Key Insights:

• U.S. Trustee opposes FTX’s restructuring plan, citing overly broad legal protections and unfair treatment of smaller creditors.
• FTX creditors push for in-kind cryptocurrency repayments to avoid hefty tax liabilities associated with cash payouts.
• FTX’s restructuring plan garners 95% creditor support but faces October 2024 legal hurdles in U.S. Bankruptcy Court.

The restructuring plan for the bankrupt cryptocurrency exchange FTX is facing opposition from the U.S. Trustee and a group of creditors. This resistance arises despite the strong support from most creditors, with more than 95% voting in favor of the proposed reorganization plan. The objections center on legal protections, payment distribution concerns, and the treatment of smaller creditors.

U.S. Trustee Raises Concerns Over Legal Protections

U.S. Trustee Andrew R. Vara has filed a complaint highlighting several issues with FTX’s amended reorganization plan. Among his ten concerns, Vara emphasizes that the legal protections extended to those involved in the bankruptcy process are overly broad. He argues that the plan grants immunity to more individuals and entities than is permissible under current laws, potentially setting a problematic precedent.

Vara is also concerned about how the plan treats smaller creditors. He asserts that these creditors are at a disadvantage compared to larger ones and that the estate has sufficient funds to compensate all creditors more equitably. Additionally, Vara criticizes the inclusion of expenses related to a data breach suffered by an estate service provider, which the plan allocates to the estate. He insists that these costs should not be the responsibility of the estate, further complicating the reorganization process.

Creditors Demand In-Kind Reimbursements

In addition to the U.S. Trustee’s objections, a group of creditors, led by Sunil Kavuri, has filed a separate complaint. Kavuri, representing the largest FTX creditor group and two other representatives of retail customers, shares concerns about the legal protections in the plan. He argues that the exculpatory provisions, which shield certain parties from legal action, violate established case law.

Kavuri also advocates for in-kind repayments, suggesting that creditors should have the option to receive their claims in the form of cryptocurrency instead of cash. This approach, he argues, could help creditors avoid the tax liabilities associated with receiving cash payments. Kavuri references the BlockFi bankruptcy case, where some creditors were allowed to receive in-kind distributions with the assistance of Coinbase, as a potential model for FTX’s reorganization.

Strong Creditor Support Despite Legal Opposition

Despite the legal challenges, FTX has reported overwhelming support for its restructuring plan from creditors. The company stated that 95% of the creditors who participated in the voting process backed the plan, representing 99% of the total claim value. FTX’s CEO, John J. Ray III, expressed optimism about the plan’s future, noting that the approval from such a large portion of creditors is a positive sign for the reorganization process.

Ray emphasized that under the proposed plan, non-governmental creditors would be fully compensated for their claims, including interest. He remains confident that the plan will proceed on schedule, with the goal of distributing funds to creditors and concluding the Chapter 11 process as planned.

Upcoming Confirmation Hearing and Future Steps

The confirmation hearing for the FTX restructuring plan is scheduled for October 7, 2024. Before this date, FTX intends to submit the final voting results to the U.S. Bankruptcy Court for the District of Delaware. The outcome of this hearing will determine whether the plan can move forward despite the objections raised by the U.S. Trustee and certain creditor groups.