SEC Coinbase Suit

The SEC has finally brought its long-anticipated lawsuit against Coinbase. The suit alleges that Coinbase has operated as an unregistered securities broker, an unregistered securities exchange, and an unregistered securities clearing agency, and that it has made unregistered sales of securities, namely of its staking-as-a-service products. The litigation hinges entirely on one key question: are any of several tokens listed or products offered by Coinbase “securities.” If the tokens and products are not securities, then Coinbase has no problem. And if they are securities, Coinbase almost assuredly loses.

June 7 virtual event on Second Circuit's Purdue Pharma decision

The Commercial Law League of America is holding a virtual event next week, free of charge and open to all, on broader implications of the Second Circuit's Purdue Pharma decision. Register here. Date and time: June 7, 2023 at noon Eastern. The panel is Candice Kline, Ralph Brubaker, Karen Cordry, and me, with Eric Van Horn moderating. 

Again, here's the link to register. 

Third-Party Releases Clearly Endorsed in the 2nd Circuit, At Long Last

Yesterday's 2nd Circuit opinion reconfirming Purdue Pharma's settlement/restructuring plan is an enlightening read for those interested in third-party releases. In what seems to me (and the concurrence) a bit of a reach, the 2nd Circuit conceded that statutory authority more specific than section 105 was needed to support third-party releases, but the Court found such support in section 1123(b)(6): “a plan may . . . include any other appropriate provision not inconsistent with the applicable provisions of this title.” Hmmm. That's quite a slender reed on which to balance such a powerful action. More interesting, the Court set forth a series of seven tests to gauge whether any given third-party release is appropriate. One key test is rather vague (whether the plan provides for the fair payment of enjoined claims), but at least we now have a roadmap for getting to an effective third-party release. Or do we? The Court in a crucial passage emphasizes "to the extent that there is a fear that this opinion could be read as a blueprint for how individuals can obtain third-party releases in the face of a tsunami of litigation, we caution that the key fact regarding the indemnity agreements at issue is that they were entered into by the end of 2004—well before the contemplation of bankruptcy." So the type of pre-bankruptcy planning we've seen in other cases may be a bridge too far, at least in the 2nd Circuit. This latest opinion seems to add weight to recent arguments that bankruptcy court is, indeed, an appropriate and effective venue for resolving sticky mass-tort issues, though the policy debate will doubtless continue.

The Debt Limit Is Unconstitutional—But It's Not What You Think!

Anna Gelpern, Stephen Lubben and I have an article in The American Prospect entitled The Debt Limit Is Unconstitutional—but Not for the Reason You Think. Various commentators—and members of Congress—have suggested that the President “invoke the 14^th Amendment” to declare the debt limit unconstitutional. They're right to argue that the debt limit is unconstitutional, but the constitutional problem isn't the 14^th Amendment. Instead, it's Article I of the Constitution, namely Congress's power to enter into contracts. The tl;dr version is that Congress has a power to make binding commitments for the United States and the President is constitutionally obligated to perform those commitments. If the Treasury lacks the funds, then the President must borrow. No specific authorization is needed. Instead, it is implicit every time Congress appropriates funds to perform a binding commitment.

Relocating the constitutional problem with the debt limit isn't merely an academic exercise. It has two implications.

First, it changes the nature of the legal debate and puts the administration on much, much firmer legal footing. The 14th Amendment argument is weak because it simply is not a prohibition on defaulting. It's a prohibition on repudiation, and a default is not a repudiation. An Article I argument reframes the issue as being about the validity of the debt ceiling, rather than the ability to default. In other words, it goes to question of whether the House GOP has holdup power, rather than whether the administration is under some cryptic constitutional limitation that it must affirmatively "invoke."

Second, it means that the President not only can, but must disregard the debt limit in order to fulfill his own constitutional duty to "Take Care" that the laws are faithfully executed. In other words, breaching the debt limit is not merely an option, but a legal requirement if Treasury is short of funds. Once Congress has appropriated funds, the President must carry out the authorized spending.

Debunking Debt Ceiling Myths

The commentary on the debt ceiling standoff has featured a bunch of mistaken conceptions from across the political spectrum. Let's address them. 

Myth #1:  The 14th Amendment Prohibits a Default

A variety of commentators claim that the 14th Amendment prohibits the United States from defaulting. It does nothing of the sort. Read the text of the Public Debt Clause: 

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

The Public Debt Clause is a prohibition on disputing the validity of US debt obligations--that is disputing whether they are legitimately owed. There's not a word in the 14th Amendment about default. The drafters of the Public Debt Clause included some very experienced commercial lawyers. They understood the difference between defaulting on an obligation and disputing or repudiating an obligation.  For example, I might acknowledge that I owe a loan, but just not be able to pay it. That's different than saying "I don't owe the money."

