BlockFi Inc.

NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY

COURT DISTRICT OF NEW JERSEY

Caption in Compliance with D.N.J. LBR

Case No. 22-19361 (MBK)

9004-2(c)

Hearing Date: August 17, 2023

In Re:

Chapter 11

BlockFi, Inc.

Debtors Judge: Michael B. Kaplan

Carol L. Knowlton, Esq. Richard S. Kanowitz, Esq.

Gorski & Knowlton, PC Kenric D. Kattner, Esq.

311 Whitehorse Ave, Suite A 30 Rockefeller Plaza, 26th Floor

Hamilton, NJ 08610 New York, New York 10112

Creditor Counsel for Debtors and Debtors in Possession

Michael D. Sirota, Esq. Joshua A. Sussberg, P.C.

Warran A. Usatine, Esq. Christine A. Okike, P.C.

Cole Schotz, P.C. 601 Lexington Ave.

Court Plaza North New York, New York 10022

25 Main St. Counsel for Debtors and Debtors in Possession

Hackensack, NJ 07601

Counsel for Debtors and Debtors in Possession

MEMORANDUM DECISION

This matter comes before the Court upon George J. Gerro’s Response to BlockFi, Inc.’s

Fourth Omnibus Objection to Certain Claims (ECF No. 1192) and Cross-Motion for an Order

Temporarily Allowing Claim No. 12386 (ECF No. 1192-4). In his motion, movant (“Gerro”) asks

the Court to overrule BlockFi’s objection and allow Proof of Claim No. 12386 in the amount of

426 bitcoin. BlockFi filed a reply to Gerro’s objection and opposes Gerro’s motion (ECF No.

1342). For reasons discussed, the Court disallows Gerro’s claim and, as a result, denies Gerro’s

Cross-Motion as moot.

I. Jurisdiction

The Court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and

157(a) and the Standing Order of the United States District Court dated July 10, 1984, as amended

September 18, 2012, referring all bankruptcy cases to the bankruptcy court. This matter is a core

proceeding within the meaning of 28 U.S.C. § 157(b)(2)(B). Venue is proper in this Court pursuant

to 28 U.S.C. § 1408.

II. Background and Procedural History

The Court limits its recitation of the factual and procedural history of this case to

information pertinent to the matter presently being decided. BlockFi and Gerro entered into a

prepetition lending relationship through which BlockFi Lending LLC issued a series of loans (the

“Loans”) to Gerro, secured by collateral in the form of bitcoin (“BTC”). The Loan Agreement

granted BlockFi a security interest in, among other things, the BTC and proceeds thereof (the

“Collateral”). Significantly, the Loan Agreement also contained a specific loan-to-value (“LTV”)

Ratio requirement that authorized BlockFi to liquidate Collateral with 3 days’ notice if the LTV

Ratio rose above 70%, and immediately if it rose above 80%.

In March of 2020, BlockFi notified Gerro that—because the price of BTC had dropped—

he was required to post additional BTC Collateral to avoid liquidation. Gerro did not respond to

BlockFi’s margin call, and on March 12, 2020, BlockFi liquidated approximately 399 BTC to

bring the loan into compliance with the required LTV Ratio. The parties communicated regarding

the liquidation, see Ex. B to BlockFi’s Reply, ECF No. 1341, and Gerro ultimately requested a

further liquidation to pay off his remaining Loan balance and asked that whatever Collateral

remained after the payoff be transferred to his external wallet with immediate confirmation after

the trade. Upon Gerro’s request, BlockFi then provided Gerro with several options to achieve

reinstatement of some or all of the Loans. Gerro responded on March 24, 2020 by indicating he

was “in the due diligence phase with a traditional source of capital,” id. at 47, and inquired about

the formula BlockFi was using to determine the amount Gerro would need to pay in order to

reinstate his loan. That same day, BlockFi responded with the formula and gave an example that

assumed 426 BTC collateral at 60% LTV Ratio. BlockFi further cautioned that the example was

subject to fluctuation, given the volatility of BTC and the need to satisfy the LTV Ratio

requirement.

