Lawyers seeking to seize $71 million in frozen ether for victims of North Korean terrorism changed their legal strategy on Tuesday, arguing in a new court filing that the April 18 rsETH breach was not theft but fraud, directly rebutting Aave’s attempt to invalidate a restriction notice preventing the asset from being released.
In a 30-page opposition brief filed in the Southern District of New York, attorneys representing victims of North Korea terror argued that the exploit was not a smash-and-grab theft but a fraudulent lending transaction, and that under long-standing U.S. law, a fraudster who obtains property through deception can gain legal title to the property, even if that title can later be reversed.
“What actually happened is that North Korea borrowed assets from Aave Protocol users, failed to repay them, and when Aave Protocol attempted to liquidate North Korea’s collateral, Aave Protocol unfortunately discovered that the collateral was worthless,” the new document reads.
“The law is very clear that fraud victims pass title, not just possession, to the fraudster… Charles Ponzi, through his now eponymous scheme, obtained a ‘defeasible title’ to his victims’ cash,” it continued.
The dispute dates back to last month’s cross-chain bridge vulnerability, which cost around $230 million from Aave, the largest decentralized lending protocol by total value locked.
Forensic firms such as Chainaanalysis and TRM Labs have widely attributed the attackers to North Korea’s Lazarus group, which minted unbacked rsETH tokens, used them as collateral on the Aave lending market, and borrowed real ether against worthless deposits.
Subsequently, developers associated with the Arbitrum blockchain intercepted approximately $71 million before cashing out.
The filing also escalates the dispute beyond New York property law, citing the Terrorism Risk Insurance Act (TRIA), a post-9/11 federal law that allows people who win court judgments against state-sponsored terrorism to collect those judgments from any property held in the United States that belongs to the country in question.
If the court accepts this theory, Ive’s previous arguments about New York property law may be less relevant.
The filing also asks whether Aave has the legal standing to challenge the freeze, citing the company’s own terms of service, which state that it has no “possession, custody or control” over user assets, a core aspect of decentralized finance.
Lawyers also noted in the filing that affected users may not need the frozen ether at all. As of Tuesday morning, DeFi United had raised $327.95 million, more than four times the controversial $71 million. Aave itself is part of an industry-led recovery fund.
A hearing is scheduled for Wednesday, May 6, in Manhattan federal court.