[Crypto-Bankruptcy Series] The FTX Bankruptcy: First Week Motions, Jurisdictional Squabbling, and Other Unusual Developments
by | posted in: Avoidance, Bankruptcy, Chapter 11, Chapter 15, Crypto-Bankruptcy Series, Cryptocurrency, International and Comparative, Priority | 0

By Megan McDermott (University of Wisconsin-Madison School of Law)

Megan McDermott

Note: This post is the first post in a series of posts on bankruptcies of cryptocurrency companies and the emerging issues they pose.  This series is being managed by the Bankruptcy Roundtable and Xiao Ma, SJD at Harvard Law School, xma [at] sjd [dot] law [dot] harvard [dot] edu.

Check the HLS Bankruptcy Roundtable periodically for additional contributing posts by academics and practitioners from institutions across the country.

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The FTX bankruptcy isn’t just significant for its size and scope, but also for some extraordinary procedural wrinkles.  Here are a few notable developments from the first six weeks of the FTX bankruptcy:

  • Unusual delays. Most Chapter 11 bankruptcies are the products of weeks, if not months, of behind the scenes planning.  As a result, the typical debtor is able to file a flurry of first day motions that ensure a high degree of debtor control – at least during the early stages of bankruptcy, while creditors are scrambling to find representation and determine strategy.  Not so with FTX, due to the fact that current CEO John Ray took over from Sam Bankman-Fried immediately before the Chapter 11 filing.  Ray has testified that FTX’s abysmal record-keeping and absence of corporate controls have made it extremely difficult to get an accurate picture of FTX’s assets and liabilities.  As a result, the traditional first day motions were heard a week into proceedings, and second day motions were postponed to January 11. The delay makes it easier for individual creditors to organize push back to the debtors’ plans, which could in turn impact overall creditor recovery.
  • Jurisdictional squabbling. Bahamian regulators are mounting a spirited fight to retain control over the liquidation of FTX Digital Markets, one of the many entities in FTX’s global web of related businesses.  The Bahamian regulators backed off their initial strategy of asking the Southern District of New York to open a parallel Chapter 15 proceeding.  Nonetheless, they are currently arguing that the Delaware Bankruptcy Court lacks authority to halt liquidation under Bahamanian law.  Given the rumors that Bahamanian authorities encouraged (or possibly compelled) Bankman-Fried to give Bahamanian customers preferential treatment in withdrawing frozen funds, there is a lot at stake in this jurisdictional skirmish.  In his testimony to Congress, Ray mentioned this “extraordinary pushback” but expressed confidence that these efforts would be rejected in favor of the transparency and clarity that Chapter 11 promises to all stakeholders.
  • Sealed submissions. Despite this commitment to transparency, FTX has asked to file a variety of court submissions under seal, including creditor lists.  FTX’s lawyers argue that revealing creditor names would make them a target for hacking or, at the very least, poaching by competitors of FTX.  The U.S. Trustee has objected strenuously to sealing these records, on the grounds that these risks are the trade-offs of a public and transparent proceeding.  In addition, Dow Jones, Bloomberg, and other media interests have moved to intervene in order to oppose the debtor’s efforts to avoid disclosing creditor identities.  In the Celsius bankruptcy, the Southern District of New York decisively rejected efforts to keep parts of the docket under seal.  Judge Dorsey hasn’t taken a clear position yet but has agreed to keep creditor lists under seal – for now.
  • Preferential transfers. During Congressional questioning, Ray was asked about rumors of looting in the months preceding the Chapter 11 filing, as well as some dubious post-petition maneuvers.  There are also likely to be a number of insider transfers, especially since at least one of Bankman’s Fried’s parents (Stanford Law Professor Joseph Bankman) has reportedly received payments from FTX.  Transfers between FTX and Bankman-Fried and his family may be in the billions.  Expect some bombshells as FTX seeks to use Chapter 11 to avoid these transfers.
  • Property of the estate. Major stakeholders are already wrangling to have their assets returned on the ground that these assets should not be considered property of the estate.  Of particular note are two motions filed by committees representing U.S. and non-U.S. exchange customers.  The customers are arguing that they are entitled to have their crypto assets returned rather than having to wait in line for a pro rata recovery alongside other unsecured creditors.  Although some commentators have suggested that FTX’s terms of service may support these arguments, the legal authority for how to treat these assets is far from clear.  Another early mover is crypto lender BlockFi, which is staking its claim to 56 million Robinhood shares that Alameda Research had pledged as collateral shortly before FTX’s Chapter 11 filing.  These shares have lost around 40% of their value since early November, which is part of the reason BlockFi has filed its own Chapter 11 bankruptcy in the District of New Jersey.  Bankruptcy courts across the country will likely see many similar ripple effects before FTX’s creditors see any recovery.
  • Executory contracts. Given FTX’s lavish public relations spending and celebrity co-branding, many FTX partners are undoubtedly eager to extricate themselves from the now-disgraced company.  For example, the publisher of the League of Legends video game filed an early motion for relief from the automatic stay, asking the court’s permission to halt their contractual obligation to promote FTX at various events.  Right before the new year, FTX granted their wishes, moving to reject that cobranding deal alongside a long list of other executory contracts.  FTX’s motion details almost two dozen sponsorship deals, ranging from the Golden State Warriors to Berkeley Athletics to an international cricket competition.  FTX also hopes to cast aside paid celebrity endorsements from the likes of Gisele Bundchen and Shohei Otani.  In the motion, FTX explained that “the Contracts are not integral to the Debtors’ Chapter 11 efforts, are not otherwise beneficial to the Debtors’ estates and present burdensome liabilities.”  Accordingly, FTX requested that the contracts be deemed terminated immediately.  That means the Miami Heat Arena may soon be in the market for a new naming rights partner.  (See photo.)  [Editor’s Note: On January 11, 2023, the bankruptcy court approved the termination of FTX’s naming rights: https://www.nba.com/news/miami-dade-coun…]

