Wed 05/03/2023 18:28 PM
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Relevant Documents:
Debtors Objection
UCC Objection
Customer Plaintiffs Objection

The FTX Group debtors, official committee of unsecured creditors and a group of class-action U.S. customer plaintiffs are opposing the stay relief motion filed by the joint provisional liquidators, or JPLs, in the Bahamian liquidation proceedings of FTX Digital Markets Ltd., or FTX DM, which seeks permission to file applications with the Supreme Court of the Bahamas to resolve foreign law issues relating to “the identification and protection” of FTX DM’s account holders and creditors.

The debtors and UCC reject the JPLs’ characterization of their requested relief, warning that what the JPLs are actually seeking is a determination by the Bahamas court that assets of the international exchange belong to FTX DM.

According to the debtors, the JPLs’ proposed application is aimed at obtaining a declaration from the Bahamas court that “billions of dollars in assets” belong to FTX DM, even though all distributable assets are controlled by the debtors and therefore constitute property of the debtors’ estates within the bankruptcy court’s exclusive jurisdiction. The motion is about the estate of FTX DM, which is “virtually empty,” and the JPLs would like to “fill it” with property “taken from” the debtors, the debtors assert, calling the motion “at [its] heart” a request for a change of venue.

The debtors argue that relief is not warranted. The JPLs have offered “no evidence” for why the Bahamas court rather than the bankruptcy court should decide these property-related questions other than foreign law is involved. However, that is “no basis at all,” contend the debtors, given that the bankruptcy court resolves foreign law issues all the time and there is no need to obtain a nonbinding opinion from the Bahamas court.

They also note that even if a Bahamas court was more skilled in applying English contract law, customer entitlement claims would include equitable claims and defenses that would be decided under Delaware law and federal bankruptcy law.

Contrary to the JPLs’ primary evidence based on the debtors’ own initial assumption that 6% of customers were customers of FTX DM, the debtors say they have determined there is no colorable basis to deny any customer claims against the debtors on the theory that such customer was “secretly novated and sent to FTX DM.” The plain language of the 2022 terms of service makes clear that the customer relationship remained with FTX Trading, the owner and operator of, and that FTX DM provided “at most” certain specified services, according to the debtors. As a result, the debtors say, creditors are not competing with each other to recover claims across jurisdictions because 100% of customers with losses will have claims against the debtors.

The debtors also point out that the JPLs have “no material property” in their custody, which includes less than $30 million of liquid assets that are “rapidly” being spent on professional fees and copies of customer data and information “legally owned and provided by” the debtors that the JPLs now seek to “exploit.” These assets comprise “less than one-half of one percent” of the $7.3 billion of liquid assets held by the debtors today, according to the debtors’ objection.

The debtors emphasize they do not intend to seek any relief from the Bahamas court in connection with confirmation or implementation of a plan of reorganization, with the exception of debtor FTX Property Holdings, whose assets are being marketed in the Bahamas under the parties’ cooperation agreement. The debtors add that they are moving directly to discuss plan formation with stakeholders and, as previously announced, intend to file a preliminary plan in July.

This is not a “sign of disrespect” for the Bahamas court, insist the debtors, but rather a recognition of the unique facts of the chapter 11 cases that make it imperative for the bankruptcy court to oversee the process in “a centralized manner without unnecessary delay or jurisdictional complications.” The debtors say this is a position that they and the UCC have maintained since the outset of the cases and that is reflected in the debtors’ cooperation agreement with the JPLs. The cooperation agreement rejected the concept of concurrent jurisdiction, note the debtors, so that the bankruptcy court could determine such issues without deference to any other court.

The debtors explain that the bankruptcy court’s exclusive jurisdiction over the debtors’ property is “especially critical” given competing claims to property interests by the JPLs and two separate groups of customers. The two customer groups have agreed to defer litigation in favor of plan discussions, but unless the JPLs participate in the discussions, their issues will be determined through the debtors’ adversary proceeding against FTX DM (seeking declaratory relief that FTX DM has no ownership interest in the debtors’ property and asserting fraudulent transfer claims) and the plan confirmation process.

