Civil Rehabilitation and Coinlab

Back in November, anonymous creditors behind mtgox-creditors.com filed a request to end the bankruptcy and move Mtgox into Civil Rehabilitation.

Civil Rehabilitation is generally used as a means of restructuring a failing company while protecting it from lawsuits. In the case of MtGox, it’s not likely to be used to actually restructure the company but rather as a more flexible form of bankruptcy. This is a standard and tested use of Civil Rehabilitation, though less common than the restructuring scenario.

Instead of following a rigid set of steps as in bankruptcy, the trustee would be free to create his own plan. And most importantly, the bitcoin claims will be able to be revalued – hopefully in bitcoin this time. The creditors will get to vote on this plan.
The most obvious distribution would be that the fiat creditors would be paid back 100% of their claim because by law they couldn’t be paid less than they would under bankruptcy. Then we would expect the bitcoin creditors to share what remains of the bitcoins. However, the rules of CR could be interpreted in such a way that the court could potentially have issues with doing it this way so we’ll have to see what happens. Perhaps Kraken will end up distributing the bitcoins after all.

 

Likelihood of going ahead

A court examiner tasked with giving an opinion about 3 of the entry conditions reports his conclusion to the court on 28th February, and shortly after the court will make a decision whether we can progress down the path of Civil Rehabilitation.

It looks extremely likely that the examiner will give this his green light, despite that there have been claims to the contrary for the purposes of raising funds from creditors.
In order to argue against it, the examiner would have to make the case that either the bankruptcy is more suitable from the perspective of creditors in general, or it is obvious that a CR plan would not be approved by creditors or the court, or the petition for CR is filed for unjust purposes. The examiner would simply not have sufficient grounds to support these arguments. However if he did try to, and the court subsequently denied the request, there would be plenty of opportunity and ammunition to appeal.

Moving into Civil Rehabilitation would be a great benefit for almost everyone. We as creditors should get our bitcoins returned. The Japanese government can diffuse the internationally embarassing situation which is mounting over the MtGox bankruptcy. The Japanese legal system can escape from the nightmare of MtGox with its dignity bruised but still relatively intact. Mark Karpeles can avoid the poisoned money. Win-win-win-win.

It would technically not be in the financial interests of the shareholders, which could drag in the Tibanne trustee, but the court would not take the shareholders’ interests into consideration when making the decision.

 

Revaluation Of Claims

We would have to go through another claims process. In a practical sense, there would be no need to re-file claims because the data is already collated, including the bitcoin value. However legally if the claims are carried over from bankruptcy then the same yen amount has to be used. Therefore we would probably have to refile all the claims. The trustee may be able to use the existing claims data to expedite the process however.
The good news is for those who didn’t get a claim in the first time round there would by law be a reopening of the claims process for those people.

 

Coinlab’s claim – good news

The rules for Coinlab’s claim would be largely the same under Civil Rehabilitation as under the Bankruptcy Act.
However, there would a big difference in the situation. There’s no reason why the creditors cannot be paid back while such a (relatively) small claim is pending, therefore our money would no longer be held to ransom. The bitcoins are worth approximately $2.1 billion, Coinlab’s claim is roughly 3.5% of that. It would be fair to expect the trustee to distribute almost all of the money while Coinlab’s case is still pending. So effectively, Coinlab would be likely to become a very small issue.
If Coinlab’s claim is no longer holding up the main distribution, it will lose its teeth and it wouldn’t be a big issue to just let it work its way through the legal system until it eventually gets excreted out. Goodbye Peter.
Alternatively, Coinlab might realise that their leverage is disappearing and accept a lowball offer by the trustee.

 

Creditors meeting, March 7th

It seems probable that the court’s decision will still be pending when the creditors’ meeting happens, and given the likely switch to CR, I expect this will be one of the less interesting or important meetings. Hopefully it will be the last one though.

 

Timeframe

Civil Rehabilitation runs pretty quickly. According to statistics published by Tokyo District Court, a Civil Rehabilitation plan is generally confirmed by the court within 5-6 months of filing the petition, and by then the claims are normally finalised. At that point there’s no reason why we couldn’t move towards the main distribution whilst leaving some money for pending claims like Coinlab. So we could well have most of our money by later this year.

Creditors’ Committee Pre-announcement and Roadmap

Most of the work required to launch has now been done and we have a fairly solid plan of the legal process. We still have work to do in unifying our approach.

