Judge delays Aave’s bid to unfreeze $71 million in ETH tied to Kelp Dao Hack

A Manhattan federal judge in the US has declined to immediately rule on open source protocol Aave’s emergency bid to release $71 million in frozen Ether, scheduling a follow-up hearing for June 5 and ordering both sides to submit supplemental legal briefs by May 22.

At issue is 30,765 ETH that Arbitrum’s Security Council locked down on April 21, three days after an attacker exploited Kelp DAO’s LayerZero-powered cross-chain bridge. The hacker minted unbacked rsETH tokens and used them as collateral on Aave’s v3 lending protocol to borrow an estimated $230 million in wrapped ETH, leaving DeFi lending markets with roughly $190 million in bad debt.

U.S. District Judge Margaret M. Garnett acknowledged the potential harm to Aave users but said the case raises legal issues too complex to resolve on an emergency timeline.

She further directed both Aave and plaintiff law firm Gerstein Harrow LLP to address six specific questions, including whether New York’s shelter principle applies to the transactions, how courts should distinguish theft from fraud under the relevant statutes, and whether the hackers ever acquired a legally recognizable ownership interest in the assets.

The judge also asked whether Aave or Arbitrum could identify individual victims precisely enough to support a pro rata distribution of recovered funds.

Gerstein Harrow had earlier secured court approval to serve a restraining notice on Arbitrum DAO, freezing the ETH. Aave pushed back on May 4, arguing that stolen crypto does not become a thief’s lawful property simply because it passed through attacker-controlled wallets, and warning that the extended freeze could compound user losses and obstruct recovery efforts.

Outside the courtroom, remediation has been moving forward. Aave and Kelp DAO announced Tuesday that the hacker’s rsETH on Arbitrum has been destroyed, and nearly $278 million in replacement assets is expected to be restored to affected users within two weeks through the Aave Recovery Guardian multisignature wallet.

Aave also transferred the first 25,000 rsETH into its LayerZero OFT adapter on Ethereum mainnet on May 13, formally reopening cross-chain bridging for the token.

An Arbitrum governance proposal introduced May 12, which would transfer the frozen ETH to an Aave-controlled address, has been permitted to proceed through on-chain voting.

Judge Garnett modified her earlier freeze to allow governance participants to vote without personal liability — but preserved the plaintiffs’ legal claim over the assets. Aave cannot use the ETH until the court resolves the dispute.

The June 5 hearing will be a pivotal moment, not only for Aave and its users, but for how U.S. courts navigate questions of ownership and traceability when stolen digital assets change hands across decentralized infrastructure.