FTX bankruptcy pits US vs. Bahamas in battle for billions

FTX Trading is scheduled to appear in a Delaware bankruptcy court on Tuesday for a so-called "first day hearing."

Such hearings are normally routine matters that give a company various powers to operate in bankruptcy in much the same way it functioned pre-bankruptcy.

FTX’s hearing includes an unusual addition—control of the case. Judge John Dorsey will ponder whether to consolidate the U.S. bankruptcy in Wilmington with a joint provisional liquidation in the Bahamas, where FTX incorporated in September 2021.

The stakes are high. The failed crypto exchange owes its 50 largest creditors more than $3 billion. The top two creditors are owed more than $200 million each. The document did not name anyone.

Lawyers for FTX Trading have asserted that former CEO Sam Bankman-Fried may be supporting efforts to sabotage the U.S. bankruptcy by expanding the proceeding into the Bahamas:

"Mr. Bankman-Fried, the co-founder, and controlling owner of all of the debtors and of FDM [Bahamas-based FTX Digital Markets], appears to be supporting efforts by the JPLs [joint provisional liquidators] to expand the scope of the FTX DM proceeding in the Bahamas, to undermine these Chapter 11 cases, and to move assets from the debtors to accounts in the Bahamas under the control of the Bahamian government."

The Securities Commission of the Bahamas said on Nov. 17 that it transferred all digital assets of FTX FDM to a digital wallet controlled by the Commission, for safekeeping.

FTX Trading says the move violates bankruptcy law, which freezes, or "stays" debtors’ assets unless a judge approves a transfer.

It is critical to the efforts to end the chaos and to ensure that assets can be secured and marshaled in an orderly process ….

- Court document filed by FTX Trading lawyers

"The appointment of the JPLs and recognition of the Chapter 15 Case are thus in serious question. It appears that the automatic stay has been flaunted, by a government actor no less," lawyers for FTX Trading opined in a court document.

FTX Digital Markets filed a Chapter 15 bankruptcy petition on Nov. 15 in New York City. The filing seeks to give the Bahamas proceeding equal status under U.S. bankruptcy law as a U.S. proceeding.

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The Bahamas argument

Three joint provisional liquidators for Bahamas-based FTX Digital Markets argue that U.S.-based FTX Trading had no authority to file for bankruptcy, saying Digital Markets should be in charge.

"The entire FTX Brand was ultimately operated from a single location: The Bahamas. All core management personnel likewise were located in The Bahamas," said joint provisional liquidator Brian Simms in a court document.

Simms said no one, except himself, could authorize a bankruptcy filing: "I reject the validity of any purported attempt to place FTX affiliates in bankruptcy insofar as such filing required FTX Digital's officers, directors, or management to approve and authorize such action."

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The U.S. argument

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U.S.-based FTX Trading said: "The filing of the Chapter 15 Case without advance notice and in the SDNY [U.S. Bankruptcy Court for the Southern District of New York] is a blatant attempt to avoid the supervision of this court and to keep FTX DM isolated from the administration of the rest of the debtors, which constitute the vast majority of the remainder of the FTX group."

It wants everything decided in Delaware, arguing that having two bankruptcy courts consider related issues simply makes no sense.

"Basic principles of efficient judicial administration and effective coordination argue strongly in favor of all U.S. proceedings relating to the FTX group occurring in a single U.S. court—this Court."

Simms said he doesn’t believe having the case controlled in the Bahamas will "impact" the 102 affiliates that filed for bankruptcy in the U.S., nor does he want the Chapter 11 cases dismissed.

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FTX Trading wants Judge Dorsey to transfer the Chapter 15 case to Delaware so both may be jointly administered.

The firm also wants any action in the Chapter 15 case stayed until the question of control is resolved.

"It is critical to the efforts to end the chaos and to ensure that assets can be secured and marshaled in an orderly process that all proceedings related to the Debtors and their affiliates — including the Chapter 15 Case — take place in a single venue. That venue is this Court, the United States Bankruptcy Court for the District of Delaware," lawyers said.

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First day motions

Along with the request for change of venue for the Chapter 15 case, Dorsey will hear first day motions including requests to:

– Jointly administer all 102 affiliated Chapter 11 cases

– Allow FTX to maintain a consolidated list of creditors

– Pay critical vendors and authorize financial institutions to honor related payment requests

– Operate a cash management system and maintain existing forms of business

– Pay compensation and benefits