FTX Bankruptcy Agreement Overview

As part of a newly-revealed provision, the debtors in charge of the collapsed cryptocurrency exchange FTX will set aside up to $230 million from government forfeiture proceedings for preferred shareholders.

The agreement, revealed in a recent filing, surprised creditors, who typically get reimbursed before shareholders in bankruptcy proceedings. Many were unaware of this provision when they voted overwhelmingly to approve the plan before the August 16 voting deadline.

“Ordinary creditors had no input,” said Sunil Kavuri, a representative of the largest FTX creditor group. “FTX customers following me have commented on how they feel scammed and robbed again by the estate.”

Key Terms of the Agreement

Under the new agreement, the FTX debtors’ estate, led by lawyers from Sullivan and Cromwell, will contribute 18% of all proceeds from government forfeiture actions to a special fund for the “exclusive benefit” of certain shareholders, up to $230 million in total.

Although the agreement was officially executed on August 28, almost two weeks after the creditors voted, it was only revealed on September 27—the final day the estate was permitted to file the amended plan.

According to the filing,

“The Debtors and the Preferred Shareholders each have an interest in avoiding the cost, expense, and delay that would be associated with litigation in connection with the Plan and the Forfeiture Proceeds.”

Estimated Forfeiture Proceeds

The FTX estate estimated forfeiture proceeds in a June filing to be around $626 million confiscated from the Emergent entity, along with fiat and digital assets valued at around $379 million, $150 million in cash from accounts tied to FTX DM, and two private planes purchased using approximately $35 million of estate assets.

Summing these values gives an estimated total asset amount of approximately $1.19 billion, making 18% of that about $214.2 million, which aligns with the $230 million stated in the agreement. Additionally, the plan provides each shareholder with up to $250,000 for legal fees from the segregated fund.

Creditor Reimbursements and Claims Evaluation

Under the FTX bankruptcy plan, which garnered “overwhelming preliminary support” from creditors, 98% are expected to receive at least 118% of their claim value in cash. However, Kavuri expressed concerns, stating that creditors might realistically receive much less, potentially between 10% to 25% of their crypto back, as bankruptcy claims were assessed based on the cryptocurrency values at that time.

The price of Bitcoin was around $16,000 during FTX’s bankruptcy, while it’s nearly $66,000 now. As a result, a creditor who lost 1 BTC would get about $16,000, which is only 24% of the value they would have recovered if claims were paid in-kind.

Though the SEC cautioned FTX against repaying creditors in stablecoins or other crypto securities due to potential legal challenges, other cryptocurrency companies like Genesis and BlockFi have included some form of in-kind repayments in their bankruptcy plans.

Final Steps

The confirmation hearing for the FTX reorganization plan, presided over by Judge John Dorsey of the United States Bankruptcy Court for the District of Delaware, is scheduled for 10:00 am ET on October 7. The FTX estate must report the complete results of the creditor vote by September 30, providing seven days prior to the hearing for any objections and responses to help confirm the plan.