So far the committee members are: Kolin Burges, Daniel Kelman, Josh Jones, plus an unconfirmed other. These are the founding members who are getting this thing off the ground, and any participation as voting members will be discussed during the consultation period. Kim Nilsson will be an advisor. We will appoint more committee members during the consultation period, this will be done with creditor participation and based around the aim of diversity of representation.

Edit – due to recent additions to the team, the details below are now back under review and not yet agreed with all current members.

Purpose

The primary aims are to represent the interests of all creditors, and to push for a speedy and fair distribution. There are a number of novel ideas on the table for dealing with the bankruptcy problems but the court is unlikely to approve of novel proposals unless they can be shown to be backed by a very large number of people. The committee will be able to submit such proposals with a much larger degree of authority than individuals could.

Diversity

Diversity is absolutely critical. The committee will be representing the interests of ALL types of creditors. We need support from the majority of creditors in order to be formally recognised by the court as a creditors’ committee. We will be taking feedback on our diversity and using that to help select more members.

Independence

The committee will be an independent structure, not directly connected with mtgoxprotest.com or any other entity. Our independence is very important as we must demonstrate that we will be representing creditors fairly. We will put a structure in place to help ensure this and to allow creditors to feedback with any concerns.

Constitution

The committee is producing a constitution, which is a binding representation of our position and the values by which we intend to act. It’s used as a check to bind us to the same set of expectations that creditors signed up for. We will present an initial draft constitution at stage 1 and it will be updated and fine-tuned using creditor feedback until stage 2 begins, at which point it will be set in stone.

Funding and costs

The committee’s ethos is that it will always be completely free to be represented by the committee. The starting legal expenses were covered by the founding members. At some point we may request voluntary donations to help cover expenses, however we don’t expect a high level of expenses.

Roadmap

STAGE 1 (Approximately 2 weeks from now)

Official kick-off! Open website and begin signups. The draft constitution will be available on the site, along with committee member profiles.

Consultation period (Pencilled in to be approximately 4-5 weeks in length, but in reality this will last as long as it lasts)

  • Creditor feedback on the constitution
  • Creditor feedback on any concerns about diversity of representation
  • General questions and feedback

STAGE 2  Begin verification process

STAGE 3  Process verified signups and present to court

 

 

MtGox Legal, October update, and Creditor Committee

I am constantly being asked about what I think of the MtGox Legal group. I have been sharing information with the group and I explained my position in a post on their forum a while back. As much as I’d like to be part of it in some way, I can only give limited support to something like this because it potentially puts the needs of the few above the needs of the many. MtGoxProtest.com has always been about the creditors as a whole (although it’s probably weighted slightly towards bitcoin creditors).

I think we should be investigating as many legal avenues as possible, and it’ll be very interesting to hear what their lawyer comes up with because it may be something which helps us all. But my issue is that the group has said it will be taking the path of most benefit to the paying members, and right now the greatest danger in the bankruptcy is if we move in separate directions. So I worry about what is going to happen if the group’s lawyer’s recommendation is something which doesn’t benefit everyone. His incentivisation is towards helping the group specifically and that in itself could be dangerous because it might be an easier task.

I mentioned in my last post that the most important thing now is that we all work together. The best way to serve our own interests is to work towards everyone’s interests. If we slide (maybe unconsciously) into a “me first” culture we will end up fractured and could destroy any chance we have of solving the main issue(s). Information or idea sharing could become strained because those who have important information/ideas may not want to share it when others might ultimately end up using it against them. I feel this bankruptcy situation is like the Prisoners’ Dilemma in game theory, where different factions might be inclined to do their own thing to maximise their interests but in fact they may only be moving themselves away from the best possible solution.

That brings me to what I’ve been doing since 2 or 3 weeks ago. Following on from my last post, I believe the best possible way forward is to build a universal creditor committee which represents the interests of every creditor, including bitcoin and fiat creditors. I’ve been working towards this goal almost full-time, and there are other well-known names now involved in it.

If we can manage to get a committee formalised and approved, we will wield a significant degree of influence over the bankruptcy. The main thing which is hobbling the creditors right now is that any proposal to the court, or to the trustee, which deals with the bitcoin surplus is likely to be thrown out. That’s partly because there will likely be a set of creditors (or shareholders) who will be disadvantaged by it. If the proposal is part of a wider effort which considers all creditor interests, and there’s committee backing to prove it, it would become difficult to throw out on the basis that it goes against the interests of other creditors. Bankruptcy law is vague enough that novel approaches can be tried without going against the letter of the law, and if we can remove the main barrier which is stopping us from doing this then we give ourselves a reasonable chance.

