Creditors of the insolvent crypto lending company BlockFi have filed a new court document claiming the company used customer money to buy $30M insurance.
BlockFi presented its Chapter 11 reorganization plan to the United States Bankruptcy Court in Trenton, New Jersey, on May 12. The company stated that selling BlockFi may need to generate more value for its top 50 creditors, as it owes nearly $1.3 billion to them.
In retaliation, BlockFi’s creditors filed a second court document on May 15, arguing that the company intentionally delayed the trial.
BlockFi’s creditors, represented by the law firm Brown Rudnick, wrote that the company sold roughly $240 million worth of cryptocurrency before filing for bankruptcy in late November 2022.
The creditors emphasized that the crypto lender sold the assets “at the nadir,” referring to a significant market decline following FTX’s demise.
“Liquidating nearly all domestic cryptocurrency in November 2022 was a deplorable decision,” creditors stated, arguing that the decision cost more than $100 million in the subsequent months.
The creditors also cited “unnecessary and undesirable tax consequences” and noted that the sale amount had no bearing on the company’s bankruptcy. The document states:
“Selling $240 million in cryptocurrency was never rationally related to bankruptcy funding needs, given that no reasonable estimate would peg the costs of this bankruptcy at $240 million.”
Customers of BlockFi stated that the company used $22.5 million in customer funds to purchase a $30 million insurance policy.
According to the creditors, this transpired shortly after BlockFi disposed of its digital assets but before its bankruptcy petition.
“By selling everything before filing for bankruptcy, BlockFi gave itself an almost limitless budget, essentially immune from bankruptcy’s adversarial process, to run its case as long and contentious as it sees fit without the ‘typical milestones’ in a DIP or cash collateral order,” creditors wrote.
The plaintiffs urged the court to end the case as quickly as possible by transferring the estate’s assets “into the hands of new management.”
The creditors reiterated that this scenario appears inconsistent with the debtors’ case strategy.
