FTX and Genesis Global Seek Approval of Settlement Resolving Dueling Claims; Genesis Says Deal Would ‘Smooth’ Path to Confirmation

FTX Rule 9019 Settlement Motion / Ray Declaration
Genesis Rule 9019 Settlement Motion / Islim Declaration

FTX Trading Ltd. and certain of its debtor and nondebtor subsidiaries, or FTX, and Genesis Global Holdco LLC and certain of its debtor and nondebtor subsidiaries, or Genesis, filed separate motions in their respective chapter 11 cases to approve a global settlement. On July 27, FTX and Genesis disclosed to the U.S. Bankruptcy Court for the Southern District of New York that they reached an “agreement in principle” that would resolve dueling claims in both chapter 11 cases and allow Genesis to move forward with confirmation of its plan.

Prepetition, certain of the FTX entities and the Genesis entities were engaged in a lending relationship whereby Genesis Global Capital LLC, or GGC, provided billions of dollars’ worth of cryptocurrency loans to Alameda Research and the Genesis entities maintained a customer account on the FTX.com platform. The settlement would resolve the crisscrossing disputes arising out of that relationship. Key terms include:
 

• Alameda would have a $175 million allowed general unsecured claim against GGC and Genesis would not seek to subordinate, recharacterize or otherwise provide any alternative treatment of such claim;
   
• The Alameda claim would be satisfied in fiat and entitled to receive pro rata distributions with all other allowed GUCs. Further, the Alameda claim would be entitled to all treatment afforded allowed GUCs in its respective class, and would not be separately classified from other GUCs owed fiat against GGC (other than claims of Gemini lenders and claims separately classified solely for purposes of administrative convenience) or otherwise treated in any disparate or discriminatory way as compared to other GUCs against GGC, other than participation in an early payment election. This is provided that FTX may participate in any early payment class election if available to all similarly situated unsecured creditors holding claims in an amount equal to or more than the Alameda claim;
   
• Genesis waives and releases FTX from all claims and FTX waives and releases Genesis from all claims other than the Alameda claim and all of FTX’s and Genesis’ proofs of claim, other than the Alameda proof of claim, would be deemed expunged;
   
• FTX’s claims against any affiliates or subsidiaries of Digital Currency Group other than Genesis are not released and are preserved;
   
• Each party would not object to any plan proposed by the other party that is consistent with the terms of the settlement agreement; and
   
• When the settlement becomes effective, FTX would withdraw with prejudice its lift stay motion and Genesis would withdraw with prejudice its estimation motion.
   

The FTX debtors’ settlement motion is scheduled for hearing on Sept. 13 at 1 p.m. ET, with objections due Aug. 30 at 4 p.m. ET.

The motions sketch out the claim disputes that the global settlement would put to rest. On May 3, FTX filed a motion to lift the automatic stay in Genesis’ chapter 11 cases to allow FTX to prosecute certain avoidance claims against Genesis. On June 1, Genesis filed a motion to estimate the FTX entities’ claims at $0 for purposes of voting, allowance and distribution. Both motions are pending before the court.

According to the FTX settlement motion, Genesis has asserted against FTX (i) an approximately $176 million customer claim against FTX Trading, (ii) an approximately $140 million avoidance claim against Alameda, (iii) an approximately $40 million outstanding loan claim against Alameda Research and (iv) claims under section 502(h) of the Bankruptcy Code to the extent allowed.

According to Genesis’s settlement motion, FTX filed proofs of claim in the Genesis debtors’ chapter 11 cases totaling approximately $3.876 billion, comprising (i) $1.819 billion in preferential loan repayments made by Alameda to GGC, (ii) $272.7 million of collateral preferentially pledged by Alameda to GGC, (iii) $143.615 million of collateral preferentially pledged by Alameda to GGC and (iv) $1.641 billion of assets withdrawn by Genesis from the FTX.com exchange during the preference window.

Both sets of debtors contend that the deal should be approved under Bankruptcy Rule 2019. FTX insists that the settlement agreement “fully and finally resolves multi-faceted, multi-jurisdictional litigation” between FTX and Genesis regarding FTX’s preference claims against Genesis and Genesis’ customer, loan, preference and other claims against FTX. FTX argues that the settlement agreement should be approved because it provides “material value” to the FTX debtors’ estates through the allowance of the Alameda claim and the release of all Genesis’ claims, including “more than $215 million in liquidated claims.”

FTX says that the settlement agreement would allow the parties to avoid “costly and time-consuming litigation in connection with the Estimation Motion and Lift Stay Motion, and adjudication of the merits of the claims and defenses asserted by the Parties.”

FTX emphasizes that it believes it has meritorious claims against Genesis, but recognizes the “significant risks and uncertainties” with regard to its claims and the “potential net recoveries” on account of such claims. FTX concedes that its over $3 billion in claims against Genesis are subject to numerous affirmative defenses and FTX would have trouble satisfying certain elements of section 547(b) of the Bankruptcy Code. Furthermore, FTX says that any recovery from Genesis would be uncertain.

Lastly, FTX says it expects that Genesis’ claims against FTX are valuable, and higher recoveries in the FTX debtors’ cases would “materially reduce the net value” of FTX’s claims.

According to the Genesis settlement motion, the settlement agreement would “significantly smooth” the Genesis debtors’ “path to confirmation” of their plan by eliminating any litigation regarding FTX’s claims.

Genesis also argues that the settlement agreement would resolve all claims asserted by FTX against Genesis “at a fraction of their face value.” Specifically, the allowed Alameda claims are “less than 5%” of all of FTX’s claims against Genesis, which claims constitute “more than 250% of the value” of the Genesis debtors’ liquid assets and “equal approximately 90% of all scheduled claims against GGC combined.”