The United States Bankruptcy Court for the District of Utah has ordered the appointment of a Chapter 11 Trustee in the bankruptcy case of Power Block Coin, L.L.C. (d/b/a SmartFi), a crypto-based financial services company with approximately $200 million in unsecured claims. In a Memorandum Decision filed March 31, 2026, the Court granted the Official Committee of Unsecured Creditors' motion to appoint a Chapter 11 Trustee under Section 1104(a)(2) of the Bankruptcy Code and denied the Debtor's competing motion to convert the case to Chapter 7, concluding that remaining in Chapter 11 under independent trustee oversight best serves the interests of creditors.
Company Background and Business Operations
Power Block Coin, L.L.C., operating under the trade name SmartFi, is a Utah limited liability company that provided crypto-based financial services including cryptocurrency exchange, savings, crypto-based lending, token creation and offering, alternative currencies, and cryptocurrency investment. The company had no employees of its own. All work was performed by employees of its parent company, Blue Castle Holdings, Inc., under a pre-petition Management Services Agreement that the Court subsequently approved. Under that agreement, Blue Castle used funds from its own bank accounts to pay the Debtor's obligations, and the Debtor either transferred cryptocurrency to Blue Castle or applied credits against a $1.4 million loan it had made to Blue Castle in August 2023.
The Debtor has ceased operations. Beginning in 2022, worldwide cryptocurrency markets experienced a rapid collapse and sustained period of instability, which contributed to the company's financial deterioration.
Path to Bankruptcy and Case History
The case has been pending for approximately 21 months since the petition date, and the Court characterized it as having been "fraught with issues" throughout. The Debtor initially elected to proceed under Subchapter V of Chapter 11 despite facing claims in excess of $192 million. Almost four months later, the Court sustained objections to that election, rendering the case a traditional Chapter 11 proceeding and leading to the appointment of the Official Committee of Unsecured Creditors.
The Committee's investigation uncovered a series of concerns about the Debtor's management of the estate. The Debtor's monthly operating reports failed to adequately account for changes in the Blue Castle loan balance and the value of its cryptocurrency holdings, and contained entries the Debtor could not adequately explain at a hearing on a motion to compel accounting. The Committee alleged that the Debtor's assets had been commingled with those of Blue Castle and its affiliates to the point of incomprehensibility, that the Debtor diverted the bulk of its assets through unsecured loans to affiliates under the principal's common control at favorable rates with no payments due for years, and that the Debtor failed to preserve its rights in a property on which a $2 million post-petition lien was placed. Monthly operating reports also revealed payments from undisclosed bank accounts, and the U.S. Trustee identified unaccounted-for checks related to a theft recovery.
Plan negotiations proved equally difficult. The Court denied the Debtor's motion to extend its exclusivity period in December 2024, noting the Debtor had not demonstrated the ability to operate with transparency and good faith. The Debtor filed its First Amended Plan of Reorganization on December 16, 2024, and the Committee filed its own plan on January 30, 2025, followed by an amended version on March 7, 2025. Negotiations with the then-largest creditor, Celsius, for a term sheet were unsuccessful, and a subsequent mediation among the Debtor, Blue Castle, the Committee, and other Debtor affiliates reached tentative agreement on some issues but ultimately ended in impasse.
Competing Motions: Trustee Appointment vs. Conversion
The Committee filed its Motion to Appoint a Chapter 11 Trustee on October 21, 2025. A creditor and the U.S. Trustee initially joined in support, though the U.S. Trustee later adopted a neutral position after the Debtor filed its own motion to convert to Chapter 7. Two additional creditors also supported the Chapter 11 Trustee appointment.
The Debtor, for its part, conceded that plan confirmation was no longer feasible due to increasing administrative fees and the inability to reach agreement with the Committee. The Debtor stated it no longer wished to remain in possession and did not challenge the Committee's allegations, recognizing that placement of an independent trustee was in the best interests of creditors. The Debtor did, however, acknowledge that Chapter 7 would produce a worse outcome than the terms previously negotiated among the Committee, Celsius, and the affiliates under the Committee's joint plan proposal.
Four creditors and investors, including one Committee member, joined the Debtor in seeking conversion to Chapter 7 after the hearing.
The Court's Analysis
The Court framed the central question as which form of trustee oversight would best serve creditors, noting that both sides agreed the Debtor should no longer control the estate. The legal standards under Sections 1104(a)(2) and 1112(a) and (f) converge on a single criterion: what is in the best interests of creditors.
On the conversion question, the Court applied the framework established by the Tenth Circuit Bankruptcy Appellate Panel in Kearney, which holds that if a court would immediately reconvert a case back to Chapter 11 under Section 706(b), it need not go through the "procedural anomaly" of converting in the first instance. The Court concluded it would do exactly that, and therefore denied conversion under Section 1112(f).
Three factors drove the Court's decision to keep the case in Chapter 11 with a trustee rather than convert to Chapter 7.
First, the Court found that conversion would cause unnecessary and potentially harmful delay. The Committee has spent significant time and energy investigating the Debtor and still needs additional information. A Chapter 7 Trustee would need to learn the case from scratch without the Committee's assistance, as the Committee would be disbanded in Chapter 7. With statutes of limitation on potential avoidance actions approaching, the estate cannot afford additional delay. The Tenth Circuit has held that the limitations clock does not reset upon appointment of a subsequent trustee, making any time lost to transition a real and permanent risk to the estate.
Second, Chapter 11 offers expanded flexibility for a trustee to exercise independent judgment and direct the affairs of the estate to optimize recovery. The Committee intends to work with the appointed trustee to confirm the Committee's pending plan, preserving the institutional knowledge the Committee and its professionals have developed over the life of the case.
Third, the Committee represented that it and its professionals would manage administrative fees to permit a Chapter 11 Trustee to recover value for the estate. The Committee has agreed to defer fees so they are not due on the effective date of the plan, and both trustee candidates the Committee interviewed have agreed to work on a contingency basis. The Committee asserts sufficient assets exist to fund the case, including cryptocurrency inventory, amounts owed under the Blue Castle loan, and potential claim settlements.
The Court also considered and rejected the Committee's argument that a Chapter 11 Trustee would be better insulated from the in pari delicto defense than a Chapter 7 Trustee. The Court found this factor not determinative, concluding that the defense's applicability depends more on the nature of the claims brought than on who brings them.
The Court described the decision as "a close one" but concluded that remaining in Chapter 11 offers material benefits to creditors compared to conversion.
Disclosure Statement and Next Steps
The Court placed the pending disclosure statement on hold pending the Chapter 11 Trustee's appointment and review, finding it would be a waste of resources to advance the disclosure statement process without the incoming trustee's approval. The Court noted concerns about whether the disclosure statement contains sufficient information regarding assets available to pay creditors relative to anticipated administrative fees.
If the appointed Trustee wishes to move the disclosure statement forward in a substantially similar form, the Court indicated it will entertain requests for expedited consideration. The Court also acknowledged that if the Debtor is correct that insufficient assets exist to pay administrative fees and confirm a plan, a trustee working on a contingency basis would be positioned to inform the Court if liquidation through Chapter 7 is ultimately the better course.
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