On April 27, 2020—more than 30 days after BlockFi provided the reinstatement

information—Gerro responded to BlockFi via email, indicating that he “accept[ed] BlockFi’s offer

to reverse [his] collateral sales[,]” and he provided his own calculations for the terms of the

reinstated loan. Id. BlockFi promptly responded, explaining that—due to the increase in the value

of BTC in the month that had transpired since BlockFi’s initial email—BlockFi could not offer to

reinstate the loan on those terms. Additional communications on that day clarified that—upon

Gerro’s default on the Loans over 45 days prior—BlockFi had liquidated BTC at a rate of about

$5,000 per coin. At the time of the April 27, 2020 communications, BTC was valued much higher,

meaning that BlockFi would incur substantial losses if it were to buy the liquidated Collateral back.

In other words, BlockFi could not reverse the prior liquidation of the Collateral.

Gerro filed a series of lawsuits against BlockFi in state court (the “State Court Litigation”),

which were stayed upon the filing of BlockFi’s chapter 11 bankruptcy filing. He then filed Claim

Nos. 12386 and 15248 in the bankruptcy case, asserting duplicative claims for the return of the

initial 426 BTC he had pledged as Collateral pursuant to the parties’ Loan Agreement. When

BlockFi objected to Gerro’s claims, Gerro filed the response and Cross-Motion that are the subject

of the instant Opinion.

III. Discussion

Gerro raises multiple arguments in support of his position under the California Financial

Code, the California Commercial Code, California pawnbroker laws, and the Uniform

Commercial Code. The Court will address each in turn.

A. California Financial Code

1. CFC § 22009

Gerro examines the statutory construction and legislative history of § 22009 of the

California Financial Code and asserts that BlockFi violated same by using, possessing and

liquidating his BTC Collateral. The Court disagrees.1

Gerro first asserts that “BlockFi’s Finance Lender’s License (60DBO-81955) permits

BlockFi to ‘engage in the business of “finance lender” . . . as defined in [California’s Financing

Law].’ ” Gerro Response 4, ECF No. 1192 (internal citations omitted). Under the California

Financial Code, a “finance lender” is defined as

any person who is engaged in the business of making consumer loans or making

commercial loans. The business of making consumer loans or commercial loans

may include lending money and taking, in the name of the lender, or in any other

name, in whole or in part, as security for a loan, any contract or obligation involving

the forfeiture of rights in or to personal property, the use and possession of which

property is retained by other than the mortgagee or lender, or any lien on,

assignment of, or power of attorney relative to wages, salary, earnings, income, or

commission.

Cal. Fin. Code § 22009 (emphasis added).

Gerro points to both the language of California’s Financing Law (“CFL”) and certain

deficiencies in BlockFi’s CFL License Application identified by the Department of Business

Oversight (the “Department”) in an April 18, 2018 letter. See Attachment 9 to Gerro Response 37,

1 For purposes of resolving this motion, the Court will assume—without finding—that California law applies.

ECF No. 1192-3. Specifically, the Department stated at that time that BlockFi “cannot hold the

borrower’s digital assets as collateral” and that “[b]ased on the business plan and explanation

provided, the Applicant is conducting or will be conducting activities not authorized under the

CFL.” Id. at 38. However, Gerro’s argument ignores that BlockFi continued communications and

negotiations with the Department, which ultimately issued the license to BlockFi. Moreover,

BlockFi obtained a declaration from Jan Lynn Owen, the Commissioner of the Department during

the time BlockFi’s license was issued, confirming that:

The business practice of holding and using collateral—including the

rehypothecation of that collateral—is common both in California and throughout

the United States in connection with secured lendings. As Commissioner, I was

required to become intimately familiar with . . . the CFL (including section 22009)

as well as the Uniform/California Commercial Code, and the argument that the

holding or use of collateral by a finance lender is somehow inconsistent with either

of these laws is incorrect. Indeed, a rule to the contrary-that finance lenders were

somehow not permitted to hold or use collateral securing loans-would not only be

contrary to established California law, it would significantly and detrimentally

hamper lending activities…throughout the State. Accordingly, during my tenure as

Commissioner, the [Department] granted finance lender licenses to businesses

planning to hold and/or use collateral securing loans, including but not limited to

licenses which I approved as . . . Commissioner.

