FTX Restructuring Plan Faces Legal Hurdles Despite Creditor Support

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As a seasoned crypto investor with a decade-long journey through the volatile world of digital assets, I find myself once again navigating the murky waters of legal battles and restructuring plans, this time involving FTX.

The proposed restructuring of FTX, the bankrupt cryptocurrency exchange, is encountering legal obstacles from the U.S. Trustee and a contingent of creditors, casting doubt on its execution. This decision comes despite a report indicating that the plan was endorsed by creditors, with more than 95% of them voting in favor.

FTX Restructuring Plan Faces Legal Hurdles

Andrew R. Vara, who represents the US in matters related to bankruptcy, has submitted a complaint with ten points of concern about FTX’s revised plan for reorganization. His main issues include what he sees as overly generous protections given to those involved in the bankruptcy process, an alleged mistreatment of smaller creditors, and resistance to not covering expenses related to a data breach that was experienced by an estate service provider.

As a crypto investor, I find myself in a situation where the Trustee is asserting that the estate’s experts are requesting large sums of money to cover their expenses related to addressing the breach. However, Vara strongly believes that it shouldn’t fall on the estate’s shoulders to bear this financial burden.

Andrew R. Vara voiced concerns about the allocation of claims, pointing out that smaller creditors may receive less compensation than larger ones. He argues that the estate has sufficient funds to pay all creditors equally, irrespective of the amount owed to each. Moreover, he questioned the ‘umbrella’ clause in the plan, suggesting it offers immunity to a greater number of individuals and organizations than what is legally allowed under relevant laws.

Creditors Seek In-Kind Reimbursements

Sunil Kavuri, on behalf of the biggest FTX creditor group, together with two other representatives for retail customers, submitted a distinct complaint. Similar to the Trustee’s objection, Kavuri argued against certain sections in the plan, stating that these exculpatory provisions contradict the prevailing legal rulings in relevant cases.

Kavuri additionally emphasized a method he referred to as “in-kind repayments”, suggesting that lenders should have the option to receive their owed funds in the form of the missing cryptocurrency. He believes this approach could help creditors bypass high taxes on cash receipts, typically imposed when tax payments are made.

The filing against the bankrupt crypto exchange also refers to the BlockFi bankruptcy case, in which some of the creditors were allowed to receive in-kind distributions with Coinbase’s help.

FTX Strong Creditor Support

Prior to submitting the US Trustee filing, FTX had shown optimism about its restructuring strategy, even with the ongoing legal complications. The firm declared that approximately 95% of the voting creditors approved the plan, which is equivalent to nearly 99% when considering by claim value.

John J. Ray III, the CEO of the company, was particularly enthusiastic about this proposal. He pointed out that, if implemented, non-governmental creditors would receive full compensation for their claims, including interest. Ray was confident that the plan would follow its timeline, funds would be disbursed to the creditors, and the Chapter 11 proceedings would come to an end.

The FTX restructuring plan’s confirmation hearing has been scheduled for October 7, 2024. Prior to this hearing, the bankrupt cryptocurrency exchange plans to present the final voting outcomes to the United States Bankruptcy Court in the District of Delaware.

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2024-08-25 03:42