Gemini Trust Company, LLC v. Genesis Global Capital, LLCGemini Trust Company, LLC v. Genesis Global Capital, LLC
Case Information
UNITED STATES BANKRUPTCY COURT FOR PUBLICATION SOUTHERN DISTRICT OF NEW YORK
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In re Chapter 11 GENESIS GLOBAL HOLDCO, LLC, et al. Case No. 23-10063 (SHL)
Debtors. (Jointly Administered) ---------------------------------------------------------------x
GEMINI TRUST COMPANY, LLC, for itself and
as agent on behalf of the Gemini Lenders,
Plaintiff,
vs.
Adv. Pro. No. 23-01192 (SHL) GENESIS GLOBAL CAPITAL, LLC,
GENESIS GLOBAL HOLDCO, LLC, and
GENESIS ASIA PACIFIC PTE. LTD.,
Defendants.
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MEMORANDUM OF DECISION
A P P E A R A N C E S:
HUGHES HUBBARD & REED LLP
Counsel for Gemini Trust Company, LLC
By: Anson B. Frelinghuysen, Esq.
Marc A. Weinstein, Esq.
Dustin P. Smith, Esq.
One Battery Park Plaza
New York, New York 10004
WILLKIE FARR & GALLAGHER LLP
Counsel for Gemini Trust Company, LLC
By: Donald Burke, Esq.
787 Seventh Avenue
New York, New York 10019
CLEARY GOTTLIEB STEEN & HAMILTON LLP
Counsel for Genesis Global Capital, LLC, Genesis Global Holdco, LLC and Genesis Asia Pacific PTE. LTD.
By: Sean A. O’Neal, Esq.
Luke A. Barefoot, Esq.
Jane VanLare, Esq.
Andrew Weaver, Esq.
One Liberty Plaza
New York, New York 10006
WHITE & CASE LLP
Counsel for the Official Committee of Unsecured Creditors
By: J. Christopher Shore, Esq.
Colin T. West, Esq.
1221 Avenue of the Americas
New York, New York 10020
SEAN H. LANE
UNITED STATES BANKRUPTCY JUDGE
Before the Court are cross-motions to dismiss filed in the above-captioned adversary proceeding. Defendants Genesis Global Capital, LLC (“GGC”), Genesis Global Holdco, LLC (“Holdco”) and Genesis Asia Pacific PTE. Ltd. (“GAP,” and together with GGC and GGH, the “Debtors”) have moved to dismiss Counts II, III and IV of the complaint [ECF No. 1] (the “Complaint”) filed by Plaintiff Gemini Trust Company, LLC’s (“Gemini”), [2] and to dismiss the Complaint in its entirety against Holdco and GAP. Gemini opposes the Debtors’ MTD [3] and has, in turn, moved to dismiss Counterclaims IV, VI and VII asserted by the Debtors against Gemini in the Debtors’ answer to the Complaint. [4] See Answer, Affirmative Defenses, and Countercl. of Genesis Global Capital, LLC, to the Compl. [ECF No. 10] (“GGC’s Answer”). The Official Committee of Unsecured Creditors appointed in the Debtors’ bankruptcy cases (the “UCC”) has also intervened. See Stip. and Agreed Order Auth. Intervention [ECF No. 20]. While the UCC did not file responsive papers, it did participate in the oral argument on these motions that was held on January 18, 2024 (the “Hearing”). See Hr’g Tr. 93:22-102:5 (Jan. 18, 2024) [ECF No. 31].
The dispute between Gemini and the Debtors centers on certain shares of the Grayscale Bitcoin Trust (“GBTC”). [5] One tranche of disputed GBTC shares constitutes collateral that was transferred by the Debtors to Gemini and upon which Gemini purports to have foreclosed (the “August 2022 Collateral”). A second tranche relates to GBTC shares that are still held by Debtor GGC, but in which Gemini claims to hold a security interest (the “Additional GBTC Shares”). Today’s dispute concerns this second tranche of Additional GBTC Shares, which is the subject of three cоunts of the Complaint. [6] In Count II, Gemini seeks a declaratory judgment that it holds a security interest in the Additional GBTC Shares currently held by GGC. See Compl. ¶¶ 68-75. Count III of the Complaint seeks a declaratory judgment that the Additional GBTC Shares do not constitute property of the Debtors’ estates. Compl. ¶¶ 76-79. Count IV of the Complaint seeks to impose a constructive trust on the Additional GBTC Shares for the benefit of Gemini and certain of its customers. See Compl. ¶¶ 80-85.
The Debtors disagree with Gemini and seek dismissal of Counts II, III and IV. The Debtors argue that, under the clear terms of the parties’ agreements, Gemini lacks a security interest in the Additional GBTC Shares and that there is no basis to impose a constructive trust as to these Additional GBTC Shares. See Debtors’ MTD ¶¶ 27-45 (seeking dismissal of Counts II-IV); GGC’s Answer at GGC’s Countercl. ¶¶ 63-67 (seeking a grant of Counterclaim IV). In the alternative, the Debtors have asserted counterclaims alleging that any GGC pledge of the Additional GBTC Shares to Gemini as security would constitute an avoidable preferential transfer that is recoverable for the benefit of the estate under Sections 547(b) and 550(a) of the Bankruptcy Code. See GGC’s Answer at GGC’s Countercl. ¶¶ 75-84, ¶¶ 85-88 (setting forth Counterclaims VI and VII). Lastly, the Debtors seek to dismiss the Complaint in its entirety as to two Debtor entities—Holdco and GAP—arguing that Gemini has failed to plead any facts that link Holdco and GAP to the substantive allegations of the Complaint. Debtors’ MTD ¶ 26.
Gemini opposes the Debtors’ MTD and seeks dismissal of GGC’s Counterclaims IV and VI in their entirety and Counterclaim VII as it relates to the Additional GBTC Shares. In its papers, Gemini relies heavily upon the parties’ intent in аrguing that it holds a valid security interest in the Additional GBTC Shares and that there is a constructive trust for its benefit as to the Additional GBTC Shares. To the extent that the Court reaches the Debtors’ preference counterclaims, Gemini contends these counterclaims are barred by the safe harbor provisions of Section 546(e) of the Bankruptcy Code. As for Holdco and GAP, Gemini asserts that they are proper Defendants here because there are sufficient facts in the Complaint to state a claim against them.
