It is worth consulting with a bankruptcy lawyer before returning any funds (and I am not anyone’s lawyer).
If it hasn’t filed yet, the best case scenario I can see is that the FTX debtor entities have a bulletproof fraudulent conveyance claim against FTX Foundation / FTX Philantrophy (have seen both names, will call them F/P), and then can use the power of 11 USC 550(a)(2) to go after the grantees as the “immediate or mediate transferee of such initial transferee [i.e., F/P].” The claim against F/P seems bulletproof because at least several of its directors not only had actual knowledge of the fraudulent scheme, but actively participated in it. But the ultimate recipient of proceeds from any claim against the grantee would be the FTX entities themselves. Some grantees may have sufficient reasons to go ahead and return the monies to them now, whether for tax reasons or optics reasons.
I wouldn’t expect any 501(c)(3) to be in the main bankruptcy filing at all—as 501(c)(3)s, they are not “owned” by anyone in a beneficial sense, and—especially under these circumstances—it would be a conflict of interest for the same attorneys to represent the FTX entities and the 501(c)(3). Based on what has been said, it sounds like F/P had no independent funds or assets of its own; at best, the money was transferred from an FTX entity to F/P immediately before F/P sent it to the grantee. So it can’t probably afford to hire attorneys (not that it has any potential defenses anyway) or file for voluntary bankruptcy, although there may be an involuntary petition filed against it at some point. So I wouldn’t put too much weight on whether F/P has filed itself.
Regarding your point that F/P doesn’t have any potential defences, I would have thought that there’s some chance F/P could argue:
1) Only a certain amount of money was received from FTX-proper within the 90 clawback window (impossible for us outsiders to know how much that would impact anything, if at all, but it could reduce the quantum from ‘anything F/P has ever done’ to ‘the recent activity of F/P’), and
2) Notwithstanding the above, that the new value defense applies. That is, F/P was given money to do a particular thing (make grants) and that it discharged its obligation to do that thing (it made the grants).
Any views on that?
(Usual caveat of not being a US bankruptcy lawyer)
There are two mechanisms likely at play here—fraudulent conveyance under 11 USC 548 and applicable non-bankruptcy law doesn’t have a 90 day limit.
I don’t see how F/P provided new value to the insolvent FTX parties, or any value at all, in exchange for the transfers. The theory behind new value is that the other creditors are just as well off as they were before and so there has been no preference.
It doesn’t seem to me the payments were made to hinder / defraud (I guess that’s a stage-of-mind point I don’t have information on) ; the payments weren’t undervalued ; FTX was solvent when (at least some of) the payments were made.
It is worth consulting with a bankruptcy lawyer before returning any funds (and I am not anyone’s lawyer).
If it hasn’t filed yet, the best case scenario I can see is that the FTX debtor entities have a bulletproof fraudulent conveyance claim against FTX Foundation / FTX Philantrophy (have seen both names, will call them F/P), and then can use the power of 11 USC 550(a)(2) to go after the grantees as the “immediate or mediate transferee of such initial transferee [i.e., F/P].” The claim against F/P seems bulletproof because at least several of its directors not only had actual knowledge of the fraudulent scheme, but actively participated in it. But the ultimate recipient of proceeds from any claim against the grantee would be the FTX entities themselves. Some grantees may have sufficient reasons to go ahead and return the monies to them now, whether for tax reasons or optics reasons.
I wouldn’t expect any 501(c)(3) to be in the main bankruptcy filing at all—as 501(c)(3)s, they are not “owned” by anyone in a beneficial sense, and—especially under these circumstances—it would be a conflict of interest for the same attorneys to represent the FTX entities and the 501(c)(3). Based on what has been said, it sounds like F/P had no independent funds or assets of its own; at best, the money was transferred from an FTX entity to F/P immediately before F/P sent it to the grantee. So it can’t probably afford to hire attorneys (not that it has any potential defenses anyway) or file for voluntary bankruptcy, although there may be an involuntary petition filed against it at some point. So I wouldn’t put too much weight on whether F/P has filed itself.
Thanks for this post.
Regarding your point that F/P doesn’t have any potential defences, I would have thought that there’s some chance F/P could argue:
1) Only a certain amount of money was received from FTX-proper within the 90 clawback window (impossible for us outsiders to know how much that would impact anything, if at all, but it could reduce the quantum from ‘anything F/P has ever done’ to ‘the recent activity of F/P’), and
2) Notwithstanding the above, that the new value defense applies. That is, F/P was given money to do a particular thing (make grants) and that it discharged its obligation to do that thing (it made the grants).
Any views on that?
(Usual caveat of not being a US bankruptcy lawyer)
There are two mechanisms likely at play here—fraudulent conveyance under 11 USC 548 and applicable non-bankruptcy law doesn’t have a 90 day limit.
I don’t see how F/P provided new value to the insolvent FTX parties, or any value at all, in exchange for the transfers. The theory behind new value is that the other creditors are just as well off as they were before and so there has been no preference.
Which part of 11 USC 548 do you think applies?
It doesn’t seem to me the payments were made to hinder / defraud (I guess that’s a stage-of-mind point I don’t have information on) ; the payments weren’t undervalued ; FTX was solvent when (at least some of) the payments were made.
Thanks, super-helpful.