Federal Judge Clears @Aave To Recover $71m Frozen After North Korea Exploit

A Manhattan federal judge has cleared the way for @aave to proceed with its recovery plan after the $292 million Kelp DAO bridge exploit, allowing roughly 30,765 frozen $ETH worth approximately $71 million to be transferred out of @arbitrum DAO and into an Aave-controlled wallet.

The Court's Ruling

Judge Margaret Garnett of the U.S. District Court for the Southern District of New York issued the order on May 9, modifying a restraining notice that had locked the assets inside Arbitrum DAO since May 1. The modification enables an onchain governance vote to transfer the funds to a wallet controlled by Aave LLC. Crucially, the order explicitly shields anyone who initiates, votes on, or participates in the transfer from being treated as in violation of the freeze, resolving a key concern for Arbitrum delegates who feared personal legal exposure.

The ruling followed an emergency motion that Aave filed through Morrison Cohen LLP, which asked the court to vacate the restraining notice outright or require the plaintiffs to post a bond of at least $300 million. Judge Garnett took neither path, instead choosing a middle course that keeps the recovery process moving while leaving the terrorism creditors' claims intact. Aave agreed to be bound by the restraining notice as though served directly, meaning the legal fight over ownership of the assets is far from over.

Before the ruling, Arbitrum delegates had already voted overwhelmingly to release the funds, with 182.2 million ARB tokens supporting the measure, accounting for roughly 91% of all voting power.

The Broader Legal and DeFi Context

The frozen funds trace back to April 18, when attackers exploited a vulnerability in Kelp DAO's LayerZero-powered cross-chain bridge, using a forged message to mint 116,500 unbacked rsETH tokens. Around 107,000 of those tokens ended up in lending positions across Aave, generating substantial bad debt across the protocol. The exploit, widely attributed to North Korea's Lazarus Group, caused an estimated $292 million in losses.

Terrorism judgment creditors, represented by Gerstein Harrow LLP, hold roughly $877 million in unpaid court judgments against North Korea across three separate cases. They moved to seize the frozen $ETH under the Terrorism Risk Insurance Act and the Foreign Sovereign Immunities Act, arguing the funds constituted North Korean state property. Aave countered that a thief cannot hold lawful ownership of stolen assets and warned the restraining notice could deter future DeFi recovery efforts by creating legal uncertainty following hacks.

In response to the exploit, the DeFi United coalition, which includes Aave, Kelp DAO, EtherFi, LayerZero, and Compound, assembled more than $311 million in pledges to restore full rsETH backing. The 30,765 $ETH frozen on Arbitrum represents a significant portion of the shortfall still to be closed.

The terrorism plaintiffs' claim survives the transfer, so the broader property-rights dispute is unresolved. But the court's willingness to let DeFi governance proceed without exposing participants to liability sets a notable precedent for how onchain recovery efforts may be treated in future cases.

Sources:
The Block: Arbitrum's $71 million in ETH cleared for Aave transfer
CoinDesk: Judge clears path for Aave to move $71 million in ETH linked to North Korea hack
The Block: DeFi United unveils plan to restore rsETH after $292 million Kelp DAO exploit