Ex. D to BlockFi Reply (Owen Decl.) ¶6, 70, ECF No. 1341.

Ms. Owen went on to state that:

BlockFi’s stated business operations—holding and/or using collateral in the form

of cryptocurrency for secured loans, falls squarely under the umbrella of business

activities performed by a finance lender licensed by the [Department]. . . . A finance

lender license is the appropriate license in California for such operations, and the

holding and use of these various types of collateral is not only consistent with

California finance lender laws, but is also the standard commercial lending practice

for finance lending on easily transferrable collateral.

Id. at 73.

Further, BlockFi attaches to its Reply the Declaration of Charles E. Washburn, an attorney

retained by BlockFi to assist in responding to the Department’s initial response to BlockFi’s

finance lender and broker license application. Ex. C to BlockFi Reply (Washburn Decl.) 52, ECF

No. 1341. In this document—which was prepared and submitted in connection with the State

Court Litigation—Mr. Washburn certifies:

The [Department] legal staff never reached a negative opinion with respect to the

ability of a licensee to hold collateral, ‘preliminary’ or otherwise, with respect to

my request. Instead, [Department] legal staff agreed that a licensee may hold

collateral, a determination that was evidenced by the issuance of licenses to

BlockFi when BlockFi had disclosed it would hold collateral.

Id. at 55.

Given the Department’s own interpretation of the CFL, and given the fact that the

Department granted BlockFi a license premised upon an application wherein BlockFi explicitly

had held itself out to be a business that intended to hold cryptocurrency as security for loans, this

Court cannot conclude—as Gerro urges—that BlockFi willfully violated the California Financial

Code. Rather, this Court, consistent with the tentative ruling in the State Court Litigation, will

defer to the Department’s application and interpretation of the applicable laws and regulations.

2. Pawnbroker

Gerro also contends that BlockFi operated as “an unlicensed pawnbroker” and, as such,

was not permitted to refuse Gerro’s request for return of his BTC collateral. See Gerro Response

4-5, ECF No. 1192; see also Gerro Memo in Support of Cross-Motion 9-16, ECF No. 1192-4. In

support of this argument, Gerro cites to California Financial Code § 21000, which states that

“[e]very person engaged in the business of receiving goods, including motor vehicles, in pledge as

security for a loan is a pawnbroker within the meaning of this division.” Gerro then asserts that

“Bitcoin constitutes a ‘good’ within the meaning of the California pawnbroker law[.]” Gerro

Response 24, ECF No. 1192.

To evaluate this argument, this Court looks to the definitions provided by the California

Commercial Code. See CAL. COM. CODE § 9102(a). Pursuant to that code, the term “goods” means

“all things that are movable when a security interest attaches” and “does not include . . . general

intangibles.” CAL. COM. CODE § 9102(a)(44) (emphasis added). Moreover, the term “general

intangibles” is defined as “any personal property, including things in action, other than accounts,

chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments,

investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals

before extraction. The term includes payment intangibles and software. CAL. COM. CODE §

9102(a)(42). The Court finds that BTC fits more neatly into the “general intangible” category

under the California Commercial Code. BTC is not something that can be held or moved as

contemplated by the definition of “goods.” Rather, it is “a form of digital currency based on

mathematical algorithms that is not controlled by any country, bank, or individual.” United States

v. Costanzo, 956 F.3d 1088, 1089 (9th Cir. 2020); see also Symphony FS Ltd. v. Thompson, No.

18-3904, 2018 WL 6715894, at *1 n.1 (E.D. Pa. Dec. 20, 2018) (“Bitcoin is the most prominent

example of cryptocurrency, an electronic form of currency with no tangible format.”). Because

this Court determines that BTC is not a “good,” BlockFi is not a pawnbroker, and Gerro’s argument

fails.

