Quick thoughts—this isn’t intended to be legal advice, just pointing in a relevant direction. There are a couple types of “clawbacks” under bankruptcy law:
Preference action (11 USC 547): Generally allows clawback of most transfers by an insolvent entity or person made within 90 days of filing for bankruptcy. The concept here is that courts don’t want people to be able to transfer money away to whoever they want to have it just before filing for bankruptcy. My GUESS (this really really isn’t legal advice, I’m really not a bankruptcy lawyer) is that any money transferred to a grantee before ~early August won’t be able to be clawed back in a preference action. Caveat: There are special rules around transfers to insiders, so the situation might be more complicated for grantees that have multiple types of relationships to FTX.
Fraudulent transfer action (11 USC 548): Generally allows clawback of transfers made within 2 years of a bankruptcy filing in cases where the transfer was meant to help conceal or perpetrate the fraud (very rough characterization—trying to balance precision and comprehensibility here). This is the classic Madoff/Ponzi case, where a person/company will pay out some creditors in order to encourage others to invest, meaning that the clawed-back transfers were ones that helped the fraudulent scheme itself work. There’s a special provision (subsection (a)(2)) that says charitable donations usually can’t be clawed back this way, but it doesn’t seem like grant money was necessarily flowing through a 501c3 entity, so I wouldn’t assume this applies. Still, my GUESS (this really really isn’t legal advice, I’m really not a bankruptcy lawyer) is that grants won’t be treated as the kinds of transfers addressed by section 548 because they don’t help perpetuate fraud.
This leaves the situation somewhat unclear for grantees who received funds between August and now. I would GUESS (this really really REALLY isn’t legal advice) that disbursed grants being clawed back isn’t super likely because of a cluster of factors that I won’t be able to clearly describe. This is not very helpful but it’s all I can offer. If I get a better understanding of the situation in the next few days I will post an update.
Because of the specter of a bankruptcy proceeding looming over all of this, I would be surprised if additional grant funds were disbursed in the near future. I’m not sure if any bankruptcy petition has already been filed (I’ve heard conflicting things), but once it is money is effectively frozen.
Do you know how likely it is that United States law applies? I haven’t thought about this properly, but it seems like the main entity that is insolvent is a Antigua and Barbuda company doing business in the Bahamas? And I’m also uncertain which FTX entities were actually distributing the grants.
“Fraudulent transfer” under 11 USC 548 is a bit of a misnomer. Subsection (a)(1) explains what makes a transfer “fraudulent.” One option, subparagraph (A), requires intent to mess over creditors. But subparagraph (B) does not require any ill intent at all—it only requires that the debtor “received less than a reasonably equivalent value in exchange” for the transfer (check), and that one of four criteria concerning the debtor’s financial condition is met (e.g., that the debtor “was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital”). The underlying idea is that if a company that is insolvent, on the brink of insolvency, etc. has no business handing out money to favored entities or persons in preference to the claims of its creditors.
For the curious, the shorter “preference” period is more about favoring creditors close to the bankruptcy filing date. So, e.g., if I owe my friend and the bank 100K each, I can’t make a big payment to my friend and then file for bankruptcy, because that violates the bankruptcy norm of treating like creditors alike.
A trustee can also seek clawbacks under 11 USC 544(b) if allowed under applicable state law, which can sometimes look back up to six years.
Of course, the relevance of this discussion is dependent on whether a US bankruptcy court would apply US law if an FTX debtor filed in US bankruptcy court (for which the standards are low—https://www.skadden.com/insights/publications/2021/06/quarterly-insights/international-companies-turn-to-us-restructurings) or sought ancillary proceedings under Chapter 15 (which I know very little about). If the target of a clawback isn’t in the US, there is also a question of whether the target is effectively beyond the reach of a US court order.
Complicated stuff, and I’m not qualified to offer an opinion beyond “consult with your lawyer if you think you have exposure.”
Edit: I threw the below together pretty quickly and now think it was wrong (because i hadn’t reviewed the whole statute closely). Sorry about that...