This is something which has never been done before in Japan, and we have our work cut out for us because getting support from the required creditor majority (around 12,500 people) will be quite a logistical problem. And the court representative has told us that it will be difficult to fulfil the legal requirements because they will only allow a committee which can demonstrate it is truly working on behalf of everyone.
However I believe it’s possible to accomodate the interests of all creditors when there is so much “surplus” money at stake. We are still working thorough the details of how this could be done.
The entry barrier to supporting the committee is being kept down by having no joining fee and by making it as easy as possible to sign up. Built into the committee will be a constitution which guarantees it operates in the manner expected, and of course anyone can opt out of supporting it at any point. Joining a legal action group will not affect your ability to support a creditors’ committee, so you don’t need to worry about making a choice between the two.

More on this soon.

Analysis – What do we do now?

The big bombshell from the creditors’ meeting is that it was officially announced that the creditors’ 200,000 bitcoins are going to be sold off and a maximum of approx $473 per bitcoin will be paid back to the creditors. The rest will go to the owners of MtGox, effectively Mark Karpeles and Jed McCaleb.
This is something we all knew was an issue but to hear a direct acknowledgement that that’s the official course of action was a surprise. It means most of the value of our bitcoins will probably be lost, and the Japanese authorities are not going to try to do anything to stop it. This is a full-scale bankruptcy disaster.

Mark Karpeles has claimed he doesn’t want the money due to the lawsuits which would inevitably target him, but when asked to make a statement on Reddit saying he would give the creditors the money back, he did not respond.
This is an important point. He cannot continue to cultivate his new “nice guy” image and claim he doesn’t want the creditors’ money, while at the same time avoiding stating that he will give the money back. It’s one or the other and he now has to make a choice.

 

Why is the trustee doing this?

For the trustee, this is the safest option. This whole situation is very complicated, and if he was to take another course of action it would be difficult to find and manage a solution which pleased everyone. If he tried anything unorthodox, he’d be likely to attract complaints from somewhere.
Decisions made in the Japanese legal system tend to err towards equality rather than efficiency, so it might be considered better to give everyone a bad solution than to give most people a good solution but have some others complaining about it.

For example, if he was to attempt to re-evaluate the bitcoins at their current value it may draw complaints from the trustee of Tibanne’s bankruptcy. Tibanne’s trustee is obviously going to try to suck as much money out of MtGox as he can, and the nature of his job means he may not be allowed to take morals into consideration. So if a motion is filed which would pass the value of the bitcoins to the MtGox creditors rather than to Tibanne he’d be likely to complain about that and there’s a good chance the court would take the “safe” decision and refuse the bitcoin evaluation change.

What is very noteworthy is that in this creditors’ meeting the trustee kept stressing “this is the law” and similar things. Basically saying he’s sticking as close to the vanilla bankruptcy route as possible and not acknowledging that there may be other possibilities. He has made decisions before which stray from the vanilla path, such as not selling off the bitcoins at the start of the bankruptcy. But it looks like he’s clamping down now.

 

Can something be done to fix this?

Absolutely, yes it can. This is now down to the creditors to fix, so it’s time to get busy!

The two main angles are legal and political.

From a legal point of view, this problem may or may not be solvable. Creditors need to try as many ways as possible and we need to coordinate efforts as much as possible.
From a political point of view, this is most definitely solvable. The laws which have caused this disaster were written when the world was different, and they can be updated. In my next post “The Next MtGox is Now just Around the Corner”, I will argue why it’s only a matter of time before the laws do get updated. How fast it happens is down to political will, and that in turn is down to us creditors.

 

What do we do now?

T    NC

The next step is clear. We have to create the biggest creditor group possible. Let’s make the biggest group in Japanese history. This will give us strong leverage both inside and outside the bankruptcy. I’ve already been working on this. Expect to see more details and an announcement soon.

Just throwing a few things out there:
We also need to start creating structures of organisation instead of everyone running around panicing and doing their own thing in isolation. So as well as a creditor group, we need people cooperating on legal solutions.
The media will be indispensable to us and they love a good bankruptcy. This requires careful planning.
This is now my day job and I’m going to be following this up with regular updates. I’ll try to be more active on Reddit too.