The Public Debt Clause is a prohibition on Congress, the Executive, and the Courts from disavowing US debt obligations. It's not a prohibition on defaulting because such a prohibition would be meaningless. If a country is unable to pay its obligations, no constitutional commitment device can change that. A constitution cannot fill a bare cupboard. And if a country is simply unwilling to pay its obligations (but admits to them), then its creditors are left with whatever legal recourse they might have. But prohibiting default doesn't get creditors anything. Prohibiting disavowal does because it means that creditors retain their right to be paid.

What all this means is that "invoking the 14th Amendment" is meaningless, unless it is shorthand for "treating the debt limit as unconstitutional." Now it just so happens that the debt limit is unconstitutional—but not because of the 14th Amendment!

 

Community Financial Services of America v. CFPB Amicus Brief

This fall the Supreme Court will be hear a case captioned Community Financial Services of America v. Consumer Financial Protection Bureau, dealing with the constitutionality of the CFPB's funding mechanism. I'm pleased to announce that Patricia McCoy and I filed an amicus brief today in support of the CFPB. We were very capably represented by Greg Lipper of LeGrand Law.

The tl;dr version: if the 5th Circuit's opinion is upheld it will result in market chaos--all of the CFPB's existing regulations will be void, and that includes things on which market actors rely, such as TILA disclosure safe harbors and ability-to-repay rule safeharbors. Moreover, there's no way to cabin the 5th Circuit's opinion to the CFPB--if the Bureau's funding is unconstitutional, so too is that of every federal banking regulator, including the Federal Reserve Board. There's simply no credible way to do a surgical strike on the Bureau's funding without collateral damage of economic havoc.

14-4: Any Questions?

Anna, Adam, and myself have a piece up on Alphaville about section four of the 14th Amendment, which is all the rage these days.

Calculation of Secured Claims

When I was a law student the rule I learned about secured claims was that they accrue post-petition interest and attorneys' fees (if provided for by contract or statute) up to the amount of the value of the collateral that exceeds their claims, but then nothing further once they are fully secured.  That was an easy enough rule to apply.

But then the Supreme Court's ruled in Travelers v. PG&E (2007) that the standard basis for disallowing the excess attorneys' fees—the Fobian rule—was no longer valid. SCOTUS expressly left open the possibility of other arguments for limiting attorneys' fees, but none have been successful in the courts of appeals so far. 

So this brings up a question:  If post-petition interest is capped by the collateral cushion, but post-petition attorneys' fees are not so capped and can therefore spillover into an unsecured claim, what is the order in which the collateral cushion is applied?  That is, what is the correct order of operations?  Is the collateral cushion applied first to post-petition interest and then to attorneys' fees or vice-versa or are they applied as they accrue? 

I'm curious for readers' thoughts on the right answer to this problem, or at least how it is handled in practice.  I'm also curious for thoughts on why the issue hasn't arisen in any reported decision. The problem seems akin to that of how adequate protection payments are applied to reduce a claim and collateral value, where there is a little bit of caselaw.  

LTL 2.0: The Largest Fraudulent Transfer in History

[Updated 4.12.23 to reflect the transcript of the first day hearing with much more detailed analysis of LTL's arguments regarding fraudulent transfer allegations.]

Today was the first day hearing for LTL 2.0. An ad hoc committee of talc claimants (most of the members of the Official Committee from LTL 1.0) weighed in with an informational brief that blasted the bankruptcy filing as being in bad faith and premised on what is, without hyperbole, the largest fraudulent transfer in history, weighing in a jaw-dropping $52.6 billion.

LTL, Part Deux (now with even more fraudulent transfers!)

This post is a joint post by Hon. Judith K. Fitzgerald (ret.)[*] and Adam Levitin

Here we go again. Precisely one hour and thirty-nine minutes after the dismissal of the bankruptcy filing of LTL, Johnson & Johnson’s artificially created talc-liability subsidiary, the company was right back at it again with the filing of a new chapter 11 case in New Jersey, again assigned to Judge Kaplan.

It took some fast work from our friends at Jones Day to get a second complex chapter 11 case out the door, albeit without any schedules! With the filing came, inter alia, a declaration, a statement by the Debtor regarding its second filing, and a new Adversary Proceeding that seeks the same preliminary injunctive relief for the benefit of some 700 J&J affiliates and favored customers that was achieved in the first LTL case.

