FTX Bankruptcy Plan Approved by Judge, Promises Substantial Recoveries for Creditors
On Monday, October 7, 2024, Delaware Bankruptcy Judge John T. Dorsey confirmed FTX Trading Ltd.’s Chapter 11 reorganization plan. This decision overruled several objections and marks the beginning of a process to distribute billions of dollars to customers less than two years after the cryptocurrency exchange’s collapse.
During the confirmation hearing, Judge Dorsey praised the collaborative efforts of all parties involved, describing the case as a “model” for handling complex Chapter 11 bankruptcy proceedings. He noted that the plan allows former customers and digital asset holders to recover between 118% and 142% of the value of their claims based on the petition date in November 2022. FTX has estimated that it possesses between $14.7 billion and $16.5 billion available for distribution.
Under the approved plan, creditors with claims valued at $50,000 or less will be categorized as “convenience classes.” These creditors are expected to receive their payments, including interest, within 60 days of the plan’s effective date. FTX anticipates that around 98% of creditors will receive at least 118% of their allowed claims during this initial recovery phase.
FTX CEO John J. Ray III hailed the confirmation as a significant milestone in the journey to return funds to customers and creditors. He credited the achievement to the diligent efforts of the professional team involved, who have been instrumental in recovering billions of dollars by thoroughly reconstructing FTX’s financial records.
Attorney Andrew G. Dietderich of Sullivan & Cromwell LLP, representing FTX, highlighted three crucial decisions made by the restructuring team upon taking over the company. Notably, they opted to exclude former management from any role in the bankruptcy process. This decision follows the sentencing of former CEO Sam Bankman-Fried to 25 years in prison for defrauding FTX customers, investors, and lenders. Bankman-Fried has filed an appeal against his conviction.
Dietderich emphasized that the restructuring team’s efforts to establish credible corporate systems were vital for the case’s success. Additionally, the team chose to collaborate with government authorities, which helped mitigate potential criminal charges and facilitated substantial settlements with the Internal Revenue Service and the U.S. Commodity Futures Trading Commission. These agreements involved subordinating the debts owed to these agencies in favor of customer claims.
The restructuring team’s cooperation with the creditors committee and key stakeholders also contributed to various settlements that enhanced the overall value returned to creditors. The plan garnered overwhelming support, with 95% of voting creditors in favor and participation from over two-thirds of claims by voting value.
Despite this consensus, a few objections remained unresolved during the confirmation hearing. Judge Dorsey overruled these objections, including one from the U.S. Trustee’s Office regarding opt-out releases for third parties in the reorganization plan. The U.S. Trustee contended that these releases were not consensual, as they were presumed accepted by creditors without any affirmative action on their part.
In response, Judge Dorsey referenced a recent U.S. Supreme Court ruling concerning nonconsensual third-party releases in the Purdue Pharma bankruptcy case. He affirmed that the ruling does not preclude the use of opt-out releases within a plan, provided creditors are given a chance to opt out. He clarified that the releases were precisely tailored and did not pertain to activities prior to FTX’s bankruptcy filing.
The judge also dismissed an objection from LayerZero Labs Ltd., which had been sued by FTX in September 2023 over payments made shortly before the exchange’s collapse. LayerZero claimed it was unfairly treated in comparison to other entities in the same class. However, Judge Dorsey ruled that the settlement related to customer preferences was not part of the Chapter 11 plan itself.
The confirmation of FTX’s reorganization plan represents a significant step toward resolving the aftermath of one of the largest collapses in cryptocurrency history, with the potential for substantial recoveries for affected customers and stakeholders.