For the reasons set forth below, the Court concludes that the contractual terms here are unambiguous and clearly require a transfer of the Additional GBTC Shares by or on behalf of GGC to or for the benefit of Gemini in order for them to be pledged as collateral. As this transfer did not take place, Gemini does not have a security interest in the Additional GBTC Shares. The Court also concludes that the Complaint does not state a claim to impose a constructive trust on the Additional GBTC Shares on behalf of Gemini. Therefore, the Debtors’ MTD is granted with respect to Counts II, III and IV as against all Defendants. Based on the same logic, Gemini’s MTD is denied as to Counterclaim IV, which seeks a declaratory judgment that Gemini does not have a security interest in the Additional GBTC Shares. As Debtors’ Counterclaims VI and VII were plead as an alternative basis for relief should Debtors’ MTD be unsuccessful in dismissing the security interest and constructive trust counts, the Court need not address Debtors’ Counterclaims VI and VII as to the Additional GBTC Shares as these Counterclaims are moot. [7] Lastly, the Debtors’ MTD is granted without prejudice as to Holdco and GAP as Gemini has not plead enough to survive dismissal of these two Defendants.
BACKGROUND [8]
The Debtors are among several companies owned by Digital Currency Group, Inc.
(“DCG”). See Compl. ¶ 20. Prior to its bankruptcy filing, GGC provided lending and borrowing services for digital assets and fiat currency, primarily to and from institutional and high net worth individual customers. Compl. ¶¶ 17, 20. GGC obtained capital for its lending services by borrowing from lenders through loans denominated in cryptocurrency assets or U.S. Dollars. See Compl. ¶ 21. GAP offered a single point of access for digital asset trading, derivatives, borrowing, lending and prime brokerage services. See Compl. ¶ 19. Both GGC and GAP are owned by Holdco. See Compl. ¶¶ 17-19. Holdco, in turn, provided lending and borrowing, spot trading, derivative and custody services for digital assets and fiat currency and is entirely owned by DCG. See Compl. ¶ 18. Holdco’s lending and borrowing services were primarily offered through GGC and GAP to serve customers located around the world. See Compl. ¶ 18.
Gemini operates a cryptocurrency platform that enables its users to buy, sell, and store cryptocurrency. See Compl. ¶ 16. Gemini acts as custodian and authorized agent on behalf of the Gemini users. See Compl. ¶ 16; GGC’s Answer at GGC’s Countercl. ¶ 14. In February 2021, Gemini began offering a new program through its cryptocurrency platform called Gemini Earn (the “Gemini Earn Program”). See Compl. ¶ 22. Under the Gemini Earn Program, certain Gemini users (the “Earn Users”) could choose to loan their digital assets to GGC. See Compl. ¶ 22. These transactions were each governed by individual contracts referred to as mаster loan agreements (the “MLAs”), which were executed by three parties: (i) an individual Earn User; (ii) GGC as borrower; and (iii) Gemini as custodian and authorized agent on behalf of an Earn User. See Compl. ¶ 22. Under the terms of the MLAs, GGC would periodically provide Gemini with the terms for loans that GGC was willing to enter into along with the maximum amount of digital assets it was willing to borrow under those terms; GGC then had an obligation to accept loans up to that maximum amount. MLA § II. Under the terms of the MLAs, each Earn User was entitled to the return of the digital assets they had loaned to GGC upon request or at the expiration of a specified period. Compl. ¶ 22. The MLAs did not require GGC to post or pledge assets as collateral to secure its obligations. See generally MLA.
In August 2022, following broad cryptocurrency market turmoil, Gemini made numerous inquiries to GGC and DCG regarding GGC’s financial condition. [10] See Compl. ¶¶ 24-26; GGC’s Answer at GGC’s Countercl. ¶ 19. In response, DCG and GGC provided information that Gemini asserts was false and misleading. See Compl. ¶¶ 24-25. At this time, Gemini also sought collateral from GGC as security for the Earn Users’ loans. See Compl. ¶ 26. On August 15, 2022, Gemini, as agent on behalf of the Earn Users, entered into an agreement with GGC (the “Security Agreement”) under which GGC pledged the August 2022 Collateral in the amount of 30,905,782 shares of GBTC to secure its obligations under the MLAs. [11] See Compl. ¶ 27. Section 2 of the Security Agreement provided:
Section 2. The Pledge. As security for the prompt payment and performance in full when due (whether at stated maturity, by acceleration, or otherwise) of all liabilities and obligations of [GGC] under the [MLAs], whether now existing or hereafter arising, whether or not mature or contingent (the “Sеcured Obligations”), [GGC] hereby pledges, assigns, and grants to [Gemini], for the benefit of [Gemini] and the [Earn Users], a security interest in all of [GGC’s] right, title, and interest in and to all property from time to time transferred by or on behalf of [GGC] to or for the benefit of [Gemini] or the [Earn Users] in connection with this Agreement or any [MLA], including without limitation all shares of and interests in [GBTC] credited to the GTC Account (collectively, the “Collateral”).
Security Agreement § 2.
Section 1 of the Security Agreement—titled “Transfer of Collateral”—laid out the mechanics of the transfers contemplated by the Security Agreement. See Security Agreement § 1. It stated:
As promptly as practicable after the execution of this Agreement, [GGC] shall transfer or cause to be transferred 30,905,782 shares of [GBTC] to the account held in the name of [Gemini] “for the benefit of” (“FBO”) the Principal Lenders at Morgan Stanley Smith Barney LLC with account number ending in -6250 (the “GTC Account”); provided that, for the avoidance of doubt, [GGC] shall have no obligation to transfer, cause to be transferred or otherwise deposit additional shares of [GBTC] or any other shares into the GTC Account after such date except as required under and in accordance with Section 6(b) of this Agreement.
Security Agreement § 1. Section 7(b) the Security Agreement required Gemini to return the August 2022 Collateral to GGC on or before November 15, 2022. See Security Agreement § 7(b).
On October 13, 2022, Gemini provided GGC with 30 days’ notice of its intent to terminate the Gemini Earn Program. See Compl. ¶ 36. After further discussions, Gemini agreed to extend the termination date of the Gemini Earn Program to November 22, 2022. See Compl. ¶ 37. [12] On November 7, 2022, GGC and Gemini entered into an amendment to the Security Agreement extending its term to track the new termination date of the Gemini Earn Program (the “First Amendment”). [13] See Compl. ¶ 38; First Amendment § B(1).
Gemini subsequently requested that GGC pledge additional collateral to further secure GGC’s obligations under the Gemini Earn Program. See Compl. ¶ 39. On November 10, 2022, GGC, Gemini and DCG entered into a second amendment to the Security Agreement (the “Second Amendment”). [14] See Compl. ¶ 39. The Second Amendment required that parent DCG deliver to Debtor GGC the Additional GBTC Shares, in the amount of 31,180,804 shares. See Second Amendment § 1; see also Compl. ¶ 39. GGC was then to transfer the Additional GBTC Shares to Gemini for the benefit of Earn Users to secure GGC’s obligations under the Gemini Earn Program. See Second Amendment § 1. The Second Amendment sets this out as follows:
Amendment to Collateral Amount. Section 1 of the Security Agreement shall be amended and restated in its entirety as follows . . . . As promptly as practicable after the execution of this Second Amendment, [DCG] shall assign, sell, convey, transfer, and deliver to [GGC], or a controlled subsidiary of [GGC], all right, title and interest in and to 31,180,804 shares of [GBTC], free and clear of all liens, claims, charges and encumbrances. As promptly as practicable after such assignment, conveyance, transfer, and delivery, [GGC] shall transfer or cause to be transferred such 31,180,804 shares of [GBTC] to the GTC Account; provided, that, for the avoidance of doubt, [GGC] shall have no obligation to transfer, cause to be transferred or otherwise deposit additional shares of [GBTC] or any other shares into the GTC Account after such date except as required under and in accordance with Section 6(b) of this Agreement.
