Cleary Submits Amicus Brief on Behalf of Blockchain Association, SIFMA, and FIA Regarding the Application of UCC Article 8

Cleary Gottlieb represented the Blockchain Association, the Securities Industry and Financial Markets Association (SIFMA), and the Futures Industry Association (FIA) in the submission of an amicus brief in the U.S. Bankruptcy Court for the District of Delaware that highlights the importance of Article 8 of the Uniform Commercial Code in the nation’s financial markets.

The litigation involves a complaint brought by the litigation trust of Prime Core Technologies Inc. (Prime) against one of Prime’s former customers (Strike). The trust seeks the return alleged transfers of U.S. dollars and bitcoin made to Strike in the months before Prime’s bankruptcy. Strike moved to dismiss the complaint on the grounds that its pre-bankruptcy custodial agreement with Prime contained a “financial asset election” under Article 8 of the Uniform Commercial Code.

Financial asset elections are contractual terms by which one party, the “securities intermediary,” agrees to hold a designated “financial asset” in a “securities account” recorded on its books. Parties adopt financial asset elections to ensure that a customer’s financial assets do not become property of its custodian and are not subject to claims of the custodian’s general creditors.

Financial asset elections like those included in Prime’s contracts are very common in the financial services industry because they help parties establish bankruptcy remoteness, perfect security interests, and trade freely. Their commonplace nature also means that Article 8’s bankruptcy remoteness features are not often or seriously contested in court. Prime’s complaints against Strike and other former customers are novel attacks on Article 8’s role in the financial markets because Prime asserts a property interest in assets covered by a financial asset election.

The Blockchain Association, SIFMA, and FIA are leading trade associations for the digital asset, securities, and derivatives industries. The amici’s members—digital asset custodians, exchanges, investors and financiers, broker-dealers, investment banks, asset managers, and futures commission merchants, among others—rely on the durability of Article 8 to give certainty to their customers, satisfy their regulatory obligations, and engage in financing activity.

Cleary filed a motion on behalf of the amici that requests permission to file an amicus brief, together with the proposed submission. The amicus brief explains the vital role of Article 8 in the financial markets and offers key rebuttals to positions Prime has taken in opposition to Strike’s motion to dismiss. The court has not yet decided Cleary’s motion for permission to file the amicus brief.

The Cleary team included partners Thomas Kessler and Brandon Hammer, counsel emerita Sandra Rocks, and associate Travis Arbon.