BlockFi was Slammed by Creditors for using Customers’ Funds to Purchase $30 Million in Insurance

Creditors of bankrupt cryptocurrency lending firm BlockFi have submitted a new court filing in response to the platform’s latest plans for restructuring, with BlockFi claiming that selling the platform would not help generate enough value for their creditors.

BlockFi recently listed its Chapter 11 reorganization plans in a report filed with the United States Bankruptcy Court in Trenton, New Jersey. The platform said the sale of BlockFi would need more value for its creditors as they have nearly $1.3 billion in debt to its top 50 creditors. 

In response to BlockFi’s report, the creditors submitted a follow-up court filing on May 15 and argued that BlockFi deliberately delayed the trial process.

The creditors, represented by the law firm —Brown Rudnick— wrote that BlockFi had already sold off $240 million worth of cryptocurrency before they filed for bankruptcy back in November 2022 with them, emphasizing that the crypto lending firm sold assets during a massive market slump which was just after the collapse of the crypto platform, FTX. 

The creditors believe that BlockFi’s decision to liquidate nearly all their domestic cryptocurrency in 2022 could have been better. They argued that the poor choice made by BlockFi caused the loss of more than $100 million in the months after. 

The creditors also cited unnecessary and undesired tax consequences as one of the causes of BlockFi’s failure, adding that the sale amount had no relation to its bankruptcy. BlockFi’s sale of $240 million worth of cryptocurrency was not rationally related to their bankruptcy funding needs, as no reasonable estimate could peg the cost of the current bankruptcy at $240 million. 

The creditors accused BlockFi of spending more than $22.5 million of user funds to purchase a $30 million insurance policy, and according to their creditors, this occurrence was soon after the crypto lender sold out their digital assets before filing for bankruptcy. 

BlockFi selling its assets per petition gave them a near-limitless budget. It made them immune from the bankruptcy adversary process to help run its case as king and contentious as it deemed fit without the usual milestones in a DIP or cash collateral order. 

Conclusion

The plaintiff called on the court to close the case as soon as possible by ensuring the estate assets were passed into the hands of the new management correctly, and the creditors argued that a scenario like that was inconsistent with the case agenda of the debtors. 

BlockFi has been looking for other routes to pay their creditors without selling off the crypto lending platform, and they have sent restructuring plans to the court, which the creditors have disagreed with.