BlockFi has reached an agreement in principle with Vrai Nom Investment in its complex bankruptcy proceedings, potentially marking a pivotal moment in the crypto lending firm’s efforts to navigate its financial challenges. BlockFi has been granted an adjournment on related hearings until Dec. 19.
As BlockFi emerges from the shadows of its November 2022 bankruptcy filing, the firm continues to grapple with the aftermath of a tumultuous period in the crypto market.
The backdrop for this development is BlockFi’s recent emergence from bankruptcy. This emergence followed a period of halted withdrawals and intensive legal and financial restructuring, notably amidst the fallout following the collapse of the FTX empire. BlockFi’s entanglement with FTX and the subsequent $275 million claim against the latter outlined a complex web of relationships that underscored the interconnected nature of the cryptocurrency sector.
Though details remain scarce pending legal formalities, the agreement between BlockFi and Vrai Nom signals a potential resolution of some contentious issues that have prolonged the bankruptcy proceedings. This accord, aiming to settle matters in both the adversary proceeding and the main bankruptcy case, suggests a proactive approach by both parties towards a mutual understanding and, potentially, a conclusive end to certain legal disputes.
Genesis of the BlockFi and Vrai Nom dispute.
In June 2022, BlockFi, amidst its regular business operations before the bankruptcy filing, entered into a significant loan agreement with Vrai Nom. Under this agreement, Vrai Nom loaned BlockFi International 21,670,000 USDC. To secure this loan, BlockFi pledged a substantial amount of cryptocurrency, specifically ETH and ETHW tokens, as collateral. This arrangement set the stage for the ensuing legal dispute that unfolded as BlockFi navigated through bankruptcy.
The dispute intensified in March 2023 when Vrai Nom filed a proof of claim in the bankruptcy proceedings, asserting a $1.95 million claim against BlockFi’s estate. This claim was predicated on the balance owed following Vrai Nom’s exercise of remedies against the pledged collateral. However, it was revealed that these remedies were exercised after BlockFi had already filed for bankruptcy, leading to a violation of the automatic stay, which halts all collection activities against a debtor once they file for bankruptcy.
The violation was further compounded on Nov. 30, 2022, when Vrai Nom transferred 12,254.6305 ETH tokens from the pledged collateral, an action undertaken without obtaining relief from the automatic stay. This transfer exceeded the loan balance by over $1 million, followed by BlockFi International’s estate losing nearly $5.2 million in property value. Moreover, Vrai Nom continued to hold 5,631 ETHW tokens, further complicating the matter.
Failed settlement attempts and escalation.
BlockFi, recognizing the severity of the situation, issued a demand letter to Vrai Nom in May 2023, attempting to engage them in settlement discussions concerning the stay violation. However, Vrai Nom’s lack of substantive response to the demand letter and failure to address the stay violation prompted BlockFi to pursue legal action.
The automatic stay in bankruptcy is a crucial protection for debtors, preventing creditors from seizing or exercising control over the debtor’s property without court permission. Vrai Nom’s actions, executed with full knowledge of BlockFi’s bankruptcy filing, constituted a willful violation of this stay. Such violations can lead to severe consequences, including contempt of court, sanctions, and punitive damages, as they undermine the legal process and the debtor’s reorganization ability.
BlockFi accused Vrai Nom of inflicting over $5.1 million in damages to its estate. These damages were exacerbated by the costs and delays incurred in enforcing compliance with the automatic stay. BlockFi’s position is that Vrai Nom’s blatant disregard for the bankruptcy proceedings and legal norms justifies compensatory damages and punitive measures, including sanctions, attorneys’ fees, and additional relief deemed appropriate by the court.
Broader Implications and the Road Ahead
While this agreement is a notable step, the overall picture of BlockFi’s bankruptcy resolution remains multifaceted. The company’s plans to continue asset distribution, notably to BlockFi Interest Account (BIA) and Retail Loan customers starting in early 2024, remain critical to their recovery strategy. Additionally, BlockFi’s intent to pursue litigation against entities like FTX and Three Arrow Capital (3AC) for asset recovery underscores the ongoing complexities and the potential for significant shifts in the bankruptcy landscape, depending on the outcomes of these legal battles.