Second Amendment § 1 (emphasis in original); see Compl. ¶ 39. DCG subsequently transferred the Additiоnal GBTC Shares to GGC. See Compl. ¶ 47. Gemini made numerous inquiries with GGC seeking confirmation that GGC would be transferring the Additional GBTC Shares to Gemini, but GGC either didn’t respond or stated that it was working to understand the complexity of transferring the shares. See Compl. ¶¶ 48-53. In the end, however, GGC never delivered the Additional GBTC Shares to Gemini. See Compl. ¶ 53.
On November 16, 2022, GGC suspended redemptions by Earn Users under the Gemini Earn Program. See Compl. ¶ 43. On the same day, Gemini purported to foreclose on the August 2022 Collateral in a private sale to itself for total proceeds of $284,333,194.40. See Compl. ¶ 43.
In January 2023, the Debtors filed for relief under Chapter 11 of the Bankruptcy Code (the “Petition Date”). See Compl. ¶ 13. In October 2023, Gemini filed the Complaint that asserts, among other things, that it has a security interest in the Additional GBTC Shares, that the shares are not property of the Debtors’ estates, and, in the alternative, that the Debtors hold the Additional GBTC Shares in constructive trust for the benefit of Gemini and the Earn Users. See Compl. ¶ 10. GGC subsequently filed its Answer, which also asserted counterclaims against Gemini. See GGC’s Answer at GGC’s Countercl. ¶¶ 44-88.
DISCUSSION
A. Legal Standards
1. Motion to Dismiss
Federal Rule of Civil Procedure 12(b)(6), made applicable by Bankruptcy Rule 7012,
provides that a complaint must be dismissed if it fails to state a claim upon which relief can be
granted. In analyzing a motion to dismiss under Rule 12(b)(6), a court looks to whether a
plaintiff has pleaded “enough facts to state a claim to relief that is plausible on its face.”
Bell Atl.
Corp. v. Twombly
,
But “[a] complaint that pleads only facts that are ‘merely consistent with’ a defendant’s
liability does not meet the plausibility requirement”
Weisfelner v. Fund 1 (In re Lyondell Chem.
Co.)
,
2. Contract Interpretation Under New York Law
The contracts at issue are governed by New York law. MLA § X (stating that
agreement is governed by New York law); Security Agreement § 7(c) (same). “Under New
York law, written agreements are construed in accordance with the parties’ intent and [t]he best
evidence of what parties to a written agreement intend is what they say in their writing.”
Schron
v. Troutman Sanders LLP
,
The plain meaning of terms in a written agreement is given considerable weight. “[A]
written agreement that is complete, clear and unambiguous on its face must be enforced
according to the plain meaning of its terms.”
Greenfield v. Philles Records, Inc.
,
“A contract should be read as a whole to ensure that undue emphasis is not placed upon
particular words and phrases . . . . Courts may not by construction add or excise terms, nor distort
the meaning of those used and thereby make a new contract for the parties under the guise of
interpreting the writing.”
Consedine v. Portville Cent. Sch. Dist
.,
B. Interpretation of the Contracts
1. Plain Language of the Contracts
Section 2 of the Security Agreement—entitled “The Pledge”—grants Gemini a security interest in certain “Collateral.” The plain, unambiguous language of this provision requires that for an asset to be pledged as “Collateral” under the Security Agreement, there must be: (a) a transfer, (b) by or on behalf of GGC, (b) to or for the benefit of Gemini or the Earn Users. See Security Agreement § 2 . It states, in relevant part, that:
[a]s security for the prompt payment and performance . . . of all liabilities and obligations of [GGC] under the Master Loan Agreements . . . [GGC] hereby pledges . . . a security interest in all of [GGC’s] right, title, and interest in and to all property from time to time transferred by or on behalf of [GGC] to or for the benefit of [Gemini] or the [Earn Users] in connection with this Agreement or any [MLA], including without limitation all shares of and interests in [GBTC] credited to the GTC Account (collectively, the “Collateral”).
Id . (emphasis added). The allegations of the Complaint make clear that GGC never transferred the Additional GBTC Shares to Gemini or to the Earn Users. Instead, GGC refused to transfer the Additional GBTC Shares to Gemini, a fact that Gemini itself acknowledged in the Complaint. Compl. ¶ 7 (“GGC refused to then transfer the [Additional GBTC Shares] to Gemini.”).
The lack of a security interest is further supported by the plain language of Section 1 of the Second Amendment, which is entitled “Amendment of Collateral Amount” and sets forth a two-step mechanism for the transfer of the Additional GBTC Shares. The two-step process requires first a transfer of the Additional GBTC Shares from the Debtors’ parent DCG to Debtor GGC and then a second transfer from GGC to Gemini. As to the first step, Section 1 provides that:
As promptly as practicable after the execution of this Second Amendment, [DCG] shall assign, sell, convey, transfer, and deliver to [GGC], or a controlled subsidiary of [GGC], all right, title and interest in and to [the Additional GBTC Shares], free and clear of all liens, claims, charges and encumbrances.
Second Amendment § 1. As to the second step, Section 1 provides that: “[a]s promptly as practicable after such assignment, conveyance, transfer, and delivery, [GGC] shall transfer or cause to be transferred such [Additional GBTC Shares] to the GTC Account . . . .” Id. According to the clear language of the Second Amendment, therefore, there are two steps necessary to create a security interest in the Additional GBTC Shares: (1) a transfer from DCG to GGC, and (2) a transfer from GGC to the GTC Account of Gemini that takes place after the initial transfer. See id.
2. Gemini’s Interpretation of the Contracts
Gemini asserts that the Additional GBTC Shares were pledged to it under the terms of the agreements, despite these shares never having been transferred to Gemini. Gemini believes that its alleged security interest in the Additional GBTC Shares became effective upon the transfer of the shares from DCG to GGC. Gemini Opp. at 2, 10. It asserts that this interpretation is reflected in the plain language of the agreements and is in keeping with the parties’ intent in entering the agreements.
