On Thursday, the bankruptcy court allowed BlockFi to restore $297 million to clients with non-interest-bearing accounts without repaying customers who tried to shift funds into those accounts at the last minute.
In Trenton, New Jersey, U.S. Bankruptcy Judge Michael Kaplan decided that users owned their deposits in BlockFi’s Wallet program, which did not pay interest and kept customer cash separate. However, Kaplan found that interest-bearing customers did not own their deposits, which BlockFi used in its lending operation.
BlockFi, Celsius Network, and Voyager Digital all went bankrupt in 2022, raising issues regarding consumer funds. In those situations, judges held that interest-bearing accounts belong to a bankrupt corporation and can be combined with other assets to satisfy creditors.
When BlockFi stopped accounts on Nov. 10 before filing for bankruptcy without fully disabling customer-facing app features, Kaplan termed the scenario “confusing, misleading and frustrating.”
During BlockFi’s closure on Nov. 10, 48,000 users transferred $375 million from interest-bearing accounts to Wallet accounts and received in-app and email confirmation. Customers’ lawyers demanded that BlockFi honor transfers and reimburse cash.
Kaplan decided that BlockFi’s terms of service enabled it to block transfer requests as part of its shutdown since it never did the back-end work to effectuate transfers across account types.
“Quite simply, a customer’s withdrawal or transfer request on the user interface did not and does not automatically transfer digital assets,” Kaplan said.
In an earlier court hearing, BlockFi attorney Michael Slade argued that allowing the $375 million in transfers would severely dilute the recovery for Wallet customers and possibly prevent BlockFi from returning customer funds due to the practical difficulty of paying the additional Wallet claims from a fixed pool of assets.
BlockFi filed for Chapter 11 protection in November, citing market volatility and its exposure to FTX, which collapsed after customer assets went missing.
