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Judge Strips Voyager Bankruptcy Shield, Raising Crypto Liquidation Risk
A federal judge vacated Voyager Digital's bankruptcy liability shield, exposing liquidation professionals to lawsuits. The Second Circuit will now decide if the protections can stand.
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The legal protections that shielded professionals running Voyager Digital's bankruptcy are gone. US District Chief Judge Laura Taylor Swain vacated the exculpation provisions in Voyager's confirmed Chapter 11 liquidation plan, ruling the bankruptcy court lacked the authority to preemptively shield parties from future civil or criminal liability for actions taken during plan implementation.
The ruling followed an appeal by the US Department of Justice and the US Trustee. The protections had covered a broad group, including debtors, committee members, Plan Administrator Michael Wyse, the Distribution Agent, released professionals, and employees, insulating them from lawsuits related to rebalancing transactions and distributing digital assets to customers.
Voyager's exculpation clause was narrower than some. It carved out exceptions for actual fraud, willful misconduct, and gross negligence, meaning the protection applied only to good-faith actions in the ordinary course of executing the plan. Judge Swain still found it went too far.
The central question was whether a bankruptcy court can grant a prospective liability shield for future conduct. Judge Swain concluded it cannot. The bankruptcy court's jurisdiction does not extend to blocking claims that have not yet arisen, particularly for actions taken well after plan confirmation.
The DOJ and US Trustee specifically challenged protections covering customer distributions of digital assets. In a crypto bankruptcy, those distributions involve complex decisions about token conversions, timing of sales, and allocation methods.
Voyager filed for Chapter 11 protection on July 5, 2022, after a defaulted loan to Three Arrows Capital, the Singapore-based hedge fund whose collapse became one of crypto's defining cautionary tales. The liquidation plan was confirmed in March 2023. The company initially planned asset sales, potentially to another platform that could continue serving customers. That didn't materialize, and the process shifted to full liquidation, with assets sold and proceeds distributed to creditors.