But a closer examination of Gemini’s logic reveals its flaws. For instance, Gemini points to Section 4 of the Security Agreement, which states that it grants Gemini an “absolute and unconditional” seсurity interest in the Additional GBTC Shares. But Section 4 specifically relies on the defined term “Collateral,” stating that “the grant of a security interest in the Collateral shall be absolute and unconditional . . . .” Security Agreement § 4 (emphasis added); see also Security Agreement § 5(a) (“This Agreement creates a legal and valid security interest in the Collateral in favor of [Gemini] . . . .”) (emphasis added). As discussed above, under the clear and unambiguous language of the Security Agreement, an asset does not constitute “Collateral” until it has been actually transferred “to or for the benefit of” Gemini.
Other language cited by Gemini is similarly reliant upon the defined term “Collateral.”
Gemini cites to Section 5 of the Security Agreement, in which GGC represents that, “as of the
date hereof and on each day that any Loan remains outstanding[,]” GGC “is the sole owner of the
Collateral or otherwise has the right to transfer the Collateral, free and clear of any security
interest, lien, encumbrance, or other restrictions . . . .” Security Agreement § 5(b). Gemini
argues that GGC would not have been able to represent or warrant that it was the “sole owner of
the Collateral” or that it had the “right to transfer the Collateral, free . . . of . . . restriction” if the
Additional GBTC Shares only became “Collateral” after GGC transferred them to Gemini.
See
Gemini Opp. at 12. Gemini argues that Section 5 only makes sense under Gemini’s
interpretation. But that is not true. Section 5 embodies a common sentiment found in security
agreements that the party pledging collateral actually owns the collateral before the transfer, a
rеpresentation designed to put the secured party at ease. But GGC did not obtain ownership of
the Additional GBTC Shares until those shares were transferred to it by parent DCG. And the
shares did not become collateral unless they were transferred to Gemini. Additionally, the
representation in Section 5 of the Security Agreement occurred well before the parties ever
entered the Second Amendment, which addresses the specific transfer of the Additional GBTC
Shares at issue here. The more specific provisions of the Second Amendment about the steps
needed to perfect the security interest take precedent over these more general provisions of the
earlier Security Agreement.
See John Hancock Mut. Life Ins. Co.
,
Gemini also points to language defining GGC as the “Pledgor” in the Security Agreement and certain “whereas” clauses in the Security Agreement and the Second Amendment. These clauses state that “[GGC] has agreed to pledge to [Gemini] . . . certain collateral to secure [GGC’s] obligations under the Master Loan Agreements . . . .”). Security Agreement at 1; Second Amendment at 1. Gemini believes these provisions reflect the parties’ intention for GGC to pledge the Additional GBTC Shares in its possession upon its execution of the Security Agreement and receipt of the Additional GBTC Shares from DCG. Gemini Opp. at 12. But while GGC did agree to bе the “Pledgor” of certain assets, once again those assets were limited to those that met the definition of “Collateral” under the Security Agreement. The same is true for the “whereas” clauses. So while all these provisions may support a claim that GGC breached the parties’ agreement by failing to transfer the Additional GBTC Shares, they do not support Gemini’s argument that a valid security interest was created absent a transfer of these shares.
Gemini complains that the Debtors’ position “myopically” focuses on Section 2 of the
Security Agreement to the exclusion of these other provisions in the agreements. Gemini argues
that “courts read contracts as a whole to give each clause its intended purpose.” Gemini Opp. at
11 (citing
Williams Press, Inc. v. State of New York
,
This Second Amendment forms a part of, incorporates by reference, and is subject to the terms and conditions in the Security Agreement and except as set forth in this Second Amendment, the Security Agreement shall continue in full force and effect in accordance with its terms. Capitalized terms used in this Second Amendment but not otherwise defined herein shall have thе same meanings as in the Security Agreement .
Second Amendment at 1 (emphasis added). Gemini’s argument also ignores the well-established
principle that “definitive, particularized contract language takes precedence over expressions of
intent that are general, summary, or preliminary.”
John Hancock Mut. Life Ins. Co.
, 717 F.2d at
669 n.8 (applying New York law);
see also Bowmer
,
Gemini posits that the language in Section 2 of the Security Agreement defining
“Collateral” contemplates only the possibility that Gemini might return a portion of the
Collateral pursuant to a “Collateral Return Request” or that GGC might provide additional
collateral through a “Collateral Top-Up Request” as discussed in Section 6 of the Security
Agreement and Section 3 of the Second Amendment. But Section 2 of the Security Agreement
does not specifically reference either of these provisions. Indeed, nothing in Section 2 indicates
that it is limited to these two situations. Nor is there anything in Section 6 of the Security
Agreement or Section 3 of the Second Amendment to support this reading. “[C]ourts may not
by construction add or excise terms, nor distort the meaning of those used and thereby make a
new contract for the parties under the guise of interpreting the writing.”
Reiss v. Fin.
Performance Corp.
,
Security Agreement § 6 (emphasis in original). Section 3 of the Second Amendment is entitled “Amendment to Adjustment of Collateral” and provides:
Section 6 of the Security Agreement shall be amended and restated in its entirety as follows: “(a) Collateral Release. During the term of this Agreement, if the aggregate value of the Collateral (as calculated based on the price reported on the OTCQX exchange at 4pm New York time on a day the OTCQX market is open for trading (such aggregate value, the “Collаteral Value”)) exceeds 120% of the notional USD value of the aggregate loaned amounts (the “Loaned Assets”) under the [MLAs] (as calculated based on the price reported on [Gemini’s] cryptocurrency exchange, the Gemini exchange, for the relevant Loaned Asset at 4pm New York time (the “Gemini Closing Price”)), then [Gemini] shall, upon [GGC’s] written request (which may be by e- mail or other electronic transmission) (such request, a “Collateral Return Request”), be required to return an amount of Collateral such that the remaining Collateral Value is no greater than 110% of the notional USD value of the Loaned Assets (such amount, the “Collateral Return Amount”). [Gemini] shall deliver the Collateral Return Amount to [GGC’s] brokerage account at such account as [GGC] may direct in writing no later than two (2) business days after the date of the Collateral Return Request.
(b) Collateral Posting. During the term of this Agreement, if the Collateral Value falls below 30% of the notional USD value of the aggregate Loaned Assets under the [MLAs] (as calculated based on the Gemini Closing Price) then [GGC] shall, upon [Gemini’s] written request (which may be by e-mail or other electronic transmission) (such request, a “Collateral Top-Up Request”), be required to post an amount of Collateral to the GTC Account such that the Collateral Value in the GTC Account is no less than 35% of the notional USD value of the Loaned Assets under the Master Loan Agreements (such amount, the “Collateral Top-Up Amount”); provided, that, notwithstanding the foregoing, in no event shall the aggregate number of shares of [GBTC] in the GTC Account be required to exceed 62,086,586 shares at any time. [GGC] shall deliver the Collateral Top-Up Amount to the GTC Account no later than two (2) business days after the date of the Collateral Top-Up Request.”
Second Amendment § 3 (emphasis in original).
