A US bankruptcy court has approved Terraform Labs’ request to retain law firm Dentons despite concerns raised by the company’s creditors and the SEC.

This approval comes on the heels of Dentons’ commitment to return $48 million to Terraform, a substantial part of the retainer fee initially paid to the firm for legal services, marking a strategic win for the beleaguered blockchain company amid financial turmoil.

Judge Brendan Shannon, presiding over the hearing, highlighted the critical nature of legal defense expenditure by Terraform Labs and said it was a judicious allocation of the firm’s constrained financial resources.

Slush fund concerns

The engagement of Dentons had previously stirred controversy among various stakeholders, including Terraform’s creditors and regulatory bodies, due to concerns over a significant pre-payment to the law firm totaling $166 million since early 2023.

Critics argued that such payments diverted crucial resources away from creditors and bypassed the oversight of the bankruptcy court.

To quell these objections, Dentons has consented to remit $48 million back to Terraform and agreed to ensure that any future legal services, particularly those related to the SEC lawsuit and potential appeals, would undergo rigorous scrutiny by the bankruptcy court.

This arrangement aims to balance Terraform’s need for high-quality legal representation with the need to conserve its dwindling financial resources for creditor repayment and operational sustainability.

Collaborating with Kwon’s lawyers

Despite the overarching challenge of navigating its bankruptcy and legal defense, Terraform has made strides in addressing and resolving the bulk of the objections to its legal expenditures prior to the court’s latest ruling.

However, the US Trustee’s office raised a separate issue concerning the firm’s intended reimbursement of approximately $733,000 to a law firm representing Terra founder Do Kwon in Montenegro.

The company’s defense team argued that cooperation with Kwon’s Montenegrin lawyers was imperative to access vital information for its defense strategy against the SEC.

Judge Shannon endorsed the argument and dismissed the US Trustee’s concerns, deeming the financial arrangement with law firm Rodic suitable.

The legal entanglements of Terraform Labs trace back to a federal court ruling in December, which found that the company and its founders had breached US securities law by failing to register two digital currencies.

The collapse of these tokens in 2022 had a catastrophic effect on the crypto markets, leading to a $40 billion fallout. The SEC’s claims against Terraform highlight the gravity of the allegations and the potential financial liabilities far exceeding the company’s available assets.

The firm filed for Chapter 11 bankruptcy in January. Kwon was initially expected to be present at the trial; however, recent developments revealed that he will most likely be extradited to his home country, South Korea, after almost a year of legal proceedings.