BlockFi, Emergent Liquidators Spar Over Competing Claims to Robinhood Shares in Multiple Venues; Turnover Hearing to Go Forward in January as Scheduled 

Emergent Liquidators Motion
BlockFi Response

At a hearing today, Judge Michael Kaplan declined to postpone the Jan. 9, 2023, hearing on the BlockFi debtors’ turnover motion in their adversary proceeding against Emergent Fidelity Technologies Ltd. and ED&F Man Capital Markets Inc., or EDFM (nka Marex Capital Markets). However, the court approved a consensual extension of the defendants’ deadline to answer the underlying adversary complaint and a corresponding continuance of a Feb. 2 pretrial conference to dates to be agreed by the parties.

The extension was requested by Emergent’s joint provisional liquidators, or JPLs, in its Antiguan liquidation proceeding. In the motion filed on Tuesday, Dec. 27, the JPLs requested 45-day extensions of their deadline to answer the complaint (with a corresponding continuance of the Feb. 2 pretrial conference) and to respond to the turnover motion (with a corresponding continuance of the Jan. 9 hearing on the motion).

The BlockFi debtors responded earlier today, stating that they do not oppose extending the answer deadline or continuing the Feb. 2 conference, but object to any delay of the turnover motion, which they say “merely seeks to protect the Collateral and place it in the custody of an independent party” subject to the New Jersey bankruptcy court’s jurisdiction. The disputed Robinhood shares are being held in custody by defendant Marex (fka EDFM), according to the parties.

BlockFi is seeking to recover approximately 56.27 million shares of Class A common stock of Robinhood pledged by Emergent to secure two separate, defaulted loan agreements between BlockFi and Alameda Research totaling approximately $660 million. Last week, the FTX Group debtors filed a motion in their own chapter 11 cases claiming that the Robinhood shares may be Alameda’s property and seeking to enforce the FTX automatic stay against the BlockFi adversary proceeding and the shares themselves pending an ownership determination by the FTX Group bankruptcy court. A hearing on FTX’s stay enforcement motion has been set for Jan. 20 at 10 a.m. ET.

Judge Kaplan decided today that the Jan. 9 hearing should go forward as scheduled in light of the “rather limited issue” presented by the turnover motion, which he characterized as whether the Robinhood shares should be turned over to a “neutral custodian” that would “at least at the outset” be subject to the jurisdiction of the New Jersey bankruptcy court. Given the narrow issue presented, the judge encouraged the parties to confer on a resolution in advance of the hearing.

The court hinted at concerns over the interplay between the Antiguan liquidation proceedings and the BlockFi cases and acknowledged potential jurisdictional disputes, which were a focus of the JPLs’ argument today. Judge Kaplan observed, however, that his Nov. 30 order enforcing the worldwide automatic stay for the BlockFi debtors preceded a similar stay order in Antigua.

Separately, the court and BlockFi’s counsel acknowledged that, by responding to the turnover motion, the JPLs will not be deemed to waive their ability to contest in the future the bankruptcy court’s jurisdiction over Emergent and the JPLs.

In a slight accommodation to the JPLs, the court moved their objection deadline regarding the turnover motion to Jan. 5 (from Tuesday, Jan. 3) in light of the holiday weekend. The BlockFi debtors’ second day hearing is also scheduled for hearing on Jan. 9 at 10 a.m. ET.

Although the parties did not delve into the merits of the various claims to the Robinhood shares at today’s hearing, their papers (described below) shed some additional light on the competing claims - by BlockFi, FTX/Alameda, Sam Bankman-Fried and the JPLs (on behalf of Emergent creditors) - as well as potential jurisdictional issues given the multiple venues in which the dispute has been raised.

Arguments today were made by Matthew Ziegler of Morgan Lewis for the JPLs and Rick Anigian of Haynes and Boone for BlockFi. Additional appearances were made by Edward Schnitzer of Montgomery McCracken for Bankman-Fried and Therese Doherty of Mintz Levin for co-defendant Marex (fka EDFM). The FTX debtors did not appear at today’s hearing.

Emergent JPLs Motion / Hearing Argument

The JPLs argued in their motion that the extension is needed in light of competing claims to the Robinhood shares and other factors raised in the FTX debtors’ motion last week. As described in the FTX motion, the parties claiming an interest in the shares are Alameda, BlockFi, Yonatan Ben Shimon (an FTX creditor who commenced the Emergent Antigua proceeding to liquidate the shares for creditors) and FTX founder Bankman-Fried, the 90% owner of Emergent. The Robinhood shares are “[t]o the JPLs’ knowledge” Emergent’s only material asset.

The motion explains that the Antigua proceeding was initially commenced as a receivership proceeding on Nov. 18, but that the court-appointed receivers later petitioned the court to wind up Emergent, leading to their appointment as liquidators on Dec. 5. The Dec. 5 order imposed a “universal” stay of actions against Emergent and its assets, the JPLs contend, although as noted above, BlockFi’s stay order was entered before the Emergent stay order.

Both Bankman-Fried and BlockFi are challenging the Antigua proceeding, the JPLs report. According to the motion, Bankman-Fried petitioned the Antigua court on Dec. 12 (the day of his arrest) to stay the order appointing the JPLs “in order to permit SBF to petition the same court to set aside the [Nov. 18] Receivership Order.” The motion adds that Bankman-Fried also submitted affidavits stating that in or around May, he and FTX co-founder and 10% Emergent co-owner Gary Wang borrowed approximately $546 million from Alameda, which they used to capitalize Emergent and fund its purchase of the Robinhood shares.

Also on Dec. 12, the JPLs continue, BlockFi entered an appearance in the Antiguan court as a “purported creditor” of Emergent, “indicating that BlockFi also intends to challenge the JPLs’ appointment.” “It is unclear to the JPLs whether BlockFi and SBF are coordinating their efforts in the Antiguan Court,” says the motion.

