A New York judge has postponed a decision on Aave’s emergency request to unfreeze approximately $71 million in Ether connected to the recent Kelp DAO exploit, asking both parties to provide additional legal arguments before a new hearing in June.

The frozen funds are tied to the $293 million Kelp DAO hack, one of the largest decentralized finance exploits of the year.

Earlier coverage: Ripple tests RLUSD on Ethereum layer 2s as it accelerates multichain expansion

COURT SEEKS MORE DETAILS ON POTENTIAL USER LOSSES

Aave has argued that unlocking the frozen ETH is critical to ongoing recovery efforts and could help prevent further disruption across the DeFi ecosystem.

However, according to court filings in the Southern District of New York, Judge Margaret M. Garnett said Aave did not sufficiently explain how “compounding losses” for users would occur if the restraining notice remains in place.

The restraining order was initially filed by law firm Gerstein Harrow LLP, which claims its clients may have legal rights to portions of the frozen assets.

Aave responded with an emergency motion, warning that continued restrictions could trigger liquidations and increase financial stress across the protocol.

JUDGE REQUESTS SUPPLEMENTAL BRIEFINGS FROM BOTH SIDES

Judge Garnett acknowledged the complexity of the dispute and noted that the legal and technical issues involved require further clarification.

The court has now ordered both parties to submit supplemental briefings covering several unresolved legal questions.

Among the issues the judge wants addressed are:

  • Whether New York’s “shelter principle” applies to the hack-related transactions
  • The legal distinction between theft and fraud in crypto-related asset claims
  • Which parties may hold creditor priority over the frozen ETH
  • Whether a constructive trust would be an appropriate legal remedy
  • Whether victims can be identified and compensated proportionally

Both Aave and Gerstein Harrow must submit their filings by May 22, while the next hearing is scheduled for June 5.

RECOVERY EFFORTS FOR KELP DAO CONTINUE

The legal dispute comes as broader recovery efforts surrounding the Kelp DAO exploit continue to move forward.

Earlier this week, Kelp DAO and Aave announced progress toward restoring the backing of the rsETH token affected by the exploit.

According to the update, the hacker’s rsETH holdings on Arbitrum have already been burned. The lost tokens — valued at roughly $278 million — are expected to be restored over the next two weeks using funds held in the Aave Recovery Guardian multisignature wallet.

Once related smart contracts are reactivated, rsETH functionality across supported DeFi platforms is expected to resume as normal.

CASE HIGHLIGHTS GROWING LEGAL COMPLEXITY IN DEFI

The dispute underscores the increasingly complex legal landscape surrounding decentralized finance hacks and asset recovery.

As DeFi protocols continue to handle billions of dollars in user funds, courts are increasingly being asked to determine ownership rights, creditor claims and recovery procedures involving blockchain-based assets.

The outcome of the case could influence how future crypto recovery disputes are handled in US courts.

Source: Kelp DAO