Crypto meltdown a boon for bankruptcy lawyers

Turmoil in the cryptocurrency industry has rattled major exchanges and sent the value of digital assets tumbling, but at least one group stands to gain: bankruptcy lawyers.

High-profile bankruptcies involving crypto exchange FTX, hedge fund Three Arrows Capital and crypto lenders BlockFi, Celsius Network and Voyager Digital Ltd are generating new opportunities - and big fees - for law firms that counsel troubled companies.

Large law firms can rake in more than $100 million in legal fees during a long-running bankruptcy, experts said.

"You've got to pay the gravedigger," said Adam Levitin, a law professor at Georgetown University who specializes in bankruptcy law. "These are complicated cases with a bunch of novel issues, and it shouldn't be surprising that they are going to require a lot of attorney involvement."

The value of bitcoin has dropped 65% so far this year, dragging down other crypto assets and leaving investors reeling. The spectacular implosion of FTX last month sent fresh shock waves through the cryptocurrency industry.

One U.S. law firm, Kirkland & Ellis, is representing BlockFi in its bankruptcy case filed on Monday and is also lead counsel for Celsius Network and Voyager Digital, which both filed for bankruptcy earlier this year.

Kirkland commands some of the highest billing rates in the industry, charging up to $1,995 per hour for work by its partners on the Celsius and Voyager cases, according to court filings. The firm, which did not respond to a request for comment, has billed an average of about $3.3 million every month in each of those cases so far.

Law firm billing rates are normally not public, but in bankruptcy cases lawyers for the debtor company must detail their billings and request a judge's approval for their fees.

The lawyers are paid from the assets of a bankruptcy estate, and experts said judges rarely demand significant reductions in professional fees.

"Kirkland is dominant in large public company bankruptcies already, and this is just extending to a new area of bankruptcy," said Lynn LoPucki, a law professor at the University of Florida who has studied bankruptcies and corporate restructuring. "If they dominate crypto, it will keep them at the top."

Among its larger recent cases, Kirkland earned $83 million in legal fees and reimbursements for its work in the long-running bankruptcy of satellite services provider Intelsat, billing more than 87,000 hours, court filings show.

Kirkland partner Joshua Sussberg is lead counsel in all three of the firm's crypto-related bankruptcies. He has been involved in many major corporate bankruptcies in recent years, including for movie theater chain Cineworld Group and J.C. Penney Co Inc.

COMPLEX QUESTIONS

Wall Street firm Sullivan & Cromwell is bankruptcy counsel for FTX. The firm has not yet revealed its fees, but in a 2021 case involving Kumtor Gold Company, the firm's partners billed up to $1,825 per hour.

Sullivan & Cromwell is also representing trading firm Alameda Research, founded by FTX founder Sam Bankman-Fried, as a creditor in the Celsius and Voyager bankruptcies. The law firm did not reply to a request for comment.

As crypto bankruptcies mount, the law firm with the highest maximum billing rate disclosed so far is Latham & Watkins, which is advising Celsius on regulatory issues and is debtor's counsel to Three Arrows Capital. Its top rate is $2,075 an hour, according to court papers. Latham also did not respond to a request for comment.

The cryptocurrency cases are particularly significant for law firm bankruptcy practices as Chapter 11 filings set off by the COVID-19 pandemic and the struggles of big-box retailers have begun to slow, legal experts said. Crises within certain industries, such as cryptocurrency, can keep business flowing and provide years of steady revenue.

Lawyers in the crypto cases must deal with a host of issues new to bankruptcy law, including whether digital assets deposited on a platform are owned by the customer or the platform itself, according to bankruptcy law experts. That determination could help decide how much of their deposit a customer is likely to recoup from a bankrupt firm.

Levitin, a former member of the restructuring department at law firm Weil, Gotshal, & Manges, said such complex questions call for top-shelf lawyers.

"Otherwise it becomes just a grab race where it's the biggest and most sophisticated creditors grabbing everything for themselves," he said.