The reorganization proceedings for FTX, the beleaguered cryptocurrency exchange, have hit a significant snag. The U.S. trustee overseeing the case has lodged major objections against FTX’s revised reorganization plan. This development comes as a substantial setback for FTX, which had previously indicated that the plan had broad support from creditors.
Trustee’s Objections to Legal Protections
Andrew Vara, the U.S. trustee assigned to the FTX case, has expressed serious concerns about the legal protections proposed in the reorganization plan. Vara argues that the plan offers excessive legal safeguards to the administrators and advisers managing the FTX estate.
- Overreaching Immunity: Vara points out that the proposed immunity extends well beyond the usual protections afforded to estate professionals. This includes protections typically granted to individuals whose employment and compensation are closely monitored and approved by the court. Vara’s filing underscores that such extensive immunity could undermine the standard checks and balances in bankruptcy proceedings.Quote from Trustee Vara: “Such immunity would far exceed the protections that estate professionals whose employment and compensation are subject to Court approval and oversight receive during the case.”
Another significant issue raised by the trustee involves the disparity in how different creditors are treated based on the size of their claims. Vara’s filing reveals a troubling inequality in reimbursement percentages between smaller and larger creditors:
- Smaller Creditors: Those with claims under $50,000 are slated to receive a reimbursement rate of 119%.
- Larger Creditors: Those with larger claims could receive up to 143%.
Vara argues that this discrepancy is unjustified, particularly when the FTX estate is expected to have ample funds to provide equal reimbursement rates for all creditors. According to Vara, the rationale behind this uneven distribution scheme is not clear, as there seems to be no significant difference in the legal attributes of the creditors’ claims.
Data Breach Costs Under Scrutiny
The handling of costs associated with a data breach affecting FTX’s service provider, Kroll, has also attracted criticism. Vara’s filing highlights that estate professionals have requested millions of dollars in compensation for their role in addressing the breach. This has raised questions about the appropriateness of these costs and their impact on the overall reorganization plan.
In addition to the U.S. trustee’s objections, a group of FTX creditors, led by Sunil Kavuri, has also voiced concerns. Kavuri represents the largest faction of FTX creditors and has been vocal about the flaws he perceives in the reorganization plan.
- Cryptocurrency Option: Kavuri argues that creditors should be given the choice to receive payments in cryptocurrency rather than its equivalent value in U.S. dollars. He suggests that this could help creditors avoid taxable events, potentially leading to a better after-tax recovery.
- Comparative Case: Kavuri’s filing references BlockFi, another bankrupt cryptocurrency company, which managed similar in-kind requests with assistance from Coinbase. This precedent supports Kavuri’s argument that accommodating such requests is feasible and could benefit creditors.
| Creditor Type | Reimbursement Rate |
|---|---|
| Smaller Creditors | 119% |
| Larger Creditors | Up to 143% |
The objections from U.S. trustee Andrew Vara and creditor Sunil Kavuri highlight significant challenges facing FTX’s reorganization plan. The concerns revolve around excessive legal protections, unequal treatment of creditors, and the handling of costs related to a data breach. As these issues continue to unfold, the path forward for FTX’s reorganization remains uncertain.
