Genesis says DCG is trying to 'take a cut' of customer repayment

Crypto lender Genesis Global on Monday kicked off a multi-day court hearing on its proposal to repay customers in bankruptcy, asking a U.S. bankruptcy judge to overrule its parent company Digital Currency Group's objections to its Chapter 11 plan.

Equity owners are last in line to be repaid in bankruptcy, and DCG is trying to cut in line ahead of customers who loaned their cryptocurrency to Genesis, Genesis attorney Sean O'Neal said at a court hearing in White Plains, New York.

"Our clients lent us these assets, and we're trying to give them back," O'Neal told U.S. Bankruptcy Judge Sean Lane. "DCG should not be able to come in and take a cut."

DCG is trying to stop Genesis' bankruptcy plan from being confirmed, arguing that it cuts off any chance of recovery to equity holders.

The heart of their dispute centers on a fundamental question: When is a bankruptcy creditor paid "in full?"

Genesis is seeking approval of a bankruptcy plan that would repay customers in bitcoin, Ether, or U.S. dollars, depending on the type of assets they had on deposit with Genesis when it filed for Chapter 11 in January 2023. Genesis has estimated that its customers will receive up to 77% of the value of their deposits under its plan.

Genesis said that its customers are not being fully repaid because the prices of bitcoin and other cryptocurrencies have risen since it filed for bankruptcy, and it cannot repay the full current value of customers' crypto deposits.

DCG, echoing the position taken by bankrupt crypto exchange FTX, said that customers' claims should be valued using the date of a company's bankruptcy filing, and customers should be paid no more, even if asset prices rise later.

Any "excess value" should be returned to shareholders like itself, DCG argued. Genesis would be the first bankrupt crypto company to allow customers to benefit from a rise in cryptocurrency prices after its bankruptcy filing, DCG said.

FTX, for example, will consider a customer to be paid "in full" if they receive $17,000 in exchange for one bitcoin, even though the price of bitcoin has tripled since the date FTX filed for bankruptcy. That approach has been backed by the judge overseeing FTX's bankruptcy, but has drawn complaints from dozens of FTX customers.

O'Neal said that Genesis did use January 2023 crypto prices to evaluate its customers' claims, using normal procedures under U.S. bankruptcy law. But U.S. bankruptcy law does not "cap" creditors' recovery at that value if asset prices rise later, O'Neal said.

The judge said that he expects Genesis's court hearing to last three or more days, but he did not indicate whether he would rule at the conclusion of the hearing or at a later date.

The case is Genesis Global, U.S. Bankruptcy Court for the Southern District of New York, No.

For Genesis: Sean O'Neal, Jane VanLare and Luke Barefoot of Cleary Gottlieb Steen & Hamilton

For DCG: Jeffrey Saferstein, Jonathan Polkes, Caroline Hickey Zalka of Weil Gotshal & Manges

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