Second Amendment’s security provision. Again, failure to transfer the Additional GBTC Shares may be a breach of the agreement, but it does not magically excuse the contractual requirements as to security for which the parties bargained.
In conclusion, the Court finds that there is no language in the Security Agreement or the
Second Amendment supporting Gemini’s argument that a pledge of these Additional GBTC
Shares could have occurred without a transfer from GGC to Gemini. The clear language of the
contracts states otherwise. Were Gemini’s interpretation the true intent of the parties, they could
have easily drafted the contracts to provide as much.
See In re Allegiance Telecom, Inc.
, 356
B.R. 93, 99 (Bankr. S.D.N.Y. 2006) (“Courts should be extremely reluctant to interpret an
agreement as impliedly stating something which the parties have neglected to specifically
include. Hence, courts may not by construction add or excise terms, nor distort the meaning of
those used and thereby make a new contract for the parties under the guise of interpreting the
writing.”) (internal citation omitted);
Kaplin v. Buendia
,
3. The Contractual Terms are Not Ambiguous
Gemini argues, in the alternative, that the language of the contracts is ambiguous and the
parties’ intent cannot be understood from that language, which would preclude dismissal of the
relevant counts of the Complaint. A contract provision is ambiguous if it is “susceptible to more
than one reasonable interpretation.”
Brad H.
,
4. GGC’s Interest in the Collateral
In a related argument, Gemini asserts that “none of the Debtors have any equitable interest” in the Additional GBTC Shares “[b]ecause GGC obtained the [Additional GBTC Shares] from DCG for the sole purpose of delivering the [Additional GBTC Shares] to Gemini and possesses the [Additional GBTC Shares] solely to secure Earn Users’ loans . . . .” Compl. ¶ 78. But the Court finds that under the plain and unambiguous language of the agreements, DCG’s full right, title and interest in the Additional GBTC Shares was transferred to GGC and the Additional GBTC Shares remain the property of GGC’s bankruptcy estate.
This conclusion is consistent with the plain language of the Second Amendment, which
provides that GGC acquired title to the Additional GBTC Shares following the transfer from
DCG.
See
Second Amendment § 1 (requiring DCG to “assign, sell, convey, transfer, and
deliver to [GGC] . . . all right, title and interest in and to [the Additional GBTC Shares], free and
clear of all liens, claims, charges and encumbrances.”). The transfer language in Section 1 of the
Second Amendment is clear, unconditional and unqualified.
See Philles Records
, 98 N.Y.2d at
570-71 (holding that unconditional transfer of ownership rights in the context of a work of art,
unless limited by the terms of the contract, conveyed complete ownership rights);
Rhythm &
Hues, Inc. v. Terminal Mktg. Co.,
Moreover, the purpose behind the language in the Second Amendment does not comport
with Gemini’s reading. If GGC did not have title to the Additional GBTC Shares, it would not
be able to pledge those shares to Gemini. Security Agreement § 5(b) (GGC representing and
warranting to Gemini “as of the date hereof and on each day that any Loan remains outstanding”
that it was “the sole owner of the Collateral or otherwise has the right to transfer the Collateral,
free and clear of any security interest, lien, encumbrance or other restrictions . . . .”);
In re
Emergency Beacon Corp.
,
Gemini cites to Section 541 of the Bankruptcy Code, which states that assets become
property of the estate “only to the extent of a debtor’s legal title to such property, but not to the
extent of any equitable interest in such property that the debtor does not hold.” 11 U.S.C. §
541(d). Gemini cites to
United States v. Whiting Pools, Inc.
,
5. “Transfer” of the Shares
In a minor variation on its previous arguments, Gemini argues that the transfer of the
Additional GBTC Shares from DCG to GGC was in fact a transfer “on behalf of” GGC and was
“for the benefit of” Gemini and the Earn Users.
See
Compl. ¶¶ 39, 47. In urging this
construction, Gemini relies upon the fact that the sole purpose of DCG’s transfer was to provide
the Additional GBTC Shares as security to Gemini. Compl. ¶ 39. But the Complaint does
not, in fact, plead this construction of the Second Amendment other than a bare quotation of the
contractual language that DCG was transferring the Additional GBTC Shares to GGC “on behalf
of” GGC.
See Fadem v. Ford Motor Co.
,
In any event, Gemini’s reading of the contractual language once again is flawed. Under
the plain language here, a transfer made “on behalf of” an entity plainly means a transfer made
by a third-party that is acting as a рroxy for that entity. In short, the “on behalf of” language
contemplates that the entity making the transfer is a third party. It cannot be then that a transfer
from DCG to GGC constitutes a transfer made “on behalf of” GGC. Gemini’s contention
essentially would make the transferor and transferee the same party, which is a nonsensical
reading of the text. Gemini’s reading is particularly problematic given that these shares were
property of DCG until the first transfer. Nor is Gemini’s reading compatible with the language
of the Second Amendment, which makes no mention of transfers “on behalf of” GGC and
instead clearly requires a two-step process: (1) a transfer from DCG to GGC, and (2) a transfer
from GGC to the GTC Account of Gemini.
See
Second Amendment § 1. It is a strained reading
indeed to view the first step—the required transfer from DCG to GGC—as a transfer “on behalf
of” GGC when the very next provision requires the second step of transferring the shares from
GGC to Gemini. There is no need for someone to “act on behalf” of GGC with respect to the
transfer to Gemini because the Second Amendment contemplates that GGC itself will transfer
the shares directly to Gemini. Moreover, if the first step were to accomplish the entirety of the
process, there would be no need for the second step, and the language setting forth this second
transfer would be rendered entirely superfluous to the contract. This would be “a result contrary
to a bedrock principle of contract interpretation, that every word and clause in the contract
should be given meaning.”
IKB Int’l, S.A. v. Wells Fargo Bank, N.A.
,
Finally, Gemini’s reading also raises a policy concern about the creation of a “secret
lien.”
See
Hr’g Tr. 98:4-15 (Jan. 18, 2024) [ECF No. 31] (“secret lien” concern raised by
counsel to UCC). “Generally, security interests are perfected by the filing of financing
statements.”
In re O.P.M. Leasing Servs., Inc.
,
[t]here is always a way to make a lien valid against anyone in the world. It is called ‘perfection’ of the lien. It is an unfortunate word because it implies being ‘perfect.’ In fact it simply means telling the rest of the world that you have the lien; it is no longer a “secret lien” between the lender and the borrower. When a borrower ends up in a bankruptcy court, a trustee is bound by law to represent the debtor's creditors—the unpaid people, banks and landlords, etc., who never knew about the ‘secret lien.’
Horwitz v. Rote (In re Moorhouse)
,
Not surprisingly, there is a policy against the concept of secret liens, codified in the
Bankruptcy Code at Section 544 (providing that a trustee has the right to void the transfer of
property of the debtor, or any obligation by the debtor that is voidable, under various
circumstances). But this policy concern existed in the law well before the current Bankruptcy
Code. “From its inception in 1910, the express purpose of the trustee's ‘strong-arm’ powers [in
bankruptcy] has been to enable the trustee to strike down ‘evil’ secret liens and other transfers
that had evaded the assault of the trustee's other avoidance powers.”
