Bankruptcy practice is counter-cyclical. When the economy is strong, bankruptcy filings decline. During recessions, the bankruptcy bar is swamped. But gross mismanagement and fraud span all economic cycles. It was predictable that with the new technologies of artificial intelligence (AI) and cryptocurrency would come old fashioned fraud and the question of whether a bankruptcy court has jurisdiction to adjudicate claims arising out of an alleged fraudulent scheme involving nondebtors. The intersection of artificial intelligence and cryptocurrency was involved in a recent decision in In re Augustus Intelligence (Case No. 21-10744 (TMH) (Adv. No. 23-50370 (TMH), where the U.S. Bankruptcy Court for the District of Delaware dismissed claims against an alleged participant in a scheme that induced investors to fund over $30 million in an artificial intelligence company designed to generate revenue from enhanced cryptocurrency mining. The court concluded it lacked subject matter jurisdiction to adjudicate the investors’ claims that had been assigned to a post-confirmation litigation trust created under a Chapter 11 plan, and also dismissed an estate claim for breach of contract pursuant to the long-standing rules that contracts in furtherance of fraud are unenforceable and that parties to criminal acts may not assert equitable claims against the other party, also known as in pari delicto.
