as collateral" and that "[b]ased on the business plan and explanation provided, the Applicant is conducting or will be conducting activities not authorized under the CFL." Id. at 38. However, Gerro's argument ignores that BlockFi continued communications and negotiations with the Department, which ultimately issued the license to BlockFi. Moreover, BlockFi obtained a declaration from Jan Lynn Owen, the Commissioner of the Department during the time BlockFi's license was issued, confirming that:
The business practice of holding and using collateral-including the rehypothecation of that collateral-is common both in California and throughout the United States in connection with secured lendings. As Commissioner, I was required to become intimately familiar with . . . the CFL (including section 22009) as well as the Uniform/California Commercial Code, and the argument that the holding or use of collateral by a finance lender is somehow inconsistent with either of these laws is incorrect. Indeed, a rule to the contrary-that finance lenders were somehow not permitted to hold or use collateral securing loans-would not only be contrary to established California law, it would significantly and detrimentally hamper lending activities…throughout the State. Accordingly, during my tenure as Commissioner, the [Department] granted finance lender licenses to businesses planning to hold and/or use collateral securing loans, including but not limited to licenses which I approved as . . . Commissioner.
Ex. D to BlockFi Reply (Owen Decl.) ¶6, 70, ECF No. 1341.
Further, BlockFi attaches to its Reply the Declaration of Charles E. Washburn, an attorney retained by BlockFi to assist in responding to the Department's initial response to BlockFi's finance lender and broker license application. Ex. C to BlockFi Reply (Washburn Decl.) 52, ECF No. 1341. In this document-which was prepared and submitted in connection with the State Court Litigation-Mr. Washburn certifies:
The [Department] legal staff never reached a negative opinion with respect to the ability of a licensee to hold collateral, 'preliminary' or otherwise, with respect to my request. Instead, [Department] legal staff agreed that a licensee may hold collateral, a determination that...
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