Genesis Secures Dismissal of Security Interest and Constructive Trust Claims Valued at Over $1.2 Billion

February 9, 2024

Cleary Gottlieb represented Genesis Global Capital LLC (Genesis) and certain of its affiliates in successfully obtaining the dismissal of security interest and constructive trust claims in the U.S. Bankruptcy Court for the Southern District of New York.

Cleary represents Genesis, a digital assets trading, lending, and borrowing firm, in connection with its ongoing Chapter 11 restructuring.

Plaintiff Gemini Trust Company LLC (Gemini), on its own behalf and as agent to Gemini users that had participated in a program where they lent digital assets to Genesis, brought claims against Genesis last fall. Gemini sought a declaratory judgment that it had a security interest in 31.18 million shares of Grayscale Bitcoin Trust (GBTC) that Genesis purportedly pledged, but never transferred, to Gemini. Gemini also sought the imposition of a constructive trust over the GBTC shares. Genesis asserted counterclaims seeking a declaratory judgment that Gemini did not have a security interest in the GBTC shares. Both Gemini and Genesis moved to dismiss each other’s claims. The current market value of the GBTC shares is over $1.2 billion.

Following an expedited briefing schedule and oral argument, on February 7, 2024, Bankruptcy Judge Sean H. Lane dismissed Gemini’s claims. The court first dismissed Gemini’s security interest claim, holding the contractual terms of the agreement whereby Genesis allegedly pledged the GBTC shares unambiguously required a transfer of the shares to Gemini in order for those shares to actually constitute collateral. The court reasoned that because no transfer occurred, Gemini did not have a security interest in the GBTC shares. Using the same logic, the court in turn denied Gemini’s motion to dismiss Genesis’ declaratory judgment claim.

The court also dismissed Gemini’s constructive trust claim, holding that Gemini failed to adequately demonstrate the requisite factors. The court first stated that Gemini could not demonstrate Genesis was unjustly enriched by its retention of the GBTC shares where the parties’ agreement was governed by a written contract. The court further stated that the imposition of constructive trust was not warranted where there was neither an adequate basis to conclude Gemini and Genesis had a fiduciary relationship nor that Gemini ever had a cognizable interest in the GBTC shares.