Andrew Vara, the US trustee in the FTX bankruptcy case, has filed an objection to the FTX restructuring plan, citing ten flaws. His biggest concerns are that liquidators want creditors to bear the cost of last year’s data breach with FTX service provider Kroll and the unequal treatment of the creditors.
The opposition could further delay the reorganization plan, which is already equally facing legal challenges from some creditors. Although FTX liquidators claim that most creditors have approved the plan, it remains to be seen if these new concerns will be enough to prevent court approval.
<h3 id="span-style-font-weight-400-vara-outlines-10-flaws-in-the-ftx-plan-span">Vara outlines 10 flaws in the FTX plan</h3>
According to the US trustee <a href="https://restructuring.ra.kroll.com/FTX/" rel="noopener noreferrer nofollow" target="_blank">filing</a>, there are ten separate and independent reasons why the court must not confirm the restructuring plan. These include the plan contravening the Bankruptcy Code and several other rules by discharging the debtors from all liabilities and imposing third-party non-consensual releases on several entities.
Additionally, the trustee questioned the broad exculpation (immunity) under the plan for FTX, the liquidators, and events advisors, who are not fiduciaries in the case. He claims that the broad immunity violates existing bankruptcy rules and, more importantly, does not provide an exemption for gross negligence and other violations.
He wrote:
<blockquote>
 “Such immunity would far exceed the protections that estate professionals whose employment and compensation are subject to Court approval and oversight [under the relevant statutes] receive during the case.”
</blockquote>
Vara particularly wants the court to remove any claims relating to the Kroll data breach from exculpation provisions. He noted that even if the court chooses to confirm the plan with other provisions allowing for release and immunity, there must be a provision in the plan that creditors can object to any professional fees relating to the breach.
He said:
<blockquote>
 “Estate professionals have sought allowance of millions of dollars in compensation for responding to the Kroll data breach…the Debtors’ estates should not bear that cost. The fee examiner shares this view.”
</blockquote>
Meanwhile, Vara also objected to what he considers an unfair treatment of creditors in the convenience class. This group of creditors will get 119% of their funds instead of the 143% of others because their claims are smaller. He argued that the estate has enough money to pay them equally with other customers, and there is no difference between that class and other customers under the law.
<h3 id="span-style-font-weight-400-creditors-kick-against-plan-ask-for-in-kind-distribution-span">Creditors kick against plan; ask for in-kind distribution</h3>
A separate group of creditors has also opposed the bankruptcy plan, citing its own reasons and complaints. This group, represented by activist creditor Sunil Kavuri and two others, has now filed its own <a href="https://restructuring.ra.kroll.com/FTX/Home-DownloadPDF?id1=MzE3MTQyOA==&amp;id2=-1" rel="noopener noreferrer nofollow" target="_blank">complaint</a> on behalf of retail creditors.
However, their major objection is that the FTX bankruptcy estate did not provide a means for creditors to get their recovery in kind. This means crypto should be an option for receiving repayment instead of US dollars. A key reason for wanting this is to avoid making the repayment taxable.
The retail creditors argued:
<blockquote>
 “It is painfully apparent that the Debtors’ proposed Plan will inflict additional hardships on customers through forced taxation that could be avoided by making an “in kind” distribution…Certain creditors would no doubt receive a greater after-tax recovery if a chapter 7 trustee were selected who was willing to undertake more effort to making a distribution “in kind.”
</blockquote>
Most of their other objections are similar to those of the US trustee. These include the plan’s violation of the Bankruptcy Code and overly broad immunity for some parties. They also argued that creditors who refused to vote on the plan did not consent to the release.
In order to ensure in-kind repayment, the retail creditors suggest that the bankruptcy estate partner with another crypto exchange, similar to what BlockFi did with Coinbase for its restructuring. The confirmation hearing is set for October 7, and the court will likely consider the objections at this hearing.

US trustee and creditors object to FTX restructuring plan

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