In re Euro-Swiss Int’l
Corp.
,
C. Constructive Trust
As an alternative to the declaratory relief sought in Counts II and III, Count IV seeks to
impose a constructive trust on the Additional GBTC Shares for the benefit of Gemini and the
Earn Users. A constructive trust is an equitable remedy that is meant to avoid unjust enrichment.
See Rosen v. Chowaiki & Co. Fine Art Ltd. (In re Chowaiki & Co. Fine Art Ltd.)
,
Gemini asserts that (i) GGC and Gemini had a confidential and fiduciary relationship, (ii) DCG transferred the Additional GBTC Shares to GGC for Gemini’s benefit in reliance on GGC’s promise to further transfer the shares to Gemini, and (iii) the Debtors’ wrongful prepetition conduct resulted in unjust enrichment. The Debtоrs counter that the existence of a contract between the parties precludes a constructive trust claim, that the imposition of a constructive trust is disfavored in bankruptcy under these circumstances, and that the Complaint fails to meet at least three of the factors for imposition of a constructive trust. For the reasons discussed below, the Court finds that the constructive trust count must be dismissed.
1. Unjust Enrichment
“Unjust enrichment exists where the acts of the parties or others have placed in the
possession of [the defendant] money, or its equivalent, under such circumstances that in equity
and good conscience he ought not to retain it.”
In re Chowaiki
,
In the Complaint, Gemini asserts that “GGC obtained the [Additional GBTC Shares]
from its parent, DCG, for the sole purpose of delivering the [Additional GBTC Shares] to
Gemini for the benefit of Earn Users, but GGC failed to deliver the Additional Collateral to
Gemini.” Compl. ¶ 84. Gemini concludes that “[a]s a result, the Debtors were unjustly enriched
by their wrongful retention of the [Additional GBTC Shares].”
Id.
But it is well established that,
as a threshold matter, unjust enrichment is unavailable where—as here—the rights of the parties
are governed by a contract.
See In re First Cent. Fin.
,
Indeed, Gemini concedes that “constructive trust claims are equitable in nature and generally not permitted where a valid, written agreement exists . . . .” Gemini Opp. at 18. But Gemini argues that it “may plead a constructive trust claim in the alternative because the Debtors have challenged the validity of the Second Amendment.” Id . But that is incorrect. In fact, the Debtors are not challenging the validity and enforceability of the Second Amendment. By contrast, the Debtors explicitly state, “[i]t is undisputed that the parties’ rights and obligations with respect to the Additional GBTC Shares are governed by a valid contract—the Second Amendment.” Debtors’ MTD ¶ 36 (emphasis added). In any event, the Debtors’ MTD seeks dismissal of the Complaint, in which Gemini seeks relief explicitly based on its contractual rights under the Second Amendment and the Security Agreement. Compl. ¶ 7 (asserting right to 31,108,804 shares of GBTC in which Gemini had no prior interest until entry of the Second Amendment); see Second Amendment § 1 (pledging 31,180,804 shares in GBTC); see also Gemini Opp. at 22 (noting “GGC’s flagrant breach of the Second Amendment by refusing to transfer the [Additional GBTC Shares] to Gemini as required.”); cf. In re Enron Corp. , 2004 WL 726088, at *3 (S.D.N.Y. Apr. 2, 2004) (noting that movant could not establish that it had a property interest sufficient to impose a constructive trust on debtors without relying on void agreements). And the Court agrees with both parties that the question of whether a security interest exists here is—in fact—explicitly governed by the language of the Second Amendment.
Gemini next argues that even if a valid contract exists, the Court should grant its
constructive trust claim because “Gemini does not have an adequate remedy at law, such as
if an action for breach of the Second Amendment would render Gemini and the Earn Users
materially worse off as general, unsecured creditors of the estate.” Gemini Opp. at 18–19.
Gemini relies on
Simonds v. Simonds
,
Additionally, Gemini’s allegations in the Complaint do not meet the third requirement for
unjust enrichment, because they do not demonstrate a “special reason” why a constructive trust
claim should be imposed in favor of a single creditor, at the expense of other creditors in these
bankruptcies. Granting relief to Gemini here would result in the GGC estate relinquishing
property that would otherwise go to satisfying the claims of all unsecured creditors on an equal
basis.
See In re Chowaiki
,
Indeed, even if Gemini was correct that GGC engaged in “unjust, pre-petition conduct
culminating in GGC wrongfully obtaining and retaining the [Additional GBTC Shares],” Gemini
Opp. at 21, that alone does not justify a constructive trust in these bankruptcy cases. Courts
recognize that by “creating a separate alloсation mechanism outside the scope of the bankruptcy
system, the constructive trust doctrine can wreak . . . havoc with the priority system ordained by
the Bankruptcy Code.”
In re First Cent. Fin.,
Not surprisingly then, bankruptcy courts generally have held that wrongful prepetition
conduct will not justify the imposition of a constructive trust where it would favor one creditor
over others.
See, e.g., In re Chowaiki
,
2. Confidential or Fiduciary Relationship
“A fiduciary relationship arises ‘between two persons when one of them is under a duty
to act for or to give advice for the benefit of another upon matters within the scope of the
relation.’”
Genger v. Genger (In re Genger)
,
The plain language of the contract between the parties is fatal to Gemini’s argument. Specifically, the parties to the MLAs represent and warrant that “[t]he other Parties are not acting as a fiduciary for or an advisor to it in respect of any Loan.” MLA § V(j) (emphasis added). The “Parties” are defined in the MLAs as including GGC, Gemini and an individual Earn User. See MLA at 1. Gemini reasons that the MLAs are irrelevant in these circumstances because they govern the parties’ relationship “in respect of any Loan,” and the relationship that Gemini alleges between the parties here “arose out of the negotiation of the Security Agreement and Second Amendment, neither of which contained any such disclaimer.” Gemini Opp. at 25- 26. But the Security Agreement was intertwined with, and intended to supplement, the MLAs. The Security Agreement explicitly incorporates the MLAs’ defined terms and expressly states that the transactions contemplated therein were “in consideration of the outstanding and future transactions under the [MLAs].” [23] Security Agreement at 1. Section 2 of the Security Agreement similarly references the MLAs when discussing the security interest to be granted to Gemini:
As security for the prompt payment and performance in full when due . . . of all liabilities and obligations of [GGC] under the [MLAs], whether now existing or hereafter arising . . . [GGC] hereby pledges, assigns, and grants to [Gemini], for the benefit of [Gemini] and the [Earn Users], a security interest in all of [GGC’s] right, title, and interest in and to all property from time to time transferred by or on behalf of [GGC] to or for the benefit of [Gemini] or the [Earn Users] in connection with this Agreement or any [MLA] . . . .
