District Court Partially Vacates Voyager Digital Confirmation Order, Finds Bankruptcy Court Lacked Authority to Approve Exculpation Provision in US Gov’t Appeal  

Relevant Documents:
Opinion
Amended Opinion (entered Aug. 6)

U.S. District Judge Laura Taylor Swain issued an order today vacating the exculpation provisions in Judge Michael Wiles’ March 2023 decision confirming the Voyager Digital debtors’ chapter 11 plan, which went effective in May 2023. Judge Swain finds the bankruptcy court lacked authority under the quasi-judicial immunity doctrine to grant prospective protection for liability in connection with cryptocurrency transactions under the plan. The district court vacates the confirmation order to the extent it approved the exculpation provision and remands for further proceedings.

Judge Swain took the federal government’s appeal of the confirmation order under advisement on June 23. In April 2023, the U.S. government and the U.S. Trustee reached an agreement with the debtors to a narrow stay of the exculpation clause and allowed the remainder of the plan and confirmation order to go effective after the debtors pivoted to a self-liquidation under the plan following the termination of a sale to Binance.US.

The plan’s exculpation clause protected parties against liability for engaging in transactions in furtherance of rebalancing transactions and the completion of distributions of cryptocurrencies to creditors under the plan. Judge Wiles narrowed the scope of the exculpation provisions in response to the governmental objections but said he would not leave parties open to liability for transactions in the absence of any official regulatory position that the plan required illegal conduct.

Around the time the Voyager plan was confirmed, the U.S. Securities and Exchange Commission was engaging in regulation by enforcement, including enforcement actions against major exchanges Coinbase, Binance.US and Kraken, but the SEC under the Trump administration has taken an accommodating approach to the cryptocurrency industry.

As a threshold matter, Judge Swain finds that the Supreme Court’s bar on nonconsensual nondebtor releases in its 2024 Purdue Pharma decision does not invalidate the Voyager exculpation provision. The judge observes that Voyager’s exculpation clause functions to set a standard of liability for actions taken pursuant to court direction under the plan, carving out liability immunity for actual fraud, willful misconduct and gross negligence from exculpation protection. Because the exculpation provision is narrowly focused and does not excuse liability for conduct unrelated to implementation of the plan, Judge Swain concludes it does not improperly extend a bankruptcy discharge to nondebtors.

Judge Swain, however, does rely on Purdue to conclude that the exculpation provision is not authorized under the Bankruptcy Code. The judge rejects the debtors’ attempt to tie the bankruptcy court’s section 105(a) equitable powers to other Code provisions, including matters relating to the debtors’ financial condition or plan implementation under section 1142, section 1129(a)(3)’s good-faith requirement or the “catchall” provisions of section 1123(b)(6).

Judge Swain explains that section 1142(b) does not “explicitly empower a bankruptcy court to proactively insulate parties from exposure to consequences under nonbankruptcy law.” The judge further notes that the bankruptcy court’s authority to “immunize criminal conduct” is even more attenuated given the absence of jurisdiction over criminal matters.

According to Judge Swain, the standard of liability under the exculpation provision would “purport to preempt” conflicting standards under federal statutes and regulations, “disrupt” the separation of powers between the judicial and executive branches, and “intrude” on the U.S.’ sovereign immunity.

Finally, Judge Swain rejects the debtors’ attempt to ground the exculpation provision as a function of quasi-judicial immunity. Reviewing the application of immunity in the bankruptcy contest for bankruptcy trustees and members of official committees of unsecured creditors, the judge observes that immunity functions as an affirmative defense. Judge Swain finds that the Voyager exculpation provision improperly reflects a prospective grant of immunity. The judge also notes the extension of immunity for criminal conduct also exceeds the “recognized boundaries of the doctrine of quasi-judicial immunity.”