The new case is supposedly engineered to comply with the strictures of the Third Circuit’s decision dismissing the original filing for not being in good faith on account of the debtor not being in financial distress. To recall, LTL found itself hoist on its own petard before the Third Circuit, which noted that its assets included a $62 billion funding agreement, vitiating any claim of financial distress.

To this end, what has changed in LTL 2.0 is the design of the funding agreement. The funding agreement in LTL 1.0 was for up to $62 billion, and the funding was to come from both LTL’s HoldCo (New JJCI) and J&J. Now in LTL 2.0, the funding agreement is just from HoldCo, and it is for only $8.9 billion. There is a proposed backstop from J&J, but that will require bankruptcy court approval, so LTL claims that it is not part of the good faith analysis. LTL’s thinking is that Judge Kaplan previously found that the HoldCo (or at least its predecessor) was in financial distress, so it must be so now, particularly because in January of this year it transferred most of its assets—the entire J&J consumer business!—to the J&J parent. The idea is that the new funding agreemen tisn’t really so valuable, so LTL must be in financial distress.

There are (at least) three flies in J&J's ointment.

CFPB Details "Abusive" in Policy Statement and Speech

In a few hours, I'll have the pleasure of hosting CFPB Director Rohit Chopra for a virtual talk at UCI Law (today at 12pm PDT, 3pm PDT). You can still join us by registering for the Zoom link here.

Director Chopra will be discussing the new policy statement on the CFPB's "abusive" authority that the Bureau issued a few minutes ago. The statement "summarizes precedent and establishes a framework to help federal and state enforcers identify when companies engage in abusive conduct."

The full policy statement is available here and will be published in the Federal Register with a 90-day comment period that closes on July 3. I imagine we might be talking more about it and its implications here on CreditSlips in the coming days.

It's Not Just an SVB Problem: the Systemic Nature of the Bank Regulation Failure

A mid-sized regional bank specializing in lending to tech start-ups, crypto companies, or law firms hardly seems of systemic importance, even if its failure would have caused disruption in some industries regionally and might have triggered a cascade of corporate bankruptcies because of large uninsured deposit balances. That sort of collateral damage from a bank failure is unfortunate and painful for those involved, but that's the nature of market discipline.

If that's where things ended with Silicon Valley Bank, I suspect regulators would have said too bad, so sad, as they were initially prepared to do. Yet the problem with Silicon Valley Bank's failure was that it had the potential spark for a banking-industry-wide panic, in which depositors pull their funds from smaller banks and move them either to big banks or to money market funds. That sort of panic could have been devastating to small and medium banks, as they would have faced a liquidity crunch that many could not meet...for the very same reason that SVB got into trouble, namely that they are sitting on large unrealized losses on their bond portfolios because they failed to manage interest rate risk appropriately. And if we had a correlated failure of lots of small and medium-sized banks, it would have resulted in serious economic disruption in small business and agricultural lending and a lot more spillover insolvencies of firms that had large uninsured deposits at those banks. That's the systemic risk scenario with SVB, and I suspect that as the weekend after the SVB failure advanced, that's what scared federal bank regulators into guarantying all deposits at SVB and SBNY.

But notice the nature of the problem: it wasn't just SVB that mismanaged its interest rate risk. It was lots and lots of other banks. Mismanaging rate risk is a Banking 101 screw-up, but it's also a Bank Regulation 101 screw-up. Rate risk is hardly a novel problem, and it's an easy one to address through derivatives like interest rate swaps, but those eat into profitability. Why bank regulators let rate risk get out of control almost across the board is something Congress needs to understand—I suspect that the story is much like consumer protection violations, which historically were tolerated because they were profitable. This much is clear, however:  if regulators had done their job generally, SVB's bank would not have posed systemic risk because there wouldn't have been the possibility of a panic. It would have been a one-off bank failure and nothing more. Regulators should have been on SVB's problems much sooner, but the real regulatory failure was an across-the-board failure to ensure that banks managed their rate risk because that's what set up the panic scenario.

Put another way, this isn't just a problem that can be hung on the neck of the Federal Reserve Bank of San Francisco. The problem here implicates every federal bank regulator.

