What’s next for FTX after the creditor repayment proposal?

Author: Katherine Ross Source: blockworks Translation: Shan Ouba, Golden Finance

FTX's latest plan to repay creditors is another step in a process that may require more negotiation and time. In other words, this story is not over yet.

Creditors will have a chance to weigh in on the joint reorganization plan filed by the bankrupt cryptocurrency exchange late Tuesday, which will then be submitted to the court in June.

The new plan is likely to repay creditors in full (at November 2022 prices), and some creditors will also receive interest. FTX Legacy owes creditors about $11 billion, but it has managed to raise between $1.45 billion and $1.63 billion in cash.

Jonathan Groth, a partner at DGIM Law, said such a return was “unheard of.”

Erin Broderick, a partner at Eversheds Sutherland and lead counsel for holders of FTX.com customer creditor claims, noted that the crypto bull run and the potential subordinated status of big government claims contributed to the better-than-expected returns projected by the estate.

“But to achieve the expected recovery, the debtor needs stakeholder support,” she told Blockworks. “Failure to obtain that support in a timely manner threatens the value ultimately returned to customers.”

FTX said in a press release Wednesday that its plan would end the dispute “without costly and protracted litigation.”

Matthew Gold, a partner at Kleinberg Kaplan, said FTX was likely referring to several potential legal actions — including an ongoing mediation over the priority tax claims.

FTX’s proposal would resolve $24 billion in IRS claims from prior periods of Chapter 11 proceedings. In return, it would provide $200 million in cash and $685 million in junior claims, which would rank below all other claims.

Gold added: “In addition, the plan is essentially a proposed resolution of disputes over the relative priorities of different sectors of creditors. If these allocations are challenged, litigation could be costly and protracted.”

Groth noted that while some creditors have urged the estate to pay off claims at current prices (for example, Bitcoin was trading below $20,000 when FTX declared bankruptcy, but is now over $60,000), the FTX estate simply doesn’t have that much cryptocurrency.

FTX's plan to repay creditors faces controversy but may still be approved by the court

"When FTX filed for bankruptcy, the cryptocurrencies they held were only a small fraction, far less than the proportion they claimed," Groth said. "The funds they used to repay creditors actually came more from the liquidation of securities holdings... and recoveries from third-party claims and other asset sales."

Groth said that even if some creditors are unhappy with the plan, "it would be difficult for the court to look at this and say, 'How unhappy can you be?' You have been fully compensated."

Overall, Broderick said she believes the plan is "a good outcome for customers" and that it was the result of "intense negotiations" and consideration of the interests of all stakeholders.

“We remain closely involved in the development of the plan, including working with government agencies, and have been focused on assisting the estate in developing the distribution mechanics and resolving potential issues to ensure that clients receive as much of the initial distribution as quickly as possible,” Broderick noted.

While the FTX debtors have proposed a “confirmation timeline,” the procedural process under bankruptcy law takes time. The court must first hold a disclosure statement hearing — currently scheduled for June 25 — at which time the court can set a confirmation hearing date.

Gold said that in a large case like this, there could be 60 days between those hearings.

Additional hearings are also scheduled for July and August, according to the current court docket.

Gold said the plan also contains some “controversial elements,” such as release and no-suit provisions that would shield many non-debtor entities from litigation.

The Supreme Court is hearing a case involving Purdue Pharma that deals with the question of whether and to what extent bankruptcy courts can seek releases from nondebtors.

Gold said whether the release in FTX's plan is legal will depend on the court's ruling.

"This plan and disclosure statement are best understood as negotiation documents," he added. "They were signed as draft versions and there are a lot of blanks in them. There may be further negotiations before they are finalized."

While the plan may be the final plan submitted to the bankruptcy court, it will depend on factors such as creditor votes and government negotiations, Groth said.

Those details will be discussed at an upcoming hearing that will determine whether the current version "is rejected or needs to be significantly revised."