• Wed. Feb 28th, 2024

Bankrupt Crypto Companies Struggle Over Dwindling Cash | Wired

Bankrupt Crypto Companies Struggle Over Dwindling Cash |  Wired

However, legal experts say they are skeptical about FTX’s prospects. Florida International University law professor Mark Powers, who acted as counsel in the liquidation of Bernie Madoff’s infamous Ponzi scheme, says the exchange is trying to jump “ahead of other creditors” in the GGC bankruptcy. “Why should the FTX bankruptcy, or FTX as a potential creditor of Genesis, matter more than anything else?” he asks.

The largest of those GGC creditors is Gemini, a crypto exchange founded by Cameron and Tyler Winklevoss. The company’s harvesting agriculture service, Gemini Earn, allowed customers to earn interest on their crypto, which was placed on GGC’s loan book. When the lender filed for bankruptcy, $900 million in assets from Gemini customers were locked up.

Gemini has already liquidated $280 million worth of collateral posted by GGC in August to return some of the lost funds. But if FTX succeeds in its clawback, 340,000 Gemini Earn customers will be left significantly out of pocket. Gemini did not respond to a request for comment.

“I don’t think the Genesis bankruptcy court will grant FTX’s motion,” Powers says. “Given the size of the claim, I think it would be extremely devastating.”

But if the resolution is allowed, things will get messy. Powers says there will effectively be two judges from different jurisdictions involved to some extent in both bankruptcies. “That’s generally not good.”

If the case proceeds, GGC will argue that the $1.8 billion loan repayments were made in the ordinary course of business, which would exempt them from recall. FTX’s failure to specify the dates of the withdrawals in its filing raises questions, as Powers and others point out.

But even if a New York judge allows FTX’s claim to proceed, there’s no guarantee the dispute will make it to court. Clawback cases are less likely to go to trial, says Alan Rosenberg, a partner at the law firm MRTH and a fellow at the American Bankruptcy Institute — and they almost always end in settlement. FTX can use this fact to its advantage. “True, there are financial considerations to take into account when defending (against clawbacks),” says Rosenberg. “Even if you have a great defense, litigation costs money. So you need to decide whether it is more profitable to pay a sum to get rid of the claim.

The only mercy for creditors, Rosenberg says, is that FTX and GGC — as insolvent entities — have a fiduciary duty to reach an agreement as quickly as possible. “Everybody’s objective is to deliver to creditors. The more you fight, the more it destroys the estate,” he says. “Both parties are interested in reaching a decision quickly.”

Ahluwalia does not share the same optimism. He says there will likely be protracted negotiations between FTX and GGC’s lawyers over the validity and scope of the clawback claim—all of which will be paid on the debtor’s dime.

These issues will take time to resolve. But the longer the legal dispute drags on, the more money flows from the coffers of creditors into the pockets of law firms. “I don’t think the FTX claim is valid. I think it is a stretch,” says Ahluwalia. “I think John Ray is billing creditors for a remote possibility. And who makes like robbers? Lawyers.”

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