Id. at § 2. Moreover, the remedies set forth in the Security Agreement were available to Gemini, among other circumstances, “[u]pon an event of default (or similar term) under any MLA . . . .” Id. at § 3(a). That the Security Agreement and its amendments did not restate each element of the MLAs—such as the disclaimer of a fiduciary relationship—does not create a fiduciary relationship where one did not previously exist. [24]
As against this language that disavows a confidential relationship, Gemini’s Complaint
provides no basis to impose one. There is nothing to indicate that the parties’ relationship or the
transactions at issue created the fiduciary or special relationship that is required to impose a
constructive trust. “Even supposing that a contractual relationship imposed a duty to act . . . no
constructive trust will be found when the relationship is not marked by the unique degree of trust
and confidence typically characteristic of a fiduciary relationship.”
New York v. Matamoros (In
re Matamoros)
,
Gemini suggests that a fiduciary or confidential relationship somehow began when
Gemini requested information from GGC regarding GGC’s financial condition and continued
when GGC promised to transfer the Additional GBTC Shares and Gemini relied on that promise.
See
Gemini Opp. at 24-25. Gemini cites to
A. Brod, Inc. v. SK&I Co., L.L.C.
,
3. Transfer of Value
“A constructive trust is imposed on sums transferred to a fiduciary in reliance on a
promise by which he or she is unjustly enriched.”
Malmsteen v. Berdon, LLP
, 477 F. Supp. 2d
655, 669 (S.D.N.Y. 2007) (holding that “plaintiff [was] not entitled to a constructive trust” over
funds separate from those allegedly transferred by plaintiff to defendant). A constructive trust is
most often imposed for assets that a plaintiff has trаnsferred in reliance on defendant’s promise,
or for property that the plaintiff’s transfer of assets was ultimately used to acquire.
See, e.g.,
Sharp v. Kosmalski
,
D. Holdco and GAP
In addition to seeking to dismiss Counts II, III, and IV of the Complaint, the Debtors move to dismiss the entirety of the Complaint as to GAP and Holdco. See generally Debtor’s MTD. The Debtors assert that Gemini fails to state a plausible claim for relief as to GAP and Holdco because the Complaint lacks facts that might establish any basis for liability against GAP or Holdco. Id. at ¶ 26.
It is well settled that a complaint is insufficient “if it tenders ‘naked assertion[s]’ devoid
of ‘further factual enhancement.’”
Iqbal
,
Gemini nonetheless asserts that GAP and Holdco are appropriate defendants in this matter because “Gemini does not have complete knowledge and information as to the corporate relationship among Defendants [GGC], [Holdco], and [GAP], including which entity may actually be holding the [Additional GBTC Shares], and which entity or entities were responsible for the decision to not transfer the [Additional GBTC Shares] to Gemini.” Compl. ¶ 17, n.8; see also Gemini Opp. at 9. Gemini nonetheless summarily concludes that “Holdco and GAP were important players in the events giving rise to Gemini’s claims” and that Genesis—defined to include Holdco and GAP—was responsible for asserting that Gemini’s foreclosure of the August 2022 Collateral did not satisfy applicable law. Gemini Opp. at 8-9.
But this speculation is not connected to any factual allegations in the Complaint. The
Complaint itself does not state what actual actions these two Defendants took or what their
“important” role was. Gemini’s general suspicions about these Defendants and the August 2022
Collateral is insufficient to constitute “factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.”
Iqbal
, 556 U.S. at
678 (citing
Twombly
,
CONCLUSION
For the reasons stated above, the Debtors’ MTD is granted for Counts II, III and IV as against all Defendants and granted without prejudice for all Counts against Holdco and GAP. Gemini’s MTD is denied as to Counterclaim IV and is denied as moot as to Counterclaims VI and VII as to the Additional GBTC Shares. The Debtors should settle an order on three days’ notice. The proposed order must be submitted by filing a notice of the proposed order on the Case Management/Electronic Case Files docket, with a copy of the proposed order attached as an exhibit to the notice. A copy of the notice and proposed order shall also be served upon counsel to Gemini.
Dated: White Plains, New York
February 7, 2024
/s/ Sean H. Lane
UNITED STATES BANKRUPTCY JUDGE
Notes
[1] Unless otherwise noted, all Case Management/Electronic Case Filing (“ECF”) references are to Adv. Pro. No. 23-01192.
[2] See Mem. of Law in Supp. of Defs.’ Mot. to Dismiss Counts II, III, and IV of the Compl. as to Genesis Global Capital, LLC and All Counts as to Genesis Global Holdco, LLC, and Genesis Asia Pacific PTE. Ltd. [ECF No. 9] (the “Debtors’ MTD”).
[3] See Gemini Trust Co., LLC’s Mem. of Law in Opp. to the Debtors’ Mot. to Dismiss [ECF No. 14] (the “Genesis Opposition”).
[4] See Mem. of Law in Supp. of Gemini Trust Co., LLC’s Mot. to Dismiss Countercl. IV and VI in their Entirety and Countercl. VII Insofar as it Pertains to the Add’l Collateral [ECF No. 16] (the “Gemini MTD”).
[5] The parties’ papers do not provide a description of GBTC. GBTC’s website describes it as follows: “GBTC is one of the first spot Bitcoin [Exchange-Traded Fund] in the US. A spot Bitcoin [Exchange-Traded Fund] is solely and passively invested in Bitcoin, whose shares are designed to reflect the value of BTC held by the Trust, determined by reference to the Index Price, less the Trust’s expenses and other liabilities. GBTC allows investors to gain exposure to Bitcoin through a familiar investment vehicle, without the need to set up an account or wallet on a cryptocurrency trading platform.” https://etfs.grayscale.com/gbtc (last visited February 7, 2024).
[6] The Complaint asserts claims related to both the August 2022 Collateral and the Additional GBTC Shares. At the urging of the Debtors, the Court has expedited consideration of the issues relating to the Additional GBTC Shares addressed in Counts II, III and IV of the Complaint and Counterclaims IV, VI and VII. See generally Letter of Luke A. Barefoot, dated Dec. 12, 2023 [ECF No. 11]; Scheduling and Pre-Trial Order ¶ 2 [ECF No. 13]; Hr’g Tr. 28:21-42:5 (Dec. 13, 2023) [ECF No. 18]. These claims have a more direct bearing on creditor recoveries under the Debtors’ plan of reorganization, which is currently scheduled for a confirmation hearing beginning on February 14, 2024. See id.
[7] While Counterclaim VI relates only to the Additional GBTC Shares, Counterclaim VII seeks relief as to both the Additional GBTC Shares and the August 2022 Collateral. Today’s decision does not affect Counterclaim VII as to the August 2022 Collateral.