FDIC's Poor Track Record in Holdco Bankruptcies

Last week I did a post about how the FDIC as receiver for Silicon Valley Bank probably doesn't have a claim against SVB Financial Group, the holdco of the bank. I got some pushback on that (including from a former student!), but I'm sticking to my guns here. It's a result that seems wrong and surprising, but if you look at the three most recent big bank holdco bankruptcies (this takes some digging in old bankruptcy court dockets), the FDIC has ended up with little or no claim.

SVB Financial Group's Manhattan Venue

As I have previously blogged, SVB Financial Group seems to be trying to do venue by declaration. Consider the grounds for venue under 28 USC 1408 and how they apply to SVBFG:  

• Location of principal place of business for majority of past 180 days.  All of SVBFG's regulatory filings in the last 180 days said its address—principal place of business—is in Santa Clara, CA.
• Location of principal assets for majority of past 180 day. The majority of its assets for the last 180 days—Silicon Valley Bank—were in Santa Clara.
• Location of domicile for majority of past 180 day.  SVBFG is incorporated in Delaware and always has been. 
• Location of pending affiliate's case's venue for majority of past 180 day. SVBFG does not have any affiliate cases pending, much less in SDNY.

SVBFG's claim to SDNY venue seems to be based on the location of its principal assets. Those principal assets are as of today the equity of two of its non-debtor subsidiaries. But for almost all of the past 180 days, the principal assets were the equity in the bank. Not only is SVBFG trying to ignore the 180 days rule (which exists precisely to prevent this sort of gaming), but its argument that its assets are located in NY is simply wrong.  

Both of the SVBFG subsidiaries are Delaware entities according to SVBFG's last annual report. The subsidiaries might have their principal offices in Manhattan, but that's irrelevant. The corporate stock is not located in Manhattan (I really hope they aren't suggesting that the DTC's holding of stock certificates does the trick--if so, everyone can file in Manhattan). When a parent owns a subsidiary's stock, the stock either has no location as an intangible or is located where the subsidiary is domiciled.  Nothing else makes sense.

To see why, consider the following: suppose a car is my principal asset. It's titled in Delaware, but currently illegally double-parked in Manhattan. In that case SDNY venue would be proper. There's direct ownership of a physical asset that has a location and that's enough for the venue statute. It's no different than owning a building in Manhattan. But now imagine that my principal asset is not the car, but stock in a Delaware corporation, and the corporation's sole asset is a car that's illegally double-parked in Manhattan. In this scenario, I do not directly own the asset that is in Manhattan. To impute it to me would render the venue statute meaningless.  Congress knows how to talk about indirect ownership when it wants. It didn't in the venue statute. The statute is about the principal assets of the debtor, not the debtor's non-debtor subsidiaries. Trying to bootstrap in this way is akin to LTL trying to bootstrap on non-debtor J&J's "distress." Bankruptcy law has clear boundaries—debtor vs. non-debtor—but if it's going to be ignored, then what are the "rules"? 

While I'm thumping on the venue issue, what of the "no harm, no foul" argument? I don't know what the harm is of SDNY venue at this point. This isn't an obvious issue like Boy Scouts going to Delaware to avoid 5th Circuit law on non-debtor releases. But I can say this with confidence: Sullivan & Cromwell clearly thought there was some benefit to their client in having SDNY venue, rather than Delaware or California venue. It's not that these other venues are somehow not equipped to handle a case like this (and notice how insulting that argument is to most of the 375 bankruptcy judges in the country...). Delaware and (Central District) of California have both done large bank holding company bankruptcies:  WaMu and IndyMac. Perhaps S&C simply doesn't want to take the Acela to Wilmington and stay at the Hotel Dupont, just as the California-based creditors don't want to fly out to LaGuardia. But it's also possible that there's some substantive legal issue S&C is concerned about that led it to file the case in SDNY. The very fact that the debtor ordered "off-menu" when there were two good, legitimate, alternative venue choices should set everyone's spidey sense tingling. I was pleased that the court has not put in "venue is proper" language in its orders so far; we'll have to see if there's an objection. That might turn on whether other parties can suss out a potential disadvantage to being in SDNY and want to risk the possibility that the judge takes umbrage with a venue motion, even if it's about governing law, rather than a question of getting a fair shake. 