The debtors contend that relief should be denied because requiring the debtors to litigate in the Bahamas would cause prejudice to the debtors and creditors, including necessitating retention of a new set of counsel. The JPLs’ arguments regarding comity are likewise unavailing, say the debtors, particularly because only the bankruptcy court can “answer both the related questions” of the nature of the debtors’ property and the validity of the debtors’ avoidance claims stemming from the alleged criminal conduct of Samuel Bankman-Fried.

The UCC laments that “[n]early six months into these Chapter 11 Cases, the JPLs are again forcing the Debtors and the Committee to squander significant estate resources to respond to the JPLs’ game of jurisdictional tug of war that in no way will benefit creditors.” According to the UCC, the JPLs’ proposed application in the Bahamas would needlessly waste the resources of both estates, which will harm customers of the international exchange, to whom the debtors and JPLs both owe fiduciary duties.

The fact that there are two separate sets of estates at all - the FTX Group debtors in the U.S. and FTX DM in the Bahamas - is “merely a function of the haste in which proceedings against [FTX DM] were commenced,” says the UCC, claiming that FTX DM “would otherwise have been another of the more than one hundred debtors before this Court.” The existence of the Bahamas proceedings does not alter the fact that “at bottom,” FTX DM is just one of many FTX entities that could owe or be owed intercompany claims to and from other FTX entities, asserts the committee.

The UCC says it does not object to the JPLs “doing what is truly necessary to liquidate their estate,” suggesting that if the JPLs sought only to determine the scope of their creditors, the UCC “might not be objecting today.” In fact, says the committee, “the best result” for international exchange customers “is for the JPLs to simply deem all customers of the International Exchange creditors of FTX DM and distribute accordingly the limited assets FTX DM has in its possession.”

According to the UCC, “It seems obvious that no customer would object to having a claim against both FTX DM and FTX Trading, nor to receiving a recovery from both estates until each customer is made whole.” If that were the JPLs’ aim, the parties could then agree on a “protocol” to effectuate such a distribution.

However, the JPLs are instead seeking permission to litigate in the Bahamas issues concerning property of the U.S. debtors’ estates, says the committee, “including questions concerning who owns the assets that make up the International Exchange.” Specifically, the JPLs’ proposed application would have the Bahamas court decide that assets that were transferred by customers to the international exchange belonged to FTX DM, according to the UCC.

To the extent such assets are currently owned and/or held by the U.S. debtors, the application would “inevitably” require the Bahamas court to answer questions concerning property in the debtors’ possession, “the archetypal act section 362 is meant to prohibit.” The JPLs cannot “sidestep the breadth” of the automatic stay, says the UCC, by attempting to frame their relief as “routine” or “procedural.”

The UCC echoes the debtors’ position that the JPLs have supplied no evidence to support their contention that FTX DM held title to any assets of the international exchange, including customer accounts. “The alleged migration of customer accounts from FTX Trading to FTX DM upon which the JPLs so heavily rely was, at best, an aspirational plan,” says the filing, and “the Committee has seen no evidence, and none is provided in the Motion, that the ambitious timeline and milestones set forth in the Migration Plan were met.”

The U.S. customer plaintiffs argue that the JPLs’ motion “makes abundantly clear that the only way to avoid a problematic, piecemeal, and inefficient resolution of core issues concerning Customers’ digital assets and fiat currency … must be centralized in this Court.” According to the plaintiffs, the connection between customer property and the issues the JPLs want to bring to the Bahamas is “de minimis” and “attenuated,” and the JPLs have failed to establish cause to remove the adjudication of these issues to the Bahamas.

The debtors filed a declaration of Edgar Mosley of Alvarez & Marsal, the debtors’ financial advisor (focused on why stay relief is not warranted). The UCC filed a declaration of Kenneth Pasquale of Paul Hastings (attaching a copy of the services agreement between FTX Trading and FTX DM).
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