By Todd Zerega and Luke Sizemore
In late February 2014, MtGox Co., Ltd (“MtGox”), once the largest bitcoin exchange in the world, suspended all trading on its exchange after internal investigations revealed a loss of approximately 750,000 of its customers’ bitcoins worth nearly $473 million. That loss caused MtGox to become insolvent.
On February 28, 2014, MtGox, a Japanese corporation, filed a petition for the commencement of a civil rehabilitation proceeding (the “Japanese Proceeding”) under Japanese law in the Tokyo District Court, Japan. Similar to a proceeding under chapter 11 of the Bankruptcy Code, the purpose of a Japanese civil rehabilitation proceeding is to give the debtor breathing space from creditor action to formulate a plan that will coordinate the relationships between the debtor and its creditors and rehabilitate the debtor’s business. According to its petition, MtGox intends to use the breathing room provided by the commencement of the Japanese Proceeding to address technical defects in its processing software, investigate the theft of bitcoins through its exchange, and confirm a plan to rehabilitate its business. On February 28, 2014, the Tokyo District Court entered a judgment appointing an examiner to investigate the existence of a cause for commencement of a civil rehabilitation proceeding and to report its findings to the Tokyo District Court no later than March 28, 2014.
Despite MtGox’s application for commencement of the Japanese Proceeding, two civil actions against MtGox were proceeding unimpeded in the United States. MtGox believed its ongoing participation in these lawsuits would divert necessary resources away from administration of the Japanese Proceeding and, potentially, create a scenario where certain creditors receive preferential treatment. To stay these lawsuits and obtain other ancillary assistance from the United States in its rehabilitation efforts, on March 9, 2014, MtGox, through its foreign representative, filed a voluntary petition in the United States Bankruptcy Court for the Northern District of Texas (the “Bankruptcy Court”) for recognition of the Japanese Proceeding as a “foreign main proceeding” and for other emergency and permanent relief under chapter 15 of the Bankruptcy Code.
The purpose of chapter 15 of the Bankruptcy Code is to provide a mechanism to deal with cases of cross-border insolvency where, among other things, assistance is sought in the United States by the foreign representative of a debtor in a foreign insolvency proceeding. MtGox has assets and creditors in multiple jurisdictions, including the United States, and is requesting the assistance of the United States to protect those assets from creditors during the course of the Japanese Proceeding and the rehabilitation process. If the Bankruptcy Court recognizes the Japanese Proceeding as a “foreign main proceeding,” MtGox will be entitled to all of the protections provided by chapter 15 of the Bankruptcy Code, including application of the automatic stay of section 362 of the Bankruptcy Code to MtGox and all of MtGox’s property that is located within the territorial jurisdiction of the United States.
The Bankruptcy Court scheduled a hearing for April 1, 2014, to decide whether to recognize the Japanese Proceeding as a “foreign main proceeding” and grant MtGox the rights and protections available under chapter 15 of the Bankruptcy Code. The Bankruptcy Court also ordered that the automatic stay of section 362 of the Bankruptcy Code is applicable to MtGox and its assets pending a final decision after the April 1 hearing. As a result, the civil lawsuits pending against MtGox in the United States and all other actions to obtain MtGox’s property in the United States are stayed, at least temporarily.
Good day. Good recovery. TSR