What Happens to FTX Clawback Cases if the Company Repays Its Creditors?

Lawyers for the failed crypto exchange told a bankruptcy judge they expected to pay creditors in full.

When the cryptocurrency exchange FTX declared bankruptcy about 15 months ago, it seemed few customers would recover much money or crypto from the platform. As John Ray III, who took over as chief executive during the bankruptcy, put it, “At the end of the day, we’re not going to be able to recover all the losses here.” He was countering Sam Bankman-Fried’s repeated claims that he could get every customer their money back.

Well, it turns out, FTX lawyers told a bankruptcy judge this week that they expected to pay creditors in full, though they said it was not a guarantee and had not yet revealed their strategy.

The surprise turn of events is raising serious questions about what happens next. Among them: What does this mean for the lawsuits FTX has filed in an attempt to claw back billions in assets that the company says it’s owed?

Will the possibility that customers could be made whole be raised at Bankman-Fried’s sentencing? Will potential relief for customers help his appeal?

Some clawback cases could become harder to win — or may be withdrawn. FTX’s restructuring lawyers have already filed about a dozen suits, including against Bankman-Fried’s parents, and they expect to file more clawback claims this year. Other high profile lawsuits include one against K5, an investment firm headed by Michael Kives, as well as Voyager Global.

Some of the clawback cases involve allegations of fraud, but not all do. Before fraud claims are argued, there is typically a legal fight over whether a company was insolvent at the time of the investment or that the investment led to insolvency. If every FTX creditor stands to get 100 cents on the dollar, the clawback cases that don’t involve fraud wouldn’t serve much of a financial purpose and may be more difficult to argue, some lawyers say. “In theory, clawbacks may go away there,” said Eric Monzo, a partner at Morris James who focuses on bankruptcy claims.

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