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BlockFi has reached a agreement in principle with Vrai Nom Investment in its complex bankruptcy proceedings, potentially marking a pivotal moment in the crypto lending company’s efforts to address its financial challenges. BlockFi was granted an adjournment of related hearings until December 19.
As BlockFi emerges from the shadows of its November 2022 bankruptcy filing, the company continues to deal with the aftermath of a tumultuous time in the crypto market.
The backdrop to this development is BlockFi’s recent emergence from bankruptcy. This emergence follows a period of interrupted withdrawals and intensive legal and financial restructurings, particularly in the context of the fallout from the collapse of the FTX empire. BlockFi’s entanglement with FTX and subsequent $275 million claim against the latter exposed a complex web of relationships that underscored the interconnected nature of the cryptocurrency industry.
Although details remain scarce pending legal formalities, the agreement between BlockFi and True Name hints at a potential resolution of some contentious issues that have prolonged the bankruptcy proceedings. This agreement, aimed at resolving issues in both the adversarial proceeding and the main bankruptcy case, suggests a proactive approach by both parties toward mutual understanding and, potentially, a definitive end to certain legal disputes.
Genesis of the BlockFi and Real Name dispute.
In June 2022, BlockFi, as part of its regular business activities before filing for bankruptcy, entered into a significant loan agreement with True Name. As part of 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 paved the way for the ensuing legal dispute that played out as BlockFi went through bankruptcy.
The dispute escalated in March 2023 when True Name filed a proof of claim in the bankruptcy proceedings, asserting a $1.95 million claim against BlockFi’s estate. This claim was based on the balance due following Vrai Nom’s exercise of recourse against the promised guarantee. However, it was revealed that these remedies were taken after BlockFi had already filed for bankruptcy, resulting in a violation of the automatic stay, which stops all collection activities against a debtor once it has declared bankruptcy.
The violation further escalated on November 30, 2022, when True Name transferred 12,254.6305 ETH tokens from the promised collateral, an action taken without obtaining relief from the automatic suspension. This transfer exceeded the loan balance by more than $1 million, followed by the loss of nearly $5.2 million in real estate value from the BlockFi International estate. Additionally, True Name continued to hold 5,631 ETHW tokens, further complicating matters.
Failed resolution attempts and escalation.
BlockFi, recognizing the seriousness of the situation, sent a cease-and-desist letter to True Name in May 2023, attempting to engage them in settlement discussions regarding the stay violation. However, Real Name’s lack of substantive response to the demand letter and failure to remedy the stay violation prompted BlockFi to initiate legal action.
The automatic stay of bankruptcy provides a crucial protection for debtors, preventing creditors from seizing or exercising control over the debtor’s assets without court permission. True Name’s actions, executed with full knowledge of BlockFi’s bankruptcy filing, constituted a willful violation of this suspension. Such violations can result in serious consequences, including contempt of court, sanctions and punitive damages, because they compromise the legal process and the debtor’s ability to reorganize.
BlockFi accused True Name of inflicting more than $5.1 million in damages on its estate. This damage was exacerbated by the costs and delays incurred in enforcing the automatic stay. BlockFi’s position is that True Name’s blatant disregard for bankruptcy proceedings and legal standards warrants compensatory damages and punitive measures, including sanctions, attorneys’ fees, and additional relief adjudicated appropriated by the court.
Wider implications and the way forward
While this deal is a notable milestone, the overall picture of BlockFi’s bankruptcy resolution remains multifaceted. The company’s plans to continue asset distribution, including to BlockFi Interest Account (BIA) and retail lending customers from early 2024, remain central to their turnaround strategy. Additionally, BlockFi’s intention to file lawsuits against entities such as FTX and Three Arrow Capital (3AC) for asset recovery highlights the current complexities and potential for significant changes in the bankruptcy landscape, depending of the outcome of these legal battles.
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