[8] The Court takes all facts in the Complaint as true for purposes of the Debtors’ MTD.
See Nielsen Co. (US),
LLC v. Success Sys., Inc.
,
[9] A representative sample of the MLAs is attached as Exhibit 2 to the Complaint. The Court notes that “[i]n
ruling on a motion to dismiss under Rule 12(b)(6), the Court may . . . consider ‘documents attached to the complaint
as exhibits, and documents incоrporated by reference in the complaint.’”
Macquarie Rotorcraft Leasing Holdings
Ltd. v. LCI Helicopters (Ir.) Ltd. (In re Waypoint Leasing Holdings Ltd.)
,
[10] In the spring of 2022, Three Arrows Capital Ltd. (“3AC”) collapsed and subsequently entered into liquidation proceedings. See Compl. ¶ 23. Gemini asserts that, at that time, GGC had $2.3 billion in outstanding loans to 3AC. Compl. ¶ 23.
[11] A copy of the Security Agreement is attached as Exhibit 1 to the Complaint.
[12] Gemini asserts that during these discussions, GGC again made false statements regarding its financial health and stability. Compl. ¶ 37.
[13] A copy of the First Amendment is attached as Exhibit 3 to the Complaint.
[14] A copy of the Second Amendment is attached as Exhibit 4 to the Complaint.
[15] The “GTC Account” referenced in the Second Amendment was an account at a financial institution that was held in Gemini’s name for the benefit of the Earn Users. Gemini had previously received the August 2022 Collateral from the Debtors into the GTC Account. Compl. ¶ 40 n.9 (citing Second Amendment § 1).
[16] In a similar vein, Gemini notes that Section 1 of the Security Agreement is entitled the “Transfer of Collateral,” as opposed to the transfer of assets to become Collateral upon transfer. Gemini Opp. at 12. Genesis believes this confirms the parties’ understanding that the Additional GBTC Shares were already Collateral at the time they were transferred to Gemini. See id. But once again, Gemini ignores that two transfers were required before the Additional GBTC Shares would become “Collateral” under Section 2 of the Security Agreement. It is only logical that the parties would include Section 1 of the Security Agreement to address thе specifics on how the transfer and pledge should take place.
[17] Both of these sections address issues other than the method to perfect Gemini’s security interest. Section 6 of the Security Agreement is entitled “Adjustment of Collateral” and provides: (a) Collateral Release. During the term of this Agreement, if the aggregate value of the Collateral (as calculated based on the price reported on the OTCQX exchange at 4pm New York time on a day the OTCQX market is open for trading (such aggregate value, the “Collateral Value”)) exceeds 32.5% of the notional USD value of the aggregate loaned amounts (the “Loaned Assets”) under the [MLAs] (as calculated based on the price reported on the [Gemini’s] cryptocurrency exchange, the Gemini exchange, for the relevant Loaned Asset at 4pm New York time (the “Gemini Closing Price”)), then [Gemini] shall, upon [GGC’s] written request (which may be by e- mail or other electronic transmission) (such request, a “Collateral Return Request”), be required to return an amount of Collateral such that the remaining Collateral Value is no greater than 30.0% of the notional USD value of the Loaned Assets (such amount, the “Collateral Return Amount”). [Gemini] shall deliver the Collateral Return Amount to [GGC’s] brokerage account at such account as [GGC] may direct in writing no later than two (2) business days after the date of the Collateral Return Request. (b) Collateral Posting. During the term of this Agreement, if the Collateral Value falls below 27.5% of the notional USD value of the aggregate Loaned Assets under the [MLAs] (as calculated based on the Gemini Closing Price) then [GGC] shall, upon [Gemini’s] written request (which may be by e-mail or other electronic transmission) (such request, a “Collateral Top-Up Request”),
[18] Gemini cites the prefatory language in the Second Amendment stating that the transfer from GGC to Gemini take place “as promptly as practicable” after GGC’s receipt of the shares from DCG; Gemini contends this language acts to “expressly” limit GGC’s interest in those shares. Second Amendment § 1; Gemini Opp. at 16- 17. But the Court wholeheartedly disagrees. By explicitly recognizing and separating out the two transfers, this language only confirms the two-step transfer requirement for perfecting the security interest here.
[19] Gemini makes a passing reference to the “mere conduit” test, which determines whether an entity is an
initial transferee for purposes of Section 550 of the Bankruptcy Code. Gemini Opp. at 16–17 (asserting that “the
Second Amendment required that GGC serve as a mere conduit for” the Additional GBTC Shares). But the “mere
conduit” test is a judicially created defense to actions under Section 550 to recover transfers of property that
originated with the debtor from the transferee for the benefit of the debtor’s estate.
See 5
Collier on Bankruptcy ¶
550.02[2] (16th ed. 2024);
Harrah's Atl. City Operating Co., LLC v. Lamonica (In re JVJ Pharm. Inc.)
, 630 B.R.
388, 408 (S.D.N.Y. 2021) (“While the Bankruptcy Code does not define ‘transferee’ or ‘initial transferee’ for
purposes of [S]ection 550, a body of case law has developed that distinguishes the initial recipient—that is, the first
entity to touch the disputed funds—[from] the initial trаnsferee . . . . .”) (internal citations and quotations omitted);
cf. Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC
,
[20] Gemini urges the Court to recognize that the four-part test is flexible, and that many courts have imposed a
constructive trust in the absence of one or more factors.
See Simonds
,
[21] Thе Debtors have asserted that the transfer of the Additional GBTC Shares as contemplated under the Second Amendment would constitute a preferential transfer under Section 547 of the Bankruptcy Code. GGC’s Answer at GGC’s Countercl. ¶¶ 75-84. If that was the case, GGC would not be unjustly enriched by its retention of the shares because the Debtors’ estates would be entitled to a claw back of the shares from Gemini. Given the Court’s decision today, however, it does not reach that issue or Gemini’s related safe harbor defenses.
[22] As counsel to the Debtors noted at the hearing on these motions, almost the entirety of the unsecured creditor body had contracts with the Debtors in which the Debtors were required to return cash or cryptocurrency, but did not. Hr’g Tr. 99:24-100:3 (Jan. 18, 2024). Thus, the wrongdoing alleged by Gemini—that the Debtors failed to provide Gemini with assets they were owed under a contract—is not so distinct from that experienced by the Debtors’ other creditors.
[23] The Security Agreement states that “[a]ll capitalized terms not otherwise defined herein shall have the respective meanings assigned to them in the Master Loan Agreements.” Security Agreement at 1.
[24] Even if one were to conclude that the disclaimer in the MLAs was not dispositive, it would be a powerful indication of the arms’ length relationship between these parties and the notion that, if they wanted to establish a fiduciary relationship, they would explicitly do so.
[25] A stereotypical fact pattern is seen in
Fairfield Fin. Mortg. Grp.
,