Ok, but I’m saying that the situation we should’ve been in was that FTX/Alameda people (owners) should not have been in control of the funds (e.g. if they were <50% of the board). Maybe it would still take a long time to establish the timeline for the fraud.
FTX and Alameda are corporations, and as far as I can tell had zero actual control of the FTX Foundation per se. Only natural persons were board members. Natural persons who were FTX / Alameda insiders controlled the FTX Foundation, although as far as I know their status as board members was technically unrelated to their status at FTX / Alameda. It’s a subtle but sometimes legally important difference.
I think where you’re headed is that the associated charity shouldn’t be an “insider” of the corporation, which creates additional legal risks. Unfortunately, the Bankruptcy Code provides no exhaustive definition of insider [11 USC 101(31)], and so I am not sure it follows that a 51% board overlap creates insider status or a 49% overlap negates it.
Either way, in a fraud case it seems likely that—until these technical distinctions about control and source of funds are worked out in court—the court would have frozen the assets of the charity, given that it was explicitly created to hand out FTX funds, either at the request of the government, or of the civil litigants, depending on the case.
I think there are circumstances in which the identity of the board members would make a difference as to the availability of this relief. However, in the event there is strong evidence of fraud and reason to think the funds could be clawed back, there’s a good chance you could get the injunction either way.
The other possible relief—which might be more of a state-law thing—would be a requirement that the nonprofit replace its board members, at least on an interim basis. The NY AG’s office obtained relief of that nature in a well-publicized 2019 case against a very well-known public figure’s foundation.
Regarding the point about corporations vs natural persons, I’ve edited my above comment to read “FTX/Alameda people (owners)”, and the post to read “those who owned/controlled FTX/Alameda”.
Unfortunately, the Bankruptcy Code provides no exhaustive definition of insider [11 USC 101(31)], and so I am not sure it follows that a 51% board overlap creates insider status or a 49% overlap negates it.
Interesting, and surprising! I don’t see how the 49% could make it insider, given that the 51% could at any time decide to unilaterally set up another foundation and transfer the assets there. Suppose that in fact happened, 2 years went by, and then the insiders (original 49%) committed fraud/went bankrupt. Surely clawbacks couldn’t possibly apply to the new foundation in that case?
As for insider status—at least in the Ninth Circuit, an entity who is not automatically an insider is considered one if (1) the closeness of its relationship with the debtor is comparable to that of the enumerated insider classifications in the Bankruptcy Code; and (2) the relevant transaction is negotiated at less than arm’s length.
If the entity conducting the transfer was solvent and the money was clean at the time of transfer, then the nonprofit should be in the clear. Doesn’t matter if the donor (or the donor’s officers in their capacity as such) later committed fraud, or the donor later became insolvent. If potential taint exists, it is based on the time of transfer.
This is generally true even if the donor’s officers are on the board of the nonprofit. There’s no general legal basis of which I am aware to hold a nonprofit financially responsible for the criminal or fraudulent actions of its directors if those were (1) outside the scope of the directors’ work with the nonprofit and (2) not the subject of tort liability for another reason.
Likewise, if the entity conducting the transfer was insolvent, then the fact that the nonprofit was wholly independent may offer limited protection to the nonprofit. Generally, to get protection, there needs to be an exchange of reasonably equivalent value.
Insider status does have relevance—for example, the 90-day period for clawing back preferences under 11 USC 547 is extended to one year under 11 USC 547(b)(4)(B). However, even then, if the insider transferee transfers to a non-insider, you can only go after the non-insider if the initial transfer was made within 90 days of the filing. See 11 USC 550(c). So while it is definitely better for the nonprofit to be a non-insider, the significance may not be as great as one might think. I’m not aware of any clear relevance to the FTX case, although I haven’t thought about it that much.
Yeah, them not being in charge would probably be helpful once things are resolved, but it wouldn’t change the legal responsibility for directors not to distribute funds once they have reason to believe the funds had an illegitimate source.
Ok, but I’m saying that the situation we should’ve been in was that FTX/Alameda people (owners) should not have been in control of the funds (e.g. if they were <50% of the board). Maybe it would still take a long time to establish the timeline for the fraud.
FTX and Alameda are corporations, and as far as I can tell had zero actual control of the FTX Foundation per se. Only natural persons were board members. Natural persons who were FTX / Alameda insiders controlled the FTX Foundation, although as far as I know their status as board members was technically unrelated to their status at FTX / Alameda. It’s a subtle but sometimes legally important difference.
I think where you’re headed is that the associated charity shouldn’t be an “insider” of the corporation, which creates additional legal risks. Unfortunately, the Bankruptcy Code provides no exhaustive definition of insider [11 USC 101(31)], and so I am not sure it follows that a 51% board overlap creates insider status or a 49% overlap negates it.
Either way, in a fraud case it seems likely that—until these technical distinctions about control and source of funds are worked out in court—the court would have frozen the assets of the charity, given that it was explicitly created to hand out FTX funds, either at the request of the government, or of the civil litigants, depending on the case.
Is that correct?
I think there are circumstances in which the identity of the board members would make a difference as to the availability of this relief. However, in the event there is strong evidence of fraud and reason to think the funds could be clawed back, there’s a good chance you could get the injunction either way.
The other possible relief—which might be more of a state-law thing—would be a requirement that the nonprofit replace its board members, at least on an interim basis. The NY AG’s office obtained relief of that nature in a well-publicized 2019 case against a very well-known public figure’s foundation.
Regarding the point about corporations vs natural persons, I’ve edited my above comment to read “FTX/Alameda people (owners)”, and the post to read “those who owned/controlled FTX/Alameda”.
Interesting, and surprising! I don’t see how the 49% could make it insider, given that the 51% could at any time decide to unilaterally set up another foundation and transfer the assets there. Suppose that in fact happened, 2 years went by, and then the insiders (original 49%) committed fraud/went bankrupt. Surely clawbacks couldn’t possibly apply to the new foundation in that case?
As for insider status—at least in the Ninth Circuit, an entity who is not automatically an insider is considered one if (1) the closeness of its relationship with the debtor is comparable to that of the enumerated insider classifications in the Bankruptcy Code; and (2) the relevant transaction is negotiated at less than arm’s length.
If the entity conducting the transfer was solvent and the money was clean at the time of transfer, then the nonprofit should be in the clear. Doesn’t matter if the donor (or the donor’s officers in their capacity as such) later committed fraud, or the donor later became insolvent. If potential taint exists, it is based on the time of transfer.
This is generally true even if the donor’s officers are on the board of the nonprofit. There’s no general legal basis of which I am aware to hold a nonprofit financially responsible for the criminal or fraudulent actions of its directors if those were (1) outside the scope of the directors’ work with the nonprofit and (2) not the subject of tort liability for another reason.
Likewise, if the entity conducting the transfer was insolvent, then the fact that the nonprofit was wholly independent may offer limited protection to the nonprofit. Generally, to get protection, there needs to be an exchange of reasonably equivalent value.
Insider status does have relevance—for example, the 90-day period for clawing back preferences under 11 USC 547 is extended to one year under 11 USC 547(b)(4)(B). However, even then, if the insider transferee transfers to a non-insider, you can only go after the non-insider if the initial transfer was made within 90 days of the filing. See 11 USC 550(c). So while it is definitely better for the nonprofit to be a non-insider, the significance may not be as great as one might think. I’m not aware of any clear relevance to the FTX case, although I haven’t thought about it that much.
Yeah, them not being in charge would probably be helpful once things are resolved, but it wouldn’t change the legal responsibility for directors not to distribute funds once they have reason to believe the funds had an illegitimate source.