FTX’s recovery plan faces legal challenges in the US

Despite FTX’s restructuring plan having strong support from creditors, the bankrupt exchange is facing legal obstacles from the US Trustee, an agency affiliated with the US Department of Justice. In addition, a group of creditors have also raised objections to the plan as they want a different type of repayment.

As reported by Todaysgist, FTX presented the repayment plan last week, when it received virtually unanimous support from creditors. However, the dissent raises questions about the exchange’s ability to implement the plan.

The previous vote was unofficial, while the final vote on the plan will take place in October. In the meantime, the bankruptcy team will be tasked with convincing authorities and dissenting creditors.

FTX faces legal hurdles

Andrew R. Vara, head of the U.S. Trustee, was the first to voice his opposition to the restructuring plan. According to Vara, there are at least ten concerns about the plan.

In this regard, the Trustee’s main concerns are the legal shield offered to those involved in the bankruptcy process, which is very generous. He also expressed concerns about smaller creditors being treated unfairly and the refusal to disallow expenses incurred by a data breach.

The trustee also alleged that estate professionals demanded millions of dollars to compensate them for addressing the breach, which Vara emphasized should not be the estate’s responsibility.

Finally, the Trustee also complained about the distribution of claims, stating that small creditors will receive less than large ones. In his view, the estate has enough money to compensate all creditors equally. Therefore, Vara requested that these points be reviewed before FTX submits the plan for creditors’ approval.

Creditors seek cash refunds

Even though 95% of creditors approved the plan, the 5% who disagreed with it also raised objections. Sunil Kavuri, a representative of FTX’s largest group of creditors, along with two other representatives of retail clients, filed a separate complaint.

Kavuri’s objection was similar to the Trustee’s regarding the plan’s provisions to exempt certain participants, saying they violate controlling case law.

Kavuri also highlighted what he described as “refunds in kind,” but not in fiat currency. In this case, he argued that creditors should be allowed to receive their claims in the form of cryptocurrency. In other words, those who had their Bitcoin (BTC) locked up should receive BTC back.

This could help lenders avoid high taxes on cash receipts that they incur when paying taxes, he said. FTX’s plan currently provides for refunds in fiat currency.

Strong support from FTX lenders

Prior to the US Trustee lawsuit, FTX had expressed optimism about its restructuring plan despite the legal issues. The company said 95% of creditors who voted supported the plan, which represents 99% of the exchange’s debt.

The company’s CEO, John J. Ray III, was keen on that support, noting that under the proposed plan, non-government creditors could be fully compensated for their claim amounts, plus interest. Ray was optimistic that the plan would proceed on schedule.

However, the confirmation hearing for FTX’s restructuring plan is scheduled for October 7, 2024. Until then, creditor dissents, as well as Trustee objections, could block the plan and prevent immediate payments.

Follow Todaysgist on