The legal advice – Civil Rehabilitation.

The group has voted by a large margin to share the legal advice we have received.

Sekido has provided the following advice. Below it are notes from the phone conversation I had with him:

November 21, 2017
Dear Bitcoin Creditors:
Mori Hamada & Matsumoto
Mugi Sekido
Dai Katagiri
Naoki Shiraiwa
We hereby propose the matter set forth below. Please provide us with your response to this letter as
to whether you, the Bitcoin creditors, agree with our proposal and wish to retain us for the next steps
in this matter.

1. Transfer to a Civil Rehabilitation Proceeding
As previously explained, in our view, it is very difficult under Japanese law to avoid application of
the statute, being Article 103 of the Bankruptcy Act, in the current bankruptcy proceedings for
MTGOX. To overcome the statute, we should utilize another legal proceeding, and we think that
there are two options; (1) transferring the bankruptcy proceeding to the civil rehabilitation
proceeding and/or (2) filing a claim against the bankruptcy trustee of TIBANNE Co., Ltd.
(“TIBANNE”) and/or MR. Robert Marie Mark Karpeles (“Karpeles”).

Since a shareholder of MTGOX may receive the residual property of MTGOX, the Bitcoin creditors
might consider receiving such capital gains from TIBANNE and/or Karpeles, who directly or
indirectly own the shares of MTGOX. However, we believe that it will take a very long time for
TIBANNE and/or Karpeles to receive residual property from MTGOX. Additionally, it would be
difficult for the Bitcoin Creditors to prove that these lost capital gains are the damages that they
incurred under Japanese tort law. Therefore, we think so far that a transfer of the bankruptcy
proceeding to a civil rehabilitation proceeding would be the best option for the Bitcoin creditors,
even though it is not commonly used in these situations.

In order to transfer the bankruptcy proceeding to a civil rehabilitation proceeding, we will need to
explain to the bankruptcy trustee, Mr. Kobayashi, and the court that we can realize the rehabilitation
of MTGOX’s business through a business transfer agreement between a sponsor and MTGOX, and
also that the civil rehabilitation proceeding will conform to the common interests of creditors.
Essentially, a sponsor will need to purchase MTGOX’s business at fair market value, though this is a
matter for negotiation with Mr. Kobayashi and the court. In general, a sponsor does not have to pay
anything to the shareholder of MTGOX.

To realize such a business transfer, we need to develop a viable plan which is acceptable both to a
sponsor whose focus is on business rationality, and to Mr. Kobayashi and the court whose focuses
are on consistency with the Japanese law. We plan to discuss with potential sponsors suggested by
the Bitcoin creditors, to develop a plan for such a business transfer for rehabilitation of MTGOX’s
business, and to present the plan to Mr. Kobayashi and the court. Extensive discussion will be
necessary both with the sponsors and Mr. Kobayashi and the court, as the transfer from a bankruptcy
proceeding to a civil rehabilitation proceeding is unusual, and it is likely to be an arduous process to
reach an agreement on such a plan amongst all of the sponsor, Mr. Kobayashi and the court. We
will engage in such discussion with the belief that in the light of reasonableness, the increased value
of Bitcoins should not be distributed to Karpeles, the ultimate shareholder of MTGOX, but should
instead be distributed to the Bitcoin creditors. We also will seek input from others who are likely to
give us productive insights for such a plan.

2. Fee Arrangement
We do not think that the success fee arrangement would be suitable to our plan above, because the
value of the success will be distributed to not only those Bitcoin creditors who agree to pay the
success fee, but also to those Bitcoin creditors who do not agree to such payment. We do not think
that such an arrangement would be fair or acceptable. We therefore propose a fee arrangement that
would be calculated on an hourly-charge basis. For the time being, we will charge the Bitcoin
creditors for our legal services, but we understand that their budget is limited. We will aim at
subsequently receiving our fees from a potential sponsor. However, please note that in this scenario,
we will not be able to provide legal services on an item where interests of the Bitcoin creditors and
the sponsor conflict, and we will not be able to work on the conditions of the business transfer which
may affect the distribution rate to the Bitcoin creditors pursuant to the civil rehabilitation plan. We,
however, think that the accomplishment of the business transfer itself is a common interest for the
Bitcoin creditors and the sponsor, and we will be able to work towards achieving this
accomplishment without any conflict of interest issues.

The following are my notes from a phone conversation I’ve had with the legal team since receiving this to clarify some points:


Time frame: By next creditors meeting we should have an agreement with the trustee over CR, and possibly be ready to vote on CR plan.
Note that if the trustee wants to close the bankruptcy (and distribute according to the Bankruptcy rules) he can only do that by calling a creditors meeting first. So as long as he doesn’t do that we know we have time to get this plan enacted.

Chronology of vote: Creditors vote on the CR sponsor and plan right at the end of the process. So we will be voting on the sponsor and on the way they intend to calculate distribution. We’ll be involved in that discussion as the plan is formed.

Fee: A success fee can only be paid on recovery. Because CR will mean money flowing to creditors is not considered a recovery under Japanese law he can’t charge a success fee. This also means he cannot levy a cap as we had agreed. As such he has no option but to charge his hourly rate. The time involved is hard to predict, but he will work in a way that is efficient. It will exceed $20k, maybe $100k? He cannot say for sure.

Mark’s valuation method: Sekido believes it can be a lot cheaper than this. The valuation does not need to be pegged at a price that covers the value of assets. It is not to cover debts (as Mark suggested) either. The value is decided by the trustee. He decides based on what is in the creditors best interests. So equally important as the value of the purchase price, he is looking at the rehabilitation plan. Potentially if a sponsor offers a small/nominal fee, but has a plan that sees a high return for creditors, the trustee can accept it. The plan is as much a part of the negotiation as the offer is.

The “Purchase” price paid by the sponsor does not go to shareholders, it goes to creditors. Shareholders have no say in the valuation. Shareholders have no control in the company after. Shareholders receive no benefit. The fee basically is added to the assets the sponsor “purchases”, but he’s only allowed to purchase it because he’s agreed a plan with the trustee as to how those assets will be used. [My analogy, It’s like buying a wallet, but the money you pay for the wallet goes in to the wallet, so it doesn’t really matter how much you pay, as long as you look after the wallet]. The trustee then watches over the sponsors activities to make sure he’s sticking to the plan. Again this helps explain why the valuation is very flexible, because it’s paid to the creditors, not the shareholders.

From the sponsors perspective, the plan could include a fee equal to their purchase price. And a fee to cover their costs.

The most important thing for getting it approved is not the valuation, but that the assets go to creditors so the overall plan has to be in the creditors best interests. This is what will make the sponsor’s offer attractive to the trustee and the court, so they can accept it.

My reaction: This is actually a really promising plan now that I understand it better. Only down side is we have to fund the legal costs for the sponsor upfront. But that will probably be cheaper in the long run, if we are successful. It may well mean a further round of fundraising. I know many have offered to make larger donations. There may come a time when we have to ask for those kind offers. It would be good if we can protect smaller creditors from the disproportionate burden of flat fee donations.

We are thinking about how we do that and are making a plan as a group. My hope is that we can create a space on the forum for all creditors to join the discussion, and ask for voluntary donations to raise the fees for the lawyer.