The Death of Dodd-Frank: Banking Law's Dobbs Moment

Last year, I savored a bit of schadenfreude watching my con law scholar colleagues despair about their field after cases like Dobbs v. Women's Health Organization or West Virginia v. EPA. Con law scholars see themselves as the royalty of the legal academy, far above those folks who do blue collar law like bankruptcy and commercial law or grubby stuff like banking and money. And that's fine--we always laughed at them as slightly clueless toffs, not realizing (or wanting to admit) that their field is largely a battle of normative opinions, without any quasi-objective touchstone or clearly right or wrong answers. In contrast, we can point to things like express deadlines and numerical ratios that must be maintained and efficiency principles like "least cost avoider". That's what's made the Supreme Court's recent jurisprudence so delicious--it shows what every non-con law scholar has long known--that con law is as much politics as it is law. There was a certain joy in watching the con law field realize that the emperor had no clothes.  

But there's karma in the universe, and Silicon Valley Bank is sticking it right back the banking law scholars. I don't usually teach the core prudential regulation banking law class, but I really feel for colleagues who do. The response to Silicon Valley Bank is banking law's Dobbs moment. In 2010, in the wake of the 2008 crisis, Congress erected an enormous legal edifice to govern financial institutions--the Dodd-Frank Act. And we saw in the course of a weekend that it was all an expensive and wasteful Potemkin village. What good does it do to have a massive set of regulations...if they aren't enforced? To have deposit insurance limits...if they are disregarded? Dodd-Frank is still on the books, but its prudential provisions are as good as dead. Why should anyone follow its requirements now, given that they'll be disregarded as soon as they're inconvenient? And why should the public have any confidence that they are protected if the rules aren't followed? Indeed, did anyone even look at SVB's resolution plan or was it all a show? 

I really don't know how one can teach prudential banking regulation after SVB. How can you teach the students the formal rules—supervision, exposure and concentration limits, prompt corrective action, deposit insurance caps—when you know that the rules aren't followed? This is going to be a real challenge for folks who teach banking regulation. So, I invite our con law colleagues to snicker back at us. 

P.S. Anna Gelpern will say that I'm being naive--as she noted in a great 2009 article, the rules always get tossed out the window in financial crises and then there's a lot of finger wagging and new rules that are followed until the next crisis, when they aren't. And she's right. But the cycle of rules-crisis disregard-new rules had its own internal credibility:  this time I mean it! That internal credibility required there to be a certain time lag between crises, enough that a new king would arise over Egypt, who did not know Joseph, that is a new crew of regulators who could not be counted on to act the same way as in the past. When it's the same crew as from the last crisis, the internal credibility of "this time I mean it!" doesn't fly. 

SDNY: EFTA Applies to Crypto

I'm teaching cryptocurrency today in my Payment Systems class, and I'd been puzzling about why no one has applied the Electronic Fund Transfers Act and Reg E thereunder to crypto: after all, if you have a crypto account with an exchange, it would seem to be an "account" at a "financial institution" that is primarily for personal, family, or household purposes and is used for electronic transfers of "funds." In fact, I had just emailed Bob Lawless for a sanity check on this, when I came across a very recent SDNY decision that held that the EFTA applies to crypto. That's a huge consumer protection win. Reg E has important consumer protections regarding unauthorized transactions, error resolution, and provision of receipts and periodic statements. It also creates huge compliance headaches for crypto exchanges, which are not set up for dealing with any of those problems. All of the Zelle scam error resolution issues are now going to become crypto scam error resolution issues. And the ruling also indicates that consumer protection at cryptocurrency exchanges is now squarely within the existing regulatory authority of the Consumer Financial Protection Bureau. This could get interesting. 

The Regressive Cross-Subsidy of Uncapping Deposit Insurance

There's talk about removing the FDIC deposit insurance caps in response to the "Panic of 2023"®.  There's a refreshing realism about such a move. But let's also be clear about the distributional impact of such a move:  it's a huge cross-subsidy from average Joes to wealthy individuals and businesses.>

If FDIC insurance coverage caps are removed, banks will pay more in insurance premiums. They will pass those premiums through to customers because the market for banking services is less competitive than the market for capital. In particular, the higher costs for increased insurance premiums are likely to flow to the least price-sensitive and most “sticky” customers:  less wealthy individuals.  So average Joes are going to be facing things like higher account fees or lower APYs, without gaining any benefit. Instead, the benefit of removing the cap would flow entirely to wealthy individuals and businesses. This is one massive, regressive cross-subsidy. It's not determinative of whether raising the cap is the right policy move in the end, but this is something that should be considered.

The Financial Regulatory Credibility Problem

Financial regulation has a credibility problem. Actually, it's got two credibility problems.

It's not credible any more to think that financial regulators will shut down troubled institutions until they are forced to do so. And it's no longer credible that financial regulators will allow depositors to incur losses. Both are really problematic.

