A number of angry creditors claimed that the suspension of withdrawals on Celsius custody contradicted the basic language of the firm’s terms of service. Celsius, the bankrupt crypto lender, is facing more legal challenges as angry customers seek to recoup their assets after the site froze withdrawals in June.
Clients Demanding Their Money Back
An ad hoc group of 64 Celsius custodial account holders filed a complaint in the United States Bankruptcy Court for the Southern District of New York on Wednesday to retrieve their assets.
According to court filings, the creditors are attempting to reclaim more than $22.5 million in crypto assets stored in Celsius’ custody facility. Togut, Segal & Segal, a bankruptcy-focused law practice, represents the ad hoc group.
However, the business hopes to reorganize its operations and use the money made by a mining operation that is currently being built to survive.
Celsius Disregarded Withdrawals
Clients must “at all times stay” in possession of any digital assets stored in Celsius’s custodial wallet, according to the company’s terms of service, and cannot transfer that ownership to Celsius. Unless otherwise specified by the client.
With the exception of conditions authorized by court order, a competent regulatory body, a government agency, or the law, Celsius will not transfer, sell, loan, or otherwise rehypothecate qualifying digital assets held in a custodial wallet. Celsius discovered that the terms of service were last modified in April 2022.
Celsius Network is one of the numerous crypto lending companies that have suffered substantial challenges amid the ongoing bear market and associated liquidity issues in the crypto lending sector. The company’s balance sheet has a $1.2 billion hole, with most of its liabilities owed to its customers. In mid-July, Celsius filed for Chapter 11 bankruptcy protection.
In late August, amid continued legal and liquidity issues, Celsius launched a lawsuit against a large U.S. custodian Prime Trust. The firm claimed that Prime Trust failed to repay $17 million in crypto after it terminated its contract with the lending firm in June 2021.
The filing states that the group’s bitcoin is not deposited in the yield-generating “Earn” program but custodian accounts. According to the petition, this means that Celsius should have kept the money in segregated storage on behalf of the group’s members, who still own the money. The lawsuit asserts that, as a result, the clients ought to be able to get their money back regardless of how the bankruptcy proceedings turn out.
The complaint claims that “in various sessions the Court made explicit that such money should be provided to users if custody assets are not estate property.” Plaintiff has not been successful in getting the return of its custody assets, and the Debtors have not lifted the freeze with regard to Plaintiff’s custody accounts, according to the complaint, which follows discussions with the Debtors and their advisors as well as the Creditors’ Committee and its advisors.