Recent documents filed in connection with FTX’s bankruptcy filing detail how the U.S. trustee overseeing the case and a group of creditors are opposing the bankrupt cryptocurrency exchange’s revised reorganization plan.
The U.S. bankruptcy trustee outlined 10 flaws in the revised reorganization plan that FTX’s estate said a significant number of creditors approved. Most notably, it included a broad statutory exemption for many people involved in the bankruptcy, unequal repayment of creditors based on size, and the bankruptcy estate’s refusal to waive costs related to a data breach the service provider suffered last year.
“Estate experts have sought millions of dollars in compensation for their response to the Kroll data breach… The debtor’s estate should not bear the costs. The fee examiner shares this view,” Vara’s filing states.
Bara also raises concerns about the unequal treatment of creditors in the distribution system based on the size of their claims. “Here, ‘convenience’ customers… receive a smaller percentage (119%) of their distributions than other customers… (up to 143%) because their claims are smaller (generally $50,000 or less). “The debtor will have sufficient cash on the effective date to pay convenience claimants at the same rate as other customer claims… There is no appreciable difference in the legal nature of these customer claims.”
Barra also makes several technical legal claims, but perhaps the most significant is his assertion that the plan grants wealth managers and advisers an “unacceptably broad” immunity, or forgiveness of all wrongdoing. “Such immunity would far exceed the protection afforded to wealth professionals whose employment and compensation are subject to court approval and supervision (under applicable statute) in the event of litigation,” Barra writes.
Meanwhile, FTX’s bankruptcy case is being investigated by independent investigator Robert Cleary, who was assigned to the case after the original denial of the appointment was overturned.
Some creditors file complaints on their own.
Sunil Kaburi, head of FTX’s largest creditor group who had previously urged other creditors to vote against the plan, filed his complaint along with two other representatives of FTX’s retail customers.
Kaburi’s submission also takes issue with the plan’s overly broad disclaimer. The submission states that “the definition of a disclaimer is overly broad and inconsistent with prevailing case law because it is not limited to trustees of estates, as set out below.”
This filing also reiterates a claim Kavuri has made in the past: creditors should have a mechanism to receive in-kind repayment. That is, if they lost bitcoin in the FTX crash, they would receive bitcoin back, not the monetary value of the currency denominated in US dollars. Kavuri argues that in-kind repayment would allow creditors to avoid having to recognize a taxable event.
“If a Chapter 7 administrator were more willing to make ‘in-kind’ distributions, certain creditors would undoubtedly receive a larger after-tax recovery,” Kaburi wrote in the filing, noting that BlockFi was able to accommodate certain creditors who requested in-kind payments in that bankruptcy with Coinbase’s help.
Since the deadline for objections has passed, no further objections are expected before the confirmation hearing, currently scheduled for October 7.
Correction: A previous version of this article incorrectly described the roles of the trustee and the independent auditor.
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