New York court pauses decision on Aave’s $71M ETH recovery request

A New York federal judge has postponed a decision on Aave’s request to release $71 million in frozen Ethereum tied to the Kelp DAO exploit, ordering both sides to submit additional legal arguments before a June hearing.

According to filings submitted Wednesday in the Southern District of New York, Judge Margaret M. Garnett said Aave LLC had not sufficiently explained how “compounding losses” to users would occur if the restraining notice on the funds remained active. The judge scheduled another hearing for June 5 and directed both parties to file supplemental briefs by May 22.

At the center of the dispute is 30,765 ETH that Arbitrum’s Security Council froze on April 21 after tracing the assets to the April 18 Kelp DAO exploit. 

The attack targeted Kelp’s LayerZero-powered bridge and allowed hackers to mint unbacked rsETH, which was later used as collateral on Aave v3 to borrow an estimated $230 million in wrapped ETH. Earlier reports tied the exploit to roughly $190 million in bad debt across DeFi lending markets.

Earlier this month, Gerstein Harrow LLP secured court approval to serve a restraining notice on Arbitrum DAO. The law firm represents families holding about $877 million in unpaid terrorism judgments against North Korea and argued the frozen ETH should be treated as DPRK-linked property because blockchain analytics firms associated the exploit with the Lazarus Group. No court has formally determined that North Korea or Lazarus carried out the attack.

Aave pushed back against that argument in an emergency filing on May 4. Its lawyers argued that stolen crypto does not become the legal property of a thief simply because it passed through attacker-controlled wallets. The company also warned that extended restrictions on the ETH could hurt affected users and interfere with recovery efforts tied to rsETH.

Court asks for clarification on ownership and creditor claims

In her latest order, Judge Garnett acknowledged the risks facing Aave users but said the legal questions raised by the dispute require deeper examination. The court asked both sides to address six specific issues, including whether New York’s shelter principle applies to the hacking transactions, how theft differs from fraud under the relevant law, and whether the hackers ever gained a recognizable ownership interest in the stolen assets.

Additional questions focused on creditor priority rights over the frozen ETH and whether a constructive trust could be used to return funds proportionally to affected users. Judge Garnett also asked whether Aave or Arbitrum can identify individual victims well enough to support a pro rata distribution plan.

Days before the latest order, Judge Garnett modified an earlier freeze to allow an Arbitrum governance proposal tied to the recovery effort to continue moving through on-chain voting. The proposal, introduced on May 12, would transfer the 30,765 ETH from Arbitrum’s Security Council wallet to an address controlled by Aave LLC.

While the judge permitted governance participants to proceed without personal liability under the restraining notice, the court preserved the plaintiffs’ legal claim over the ETH. Aave, therefore, cannot freely use the assets until the dispute is resolved.

Elsewhere in the recovery effort, Aave and Kelp DAO said Tuesday they had taken steps to restore rsETH backing. The attacker’s rsETH on Arbitrum has already been burned, while nearly $278 million worth of replacement assets is expected to be restored over the next two weeks through funds managed by the Aave Recovery Guardian multisignature wallet.