Recent documents filed in the FTX bankruptcy detail objections to the bankrupt crypto exchange's amended reorganization plan from the U.S. Trustee overseeing the case and from a group of creditors.
The U.S. Trustee, an independent examiner of the bankruptcy who was appointed by court order after an initial ruling against his appointment was overturned on appeal, outlined ten flaws with the amended reorganization plan, which the FTX estate has said a large percentage of creditors approves of. Most critically, the Trustee, Andrew R. Vara, pointed to broad legal exemptions for many of those involved with the bankruptcy, unequal reimbursement of creditors by size, and the refusal of the bankruptcy estate to carve out costs related to a data breach its service provider suffered last year.
"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," Vara's filing states.
Vara also takes issue with the distribution scheme's unequal treatment of creditors by claim size. "Here, customers in the 'convenience' classes...would receive a smaller percentage distribution (119%) than other customers...(up to 143%) simply because their claims are smaller (generally $50,000 or less)," Vara's filing states. "The Debtors will have enough cash on hand on the Effective Date to pay convenience claimants the same rate as other customer claims...There is no discernible difference in the legal attributes of these customers’ claims."
Vara also makes a number of more technical legal arguments, but most significant may be his case against the "impermissibly broad" exculpation, or forgiveness of any wrongdoing, afforded by the plan to the estate's administrators and advisors. "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 wrote.
Some creditors file their own complaint
Sunil Kavuri, a representative of the largest FTX creditor group who had previously urged his fellow creditors to vote against the plan, filed his own complaint alongside two others as representatives of FTX's retail customers.
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Kavuri's filing also takes issue with the plan's overly broad exculpatory provisions. "The definition of Exculpated Parties is overbroad, and as set forth below, inconsistent with controlling case law because it is not limited to estate fiduciaries," the filing states.
The filing also restates an argument Kavuri has made in the past: creditors should have a mechanism to receive in-kind reimbursements, meaning if they lost bitcoin in the FTX collapse, they would receive bitcoin back rather than the monetary value of the currency in U.S. dollars. The in-kind reimbursement may allow those creditors to avoid recognizing a taxable event, Kavuri argues.
"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,'" Kavuri's filing states, pointing out that BlockFi was able to accommodate certain creditors who requested in-kind reimbursements in that bankruptcy with the help of Coinbase.
With the deadline for objections having passed, no other such filings are expected before the confirmation hearing currently scheduled for October 7.
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