Gerro asserts that—even “[i]f bitcoin were categorized as general intangible under the

Commercial Code[—]that conclusion would still would not resolve the issue of whether bitcoin

constitutes a ‘good’ within the meaning of the pawnbroker law.” Gerro Memo in Support of Cross-

Motion 16, ECF No. 1192-4. This argument is not convincing. In interpreting California law—

specifically, an interpretation that turns on the definition of a particular term—this Court finds it

appropriate to look to California law that provides the definition. Gerro offers no persuasive

argument to the contrary.

The Court finds additional support for rejection of Gerro’s argument in the record and in

California’s business laws. First, the Court looks to the professional opinion of Ms. Owen, the

Commissioner of the Department during the time BlockFi obtained its license. In her

declaration—submitted under oath in a legal proceeding—she clarifies that a “finance lender

license is the appropriate license in California” for BlockFi’s operations and adds that “[a]

pawnbroker license is neither appropriate nor required.” Owen Decl. ¶7, ECF No. 1341 at 73.

Next, the Court looks to the California Business and Professions Code, which defines a

“secondhand dealer” as “any person, copartnership, firm, or corporation whose business includes

buying, selling, trading, taking in pawn, accepting for sale on consignment, accepting for

auctioning, or auctioning secondhand tangible personal property.” CAL. BUS. & PROF. CODE §

21626(a) (emphasis added). In a publication addressing frequently asked questions regarding

secondhand dealer and pawnbroker licenses, the California Department of Justice’s Secondhand

Dealer & Pawnbroker Unit explains that “[a] pawnbroker is also a secondhand dealer but a

secondhand dealer is not a pawnbroker.” JUSTICE DATA AND INVESTIGATIVE SERVICES BUREAU,

SECONDHAND DEALER/PAWNBROKER LICENSING UNIT – FREQUENTLY ASKED QUESTIONS (FAQ’S)

5, https://oag.ca.gov/sites/all/files/agweb/pdfs/secondhand/faqs-shdpb.pdf?. Thus, under the

Business and Professions Code, a pawnbroker—as a secondhand dealer—must deal with “tangible

personal property,” which is described under the Code, in part, as “[a]ll tangible personal property,

new or used, including motor vehicles, received in pledge as security for a loan by a pawnbroker.”

CAL. BUS. & PROF. CODE § 21627(b)(1). For reasons already discussed, this Court concludes that

BTC does not fit the definition of “tangible personal property.” See Costanzo, 956 F.3d at 1089

(describing bitcoin as “a form of digital currency based on mathematical algorithms”); Symphony

FS Ltd. v. Thompson, 2018 WL 6715894, at *1 n.1 (stating that bitcoin is “an electronic form of

currency with no tangible format”). Because BlockFi is not dealing in “tangible personal

property,” it cannot be deemed a secondhand dealer and, as a result, cannot be a pawnbroker.

Finally, the Court looks to the California Financial Code. Under this Code, “[e]very person

engaged in the business of receiving goods, including motor vehicles, in pledge as security for a

loan is a pawnbroker within the meaning of this division.” CAL. FIN. CODE § 21000 (emphasis

added). “Pledged property,” in turn, is “property held as security for a loan, the title to which

remains with the pledgor and has not passed to the pawnbroker[.]” Cal. Fin. Code § 21002(a)

(emphasis added). In the present case, all indicia of ownership indicates that BlockFi regularly

engaged in the practice of taking title to collateral. Indeed, this Court addressed the issue of title

in the context of a different motion. As discussed in pleadings and on the record, it is undisputed

that in nearly every BlockFi agreement, BlockFi retained the right to “pledge, repledge,

hypothecate, rehypothecate, sell, lend or otherwise transfer or use any amount of such Collateral,”.

Hrg. Tr. May 8, 2023 — Slade 9:23-10:4, ECF No. 853; Stipulated Facts ¶44, ECF No. 842 (“The

digital assets in the Rehypothecateable Wallets are free to be pledged, repledged, hypothecated,

rehypothecated, sold, lent, or otherwise transferred, invested, or used.”). Moreover, the parties

agree that title to collateral passed to BlockFi. See, e.g., Hrg. Tr. May 8, 2023 — Slade 9:17-18,

ECF No. 853 (“[Y]ou are giving title and control over the tokens to BlockFi for use in BlockFi's

revenue-generating activities.”); Ad Hoc Response ¶ 7, ECF No. 834 (“Balances shown in BIA

reflect assets to which the customer has granted title to BlockFi.”).

Further, the Loan Agreement between Gerro and BlockFi states that, in the event of

Borrower’s default, “Lender may take immediate and exclusive possession of the Collateral[.]”

Ex. A to BlockFi Reply (Loan Agreement) 24, ECF No. 1341. And the declaration submitted by

Ms. Owen indicates that the Department routinely issued finance lender licenses to companies,

like BlockFi, who intended to engage in the “practice of holding and using collateral—including

the rehypothecation of that collateral[.]” Owen Decl. ¶6, ECF No. 1341 at 70. The record, thus,

demonstrates that BlockFi expressed its intention to take title to the Collateral, that all parties—

including Gerro and the Department—understood and acknowledged this intention, and that

BlockFi regularly took title to collateral. Because, in practice, title to collateral did not remain

with the pledgor, the collateral cannot be considered “pledged property” under CAL. FIN. CODE §

21002(a), and BlockFi does not resemble a pawnbroker under CAL. FIN. CODE § 21000.

B. Breach of Contract

Gerro also contends that BlockFi breached its contract with him. Specifically, he refers to

the email communications between the parties from March 16 to March 24, 2020 allegedly

containing BlockFi’s offer, and his April 27, 2020 email constituting his “unconditional[]

accept[ance].” Gerro Response 22, ECF No. 1192. Again, the Court is not persuaded.

As an initial matter, the Court questions whether BlockFi’s emails contained terms specific

enough to create a valid offer which could be accepted so as to form a binding contract. See, e.g.,

Apablasa v. Merritt & Co., 176 Cal. App. 2d 719, 723, 1 Cal. Rptr. 500, 503 (Ct. App. 1959) (“It

is well settled that if the offer is so indefinite as to make it impossible for a court to decide just

what it means, and to fix exactly the legal liability of the parties, its acceptance cannot result in an

enforceable agreement.”). Here, BlockFi’s email explained that the offer was dependent on the

price of BTC. See Ex. B to BlockFi Reply (March 24, 2020 email) 47, ECF No. 1341 (explaining

the formula as “Reinstated Principal Balance minus Loan Available at 60% (based on reinstated

collateral + price of BTC”) (emphasis added). Moreover, the email gave only an example of loan

terms—not specific loan terms. That example further clarified that it provided the “Loan Available

at 60%” term was “subject to fluctuate slightly based on BTC” and it assumed “426 BTC

collateral at 60% LTV.” Id. Given that the price of BTC—an essential element of the agreement—

was not established, it is unclear whether the March 24 email from BlockFi was definite enough

to constitute an offer.

Nevertheless, even assuming—without finding—that BlockFi’s March emails constitute a

formal “offer,” Gerro’s responsive email—sent more than one month later—cannot be interpreted

as “unconditional acceptance” of that offer. Instead, he supplied a counteroffer. As explained, the

record clearly demonstrates that BlockFi’s offer was dependent on the value of BTC. Gerro’s

responsive email inserted a value for BTC (“$7700 per BTC”), a term that was not included in

BlockFi’s initial email and a price that is not supported by the figures used in BlockFi’s formula.

