Ending the MtGox Bankruptcy Procedure

The MtGox bankruptcy procedure is a very special case. That’s because bitcoin prices have risen so much that MtGox now is not only solvent, but if the case proceeds under the rules made for normal, insolvent bankrupts, the bankrupt in this case (Mark Karpeles) will be left with about a billion dollars in bitcoins not distributed to the creditors.

Some of the creditors do not like this result, as well they should. They have started a website at mtgoxlegal.com discussing this case.

Their latest preliminary information about the opinion of an unnamed lawyer they have asked names Article 103 Paragraph 2 of the Japanese Bankruptcy Act as the reason. In the translation provided by the Japanese government it reads:

2 前項の場合において破産債権の額は、次に掲げる債権の区分に従い、それぞれ当該に定める額とする

(2) In the case referred to in the preceding paragraphthe amount of a bankruptcy claim shall be the amount specified in each of the following items for the categories of claimlisted in the respective items:
一 次に掲げる債権 破産手続開始の時における評価額
(i) The following claims: The amount of the claim estimated as of the time of commencement of bankruptcy proceedings:
イ 金銭の支払を目的としない債権
(a) Claim not intended for payment of money
ロ 金銭債権で、その額が不確定であるもの又はその額を外国通貨をもって定めたもの
(b) Monetary claim the amount of which is not fixed or the amount of which is fixed in a foreign currency
ハ 金額又は存続期間が不確定である定期金債権
(c) Claim for periodic payments the amount and duration of which are not fixed
二 に掲げる債権以外の債権 債権
(ii) Claim other than those listed in the preceding item: The amount of the claim

That means that claims for payment of money are settled at the purchasing power at the time of the distribution, while everything else is settled at the value of whatever good the claim is about at the time of the commencement of bankruptcy proceedings. If you had a Japanese yen deposit at MtGox, you get the exact value of the deposit in 2014, and not some amount adjusted for inflation over the last couple of years.  And if you see a claim for bitcoins as one “not intended for the payment of money”, the value of bitcoins assumed for the distribution will be that of 2014, not that of 2017.

Of course one could argue that a claim to bitcoins is a “claim for payment of money”, since bitcoins are money. That would require that the Japanese lawyers dealing with the case are smart enough to understand that this is necessary to avoid the sickening injustice of awarding Karpeles a billion dollars at the expense of the creditors. It would also require them to understand Bitcoin, which actually is money.

Both conditions are not sure to be fulfilled. It is much more likely that they just take a look at the wording of the statute and take the position that these bitcoins are not money.

I would object to such a theory on multiple grounds. I may want to come back to explain them later.

However, there is a simpler solution. The motivation for this post is to point this out.

Karpeles can only hope to fleece the creditors for one billion dollars because he is in bankruptcy. Without that, he obviously would need to give back those bitcoin balances, as opposed to their value in Japanese yen in 2014.

So the only thing necessary to stop this injustice is to stop the bankruptcy proceedings. They don’t have any merit right now, since MtGox has become solvent again many times over.

The Bankruptcy Act deals with ending a bankruptcy procedure in Article 218. This reads, again in the Japanese government translation:

Article 218 (1) The court, upon the petition of the bankrupt who satisfies any of the requirementlisted in the following items, shall make an order of discontinuance of bankruptcy proceedings:
一 破産手続廃止することについて、債権届出期間内に届出をした破産債権者の全員の同意を得ているとき。
(i) The bankrupt has obtained consent for discontinuance of bankruptcy proceedings from all bankruptcy creditors who fileproofs within the period for filing proofs of claims.
二 同意をしない破産債権者がある場合において、当該破産債権者に対して裁判所が相当と認める担保を供しているとき。ただし、破産財団から当該担保を供した場合には、破産財団から当該担保を供したことについて、他の届出をした破産債権者同意を得ているときに限る
(ii) Where there is any bankruptcy creditor who does not give the consent set forth in the preceding itemand the bankrupt has providesecurity to said bankruptcy creditor that the court finds reasonableprovided, however, that if such security is provided from the bankruptcy estate, this provision shall apply only where consent is obtained from other holders of filebankruptcy claims to the provision of the security from the bankruptcy estate.
2 前項規定にかかわらず、裁判所は、まだ確定していない破産債権を有する破産債権者について同第一及び第二ただし書同意を得ることを要しない旨の決定することができる。この場合における同第一及び第二ただし書規定適用については、これらの規定中「届出をした破産債権者」とあるのは、「届出をした破産債権者(まだ確定していない破産債権を有する破産債権者であって、裁判所決定によりその同意を得ることを要しないとされたものを除く。)」とする
(2) Notwithstanding the provision of the preceding paragraphthe court may make an order not to require the consent set forth in item (i) of said paragraph and the proviso to item (ii) of said paragraph from any bankruptcy creditor who holds a bankruptcy claim that is not yet determined. For the purpose of application of the provisions of item (i) of said paragraph and the proviso to item (ii) of said paragraph in this casethe term “holders of filebankruptcy claims” in these provisionshall be deemed to be replaced with “holders of filebankruptcy claims (excluding a bankruptcy creditor who holds a bankruptcy claim that is not yet determined, from whom the court does not require consent).”

So the conditions for discontinuing the bankruptcy procedure are a petition of the bankrupt and either consent by all creditors or, if some creditors refuse consent, they get sufficient security.

Obviously, any creditor with a bitcoin balance will consent, since they get paid in 2017 bitcoins as opposed to the 2014 yen value. And any creditor with only a Japanese yen claim can easily be satisfied with sufficient security, since MtGox is solvent many times over right now.

On the other hand, the bankrupt may be reluctant to petition, since this bankruptcy procedure will net him a billion dollar profit at the expense of the creditors if he just leans back and does nothing.

Maybe some of the creditors want to ask him if he thinks that’s a good idea.

Update: Mark Karpeles kindly replies on Twitter here, here and here.

His first Tweet explains a mistake I made in the post:

Actually MtGox is not “solvent” per se until coins are sold. But even then filing for end of benkruptcy would restore pre-bankruptcy state and MtGox would be insolvent again. Discussed this already with lawyers, conclusion was that it wouldn’t fly with the court.

It may be true that restoring the pre-bankruptcy state would mean MtGox becomes insolvent again. That’s because the amount of claims increases by a lot if you pay out bitcoins at present values.

So when I said that “MtGox is solvent many times over”, that is only correct if you assume claims based on 2014 valuations of bitcoins.

So that may be the end of this particular idea for an easy solution.

That leaves dealing with bitcoin withdrawal claims as “claims for payment of money” under Article 103.

Karpeles notes in his second Tweet about that:

Also note that bankruptcy handled BTC the same way it handled USD JPY EUR etc. All are valuated as of bankruptcy start in JPY, and may come with 6%/yr delay damages, provided among other things there is enough to pay the main claims.

That handling of foreign currency is correct, since it is required under Article 103 b Paragraph 2 Number 2 b), and this doesn’t lead to any unjustified enrichment for the bankrupt.

He also offers some caution about relying on the government translation:

By the way you shouldn’t rely on that English translation, it has been shown multiple times to be inaccurate. Asking Japanese lawyers specialized in bankruptcy will yield in most accurate advice, and even if not possible looking up specific words in the Japanese version may help.

I don’t have an opinion about that. As far as this post is concerned, let’s just note that I did not rely on an English translation and provided these texts only for the convenience of readers who may not know Japanese.


One Comment

  1. […] be a bargain in some scenarios. That are those where the bankruptcy procedure is handled under an interpretation of Article 103 that lets the bankrupt (MtGox) walk away with a big share of the capital gains in over 202,000 […]

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