FTX Announces Proposed Customer Property Settlement

FTX Trading Ltd. and its affiliated debtors, collectively referred to as the “FTX Debtors,” have announced a proposed settlement that aims to resolve ongoing customer property disputes as part of their pending Chapter 11 cases. This groundbreaking development is known as the “Customer Shortfall Settlement” and is expected to be proposed alongside an amended Plan of Reorganization by December 16, 2023. Pending approval by the Bankruptcy Court, this settlement would mark a crucial step towards resolving customer property litigation and potentially confirming the Amended Plan in the second quarter of 2024.

The core of the customer property litigation revolved around customers of FTX.com and FTX US, asserting property interests in specific assets, rather than being treated as unsecured claimants, sharing the same standing as general creditors. The Customer Shortfall Settlement is designed to put an end to this dispute by granting customers an unsecured claim against the FTX Debtors. This claim would possess an equitable priority concerning certain assets either segregated or appropriated from the exchanges.

This remarkable settlement was achieved after months of arduous, arm’s-length negotiations among the FTX Debtors, the Executive Committee of the Ad Hoc Committee of Non-U.S. Customers (representing approximately $1 billion in FTX.com customer claims), the Official Committee of Unsecured Creditors, and putative class representatives. All parties involved have committed to a “Settlement and Plan Support Agreement” (the “Support Agreement”), which has been made publicly available on the docket of the Bankruptcy Court for informational purposes.

John. J. Ray III, Chief Executive Officer and Chief Restructuring Officer of the FTX Debtors, expressed the significance of this proposed settlement, stating, “The proposed settlement of the customer property issues is another major milestone in our case. Together, starting in the most challenging financial disaster I have seen, the debtors and their creditors have created enormous value from a situation that easily could have been a near-total loss for customers.”

The Amended Plan of Reorganization and Customer Recoveries Update

The Amended Plan shares substantial similarities with the Draft Plan introduced by the FTX Debtors for discussion purposes on July 1, 2023. Under this plan, the FTX Debtors intend to categorize their assets into three pools based on the conditions at the inception of the Chapter 11 cases:

  1. Assets segregated for the benefit of FTX.com customers.
  2. Assets segregated for the benefit of FTX US customers.
  3. A “General Pool” for other assets.

Customers of FTX.com and FTX US would also have the opportunity to claim a “Shortfall Claim” against the General Pool, which corresponds to the estimated value of assets that went missing from their respective exchanges. The estimated Shortfall Claim values are approximately $8.9 billion for FTX.com and $166 million for FTX US. To balance the property rights claims and the complexities of asset tracing, a negotiated portion of the Shortfall Claim would be granted equitable priority over the General Pool. This means that 66% of the General Pool would be reserved exclusively to pay Shortfall Claims, with the remaining 34% allocated to pay other Shortfall Claims and general creditors.

The FTX Debtors anticipate that, if the Amended Plan is approved, customers of both exchanges would collectively receive over 90% of the distributable value worldwide by the end of the second quarter of 2024. However, they also anticipate that customers may not receive full payment, with customers of FTX.com likely experiencing greater percentage losses.

The ultimate recoveries for customers and non-customers will depend on numerous factors, including tax and governmental claims, asset recovery efforts, litigation results, and the claims allowance process, among others.

The Proposed Preference Settlement Offer

The Customer Shortfall Settlement also introduces an opportunity for eligible customers to address preference exposure related to their claims. Under the terms of the agreement, the FTX Debtors have committed to offering eligible customers who approve the Amended Plan a means to resolve exchange preference liability.

This resolution involves either reducing their claim or making a cash payment, with the amount specified on the Amended Plan ballot known as the “Preference Settlement Amount.” The Preference Settlement Amount for each eligible customer would be equal to 15% of the difference between their withdrawals during the nine days before the Chapter 11 cases and their deposits during the same period.

It’s important to note that the preference settlement offer has not yet received approval from the Bankruptcy Court and is subject to changes by the FTX Debtors before approval.

In conclusion, the proposed Customer Shortfall Settlement represents a significant step towards resolving customer property disputes and bringing much-needed clarity to the FTX Debtors’ Chapter 11 cases. This development offers a path to equitable resolution and potential recoveries for customers, albeit with certain uncertainties that will need to be addressed as the process unfolds. The final outcome will largely depend on various variables, making this a case that continues to draw attention and scrutiny from all parties involved.

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