NY judge delays Aave bid to unfreeze $71M in ETH

A federal judge in the Southern District of New York postponed a decision on Aave’s emergency request to unfreeze $71 million in ETH and ordered additional briefing from both sides ahead of a June 5 hearing. Judge Margaret M. Garnett issued the order after motions were filed earlier in May.

Aave asked the court to release $71 million in ETH that Arbitrum froze so the funds could be used in recovery efforts following the Kelp DAO hack, in which roughly $293 million was stolen. In court filings, Aave argued that leaving the funds frozen could cause user liquidations and increase stress on the protocol and its users.

At the start of May, the law firm Gerstein Harrow LLP filed a restraining notice asserting that its clients have legal claims to some of the frozen assets. Judge Garnett wrote that Aave’s earlier filing did not adequately explain how “compounding losses” on user funds would “occur if the restraining notice remains in place.”

The judge acknowledged the case raises complex issues and that the parties had briefed the matter on a tight schedule. “The court recognizes the risk of potential near-term harm to Aave LLC and Aave Protocol users,” Judge Garnett wrote, and ordered supplemental briefs to clarify the parties’ positions.

The court asked the parties to address six specific topics, including whether the hacking transactions fall under New York’s shelter principle; the legal difference between fraud and theft and what property interest a hacker might have in stolen assets; which body of law governs creditor priority over the frozen funds; whether a constructive trust would be an appropriate remedy; and whether Aave or Arbitrum can identify individual victims so recovered assets could be returned on a pro rata basis. Aave and Gerstein Harrow must file their submissions by May 22.

The frozen ETH is part of broader recovery steps after the Kelp DAO breach. Kelp DAO and Aave announced that the hacker’s rsETH were burned on Arbitrum and that about $278 million in lost tokens will be restored over the next two weeks from funds held in the Aave Recovery Guardian multisignature wallet. Once the relevant smart contracts are reactivated, rsETH functions are expected to resume.

Arbitrum froze the $71 million while recovery work proceeded. Aave contends unlocking the funds would help restore protocol backing and ease pressure on users facing potential liquidations. Gerstein Harrow maintains that its clients have enforceable claims to some of the frozen assets, creating a dispute over priority.

The case will return to court on June 5 after the parties submit supplemental briefs addressing the court’s listed issues.