Justice Scalia’s Bankruptcy Jurisprudence: The Right Judicial Philosophy for the Modern Bankruptcy Code?
by | posted in: Jurisprudence, Statutory Interpretation, Supreme Court | 0

By Megan McDermott (Lecturer, University of Wisconsin School of Law).

The late Justice Scalia is best known among mainstream audiences for his originalist approach to the Constitution, as well as his polarizing views on various civil rights issues. But anyone who has cracked open a bankruptcy casebook also knows Justice Scalia for his many contributions to the bankruptcy field — both through sturdy majority opinions in interpretive cases like Timbers, Nextwave, and Radlax, and through his biting dissents and concurrences in watershed decisions like Dewsnup and Stern.

My recent article, Justice Scalia’s Bankruptcy Jurisprudence: The Right Judicial Philosophy for the Modern Bankruptcy Code?, seeks to both quantify and qualify Justice Scalia’s contributions to bankruptcy law. I show that during his three decades on the Court, Justice Scalia wrote in more bankruptcy cases than any other justice (followed closely by Justices Stevens and Thomas).

I also identify four predominant themes that emerge from Justice Scalia’s bankruptcy oeuvre: (1) a holistic approach to the Bankruptcy Code; (2) a commitment to textualism, regardless of outcome; (3) disdain for legislative history; and (4) a desire for clear boundaries regarding the scope and authority of bankruptcy courts.

Finally, the article explores the impact of his jurisprudential legacy on the bankruptcy field. Of particular note are the ways in which Justice Scalia’s approach often favored ordinary consumers over creditor interests. I conclude that while Justice Scalia did not always live up to the ideals that he advocated, he nonetheless offered a unifying vision that fits well with both the purpose and the design of the Bankruptcy Code.

The full article is available here.

A Few Predictions for Justice Gorsuch’s Bankruptcy Jurisprudence
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates | 0

By Megan McDermott (University of Wisconsin Law School)

The confirmation of a new Supreme Court justice offers opportunities to speculate about how his judicial philosophy will impact various areas of the law. Bankruptcy is no exception. Justice Gorsuch’s presence on the high court could have major implications for bankruptcy law.

Using Gorsuch’s published Tenth Circuit bankruptcy decisions, my essay examines how closely Justice Gorsuch’s approach is likely to overlap with that of his predecessor, Antonin Scalia. As I show in a forthcoming Utah Law Review article (here), Justice Scalia played a leading role in the Supreme Court’s development of modern bankruptcy law during his three decades on the court. In this sequel essay, I explain why Justice Gorsuch is well-poised to play a similarly important role, with two highlights.

First, I predict that Gorsuch may push the Court to revisit Stern v. Marshall, the blockbuster 2010 decision in which the Court rejected Congress’s efforts to give bankruptcy courts judicial powers beyond the bounds of Article III. If Judge Gorsuch’s decision in In re Renewable Energy Development Corporation, 792 F.3d 1274 (10th Cir. 2015), is a reliable indication of where he and the other justices he cites are leaning, we may soon see a new approach to the many Stern problems that bankruptcy judges have faced during the last decade. Under this new approach, the focus will shift away from the public rights doctrine and toward the framework of summary and plenary jurisdiction employed by the eighteenth century English bankruptcy system.

Second, Justice Gorusch may be more open to considering legislative history arguments than his predecessor. Justice Scalia routinely urged his colleagues to avoid references to legislative history. In stark contrast to this dogmatic approach, Gorsuch’s Tenth Circuit bankruptcy writings suggest some willingness to indulge arguments about legislative history of the Bankruptcy Code. Because so many of the bankruptcy appeals that the Court hears are, essentially, statutory interpretation questions, even this slight shift in interpretive approach could have significant repercussions for the field.

The full paper can be found here.