The FTX entities are now going through the standard processes of bankruptcy in which the assets, liabilities, debtors, and creditors of each entity are identified, and a plan is agreed for the reorganization and/or sale of the entities, and the payment of creditors, including FTX customers. This process is controlled, and approved, by the Delaware bankruptcy court.

What is claw-back litigation?

Claw-back refers to the process by which a bankrupt entity attempts to “claw-back” or recover money or property that it paid to a creditor. A bankrupt entity can do that by either fraudulent transfer or preference claims. The bankrupt entity, in this case FTX or any of its affiliates, petitions the court to avoid such preferential or fraudulent transfers, and order that the funds are returned to the bankrupt entity. (A preferential transfer is made during the 90 days prior to the bankruptcy or to an “insider” such as a family member or business associate. A fraudulent transfer is one made with actual intent to defraud creditors or for less than the value of the property.) When claw-back litigation is successful, the bankrupt entity recovers the funds which thereby improves its financial position or increases the amount available to pay unsecured creditors. 

Who is at risk in the FTX bankruptcy claw-back litigation?

FTX entities have already filed cases against specific companies and people to claw-back funds transferred before FTX filed for bankruptcy in November 2022. For example, a case was recently filed in Delaware against Mirana Corp, as well as certain affiliated companies and people (Bybit Fintech Ltd., Time Research Ltd., Sin Wei “Sean” Tan (Mirana senior executive, Head of its asset management group, and director of Moonglow Capital Ltd.), Weizheng Ye (director of Moonglow Capital Ltd.), Wei Lin “Germaine” Tan (who shares a residential address with Wiezhing Ye), and Nashon Loo Shun Liang (Mirana’s Head of Risk, Compliance and Operations). These persons are at risk of being ordered to return all of the monies that they received from FTX to the debtors’ estate, which is a significant amount of money. The claw-back complaint alleges that Mirana received $838 million in transfers from FTX during the applicable claw-back period.

It is possible that more FTX claw-back cases may follow, and anyone who received funds from FTX, especially in the 90 days before the bankruptcy filing, and including FTX customers who withdrew funds from their own FTX accounts, is at risk. Companies and people who had a close relationship or a position of power over FTX or its employees, and could potentially have influenced FTX employees to prioritize their transfers over other creditors, are particularly at risk. The circumstances of the FTX bankruptcy and the subsequent prosecution of senior FTX figures has given rise to a lot of suspicion and a multitude of questions surrounding the legitimacy of FTX transactions. We expect it to be a complex and contentious bankruptcy.

What are your options if you are at risk of claw-back by FTX?

Unfortunately, claw-back actions are part of the cost of doing business, and it is important to apply consistent and accurate debt collection practices to minimize the risk of a clawback petition. However, even after one of the FTX debtors has filed for bankruptcy, there are actions that you can take to reduce your risk of being subject to a successful claw-back. 

Review any payments received from the FTX-debtor in the 90 days before the bankruptcy filing and ensure that your records are accurate and complete. If there are any changes to your ordinary course of dealing with the debtor, that could raise suspicion of a preferential transfer so it is helpful to note the business reason for this change. You should do this promptly while the events are still recent. As in the FTX bankruptcy cases, it may be a year or two after the bankruptcy is filed before a claw-back case is brought.

If you received any funds from FTX in the 90 day clawback period, it is also important to understand that transfers can be treated differently depending on how they are categorized. For example, if a payment is applied to an old outstanding invoice instead of to an open invoice, that can affect whether or not the funds can be clawed back by FTX. This is a very complex area of the law and it is crucial to get legal advice from a Delaware bankruptcy attorney to ensure that your risk of clawback is minimized. 

If you have already been named in FTX claw-back litigation, you have options. It is possible to enter negotiations with the bankrupt entity to agree a settlement that is accepted by both sides and approved by the court. This avoids the cost, publicity, inconvenience, and risk of a trial, and also allows you to maintain some control over the outcome of the clawback case. However, in some cases, it is necessary to go to trial to get the outcome that you want. An experienced Delaware bankruptcy attorney can advise you on the strength of your individual case and the options that you have.

What to expect in the FTX bankruptcy claw-back litigation?

Any litigation can be unpredictable, but, with the right experience, it is possible to advise you on the expected course of the FTX bankruptcy claw-back litigation and the strength of your case. 

The FTX bankruptcy clawback cases will generally begin with a demand letter from FTX lawyers (currently, Sullivan & Cromwell, LLP) to the creditor for repayment of the funds that they allege were preferential or fraudulent transfers. If the demand is not met, FTX would likely file a legal complaint in the United States Bankruptcy Court for the District of Delaware approximately 30 to 60 days after the demand letter. This is the start of the official court process. 

It is the creditor’s responsibility to file an answer to the complaint with the courts within 30 days of receiving it (technically, being served.) If no answer is filed within that time limit, the court will enter a default judgment against the creditor. Technically, this means that the case is already decided in favor of the debtor-plaintiff. Therefore, it is essential that you contact a lawyer promptly if you receive a demand letter from FTX or are served with a complaint alleging preferential or fraudulent transfers. If you ignore it, the court has no choice but to decide the matter against you. 

For clients who have received a demand letter or are named defendants in FTX claw-back litigation, we expect to have numerous lawyer-client conferences to discuss the strategies and action plan for mounting a robust defense. We collaborate closely with clients to determine their goals and to explore options and consequences from both a legal and business perspective. Simultaneously, we are monitoring events in the main FTX bankruptcy case to ensure that we adjust our strategies as needed with changing events, and to ensure that our clients are zealously advocated for on all fronts. 

It is impossible to state an exact timeline for any litigation or to guarantee any outcome, however, we expect that any cases related to the FTX bankruptcy could be long drawn-out due to the complexity of all of the FTX issues and parties. 

Do I need a lawyer if I think I am at risk of claw-back litigation in the FTX bankruptcy cases?

In short, yes. The FTX bankruptcy claw-back litigation is highly complex and highly valuable. For example, gross assets transferred to Mirana Corp alone in the clawback period are alleged to be $838 million. Therefore, the financial and business risk associated with these cases is huge. In addition, the very public nature of the FTX bankruptcy and the Friedman-Bank prosecution has brought a lot of attention to these cases. Any litigation, and those involved in it, may also receive significant media attention. It is advisable to have a reputable bankruptcy lawyer, who is experienced in navigating the complex legal landscape of Delaware bankruptcies and sensitive to the personal and business risk of such high profile cases.

When should I get a lawyer if I am at risk of claw-back litigation in the FTX bankruptcy cases?

If you think you are at risk of claw-back litigation in the FTX bankruptcy cases, you should seek the advice of a reliable Delaware bankruptcy attorney as soon as possible. They can advise you on what to do now that can strengthen your case and minimize your risk if you are subject to clawback litigation. Actions such as reviewing and maintaining accurate and complete accounts to record and justify any transfers can be crucial to your case. 

If you are a defendant in claw-back litigation, a bankruptcy attorney should advise you on the steps you need to take to comply with legal requirements while also dealing with other parties in the litigation, and the courts, on your behalf. Your attorney will argue your case in negotiations or in court to get you the best outcome for your business.