Creditors’ meeting, 27th September 2017

This was an extremely short meeting. I didn’t check the exact time but it was probably about 40 minutes in total.
The Dutch ambassador was supposed to be present in the meeting to represent the Dutch creditors, but despite a lot of paperwork being prepared in advance he wasn’t allowed into the meeting!
The meeting was ended after around 7 questions. My interpreter didn’t get a chance to ask my questions, though half had been asked by other people.
One thing my interpreter said was, he felt that throughout the session they were trying to avoid answering the questions and just passing off the minimum they could get away with. This is the same as I noticed in the other creditor meetings.

I was pretty annoyed when they ended it. The meeting is only twice a year and it’s the ONLY time when creditors can get updated about one of the biggest bankruptcies in history. We are paying for these people to be there at the meeting updating us, and we are paying for the whole shebang. Their responsibility is to listen to our questions at the meeting, and not to answer them poorly and then slip off after 20 minutes.
Someone actually brought something similar up in the meeting, that the transparency and frequency of updates was terrible. But as far as my interpreter can tell they didn’t answer that.

List of questions and answers
Due to translation difficulties and lack of time I’m not going to go into full details but just paraphrasing the main points of them.

1) What will happen to the surplus over $483 per bitcoin generated from the sale of our bitcoins?
A) The money over $483 will go to the MtGox shareholders

That was the big one! The hydrogen bomb of the bankruptcy. Everyone now was in shock, or at least I was. I didn’t actually expect them to answer this question. This means that in all probability most of our bitcoins will be lost to the company shareholders, and it means that the trustee is not doing anything to stop this happening. I hope this becomes the pivotal moment when everyone has had enough shit. For me it certainly is. More on this soon.

2) What happens if any bitcoins are retrieved from BTC-e?
A) They will go into the asset list and the money will go to the shareholders [not the creditors].

3) Can you be more transparent? Updates twice a year is not enough. And how are you holding the bitcoins? Are they insured?
A) We can’t say how the bitcoins are stored, and we don’t know of any way of insuring them. [AFAIK there was no reply about the transparency]

4) The bitcoin price is unstable and selling them could cause it to drop. Are you selling all 200k? Who will help to sell them?
A) We are selling ALL the 200k. How we sell them is not yet finalised.

This is at odds with the handout sheet, which says they don’t know yet whether they’ll be selling them or distributing them directly.

5) This wasn’t a question, but rather a Japanese creditor making a long statement. He said he believed we should get our bitcoins back because they are a tangible asset such as other financial assets, and therefore should be defined as property – and property is returnable outside of a bankruptcy. He said he was forming a union.
A) The trustee said the bitcoins were NOT returnable, and that forming a union was his choice and he couldn’t comment on it.

“This will be the last question.”

6) Is there any new information about Coinlab?
A) We are working on the Coinlab case and we don’t have anything to share. 

“This will be the last question.”

7) Do you have the Bitcoin Cash from the bitcoins?
A) Yes, we haven’t decided yet whether we’ll sell it or add them to the assets list. We are going to end the meeting now.

 

 

Fundraising

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Our legal fees are substantial, yet only a drop in the ocean compared to the money that’s at stake in the bankruptcy.

For the month of July 2017 they were around $16,000 USD and we’ve yet to receive August’s bill. I am covering the cost of these myself and I would like to request BTC donations towards them.

For details on the current aims of the legal help please see the post entitled “Update on bankruptcy situation.” As more things are added we’ll provide an updated list. The amount of funds raised will determine how much legal help we can get. There are many avenues to explore. None of the money will be going to myself.

The fund will be kept transparent. All receipts for money paid from the fund will be available on request.

Kolin Burges

Coinlab, Priority of Claims, and Ending the bankruptcy

The bankruptcy cannot end until the Coinlab lawsuit is ended in some way. The feeling amongst many creditors is that Coinlab is gaming the system with a meritless claim for $75m and effectively holding up the bankruptcy in order to scoop up an exorbitant payoff from our funds.

Unfortunately, if their claim is accepted it would most probably have the same priority as those of the depositor creditors. This of course goes against conventional wisdom. If someone steals something from you and is caught by the authorities with it, you would expect the authorities to hand it back to you and not sell it to fund the personal debts or lawsuits of the thief.

In addition to the Right of Segregation mentioned in the previous article, bankruptcies have the concept of priority of claims to deal with this kind of situation. Some claims can be given “preferred” status and some “subordinate”. However, under Japanese law only certain types of claim can be preferred – such as wages, taxes, pensions, etc. Bitcoin deposits would not be included. Similarly, it’s unlikely the Coinlab lawsuit would be given subordinate status.

