# Bankruptcy Insolvency Crypto > SKILL: Bankruptcy & Insolvency for Crypto Platforms - Skill: `nickgallick/bankruptcy-insolvency-crypto` (Agent Skill) - Install (CLI): `npx skillmds@latest add nickgallick/bankruptcy-insolvency-crypto` - Raw SKILL.md: https://api.skillmd.com/api/skills/nickgallick/bankruptcy-insolvency-crypto/raw - Safety review: pending (external: skill-scanner PASS, skillspector PASS) - Works with: Claude Code, Claude.ai, OpenAI Codex - Category: Coding & Dev Tools - Author: nickgallick (https://skillmd.com/u/nickgallick) - Updated: 2026-09-21 - Page: https://skillmd.com/skills/nickgallick/bankruptcy-insolvency-crypto --- # SKILL: Bankruptcy & Insolvency for Crypto Platforms **Version:** 1.0.0 | **Domain:** Bankruptcy Code, Crypto Insolvency, Asset Protection --- ## The Crypto Bankruptcy Track Record | Company | Filing Date | Chapter | Key Issue | User Outcome | |---|---|---|---|---| | Celsius Network | July 2022 | Chapter 11 | Deposits = property of estate | ~47 cents on the dollar | | Voyager Digital | July 2022 | Chapter 11 | Deposits = unsecured claims | ~35 cents on the dollar | | FTX/Alameda | November 2022 | Chapter 11 | Massive fraud; missing funds | Better than expected due to crypto appreciation during case | | BlockFi | November 2022 | Chapter 11 | Concentrated FTX exposure | Partial recovery | | Genesis Global | January 2023 | Chapter 11 | DCG subsidiary; $3B+ claims | Ongoing | **The pattern:** In EVERY major crypto bankruptcy, centralized custody of user funds meant user deposits became property of the bankruptcy estate — users became unsecured creditors. Non-custodial architecture is the single most important structural decision for user protection. --- ## Chapter 11 Reorganization — How It Works **Authority:** 11 U.S.C. §§ 1101-1174 ### Filing and Automatic Stay - Filing triggers an **automatic stay** (11 U.S.C. § 362): all collection actions, lawsuits, and contract terminations against the debtor are immediately halted - This buys time to reorganize - Regulators: CFTC/SEC enforcement actions ARE stayed by bankruptcy (with some exceptions for police/regulatory actions) ### First Day Motions (Critical in Crypto) - **DIP Financing:** Debtor-in-Possession financing to fund operations during case - **Cash collateral use:** Permission to use pre-petition cash - **Employee wage payment:** Court order to pay prepetition wages (employees are priority creditors under 11 U.S.C. § 507(a)(4), up to $15,150 per employee) - **Customer funds segregation:** Celsius and FTX fought this. Your argument: user funds are NOT property of the estate because they were held in trust or smart contract escrow. ### The Critical Custody Question **Property of the estate (11 U.S.C. § 541):** Includes "all legal or equitable interests of the debtor in property as of the commencement of the case." **Celsius outcome:** *In re Celsius Network LLC*, No. 22-10964 (Bankr. S.D.N.Y.) - Court ruled that under Celsius's Terms of Service, users transferred LEGAL TITLE of their crypto to Celsius when depositing - Therefore: deposits were property of the estate, not customer property - Users became unsecured creditors — lowest priority in the waterfall **How to avoid the Celsius outcome:** 1. **Non-custodial architecture:** User funds NEVER transfer to the platform. User's wallet → smart contract → winner's wallet. The platform has no legal title to user funds at any point. 2. **Express trust language in TOS:** "All user funds are held in trust for the benefit of users and do not constitute property of [Company]." (Weak if the platform actually comingles funds, but helps if funds are genuinely segregated.) 3. **Segregated accounts:** If custodial, user funds in separate FDIC-insured accounts (not commingled with operating funds). Strong argument against property of estate. **The smart contract argument:** - Funds locked in a smart contract pending a competition outcome: the platform never had legal title - The smart contract code IS the escrow; the platform is the escrow agent, not the owner - This argument is untested in crypto bankruptcy but is consistent with traditional escrow law --- ## Preference Actions (Clawbacks) **Authority:** 11 U.S.C. § 547 **Rule:** A bankruptcy trustee can "avoid" (claw back) transfers made by the debtor: - To a creditor - Within 90 days before filing (or 1 