By Dietrich Knauth
NEW YORK (Reuters) - Bankrupt crypto lender BlockFi received court permission on Thursday to return $297 million to customers with non-interest-bearing accounts, without repaying customers who had tried to move funds into those accounts at the last minute.
U.S. Bankruptcy Judge Michael Kaplan in Trenton, New Jersey ruled that customers owned their deposits in BlockFi's Wallet program, which did not pay interest and kept customer deposits separate from BlockFi's other funds. Customers who had interest-bearing accounts did not own their deposits, which were turned over to BlockFi for use in its broader lending business, Kaplan ruled.
BlockFi was one of several crypto lenders to go bankrupt in 2022, and questions about the ownership of customer funds have also been raised in the bankruptcies of Celsius Network and Voyager Digital. Judges have ruled in those cases that funds in interest-bearing accounts are the property of a bankrupt company, to be pooled with other assets and used to repay all creditors at a later date.
The division at BlockFi between the two account types became muddied when BlockFi froze accounts on Nov. 10 shortly before filing for bankruptcy without fully disabling customer-facing functions on its app, creating a situation that Kaplan called "confusing, misleading and frustrating."
About 48,000 BlockFi customers tried to transfer $375 million from interest-bearing accounts into Wallet accounts during BlockFi's shutdown on Nov. 10, and they received in-app and email confirmation that the transfers were complete. Lawyers for those customers argued that BlockFi should honor the transfers and return funds to those customers as well.
But BlockFi never performed the back-end work that was required to complete transfers between the two account types, and its terms of service allowed it to block transfer requests as part of its broader shutdown, Kaplan ruled.
"Quite simply, a customer's withdrawal or transfer request on the user interface did not and does not automatically transfer digital assets," Kaplan said.
BlockFi attorney Michael Slade had argued in an earlier court hearing that allowing the $375 million in transfers would severely dilute the recovery for Wallet customers and potentially prevent BlockFi from returning any customer funds, due to the practical difficulty of sorting out how to pay the additional Wallet claims from a fixed pool of assets.
BlockFi filed for Chapter 11 protection in November, citing volatility in crypto markets and its exposure to crypto exchange FTX, which imploded amid revelations that customer funds were missing from the exchange.