Relevant Document:
Agenda
Judge John T. Dorsey granted the FTX Group debtors’
motion to estimate digital asset claims for the purposes of voting and plan distribution after an evidentiary hearing today, overruling all
objections. FTX Group creditors also received good news from debtors’ counsel Andrew Dietderich of Sullivan & Cromwell, who
announced that creditors may be paid in full if the debtors execute on their strategy.
At the outset of the hearing, the court issued a preliminary ruling finding that the digital assets must be valued as the petition date as required by the Bankruptcy Code. After argument, the court overruled all remaining objections, finding that estimation was appropriate in lieu of an individualized claim adjudication process in order to avoid undue delay in the cases.
Judge Dorsey also rejected the objections asserting that certain claims were not unliquidated, and thus susceptible to estimation, as well as due process concerns. The court concluded that the debtors’ proposed estimation methodologies were “fair,” noting also that all issues relating to customers’ ownership interests in the digital assets were preserved for resolution in connection with plan confirmation.
Judge Dorsey also issued a bench ruling in a separate matter, finding that the Internal Revenue Service has the
burden of proof to
estimate approximately $24 billion in asserted tax claims, which the court noted was recently
reduced to approximately $8 billion. Given the preliminary nature of estimated tax liability in the IRS proofs of claims, the court declined to presume that the asserted values were correct. The debtors’ tax estimation motion is set for an evidentiary hearing on March 19 at 10 a.m. ET.
In a general case update after the court’s bench rulings, Dietderich stated that the debtors anticipate filing a disclosure statement for their plan next month, projecting that customers and general unsecured creditors would be “paid in full.” Qualifying that his statement should be understood “not as a guarantee, but as an objective,” Dietderich said there was substantial work and “risk” to be overcome but that the debtors were actively executing on a strategy for full payment.
Canvassing the debtors’ substantial progress since the outset of the cases, Dietderich said
the full payment of creditors would depend on the voluntary subordination of governmental claims to creditor recoveries. He noted that the debtors’ professionals had worked to establish billions in tax loss carryforwards such the debtors do not expect creditor recoveries to be “materially reduced” by tax liabilities. Dietderich cautioned, however, that distributions would not come “immediately” and were conditioned on the debtors’ successful completion of the claim resolution process.
On the negative side of the ledger, Diederich disclosed that the potential “FTX 2.0” restart was off the table. He said that the marketing process for the exchange had not identified an investor or buyer with the capacity to restart the business.
Dietderich also disclosed a settlement in principle resolving
issues regarding debtors’
plans to reacquire the equity interests of their European subsidiaries and
fraudulent transfer litigation relating to FTX Europe.
Kris Hansen of Paul Hastings for the official committee of unsecured creditors remarked that given the court’s ruling on petition date pricing of claims, many claims would not receive a full payment “from where they started.” Hansen remarked that all parties were “committed to work together” as the debtors assess their assets and liabilities.
Although the court’s preliminary ruling on petition date pricing resolved the bulk of primarily
pro se objections to the debtors’ digital asset estimation motion, the proceedings went forward to establish the
evidentiary basis for the motion and the remaining objections to the use of estimation procedures and the proposed valuation methodologies and liquidation discounts.
Brian Glueckstein of Sullivan & Cromwell, for the debtors, presented the digital asset estimation motion. He argued that estimation was appropriate to fix the petition date prices of the approximately 1,300 assets listed in the debtors’
digital assets conversion table. Contrary to the objectors, the disparate pricing sources and market dislocations caused by the collapse of the FTX exchange made valuing the claims more complicated than a simple “black-and-white process.”
Glueckstein reviewed how the debtors set prepetition prices for the assets as well as
liquidation discounts for certain of the listed assets under the process conducted by the debtors’ experts professor
Sabrina Howell and Coin Metrics director
Kevin Lu in order to account for the impact of the debtors’ outsized holdings of these tokens on the market when sold and the lack of marketability for certain of the debtors’
nonmarketable assets.
Glueckstein also pointed out that Howell’s $0 valuation of FTX’s proprietary FTT token was supported by today’s disclosure that FTX “will not exist as an operating exchange going forward.” He said Howell’s testimony established that the token lacks any value or utility without an operating exchange.
Ken Pasquale of Paul Hastings, for the UCC, called the debtors’ approach “fair and reasonable,” adding that the uniformity of the process as compared with resolving the millions of estate claims through individualized proceedings would benefit the creditor body as a whole.
Kurt Gwynne of Reed Smith, for Serendipity Foundations, pressed his client’s objection, despite reaching an agreement, along with Map Vault, to delay the valuation of OXY, MAPS and SRM tokens to a subsequent evidentiary hearing to be scheduled in March. Gwynne argued the Serendipity Foundations’ claims were liquidated and not susceptible to estimation because there was no dispute over the number of tokens at issue. According to Gwynne, any dispute over the petition date price should be resolved through a standard claims objection process.
Thomas Bielli of Bielli & Klauder, for Auros Tech, similarly argued that the estimation procedures were inappropriate and procedurally “unfair.” Bielli argued the estimation motion was “ultimately a claims disallowance motion” and that the debtors’ choice to file the motion during the December 2023 holidays was a “violation of all creditors’ due process rights.”
Steve McNealy of Potter Anderson & Corroon, for LayerZero, reported that the debtors agreed to exclude his client’s section 502(h) claim from the estimation process.