Oops. How the FDIC Guaranteed the Deposits of SVB Financial Group

When President Biden announced the rescue of Silicon Valley Bank depositors, he emphasized that "investors in the banks will not be protected.  They knowingly took a risk and when the risk didn’t pay off, investors lose their money.  That’s how capitalism works." Unfortunately, that's not how US law works. 

There seems to be a gap in the Federal Deposit Insurance Act that is going to protect some investors in Silicon Valley Bank’s holding company, SVB Financial Group. The holdco’s equity in the bank will be wiped out in the FDIC receivership, but the FDIC doesn’t have any automatic claim on the holdco. This is basic structural priority/limited liability:  creditors of a subsidiary have no claim on the assets of a parent.

What's worse is that the holdco, which filed for bankruptcy today, has substantial assets including around $2 billion on deposit with SVB. Almost all of that $2 billion deposit at SVB would have been uninsured, but by guarantying all the deposits, FDIC accidentally ensured that the holdco’s bondholders would be able to recover that from that full $2 billion deposit.

There isn't any provision in the Federal Deposit Insurance Act that subordinates the claims of insiders—like corporate affiliates or executives—that exceed the insured deposit limit to other creditors. So once FDIC guaranteed all deposits, it necessarily guaranteed the deposits of the holdco and other insiders. 

Who Knew Silicon Valley Was in Manhattan?

Silicon Valley Bank's holding company, SVB Financial Group, filed for Chapter 11 bankruptcy this morning...in the Southern District of New York. Who knew that Park Avenue South was in the heart of Silicon Valley?

Seriously, the venue here looks problematic. SVB Financial Group's petition lists its principal place of business as 387 Park Avenue South, Manhattan. There's a SVB location there with about 20,000 square foot of space. That's sure doesn't seem like a corporate headquarters for the 16th largest bank holding company in the US. Instead, it seems to be more of a bank branch. But the petition does bear the signatures, under penalty of perjury, of SVB Financial Group's CRO and, not so clearly under penalty of perjury, of SVB Financial Group's attorney at Sullivan & Cromwell. 

Curiously, SVB Financial Group has been telling federal bank regulators a different story about where it's located. On its Bank Holding Company Report, Systemic Risk Report, Consolidated Financial Statement, and Parent Company Only Financial Statement for Large Bank Holding Companies—documents filed with the Federal Reserve Board—SVB Financial Group said its address is 3003 Tasman Drive, Santa Clara, California. Hmmm.

What's Going on with First Republic Bank?

Following the failure of Silicon Valley Bank, a lot of other regionals have experienced depositor runs and serious pressure on their stock prices. But there's actually a lot of variation among regionals, and the solutions to SVB's problems don't necessarily fit the other regionals' problems, as the case of First Republic Bank shows.

Why Weren't Silicon Valley Bank Depositors Using CDARS?

Silicon Valley Bank seems to have had large amounts of uninsured deposits from businesses and high net worth individuals. And those uninsured deposits are likely to be impaired in the receivership, meaning that they will not get paid 100 cents on the dollar whenever they do get paid.

But here's the thing:  there are turnkey products that enable depositors to insure much, much larger amounts than the FDIC-insurance cap of $250k/depositor/account type. For years and years there's been deposit brokerage services that spread out deposits at multiple banks, all in amounts under the FDIC insured cap. The best known service is called CDARS-Certificat of Deposit Account Registry Service. It's offered by IntraFi (formerly Promontory). I don't know if SVB participated in CDARS, but it's a pretty straightforward solution to the deposit insurance cap.

What Could Go Wrong When a DIP Maintains a Large, Uninsured Deposit Account at Silicon Valley Bank?

You gotta feel for BlockFi customers. First, they find themselves creditors in BlockFi's bankruptcy. And now they've found out that BlockFi had a large, uninsured deposit...at Silicon Valley Bank. Yup, it seems that BlockFi had $227 million in a money market deposit account at SVB. (The UST refers to it as a "money market mutual fund," but that cannot be right, or it wouldn't be at SVB or have any insurance. [See "Another update" below regarding possibility that it was a money market mutual fund sweep account, in which case the money would in fact be protected.]) That would mean there's a $226.75 million uninsured deposit. Given what we know about SVB, part of that $226.75 million in uninsured funds is likely lost if it's still at SVB.  

The US Trustee filed a motion today to force BlockFi to put the funds in insured accounts, but it sure looks as if the cow's out of the barn already. If the money's lost, then the question is who's going to pay for this screw up, and it's especially juicy because it's all tied up with venue competition.