year for insiders) - While the debtor was insolvent - That gives the creditor more than they would receive in liquidation **Crypto implications:** - Distributions to users (prize payouts, interest payments) within 90 days before filing → potentially clawable - Payments to vendors, contractors within 90 days → potentially clawable - Airdrops within 90 days → potentially clawable **Defense against preference claims:** - "Ordinary course of business" defense (§547(c)(2)): payment was made in the ordinary course, consistent with past practice → not a preference - "New value" defense (§547(c)(4)): the recipient provided new value after receiving the payment **Practical protection:** - Make prize payouts consistently and on schedule (establishes "ordinary course") - Don't make large unusual payments to specific users/vendors right before a potential financial crisis --- ## Fraudulent Transfer (Clawbacks) **Authority:** 11 U.S.C. § 548 (federal); Iowa Code §684A.4 (Iowa Uniform Voidable Transactions Act) **Rule:** Transfers made with intent to defraud creditors, OR transfers for less than reasonably equivalent value while insolvent, can be clawed back: - Up to 2 years under federal bankruptcy law - Up to 4 years under Iowa state law (§684A.9) **Crypto risk:** If Nick withdraws significant funds from the company right before it becomes insolvent → fraudulent transfer. Clawed back to the estate. This is also potentially criminal (18 U.S.C. § 152 — bankruptcy fraud). --- ## Corporate Veil Protection ### The LLC Shield - Iowa Code Chapter 489: an Iowa LLC member is NOT personally liable for the LLC's debts - The LLC is a separate legal entity — its debts are not Nick's debts - **This protection is critical** — without it, a judgment against the LLC could pursue Nick personally ### Piercing the Corporate Veil — When the Shield Fails Iowa courts will pierce the corporate veil (hold members personally liable) when: 1. **Alter ego:** The LLC is treated as the owner's personal property (commingled funds, no separate accounts, no adherence to formalities) 2. **Fraud or injustice:** The LLC structure is being used to perpetrate fraud or evade legal obligations *Hamilton v. Am. Chemical Fire Extinguisher Co.*, 229 Iowa 927 (1940): Iowa has recognized veil-piercing for over 80 years; standards are well-established. **Rules to prevent veil-piercing:** - Maintain **completely separate bank accounts** (never use business accounts for personal expenses; never use personal accounts for business expenses) - **Annual report filed** with Iowa SOS ($60/year — do not miss this) - **Keep corporate records:** document major decisions in writing - **Don't personally guarantee** business debts unless absolutely necessary - **Adequate capitalization:** don't undercapitalize the LLC when you know it has significant liabilities --- ## Counterparty Bankruptcy Risk **If a partner, exchange, or DeFi protocol goes bankrupt:** - Your claim against them is a general unsecured claim — lowest priority - Likely recovery: 5-50 cents on the dollar, years later - **Protection:** Don't hold significant funds in any single third-party platform - Smart contract deposits: may be treated as a **secured claim** (you know exactly where the funds are and can identify them) — stronger than unsecured **Exchange custodial risk:** - Any crypto held on a centralized exchange (Coinbase, Kraken) → you're an unsecured creditor if they go bankrupt - Coinbase 10-K disclosure (2022): "In the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors." - **Mitigation:** Keep operational funds only on exchanges; hold reserves in self-custody (cold wallet) --- ## Emergency Planning for Platform Insolvency **If you see financial trouble coming:** 1. Stop taking new user deposits immediately 2. Process all pending prize payouts before filing (so they're not clawback targets — though 90-day window still applies) 3. Consult bankruptcy counsel BEFORE filing 4. Do NOT transfer personal assets to your spouse or family members to hide them (fraudulent transfer + bankruptcy fraud) 5. Do NOT destroy financial records (obstruction + bankruptcy fraud, 18 U.S.C. § 152) 6. Communicate honestly with users about the situation (failure to do so = fraud) --- *This is legal research and intelligence, not legal advice. Consult qualified legal counsel before taking action.*