The trustee has been trying to dismiss the claim on the grounds that what Coinlab claims to be an agreement with MtGox is invalid. But it’s up to the district court and not up to the trustee. Coinlab is obviously fighting to avoid this. It could easily take a couple of years for a final ruling. That leaves everything in a long, slow stalemate for now. The trustee has the option of offering a settlement to end the claim and we don’t know yet whether this is his plan. This is most likely what Coinlab is aiming for.

Why our bitcoins are stuck in the bankruptcy

Under the laws of Japan, owners of “property” or “things” being held by a bankrupt entity are entitled to get that property directly back, without entering into the bankruptcy system and sharing that property with creditors. This is called the Right of Segregation, meaning that the property should not be mixed with the bankruptcy estate.

In the MtGox bankruptcy the bitcoins were not returned to the owners as property should be, so in 2015 there was a lawsuit to get the bitcoins given back to the depositors. The court refused on the grounds that it claimed that bitcoins are not tangible therefore could not be ownable and considered as property. This is the reason why our bitcoins are trapped in this bankruptcy.
The Financial Services Authority in Japan, a government organisation, has since classified bitcoins as property. This is certainly very interesting and we’re looking further into this at the moment.

This seems like a serious flaw in the legal system. For example, any company or person in Japan holding the keys to certain assets such as investments, could surely push themselves into bankruptcy and pocket any appreciation in value – effectively taking over the investment benefits for themselves.

The Japanese government has already amended some laws to modernise the system to take account of cryptocurrencies in the wake of MtGox. They did it possibly to demonstrate that the MtGox disaster was being addressed (though they failed to address the most important issue, and there will be an article about that at some point).
It’s expected that more laws will be updated too, such as the Banking Act. Perhaps there could be scope for updating laws to allow digital assets such as bitcoins to be ownable property. That could be one possible route for ending the bankruptcy without giving the bitcoins to the shareholders.

Who will get our 200,000 bitcoins?

Quick summary of the problem – our bitcoins were valued by the trustee at approximately $483 at the start of the bankruptcy but are now worth an order of magnitude more. This means that the MtGox administrators can sell our 200,000 bitcoins, pay us a fraction of the money from the sale, and regard our claims as having been paid in full. The rest of our money may go to the parent company Tibanne, meaning the Tibanne shareholders Mark Karpeles and Jed McCaleb would be the beneficiaries. Karpeles claims he doesn’t want the money because of the personal lawsuits it would attract, but says has no power over the process.

The lawyers were initially upbeat about the prospects of the creditors receiving the full value from their sold 200k bitcoins. But after more investigation their advice is now that it looks like the bitcoin creditors could be paid only the original valuation amount at around $483 per bitcoin, and the value above that would be passed into the company liquidation. Liquidation is performed under corporate law rather than bankruptcy law, and the remaining money in the company would go to the shareholders. They don’t currently know of a way to avoid this situation. This is not good news.

Please note that the rest of this post is my personal opinion and not necessarily that of the lawyers.

The thoughts and plans of the bankruptcy trustee are as yet unknown. He may be able to perform actions which can change this. Give his stature and the uniqueness of a bitcoin bankruptcy, his suggestions hold a deep influence over the bankruptcy court. They must always comply with the letter of the law, but laws are often not clear-cut when applied to particular contexts – especially one as unprecedented as MtGox. And so there could be scope for either movement within the bounds of the law or for varying interpretations of the law.
The trustee’s responsibility is to maximise return to creditors in a manner which is fair and in the interests of justice. If the creditors’ money passed to the shareholders it would be neither fair nor in the interests of justice. The question is how able and willing he is to achieve this within the constraints of the law.

The lawyers have advised that the best way to discuss this situation with the trustee is to ask at the upcoming creditor meeting on 27th September. I’ll be at the meeting to ask that and other questions, and will be providing a report here.
Having been to these creditor meetings before, I expect we won’t get a significant answer on this. The meaty questions are rarely answered. Creditors come out of that meeting looking about as satisfied as a Bitcoin Core member who’s wife just sold all his bitcoins for BCH.

If we don’t get a resoundingly positive and clear answer at the meeting, I’ll regard this bankruptcy and our money as being in a critical state of emergency. At that point I think it should be a major concern for everyone who wants their bitcoins back.
I’ve been making plans for if this happens. I’ll be spending at least the next 2 months working on this full-time and longer if necessary.
For what it’s worth I believe the situation can be resolved, but it may only be possible if we are all willing to push hard enough for it.
Let’s see what happens at the creditors’ meeting.