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Home New Cases NY BK Court Disallows Defendants to “Manufacture” Claims at Motion Stage

NY BK Court Disallows Defendants to “Manufacture” Claims at Motion Stage


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December 08, 2022, US Bankruptcy Court for Southern New York – The Bankruptcy Court for Southern New York denied a motion filed by Jason Stone and KeyFi, Inc. (“Defendants”), which sought to dismiss Celsius Network’s complaint against them. Celsius’s complaint alleged that Celsius entrusted the operation of its cryptocurrency “staking” activities to Jason Stone in 2020 based on Mr. Stone’s alleged misrepresentations that the Defendants were qualified for staking activities and that the business was profitable.

In 2021, when Celsius instructed the Defendants to return the coins Celsius had made available for deployment, Defendants were unable to return them. Celsius claimed that, without authorization, Mr. Stone used Celsius coins for activities other than staking and brought an adversary proceeding seeking turnover of the coins as estate’s property. Defendant contended that the turnover and conversion claims were improper since they were allegedly being used to litigate a contract dispute and/or to recover property whose title was allegedly disputed. The Court rejected this argument. The Court found that Celsius’s complaint had alleged that Defendants kept assets that do not belong to Defendants, outside the scope of any other duties of performance owed under the contracts. The Court also found that the Defendants’ arguments rely entirely on allegations outside Celsius’s complaint and “manufacture” a dispute over title. The Court held that the Defendants can not insert their own factual allegations at the motion to dismiss stage.

Defendants also claimed that they were not in “possession, custody or control” of estate property “during the case” since they allegedly exchanged Celsius’s coins for other forms of “new” property (NFTs, equity interests) pre-petition. This argument also failed since the Court found that the argument contradicted the broad definition of property of the estate under sections 541 and 542 which also includes proceeds of estate property.

The Court held that Celsius sufficiently pleaded its turnover and conversion claims against Defendant and denied Defendants’ motion to dismiss Celsius’s complaint.

Celsius Network Ltd. v. Stone (In re Celsius Network LLC), 2022 Bankr. LEXIS 3470, 2022 WL 17541051

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