The ongoing FTX reorganization proceedings have taken a new turn as the US Trustee overseeing the case has raised significant objections to the crypto exchange’s amended reorganization plan. 

The Trustee, Andrew R. Vara, along with a group of creditors, has filed complaints highlighting multiple flaws in the proposed plan, which the FTX estate has touted as having widespread creditor support.

This follows a claim by the bankrupt crypto trading platform FTX that its amended reorganization plan gained overwhelming preliminary support from creditors entitled to vote. 

Broad legal exemptions under scrutiny

One of the Trustee’s primary concerns centers around the legal exemptions proposed in the reorganization plan. Vara argues that the plan gives too much legal protection to the estate’s administrators and advisers.

These protections, he contends, go far beyond what is typically afforded to estate professionals under relevant statutes. “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,” Vara stated in his filing.

Objection of the US Trustee to Confirmation of First Amended Joint Chapter 11 Plan of Reorganization of FTX Trading, Ltd. Source: Kroll

Another critical issue raised by the Trustee is the unequal treatment of creditors based on the size of their claims. Vara points out that smaller creditors, with claims generally under $50,000, would receive a lower percentage of reimbursement (119%) compared to larger creditors (up to 143%). 

This disparity, Vara argues, is unjustified, especially given that the FTX estate is expected to have sufficient cash on hand to pay all creditors at the same rate. “There is no discernible difference in the legal attributes of these customers’ claims,” Vara asserted, calling into question the rationale behind the proposed distribution scheme.

The handling of costs related to a data breach suffered by FTX’s service provider, Kroll, has also come under fire. Vara’s filing notes that estate professionals have sought millions of dollars in compensation for responding to the breach. 

Creditors voice their own concerns

In addition to the US Trustee’s objections, a group of FTX creditors, led by Sunil Kavuri, had filed a separate complaint. Kavuri, representing the largest group of FTX creditors, has been a vocal critic of the reorganization plan. 

Kavuri argues that creditors should have the option to receive cryptocurrency—such as Bitcoin—rather than its equivalent value in US dollars. This, he claims, could help creditors avoid recognizing a taxable event, potentially leading to a better after-tax recovery.

Kavuri’s filing also points out that BlockFi, another bankrupt crypto company, was able to accommodate similar in-kind requests with the help of Coinbase, suggesting that such a solution is feasible.

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