US Trustee Andrew Vara has filed an official objection to the FTX restructuring plan in the FTX bankruptcy case, pointing out ten major flaws. Vara's main concerns are that liquidators want creditors to bear the cost of last year's data breach with FTX service provider Kroll and unequal treatment of creditors.
Flaws in FTX Restructuring Plan According to Vara
According to the US Trustee, the FTX restructuring plan has ten separate and independent reasons why the court should not approve it. These include violations of the Bankruptcy Code and several other rules by discharging the debtors from all liabilities and imposing third-party non-consensual releases on several entities. The trustee also questions the broad exculpation (immunity) for FTX, the liquidators, and event advisors under the plan, who are not fiduciaries in the case. He claims that the broad immunity violates existing bankruptcy rules and does not provide an exemption for gross negligence and other violations. He writes: CITE_W_A “Such immunity would far exceed the protections that estate professionals whose employment and compensation are subject to Court approval and oversight [under the relevant statutes] receive during the case.” Vara particularly wants the court to remove any claims relating to the Kroll data breach from exculpation provisions. He noted that even if the court chooses to confirm the plan with other provisions allowing for release and immunity, there must be a provision in the plan that creditors can object to any professional fees relating to the breach. He also added: CITE_W_A “Estate professionals have sought allowance of millions of dollars in compensation for responding to the Kroll data breach…the Debtors’ estates should not bear that cost. The fee examiner shares this view.”
Other Creditors' Complaints
A separate group of creditors has also opposed the bankruptcy plan, citing its own reasons and complaints. This group, represented by activist creditor Sunil Kavuri and two others, has now filed its own complaint on behalf of retail creditors. Their major objection is that the FTX bankruptcy estate did not provide a means for creditors to get their recovery in kind. This means crypto should be an option for receiving repayment instead of US dollars, to avoid making the repayment taxable. The retail creditors argued: CITE_W_A “It is painfully apparent that the Debtors’ proposed Plan will inflict additional hardships on customers through forced taxation that could be avoided by making an ‘in kind’ distribution…Certain creditors would no doubt receive a greater after-tax recovery if a chapter 7 trustee were selected who was willing to undertake more effort to making a distribution ‘in kind.’” Most of their other objections are similar to those of the US trustee, including the plan’s violation of the Bankruptcy Code and overly broad immunity for some parties. They also argued that creditors who refused to vote on the plan did not consent to the release.
Potential Consequences
The opposition to the restructuring plan could further delay its approval, which is already facing legal challenges from some creditors. Although FTX liquidators claim that most creditors have approved the plan, it remains to be seen if these new objections will be enough to prevent court approval. Retail creditors suggest partnering with another crypto exchange to ensure in-kind repayments, similar to what BlockFi did with Coinbase for its restructuring. The confirmation hearing is set for October 7, and the court will likely consider these objections at that hearing.
The situation around the FTX restructuring remains uncertain with new objections and potential delays in the process. The objections are expected to be considered in court, which may significantly impact the future course of the case.
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