FTX Challenges 3ACs $1.53 Billion Claim, Citing Self-Inflicted Losses

FTX's bankruptcy estate has filed an objection against Three Arrows Capital’s $1.53 billion claim in the United States Bankruptcy Court, District of Delaware. This objection is significant as it challenges a substantial claim increase by Three Arrows Capital, potentially impacting creditor recoveries. FTX's management opposes Three Arrows Capital's claim expansion from $120 million to $1.53 billion, arguing that the claim is untimely and introduces new issues. Three Arrows Capital filed for the increase, citing new asset liquidation information. The dispute could substantially alter recovery percentages for other FTX creditors.

The ruling would also increase the claim pool by 20%, which would be a disaster for customer creditors…significantly lower recoveries are to be expected if 3AC gets the $1.5 billion claim in FTX." — Louis D’Origny, CFO, FTX Creditors. The proceeding’s complexity matches precedents in previous crypto bankruptcies. Both bankruptcy estates are overseen by US-appointed professionals, involving institutional creditors. There is no direct market impact, but the dispute emphasizes ongoing challenges in resolving crypto bankruptcies. Historical trends show lengthy creditor disputes but minimal immediate market disturbances.

FTX's legal team has formally contested a $1.53 billion claim filed by the defunct trading firm Three Arrows Capital (3AC), urging the court to dismiss the claim entirely. The lawyers argue that 3AC's losses were a result of market price movements and the firm's own trading activities, rather than any actions taken by FTX. This dispute arises from a previous ruling in March, where a bankruptcy court allowed 3AC to increase its initial claim from $120 million to $1.53 billion, despite FTX's opposition.

The core of FTX's argument is that 3AC's financial troubles were self-inflicted. The lawyers contend that 3AC's extensive spot and margin trading, partially funded by a $120 million credit line from FTX, led to the firm's collapse. FTX acknowledges an $82 million forced liquidation but asserts that this action was contractually required under the credit and margin agreements. The lawyers further claim that 3AC breached its agreements with FTX in June 2022, following the Terra collapse, which caused significant price drops across the crypto market. During this period, 3AC's account balance fell below the required $240 million, and instead of addressing the breach, 3AC withdrew $18 million in ETH, according to internal communications.

FTX's legal team argues that the liquidation of 3AC's account, which sold assets for $82 million, was a necessary action to preserve the value of 3AC's assets. They maintain that without this liquidation, 3AC's account would have been $18 million underwater by the time FTX filed for bankruptcy. The lawyers assert that no action by FTX resulted in any loss of value for 3AC, thereby dismissing the claim that 3AC has a valid claim against FTX.

Supporting the objection are declarations from Alvarez & Marsal managing director Steven P. Coverick, who states that the liquidation was reasonable and necessary to prevent a negative balance, and from British Virgin Islands KC Stephen Atherton, who opines that 3AC’s legal theories under BVI law are unsound. FTX's lawyers argue that 3AC is attempting to extract value from the FTX estate at the expense of legitimate creditors, a move they describe as an attempt to salvage 3AC's failed liquidation proceedings. 3AC has until July 11 to respond to FTX's objection, and a non-evidentiary hearing is scheduled for August 12. The outcome of this legal battle will significantly impact the distribution of assets among FTX's creditors and the resolution of 3AC's liquidation proceedings.