Additionally, Blockfi’s email referenced a “new principal balance to $1,505,746.11 backed by 426

BTC” whereas Gerro’s responsive email suggested a “New principal balance of $1,968,120 backed

by 426 BTC collateral.” Id. “A qualified acceptance is a new proposal.” CAL. CIV. CODE § 1585;

see also Roth Grading, Inc. v. Martin Bros. Constr., 493 F. Supp. 3d 865, 869 (E.D. Cal. 2020)

(“California, as have many other jurisdictions, recognizes the common-law ‘mirror image’

rule[.]”); Sung v. Hamilton, 676 F. Supp. 2d 990, 1002 (D. Haw. 2009) (explaining that “a

purported acceptance of an offer which attempts to modify one or more terms of the offer acts as

a rejection of the offer and results in a counteroffer.”).

In any event, the Court finds that there was no meeting of the minds sufficient to form an

enforceable contract. “California law is clear that there is no contract until there has been a meeting

of the minds on all material points.” Banner Ent., Inc. v. Superior Ct. (Alchemy Filmworks, Inc.),

62 Cal. App. 4th 348, 358, 72 Cal. Rptr. 2d 598 (1998), as modified (Mar. 30, 1998); see also

Bustamante v. Intuit, Inc., 141 Cal. App. 4th 199, 215, 45 Cal. Rptr. 3d 692, 704 (2006). “[T]he

failure to reach a meeting of the minds on all material points prevents the formation of a contract

even though the parties have orally agreed upon some of the terms, or have taken some action

related to the contract.” Banner Ent., Inc. v. Superior Ct., 62 Cal. App. 4th at 359; see also

Hauswirth v. Shih, No. D080294, 2023 WL 1790070, at *3 (Cal. Ct. App. Feb. 7, 2023), as

modified on denial of reh'g (Feb. 24, 2023), review denied (May 3, 2023); Sterling v. Taylor, 40

Cal. 4th 757, 766, 152 P.3d 420, 425 (2007) (citing RESTATEMENT (SECOND) OF CONTRACTS § 131

(1981) and discussing the statute of frauds and explaining that the essential contract terms must be

stated with reasonable certainty); Grove v. Grove Valve & Reg. Co., 4 Cal. App. 3d 299, 311–12,

84 Cal. Rptr. 300 (1970).

Here, the record demonstrates that material terms remained uncertain; namely, the value of

BTC to be used in the formula calculating the amount required to reinstate Gerro’s loan. Gerro

concedes in his pleadings that he “expressly proposed reinstating at $7,500 per bitcoin and BlockFi

did not indicate any contrary intentions.” Gerro Response 22, ECF No. 1192. Indeed, in a March

19, 2020 email to BlockFi, Gerro proposed that value for BTC. See Ex. 1 to Gerro Response

(Gerro’s March 19, 2020 email) 92, ECF No. 1192-3. However, BlockFi responded several days

later with its own formula and calculations, which—under California contract law previously

cited—cannot be construed as acceptance of Gerro’s proposed BTC price. Moreover, Gerro’s

April 27, 2020 email suggests a price of $7,700 per BTC, a value different than what he proposed

more than a month prior. See Ex. B to BlockFi Reply (March 24, 2020 email) 47, ECF No. 1341.

Given an email exchange that included shifting figures, varied formulas based on assumptions,

and the fluctuations in the value of BTC over a more-than-a-month period, the Court simply cannot

conclude that there was any meeting of the minds between the parties as to the precise terms of an

agreement to reinstate Gerro’s loan. As such, there was no contract and, thus, no breach by

BlockFi.

C. BlockFi is not an Unlicensed Commercial Bank

Gerro also argues that BlockFi engages in the commercial banking business without a

banking license. He does not provide any analysis or evidence of this assertion beyond reference

to a New York Times article. Gerro Memo in Support of Cross-Motion 17, ECF No. 1192-4. The

Court need not address this argument in detail as it lacks merit. The Court finds that it fails for

many of the same reasons as Gerro’s pawnbroker argument.

IV. Conclusion

For the aforementioned reasons, the Court disallows Mr. Gerro’s claims and denies the

Cross-Motion as moot. Counsel for Debtor is directed to submit a form of order consistent with

this opinion.

WM cle 2k ep

Michael B. Kaplan, Chief Judge

U.S. Bankruptcy Court

District of New Jersey

Dated: August 29, 2023

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