I do note that the press release states that: âTo the extent such payments are not returned voluntarily, the FTX Debtors intend to commence actions before the Bankruptcy Court to require the return of such payments, with interest accruing from the date any action is commenced.â (emphasis mine). So we can seemingly rule out at least one potential downside of taking some time to think about this; the debtors are not going to seek interest for any period prior to the filing of an avoidance action.
Replying to my own comment, I suspect that the next step will be demand letters from the FTX bankruptcy estate to grantees. Those may come sooner than I had expected; I was somewhat surprised to see so much attention given to charitable/âpolitical donations so early in the process, given that the bulk of them are fairly small in the grand scheme of things. That could be due to the media attention given to these donations.
A few observations on how that could happenâof course, I cannot predict or offer advice to any individual grantee, including an assessment of any potential defenses the grantee might have. If the Madoff matter is any guide, the estate may be willing to negotiate at that point. The Madoff trusteeâs stated goal was âto negotiate, not litigate, and [his procedures were] designed to facilitate the evaluation and administration of each case and encourage an out-of-court, amicable resolution.â The Madoff trustee also dismissed, or decided not to bring, 533 avoidance actions on the basis of demonstrated hardship (although I believe that was a novel program).
There was apparently some consideration of the âwhether former customers used any fictitious profits to pay taxesâ in assessing hardship claims (p. 40 of document below). I infer that the trustee was willing to consider that money spent to pay taxes on fictitious profits generated no benefit to the potential defendant (to the extent the potential defendant couldnât benefit from taking a tax loss in the year the loss was discovered). In contrast, the trustee doesnât generally seem to have been concerned about potential targets having spent money to their benefit that they wouldnât have spent but for receipt of fictitious profits.
You can read more about how clawbacks went down in the Madoff matter here. One outcome of note was that the trustee settled one major claim (Hadassah) for about 58% of the alleged avoidable amounts to prevent closure of a non-profit hospital. Also, there was $84 million from a charitable foundation that âthe Trustee did not seek to recover, because the funds had been donated to charitable causesâ (p. 73); it is unclear whether this decision was made for legal reasons or because recovery from downstream charities who did not have any dealings with Madoff seemed inequitable. In general, the âbenchmark for good faith claims at 95 percent, in consideration of the comparative ease in making such casesâ (p. 77), but the discussion is focused on larger targets and I would guess that there was more flexibility for smaller ones since the costs of litigation do not scale linearly with amount demanded.
Should grantees wait to be asked for the money or should they do so proactively?
Iâd advise any sufficiently large grantee to speak to a lawyer on this.
Agree.
I do note that the press release states that: âTo the extent such payments are not returned voluntarily, the FTX Debtors intend to commence actions before the Bankruptcy Court to require the return of such payments, with interest accruing from the date any action is commenced.â (emphasis mine). So we can seemingly rule out at least one potential downside of taking some time to think about this; the debtors are not going to seek interest for any period prior to the filing of an avoidance action.
Replying to my own comment, I suspect that the next step will be demand letters from the FTX bankruptcy estate to grantees. Those may come sooner than I had expected; I was somewhat surprised to see so much attention given to charitable/âpolitical donations so early in the process, given that the bulk of them are fairly small in the grand scheme of things. That could be due to the media attention given to these donations.
A few observations on how that could happenâof course, I cannot predict or offer advice to any individual grantee, including an assessment of any potential defenses the grantee might have. If the Madoff matter is any guide, the estate may be willing to negotiate at that point. The Madoff trusteeâs stated goal was âto negotiate, not litigate, and [his procedures were] designed to facilitate the evaluation and administration of each case and encourage an out-of-court, amicable resolution.â The Madoff trustee also dismissed, or decided not to bring, 533 avoidance actions on the basis of demonstrated hardship (although I believe that was a novel program).
There was apparently some consideration of the âwhether former customers used any fictitious profits to pay taxesâ in assessing hardship claims (p. 40 of document below). I infer that the trustee was willing to consider that money spent to pay taxes on fictitious profits generated no benefit to the potential defendant (to the extent the potential defendant couldnât benefit from taking a tax loss in the year the loss was discovered). In contrast, the trustee doesnât generally seem to have been concerned about potential targets having spent money to their benefit that they wouldnât have spent but for receipt of fictitious profits.
You can read more about how clawbacks went down in the Madoff matter here. One outcome of note was that the trustee settled one major claim (Hadassah) for about 58% of the alleged avoidable amounts to prevent closure of a non-profit hospital. Also, there was $84 million from a charitable foundation that âthe Trustee did not seek to recover, because the funds had been donated to charitable causesâ (p. 73); it is unclear whether this decision was made for legal reasons or because recovery from downstream charities who did not have any dealings with Madoff seemed inequitable. In general, the âbenchmark for good faith claims at 95 percent, in consideration of the comparative ease in making such casesâ (p. 77), but the discussion is focused on larger targets and I would guess that there was more flexibility for smaller ones since the costs of litigation do not scale linearly with amount demanded.