FTX Proof of Claim Primer

Originally published via the Blockchain Lawyers Group on Medium, December 22, 2022.

FTX filed a petition under Chapter 11 of the U.S. Bankruptcy Code on November 17, 2022. So what now?

In the bankruptcy system, FTX and associated entities (generally referred to as “FTX” throughout) is now the “debtor” and if FTX is alleged to owe an individual or entity money, they are the “creditor” with a claim against the debtor’s bankruptcy estate. This article is a brief primer on steps FTX creditors can take to ensure their status and claim is properly documented with the bankruptcy court and considered in the event of distribution of assets by the estate. A general overview of how a Chapter 11 reorganization under Chapter 11 of the U.S. Bankruptcy Code can be found here.

A. Review Deadlines and Consult Appropriate Counsel

The Bankruptcy Code requires that notice be sent to creditors and interested parties in a case under the U.S. Bankruptcy Code. (See 11 U.S.C. § 342). The Notice of Bankruptcy Case (“Notice”) is issued by the bankruptcy court and is mailed to the parties appearing on a Creditor Matrix prepared by the debtor describing the debtor’s creditors and implicated debts.

The Notice from the FTX proceedings can be downloaded here.

As soon as an individual or company receives a Notice, they should begin by:

Assessing the value of the potential claim against the debtor (in this case, FTX) and gathering supporting documentation.

Creditors interested in filing a claim should preserve all documents related to their relationship with the debtor and be prepared to share those documents with the bankruptcy court in connection with the claims process and as described in Section C infra.

Determine whether to take an active role in the bankruptcy proceedings by joining a creditor’s committee, engaging in an adversarial action, or other efforts.

Noting any deadlines set forth in the Notice.

Coordinating with internal or external counsel and consider retaining local counsel, depending on the posture and value of the claim.

With custodial crypto exchanges like FTX, there is the additional important consideration of whether creditor assets are assets of the bankruptcy estate, or if title remains with the customer. In the Celsius bankruptcy, Judge Martin Glenn recently ruled that customers whose funds were held in a purely custodial manner would be returned to the customers because they were not assets of the estate. Bankrupt crypto lender BlockFi has also petitioned the U.S. Bankruptcy Court to allow clients to withdraw cryptocurrencies that are held in their BlockFi Wallet Accounts. According to FTX’s terms of service, title to customer crypto assets on the FTX platform remains with the customer. However, one significant distinction between the Celisus and FTX cases is that FTX’s apparent misuse and co-mingling of custodied customer assets across the FTX debtor group may simply mean there are no ascertainable customer-owned assets to return.

B. Where Can I Find Information About the Case

The most efficient way to access information regarding a pending bankruptcy proceeding is to review the case docket and obtain copies of the debtor’s bankruptcy schedules and other pleadings filed that discuss the debtor’s financial situation.

These documents can be found on PACER/ECF for the U.S. Bankruptcy Court for the District of Delaware.

If creditors/attorneys don’t have access to PACER/ECF, the docket and information about relevant dates/deadlines are hosted by a third-party here (this is required by the bankruptcy court so the public can readily access information).

The creditor or counsel should monitor the case and relevant deadlines. Counsel can file a Notice of Appearance and Request for Service of Papers. (See Fed. R. Bankr. P. 9010(b)). After filing a Notice of Appearance and Request for Service of Papers, counsel will receive electronic notice of all pleadings filed by parties in the case and be notified of any hearings and deadlines established by the Court.

With respect to the need to retain local counsel, the U.S. Bankruptcy Court for the District of Delaware permits parties (pro se or through out-of-state counsel) to file or prosecute a proof of claim or a response to their claim. The Court may, however, direct the claimant to consult with Delaware counsel if the claim litigation will involve extensive discovery or trial time.

C. The Proof of Claim

A Proof of Claim is an essential initial element in the bankruptcy process. It documents a creditor’s right to repayment from the debtor. The proof of claim describes the type of claim, priority status, and the amount of the outstanding debt. Filing a Chapter 11 bankruptcy proof of claim can affect whether, how, and when you receive repayment from the debtor.

A proof of claim will need to include redacted copies of any documents supporting the claim that are required by Bankruptcy Rule 3001(c), including:

Any writings supporting the claim (i.e. contracts, correspondences, invoicing, etc.).

An itemized statement of the interest, fees, expenses, or charges.

Documents demonstrating the existence and scope of a security interest in property of the estate.

When a claim is based on an open-end or revolving consumer credit agreement, a statement including the following information that applies to the account must be included:

  • the name of the entity from whom the creditor purchased the account;

  • the name of the entity to whom the debt was owed at the time of an account holder’s last transaction on the account;

  • the date of an account holder’s last transaction;

  • the date of the last payment on the account; and

  • the date on which the account was charged to profit and loss.