“For what it’s worth (and I haven’t been licensed/practiced as an attorney in a while) , My intuition is the charitable exception here seems pretty solid (for the grants that took the form of charitable donations to 501c3s/other charitable entitities. The key question to me doesn’t seem like if granting entity was a 501c3/foundation but whether the recipient was a charity/purpose of the donation was charitable. (The money given to individuals may be dicier but 1. I think it’s still fine and 2. It’s not that much in absolute terms such that I can’t imagine a bankruptcy trustee going hard after it). ”
Quick thoughts—this isn’t intended to be legal advice, just pointing in a relevant direction. There are a couple types of “clawbacks” under bankruptcy law:
Preference action (11 USC 547): Generally allows clawback of most transfers by an insolvent entity or person made within 90 days of filing for bankruptcy. The concept here is that courts don’t want people to be able to transfer money away to whoever they want to have it just before filing for bankruptcy. My GUESS (this really really isn’t legal advice, I’m really not a bankruptcy lawyer) is that any money transferred to a grantee before ~early August won’t be able to be clawed back in a preference action. Caveat: There are special rules around transfers to insiders, so the situation might be more complicated for grantees that have multiple types of relationships to FTX.
Fraudulent transfer action (11 USC 548): Generally allows clawback of transfers made within 2 years of a bankruptcy filing in cases where the transfer was meant to help conceal or perpetrate the fraud (very rough characterization—trying to balance precision and comprehensibility here). This is the classic Madoff/Ponzi case, where a person/company will pay out some creditors in order to encourage others to invest, meaning that the clawed-back transfers were ones that helped the fraudulent scheme itself work. There’s a special provision (subsection (a)(2)) that says charitable donations usually can’t be clawed back this way, but it doesn’t seem like grant money was necessarily flowing through a 501c3 entity, so I wouldn’t assume this applies. Still, my GUESS (this really really isn’t legal advice, I’m really not a bankruptcy lawyer) is that grants won’t be treated as the kinds of transfers addressed by section 548 because they don’t help perpetuate fraud.
This leaves the situation somewhat unclear for grantees who received funds between August and now. I would GUESS (this really really REALLY isn’t legal advice) that disbursed grants being clawed back isn’t super likely because of a cluster of factors that I won’t be able to clearly describe. This is not very helpful but it’s all I can offer. If I get a better understanding of the situation in the next few days I will post an update.
Because of the specter of a bankruptcy proceeding looming over all of this, I would be surprised if additional grant funds were disbursed in the near future. I’m not sure if any bankruptcy petition has already been filed (I’ve heard conflicting things), but once it is money is effectively frozen.
Do you know how likely it is that United States law applies? I haven’t thought about this properly, but it seems like the main entity that is insolvent is a Antigua and Barbuda company doing business in the Bahamas? And I’m also uncertain which FTX entities were actually distributing the grants.
“Fraudulent transfer” under 11 USC 548 is a bit of a misnomer. Subsection (a)(1) explains what makes a transfer “fraudulent.” One option, subparagraph (A), requires intent to mess over creditors. But subparagraph (B) does not require any ill intent at all—it only requires that the debtor “received less than a reasonably equivalent value in exchange” for the transfer (check), and that one of four criteria concerning the debtor’s financial condition is met (e.g., that the debtor “was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital”). The underlying idea is that if a company that is insolvent, on the brink of insolvency, etc. has no business handing out money to favored entities or persons in preference to the claims of its creditors.
For the curious, the shorter “preference” period is more about favoring creditors close to the bankruptcy filing date. So, e.g., if I owe my friend and the bank 100K each, I can’t make a big payment to my friend and then file for bankruptcy, because that violates the bankruptcy norm of treating like creditors alike.
A trustee can also seek clawbacks under 11 USC 544(b) if allowed under applicable state law, which can sometimes look back up to six years.
Of course, the relevance of this discussion is dependent on whether a US bankruptcy court would apply US law if an FTX debtor filed in US bankruptcy court (for which the standards are low—https://www.skadden.com/insights/publications/2021/06/quarterly-insights/international-companies-turn-to-us-restructurings) or sought ancillary proceedings under Chapter 15 (which I know very little about). If the target of a clawback isn’t in the US, there is also a question of whether the target is effectively beyond the reach of a US court order.
Complicated stuff, and I’m not qualified to offer an opinion beyond “consult with your lawyer if you think you have exposure.”
Edit: I threw the below together pretty quickly and now think it was wrong (because i hadn’t reviewed the whole statute closely). Sorry about that...
“For what it’s worth (and I haven’t been licensed/practiced as an attorney in a while) , My intuition is the charitable exception here seems pretty solid (for the grants that took the form of charitable donations to 501c3s/other charitable entitities. The key question to me doesn’t seem like if granting entity was a 501c3/foundation but whether the recipient was a charity/purpose of the donation was charitable. (The money given to individuals may be dicier but 1. I think it’s still fine and 2. It’s not that much in absolute terms such that I can’t imagine a bankruptcy trustee going hard after it). ”