Brown Rudnick Achieves Landmark Ruling in the Treatment of DAOs in Bankruptcy

Brown Rudnick, on behalf of the receivers of Hector DAO, achieved the first Chapter 15 recognition of a foreign main proceeding in which the debtor was a decentralized autonomous organization (DAO), a community-led entity collectively owned and managed by its members on an open-source blockchain. This is the first U.S. bankruptcy case where the debtor is a DAO.

On July 15, 2024, U.S. Bankruptcy Judge Michael B. Kaplan granted the firm's petition for recognition of the British Virgin Islands receivership over the assets of debtor Hector DAO as a foreign main proceeding under Chapter 15. The landmark decision establishes a crucial precedent for the treatment of DAOs in cross-border insolvency cases, reinforcing their legal status as entities capable of being debtors.

Founded in 2021, Hector DAO entered into receivership in the British Virgin Islands after a series of financial mishaps that led Hector's token holders to vote in July 2023 to liquidate and distribute all of its remaining assets. In January 2024, Hector lost $2.7 million worth of distribution assets after it suffered a hack, prompting the liquidation committee to seek the appointment of receivers.

On Feb. 19, 2024, James Drury and Paul Pretlove of Interpath Advisory were appointed by the Eastern Caribbean Supreme Court as interim receivers, with their appointment being made final on April 9, 2024 for the purposes of winding down Hector's operations, distributing assets to creditors and token holders, and investigating prior events including the January hack.

In response to the January hack, a group of token holders filed suit against Hector and others in New Jersey alleging breaches of contract and fiduciary duty, thus threatening to interfere with and delay the collective receivership proceeding.

In addition to granting the petition for recognition, Judge Kaplan also stayed the pending litigation.

The Brown Rudnick team representing the receivers was led by partners David Molton and Stephen Palley and included partner Gerard Cicero, associates Michael Reining and Lizzy Castano, and summer associate Gwyneth Chen.