A significant group of FTX creditors, led by Sunil Kavuri, has posed objection to the proposed bankruptcy reorganization plan of FTX, which gave rise to several concerns. One of the most primary objections is the plan not serving the best interests of the creditors.

The crux of their objection lies in the potential tax implications of cash reimbursement. They argue that receiving cash would trigger taxable events, burdening them financially. Instead, they advocate for reimbursement in the form of assets, which they deem fairer and a way to sidestep tax complications.

Tax Matters Amidst Settlements

The bankruptcy controversy is further complicated by tax implications. Creditors’ objection to receiving cash payments, ultimately leading to tax liabilities, emerges amidst the settlement of FTX with the IRS. It saw a reduction in tax bills from $24 billion to $200 million. In spite of this huge reduction, the creditors have divided opinions on the overall plan of bankruptcy. 

Adding to the complexity are suspicions raised by creditors regarding the legitimacy of some assets slated for distribution by the FTX estate. Concerns about potential theft further strain the already tenuous relationship between creditors and the estate.

Tracing the Troubles through Time

The friction witnessed between FTX’s bankruptcy estate and its creditors isn’t new. Sheer disappointment was expressed by the Official Committee of Unsecured Creditors (UCC) of FTX in 2023, about the estate’s reorganization plan, as they did not take any of their input. 

In addition, the UCC stated that the proposed provisions would only make the bankruptcy process unnecessarily complicated and long. This currently ongoing conflict reached its peak earlier this year, in January 2024 with the demand of creditors for reimbursement based on current market prices and not depressed prices from 2022, bringing to light a major contention in the bankruptcy proceedings about property rights and valuation.

Legal Tensions

In February 2024, tensions increased as FTX creditors filed a lawsuit against Sullivan & Cromwell, the legal firm supervising the bankruptcy. The firm was accused of complicity in FTX’s dishonest activities, who claimed to be unaware of the issue prior to the collapse of the exchange. 

However, an independent investigation was conducted later, which cleared that Sullivan & Cromwell wasn’t involved in any malpractice, and said they had no prior knowledge of the fraud. In spite of this, the lawsuit points to the intense mistrust and legal battles that have characterized the bankruptcy process of FTX, and highlights the complex nature and high stakes required to resolve the creditors’ claims.

 Is the current bankruptcy plan fair? Let us know if you think there’s a better solution for FTX creditors.

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