Among the many concerns arising from the increasing prevalence of cryptocurrency are the problems and risks associated with the fact that the liquidity and value of cryptocurrencies fluctuate over time. To illustrate the kinds of liability risks this fluctuation can lead to, Sarah Abrams, Head of Claims Baleen Specialty, a division of Bowhead Specialty, reviews a recent set of circumstances in which Stoli Group USA, LLC sought to settle a secured debt liability by payment of another kind of alternative asset with fluctuating valuation – in this case, 35,000 barrels of unfinished bourbon. Sarah considers the potential implications from the Stoli case for companies with crypto treasury assets. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
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A recently rejected attempt by Stoli Group USA, LLC (Stoli) to satisfy $78 million in secured debt with 35,000 barrels of unfished bourbon may present a compelling analog for D&O risk stemming from the increasing creation of crypto treasuries. As companies continue to invest in crypto treasury strategies, there can be follow-on financial stress and D&O underwriting liability resulting from cryptocurrency volatility.
The court’s decision in the Stoli bankruptcy proceeding highlights a potential theme in distressed-company D&O underwriting exposure stemming from the liquidity and value of assets that fluctuate in real time. Particularly, when a bankruptcy estate cannot satisfy creditors because a key asset (like crypto) loses value, disappears, or proves illiquid, the D&O underwriter risk may arise not from the bankruptcy itself, but from the alleged governance failures and disclosure missteps leading up to it.
To appreciate the potential D&O underwriting impact from increasing corporate crypto treasury strategies, particularly when a company becomes distressed or files for bankruptcy, the following will discuss relevant portions of Stoli’s rejected restructuring plan, as well as how crypto treasuries are created and D&O-related risks stemming therefrom.
Bourbon-as-Collateral Plan
Stoli and its affiliate Kentucky Owl, LLC (Kentucky Owl) filed for Chapter 11 bankruptcy protection on November 27, 2024, in the U.S. Bankruptcy Court for the Northern District of Texas. According to Stoli the bankruptcy filing was driven by a liquidity crisis stemming from supply chain disruptions, decreased demand for spirits, and rising prices.
Notably, Stoli cited that Kentucky Owl’s bourbon inventory was a root cause of its inventory and supply chain imbalance. Specifically, Kentucky Owl held tens of thousands of barrels of aging bourbon stored at third-party facilities and carrying costs of that inventory, coupled with limited near-term revenue from finished goods, strained Stoli’s liquidity. Thus, Stoli’s restructuring plan presented the Kentucky Owl bourbon as the Stoli’s principal tangible asset and requested that the barrels of bourbon be used as collateral to secure the company’s senior bank debt.
Stoli proposed, in part, that its secured creditors monetize Kentucky Owl’s bourbon inventory, either through sale, transfer, or collateral substitution. One of Stoli’s secured creditors objected to the plan on the basis that bourbon prices are too depressed to cover the value of its loan and that the bank is not in a position to conduct liquor sales. The Stoli bankruptcy judge agreed, indicating that he was further persuaded by the bank creditor’s expert witness’ description of a “dismal” bourbon market due to falling customer demand and a surplus of barrels from several large distilleries, creating a “race to the bottom” in pricing.
The Stoli bankruptcy court’s decision reinforces that bankruptcy courts often resist speculative asset-for-debt plans where valuation depends on unstable commodity markets or extended liquidation timelines. While confirmation of (bankruptcy) plan §1129(b)(2)(A) allows non-cash payments to secured creditors, feasibility and adequate protection remain paramount. To succeed, debtors must provide credible, market-supported valuations; ensure prompt liquidation timelines; and secure creditor consent or backstop guarantees.
That may be a challenge for a distressed company that invested in a crypto treasury with large Bitcoin and Ether reserves. Below, I will briefly discuss what a crypto treasury is and how it is created, before going through potential D&O insurer exposure should a bankruptcy be filed.
Crypto Treasury
A crypto treasury refers to the portion of a company’s balance sheet or reserve assets held in cryptocurrency rather than in traditional cash or short-term instruments. It serves the same role as a corporate treasury, providing liquidity, collateral, and potential investment yield, but substitutes cryptocurrency coins or tokens (e.g., Bitcoin, Ether, or stablecoins) for fiat holdings or marketable securities.
From an accounting standpoint, under U.S. GAAP, crypto holdings are typically classified as indefinite-lived intangible assets, not cash equivalents, meaning gains cannot be marked up but losses must be impaired. Notably, PIPEs have become a favored method for companies seeking to establish a crypto treasury – through direct conversion of proceeds, direct participation by crypto investors, and in-kind PIPE investments. A PIPE (Private Investment in Public Equity) is a transaction where a public company issues new shares or convertible securities to accredited investors, at a negotiated discount to its current market price.
Thus, if a company raises U.S. dollars through the PIPE and converts a portion of that cash into crypto, the crypto may be held as a reserve or investment on the balance sheet. And, if a company’s particular treasury crypto, similarly to bourbon, becomes depressed in value, the impact on that company and D&O carriers may be significant. Particularly, if that company ends up filing for bankruptcy.
Discussion
D&O underwriters may want to consider, certainly in the case of a distressed insured, what percentage of company assets are in a crypto treasury. If a company raises cash through a PIPE and converts it into Bitcoin, Ether, or other tokens, those holdings sit on the balance sheet as intangible, market-sensitive assets. When prices drop sharply, the company’s reported liquidity and net worth can erode overnight, potentially triggering covenant defaults, restatements, or insolvency events. For Stoli, the price of bourbon became a driving factor to file for Chapter 11; for a company that created a crypto treasury, it could be the value of Bitcoin.
And, if bankruptcy occurs, the trustee or creditors’ committee may bring 10(b) and 10(b)(5) securities claims derivatively on behalf of the estate, arguing that management inflated liquidity or understated risk associated with crypto holdings as cash equivalents as part of a crypto treasury strategy. In addition, the trustee or creditors’ committee may allege breach of fiduciary duty and oversight failure claims brought when crypto formed a material part of a company’s balance sheet because the board is expected to institute controls and valuation governance around custody, accounting, and disclosure.
Finally, even if a D&O policy’s “insured vs. insured” or “entity exclusion” limits coverage for the bankrupt entity, Side A coverage may respond to trustee or creditor-derivative actions alleging mismanagement of digital assets; regulatory enforcement actions (SEC, CFTC, or DOJ) related to misstatements or asset misappropriation; or securities class actions filed pre-petition that continue post-bankruptcy under the automatic stay exceptions.
Therefore, D&O underwriters may want to keep in mind that, if, like Stoli, a company’sbankruptcy estate cannot satisfy creditors because a digital or volatile asset evaporates, D&O liability stemming from the creation of a crypto treasury may increase.
The views expressed in this article are exclusively those of the author, and all of the content in this article has been created solely in the author’s individual capacity. This article is not affiliated with the author’s company, colleagues, or clients. The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter.