FTX files initial Chapter 11 plan, committee says it was left out of talks

By Sarah Lizee

Olympia, Wash., Aug. 1 – FTX Trading Ltd. filed an initial plan of reorganization and a related term sheet with the U.S. Bankruptcy Court for the Southern District of New York, according to a Monday evening press release.

John J. Ray III, chief executive officer and chief restructuring officer of FTX, said the plan is being filed at this relatively early stage – before the expiration of the customer bar dates, the completion of pending investigations and the preparation of a disclosure statement – to facilitate creditor feedback to further discuss open issues in the plan with stakeholders.

Ray said the debtors have been in discussion with the official committee of unsecured creditors, the informal committee of non-U.S. customers and other parties.

“We are committed to working through these matters in the third quarter of 2023 and to filing an amended plan and a disclosure statement in the fourth quarter of 2023,” Ray said in the release.

The plan contemplates a proposed global settlement and good-faith compromise of claims, causes of actions and disputes involving the FTX debtors, including both claims against the FTX debtors and intercompany claims.

According to the term sheet, the settlement generally involves:

• The valuation of claims in U.S. dollars as of the petition date based on a valuation methodology that will be separately prepared by the debtors and approved by the bankruptcy court;

• Disputes regarding the ownership of the assets held on the FTX.com and FTX U.S. exchanges based on the applicable terms of service and trust doctrines;

• Identification of three primary recovery pools, corresponding to segregated assets attributable to FTX.com customers, segregated assets attributable to FTX US customers, and other assets that the debtors contend are not clearly attributable to the exchanges;

• Recognition of special shortfall claims by the FTX.com and FTX US exchanges for the benefit of their customers against the pool of general assets, to compensate the exchanges for the unauthorized borrowing and/or misappropriation of assets held on the exchanges;

• Cancelation of intercompany claims, other than as represented under the plan as the FTX.com intercompany shortfall claim and U.S. intercompany shortfall claim, and the substantive consolidation of the estates of substantially all of the debtors, other than excluded non-U.S. entities who are solvent and whose corporate separateness was historically respected;

• Subordination of some claims to the pecuniary losses of customers and creditors;

• The extinguishment of FTT claims in recognition of the equity-like characteristics of the FTT token, as well as the extinguishment of all other equity interests; and

• The liquidation of the estates of the debtors and the payment of distributions to customers and creditors in cash, subject to voluntary elections that may be available to customers in connection with a restart of an offshore exchange or otherwise.

The term sheet also lays out the following key open items, which the debtors hope to resolve prior to filing the amended plan:

• The expected size of the various classes of claims, recovery pools and estimates of creditor recoveries;

• The fair and appropriate amount of priority that should be given to the exchange shortfall claims against the general pool of assets;

• The decision and manner in which the FTX.com exchange would be sold or reorganized and what the relationship between any future exchange would be;

• How claims may be traded or transferred once a plan becomes effective, and whether the claims should be evidenced by a recovery rights token or other digital asset, and the ramifications of that structure; and

• The corporate governance and future stewardship of the offshore exchange company, the venture trust and the other post-confirmation entities, and the extent to which the various creditor groups should be involved in governance determinations.

Only holders of FTX.com customer entitlement claims, U.S. customer entitlement claims, NFT entitlement claims, general unsecured claims, FTX.com convenience class claims, U.S. convenience class claims, general convenience class claims and subordinated claims will be entitled to vote on the plan.

Committee response

The official committee of unsecured creditors filed a response to the plan, saying it was “extremely disappointed” because the debtors hadn’t engaged with it on some of the most important issues of the plan, mainly regarding the management of the debtors’ remaining assets.

“What was supposed to be a watershed moment for these bankruptcy cases – the filing of a plan of reorganization preceded by robust, good faith negotiation and collaboration – is anything but,” the committee said in the statement.

The committee said its main concerns regarding the plan are that it should (i) place control of the post-reorganization entities in the hands of qualified parties with relevant experience in the cryptocurrency markets, and who are selected by the committee and not the debtors, (ii) create a regulatory-compliant recovery token and facilitate a re-started FTX exchange to enhance creditor recoveries, and (iii) properly allocate value to the creditors most injured by the fraud that occurred.

“The debtors must understand that their customers and creditors will not vote in favor of a plan that is imposed on them without the substantive input and recommendation of the committee, their fiduciary representative,” the committee said.

“The current approach will simply wind up causing more delay and incurring greater fees, and the committee will then have no choice but to take the steps necessary to advance a confirmable plan in these cases for which customers and creditors will actually vote in favor.”

FTX has headquarters in the Bahamas and filed Chapter 11 bankruptcy on Nov. 11, 2022 under case number 22-11068.

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