Chapter 11 creditors technically do not need to file a proof of claim and should receive notices automatically by mail because the debtor is required to list its creditors in the Creditor Matrix. However, this assumes the debtor has accurately described the nature and amount of the debt owed in its schedules and has not designated the debt as disputed.

Even if a creditor is not technically required to file a proof of claim, filing the claim can be a useful exercise and will supersede the information — whether correct or not — filed by the creditor and listed in their schedule of assets and liabilities. Filing a proof of claim and supporting documentation also allows creditors to dispute any inaccuracies in the debtor’s schedules such as:

  • the category of debt;

  • the amount listed;

  • when the creditor is not listed in debtor’s schedules;

  • whether the claim is designated as disputed, unliquidated, or contingent.

Instructions and an electronic proof of claim form in the FTX case can be found and submitted here, as shown in the screenshot below. Instructions for filing a claim via mail can be found here.

FTX’s case information is provided below for convenience:

In re: FTX Trading Ltd., et al.

Case No. 22–11068 (JTD)

The last possible date that creditors are allowed to file their proof of claim against a Debtor in a bankruptcy case is known as the Bar Date. This is effectively the deadline for creditors to adhere to the bankruptcy claims timeframe through timely submissions of proof of claim to be accepted by the court. Assuming their information is correctly listed with the court, the creditor should receive a Notice of the Bar Date issued by the bankruptcy court. As noted below, in the FTX case, there is currently no deadline to file claims.

Generally, the bar date is set by the court within 90 days of the initial bankruptcy filing; however, the complexity of FTX’s insolvency may extend this timeline.

D. Types of Claims

In the administration of a bankruptcy estate, there are four types of claims. The type of claim will be relevant to the documentation accompanying the proof of claim. The character of the claim determines when and how any amounts are paid to the creditor. A brief overview of the four types of claims is provided below:

A secured claim is debt supported by collateral or a lien on a specific property of the debtor. Secured debt, like a mortgage or car loan, is backed by specific collateral that may be claimed by a lender if the debt goes unpaid. Secured claims have priority in the bankruptcy process, meaning they are paid before other creditor classes.

An unsecured claim is, by definition, one that does not meet the requirements of a secured claim. Unsecured debts, such as credit card or medical bills, do not grant lenders any specific collateral rights. Crypto firms that sought bankruptcy protection in 2022, including Voyager Digital and Celsius Network, have classified most of their customers, particularly those with interest-bearing accounts, as unsecured creditors. In the case of FTX, the interests of this class of unsecured creditors will be represented by a committee composed of account holders, investment funds, and an affiliate of U.S. crypto firm Genesis.

An unsecured priority claim is debt entitled to special treatment in the bankruptcy claims process and is paid ahead of unsecured non-priority claims. Examples include:

  • Employee compensation;

  • Unpaid contributions to employee benefits plans;

  • Tax obligations owed to the government;

  • Pending personal injury or workplace injury or death claims;

  • Certain deposits are given to the creditor to secure future goods or services;

  • alimony and child support;

  • The costs of administering the bankruptcy case (e.g. professional accounting and legal fees);

If an unsecured claim does not fall under any of the categories above, then it may be considered a non-priority unsecured claim. Nonpriority unsecured creditors are the last to get paid when money is available.

E. What Happens After I File?

Once a proof of claim has been filed, debtors — assuming they did not file and confirm electronically — can confirm that their claim was received by the bankruptcy court by enclosing a stamped self-addressed envelope and a copy of the completed form, and the court will return a stamped confirmation in the mail.

Chapter 11 bankruptcy proceedings — including what will almost certainly include many sub-cases pendant to the FTX bankruptcy called adversarial proceedings — are generally lengthy endeavors. Administration of the FTX’s bankruptcy will likely be further complicated by fraud and other civil and criminal allegations that might result in a Ponzi determination and civil forfeiture proceedings. Ultimately, it may be many years before a Plan of Reorganization is approved and claim payouts are ultimately distributed. This is further assuming there are sufficient funds available to make any payment to creditors. However, by submitting a valid proof of claim to the court, creditors can ensure their bankruptcy claim is accurately represented in the case, and that there is some legal right of recourse against FTX.

lawpanda is a U.S. attorney with an active litigation and counseling practice assisting builders, developers, traditional companies, and decentralized communities. He is a member of  BanklessDAO’s Legal Guild, LexDAO, LeXpunK, the Blockchain Lawyers Group, and member/consultant/contributor to a variety of DAOs and protocols. When he’s not writing for Decentralized Law, he is working to reduce operational and governance friction between on-chain and legacy entities through corporate structuring and common-sense legal solutions. Read his scribblings on Mirror and connect on Twitter, LinkedIn, or at lawpanda.eth@gmail.com. *

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