FTX Faces Legal Scrutiny Over Reorganization Plan

FTX’s reorganization plan is under scrutiny as it faces several challenges ahead of its confirmation hearing in October.

On August 23, Andrew R. Vara, the US Trustee overseeing the FTX bankruptcy case, filed an objection to the plan, citing ten major concerns.

US Trustee and Creditors Challenge FTX’s Reorganization Plan

Vara’s primary issue is the legal immunity granted to certain entities involved in the bankruptcy. He argues that the plan provides excessive legal protection to the estate’s administrators and advisers, far exceeding what is typically offered under relevant statutes.

He highlighted that such immunity is unwarranted for professionals whose employment and compensation are already subject to court approval and oversight.

“Pragmatically, such immunity would negate the exceptions for gross negligence, willful misconduct, and fraud. Further, such immunity would far exceed the protections that estate professionals whose employment and compensation are subject to Court approval,” Vara added.

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Vara also criticized the plan’s unequal treatment of creditors. He noted that the top 2% of creditors could receive up to 143% of their claims. On the other hand, the remaining 98% would receive only up to 119%. This disparity, according to Vara, raises concerns about fairness.

“The Debtors will not have business operations going forward, [so] reserving the Supplemental Remission Fund for the largest 2% of customers by number does not have a business-related justification,” Vara said.

Additionally, the US Trustee objected to including costs related to last year’s Kroll data breach in the plan. According to him, these costs should not burden the debtor’s estates. Further, he pointed out that estate professionals have already sought millions in compensation for addressing the breach.

“The Plan should be revised to specify that nothing in the Plan is releasing any claims or causes of action relating to the Kroll data breach, and nothing in the Plan shall constitute the allowance of, nor prejudice the ability of parties in interest to object to, any professional fees relating to the data breach,” he stated.

Given these concerns, Vara urged the court to reject the FTX reorganization plan unless the bankrupt firm satisfactorily resolves the issues.

Before the US Trustee’s objection, FTX creditors, including Sunil Kavuri and two others, had also filed an objection to the reorganization plan. They argued that the plan’s broad exculpation provisions and lack of in-kind distribution options for customers are problematic.

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The creditors pointed out that the broad definition of exculpated parties contradicts existing case law and could unjustly cover pre-petition conduct. They also reiterated their request for in-kind distributions to help them avoid forced taxation.

“It is painfully apparent that the Debtors’ proposed Plan will inflict additional hardships on customers through forced taxation that could be avoided by making an ‘in kind’ distribution,” the creditors argued.

Despite these objections, FTX claimed last week that its reorganization plan had received strong preliminary support from creditors, with over 95% of them — representing 99% of the claims by value — endorsing the plan.