Ziegler for the JPLs informed Judge Kaplan today that the Antiguan court held a hearing earlier today, Wednesday, Dec. 28, where it denied Bankman-Fried’s motion to stay the liquidation proceeding. He added that BlockFi indicated at the hearing that it would continue to challenge the liquidation proceeding, which Ziegler said he expects to play out over “the next few weeks.” In addition, Schnitzer for Bankman-Fried highlighted that his challenge to the original receivership order remains live.

Ziegler argued that the pending challenges to the Antigua proceeding, the competing claims to the shares and jurisdictional issues collectively warrant a delay of the turnover litigation timeline. He stressed that the JPLs need more time to take a position on title to the disputed shares and in the meantime are mainly interested in ensuring an efficient process that does not unfairly advantage any claimant.

The JPLs’ counsel raised two issues giving rise to jurisdictional uncertainties, which he suggested the debtors are attempting to skirt by pressing for the Jan. 9 turnover hearing. First, he said that the Emergent pledge agreement pledging the Robinhood shares was signed by former Alameda CEO Caroline Ellison, who he said may not have been authorized to do so. He explained that the JPLs are aware of no records to verify her authority and observed that she signed the agreement as “co-CEO” of Emergent, but the company’s bylaws do not contemplate such an office. Ziegler said this raises a “threshold” jurisdictional issue that needs to be evaluated because the BlockFi bankruptcy court’s jurisdiction rests on the pledge agreement, although he added that the JPLs may yet determine that jurisdiction is proper in the BlockFi cases or decide to voluntarily submit to the court’s jurisdiction.

The Antigua court’s Dec. 5 stay order raises a second jurisdictional question, said Ziegler, but he clarified that the JPLs are not seeking to invoke that stay at this time.

As mentioned, Judge Kaplan ultimately said the JPLs may reserve their rights to contest jurisdiction when responding to the turnover motion. Ziegler indicated that this assurance eliminates the need to move to dismiss the adversary proceeding for lack of jurisdiction prior to Jan. 9, which he said the JPLs would like to avoid.

Schnitzer for Bankman-Fried spoke briefly in support of the JPLs’ motion. Doherty for Marex appeared to assure the court that Marex is holding the Robinhood shares in custody and will not transfer them without an order from a court of competent jurisdiction. Doherty stressed that Marex takes no position on the merits of any party’s claim to the shares.

BlockFi Response / Hearing Argument

BlockFi’s response outlines the various parties’ connections to the Robinhood shares as follows:
 
As mentioned, BlockFi did not oppose the 45-day extension of the deadline for Emergent or Marex to respond to the complaint but did oppose any delay of the turnover motion. An adjournment of the turnover motion, BlockFi argued, would prejudice the debtors’ “legal rights and threatens this Court’s core jurisdiction over [the shares].”

Calling the JPLs’ motion “an effort to deprive this Court of power over the Collateral,” BlockFi asserts that the JPLs are seeking to “delay this Court’s exercise of authority over the Collateral so the Antigua court would be the first to act” and warns that if the 45-day extension is granted, the JPLs may seek to liquidate the shares pursuant to an order entered by the Antiguan court, despite the BlockFi court’s “prior-dated Worldwide Stay Order prohibiting such acts.”

Given that the turnover motion “merely seeks to protect the Collateral and place it in the custody of an independent party (who is subject to this Court’s jurisdiction) that has no preexisting relationship to BlockFi, Emergent, or any of the FTX entities,” the debtors say that no party would be prejudiced if the turnover motion goes forward on Jan. 9.

BlockFi underscores that it is the only party that has “presented any documentary evidence reflecting ownership rights” in the Robinhood collateral shares - a pledge agreement and a filed UCC-1 financing statement. BlockFi asserts that, in contrast, the “alleged rights” of the other claimants - the Antigua JPLs and FTX Group - “must travel through multiple transferees before arriving at a potential claim against Emergent.”

According to the response, the Antigua proceedings were instituted by Ben Shimon, a creditor of FTX Trading Ltd., on the basis of “speculation” that the funds Emergent used to acquire the Robinhood shares “were possibly ‘improperly diverted from those invested by [Shimon] and others with FTX.’” BlockFi says that the FTX Group’s claim “to at least have a ‘colorable’ claim to the Collateral” is based on “unauthenticated, hearsay documents that were attached to a declaration filed in conjunction with the Stay Motion.” The response points to statements by the FTX replacement CEO John Ray on the “‘complete absence of trustworthy financial information’” in the FTX Group chapter 11 cases to question the accuracy of the supporting documentation.

BlockFi says that “both Shimon’s and FTX’s rights to the Collateral rest on some version of a fraudulent-transfer claim” and that they “will be entitled to present their claims to the Robinhood Shares before this Court in due time.” In sum, the BlockFi debtors argued that the New Jersey bankruptcy court “is more than capable of sorting out the rights and interests of all parties who assert an interest in Collateral,” and none of the rival claimants has “any legitimate basis to delay or oppose this limited relief” sought in the turnover motion.

Anigian, speaking for BlockFi, emphasized today that Antigua, other than being the situs of Emergent’s incorporation, has no connection to the disputed Robinhood shares. He emphasized that the shares are located with Marex in New York and said that there are no known Antiguan creditors asserting claims against Emergent or the shares.

Given the lack of Antigua connections and the fact that BlockFi is the only party besides Emergent with any documented entitlement to the shares, Anigian argued that the BlockFi bankruptcy court is best positioned to decide the underlying dispute. He also called Emergent’s liquidation proceeding “improper” but said that is an issue for another day.