The holding company and the subsidiary (collectively the debtors) were digital and fiat currency services providers. The exchange was a cryptocurrency exchange. The exchange and the debtors entered into an agreement to allow the exchange’s users to lend their digital assets to the debtors. Initially, the exchange did not require the holding company to pledge collateral to obtain the loans. Following turmoil in the cryptocurrency market, the debtors and the exchange entered into two agreements in which the debtors pledged collateral for the loans. In the second collateral agreement, the debtors agreed to transfer approximately 31 million shares of Grayscale Bitcoin Trust (GBTC) to the exchange as collateral to receive loans from the exchange’s users. The holding company was to transfer the shares to the subsidiary, and the subsidiary was then to transfer the shares to the exchange. Two months later, the debtors filed for Chapter 11 bankruptcy without having transferred the shares. The exchange sued the debtors to obtain the shares that the debtors pledged as collateral but had not yet transferred to the exchange. Alternatively, the exchange sought to create a constructive trust for the GBTC shares. The debtors moved to dismiss the exchange’s claims.
In Genesis Global Holdco, LLC v. Genesis Global Capital, LLC, 658 B.R. 31 (Bankr. S.D.N.Y. 2024), the court granted the debtors’ motions to dismiss. The agreement between the debtors and the exchange defined collateral as property “transferred by or on behalf of [the subsidiary] to or for the benefit of [the exchange] or [the exchange’s customers].” Because the subsidiary had never transferred the GBTC shares to the exchange, the shares never became collateral. While the debtors did pledge to transfer the GBTC shares and may be liable for breaching their contract by failing to transfer the GBTC shares, the contract consistently relied on the definition of collateral such that, despite the debtors pledging to transfer the shares, the shares were not collateral because the debtors had never transferred the shares. The exchange also argued that because the holding company transferred the GBTC shares to the subsidiary solely to secure loans from the exchange’s users, the subsidiary lacked any equitable interest in the shares. However, the contract stated that the holding company was to transfer “all right, title, and interest in” the shares to the subsidiary, suggesting that the subsidiary owned the shares following the holding company’s transfer of the shares to the subsidiary. The exchange also argued that the holding company’s transfer of the shares to the subsidiary was “on behalf of” the exchange, meaning that the shares became collateral following the transfer. However, a transfer “on behalf of” means a third party acting as a proxy for a given entity. As neither the holding company nor the subsidiary acted as proxies for the exchange, the transfer was not on behalf of the exchange. The exchange alternatively sought to impose a constructive trust on the shares to prevent unjust enrichment for the debtors. The exchange argued that because the holding company only transferred the shares to the subsidiary so that the subsidiary could transfer them to the exchange, the subsidiary would be unjustly enriched if it kept ownership of the shares. However, constructive trusts are not permitted when “the rights of the parties are governed by a contract.” The exchange argued that a constructive trust claim exists because the debtors challenged the validity of its contract with the debtors. However, the debtors stated that it is “undisputed that the parties’ rights and obligations with respect to [the shares] are governed by a valid contract,” rendering the exchange’s argument incorrect. The exchange further argued that it had a constructive trust claim because its breach of contract claim was worthless due to the debtor’s insolvency. However, while the exchange’s claim was imperfect, it “is far from worthless. If it prevail[ed] on a breach of contract claim, [the exchange] would be entitled to recover as a general unsecured creditor and share ratably with other general unsecured creditors.” The exchange last argued that it, the subsidiary, and the exchange’s users who loaned their assets to the subsidiary were in a fiduciary relationship with each other. However, the contracts between the exchange’s users and the subsidiary, the language of which was incorporated into the contract between the exchange and the debtors, stated that the parties were “not acting as a fiduciary for or an advisor to it in any respect of any Loan.”
By Gregory Ferrer [email protected]
Edited By Hayden Mariott [email protected]
Edited By Ashley Boyce [email protected]