The first and most common (called a “preference claim”) target transactions that happened in the 90 days prior to the bankruptcy filing. Essentially, if you received money from an FTX entity in the debtor group anytime on or after approximately August 11, 2022, the bankruptcy process will probably ask you, at some point, to pay all or part of that money back.
“probably” sounds like >50% probability. I talked to some lawyers and my (possibly incorrect) notes from that call say that preference claims are “very unlikely” to apply to Future Fund grantees (suggesting <10%). I don’t know why they believe this; it’s possible I misunderstood them; they also flagged that everything is very uncertain.
Everything is uncertain, but I think Molly may have chosen her words carefully here: attorneys representing the bankruptcy estate “will probably ask you” to repay. Sending a demand letter is cheap; it would probably be professionally irresponsible for debtor’s counsel not to send those letters if they thought doing so would be net positive EV for the estate. I don’t know if Molly was intending to state a probability that the preference actions would succeed.
I can’t speak for the lawyers you heard either, but I feel we really don’t know enough to generate an estimate with any amount of confidence. But here are some reasons one might assign a lower probability:
You believe the grantees can establish that they provided “new value” that meets the statute’s requirements in exchange for the transfer [11 USC 547(c)(1)]
You believe the grantees can establish that the transactions were incurred and made in the “ordinary course of . . . financial affairs of the debtor” [11 USC 547(c)(2)]
You believe the grantees can overcome the presumption that the debtor was insolvent at the time of transfer [11 USC 547(b)(3), (f)].
[Edit to add] You think the grantee can only be reached under 11 USC 550(a)(2) as the “immediate or mediate transferee of [an] initial transferee,” and the grantee can meet the requirements of the (b)(1) defense as someone who received the transfer “for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided.”
[why can’t I end bullets?] Part of the reason for the uncertainty is that we don’t know when FTX started running into trouble. If everything in FTXland was fine until a week ago when Alameda incurred a huge loss, then those “ordinary course” and “not insolvent” arguments look stronger to me. If FTX was in serious trouble at the time the transfers were made and/or there was an existentially risky amount of shady stuff going on, those arguments are harder to make.
Concepts like “new value”—as well as how bankruptcy law generally deals with partially-executed contracts—are vaguely behind my suggestions in this forum that there may be a difference between pre- and post-insolvency expenditures on a grant. In particular, new value must be “in fact a substantially contemporaneous exchange.” That’s . . . vague, but it tells me that you’re not likely to shoehorn a multiyear grant into the new value defense.
None of this is to provide anyone with legal advice—it is merely to explain why you should be cautious in evaluating comments by anyone who is too confident about the final outcome for grantees in general at this stage. Molly’s post does a good job not being too confident, while I am skeptical of anyone who says “less than 10% chance” unless they provide the reasoning and supporting caselaw research to back up that claim.
I’m a little skeptical of the “new value” point. The rationale behind the exception is that, “because new value is given, a contemporaneous exchange does not diminish the debtor’s estate.” In re JWJ Contracting Co., Inc., 371 F.3d 1079, 1081 (9th Cir. 2004). A grantee might provide value in a philanthropic sense, by doing charitable work, but that work wouldn’t restore the financial value to FTX, which is what the bankruptcy court cares about.
(This is not legal advice; I am not a lawyer; I very much agree with Jason’s caution against overconfidence in either direction.)
Yes, that’s definitely a drawback of that theory. The potential argument for would be that we ordinarily employ some degree of presumtpion that the business decisions of a corporation are rational (e.g., the “business judgment rule”), and that principle might justify starting with some belief that the transaction generated something of value for the corporation. Cynically: enhancement of its reputation.
“probably” sounds like >50% probability. I talked to some lawyers and my (possibly incorrect) notes from that call say that preference claims are “very unlikely” to apply to Future Fund grantees (suggesting <10%). I don’t know why they believe this; it’s possible I misunderstood them; they also flagged that everything is very uncertain.
Everything is uncertain, but I think Molly may have chosen her words carefully here: attorneys representing the bankruptcy estate “will probably ask you” to repay. Sending a demand letter is cheap; it would probably be professionally irresponsible for debtor’s counsel not to send those letters if they thought doing so would be net positive EV for the estate. I don’t know if Molly was intending to state a probability that the preference actions would succeed.
I can’t speak for the lawyers you heard either, but I feel we really don’t know enough to generate an estimate with any amount of confidence. But here are some reasons one might assign a lower probability:
You believe the grantees can establish that they provided “new value” that meets the statute’s requirements in exchange for the transfer [11 USC 547(c)(1)]
You believe the grantees can establish that the transactions were incurred and made in the “ordinary course of . . . financial affairs of the debtor” [11 USC 547(c)(2)]
You believe the grantees can overcome the presumption that the debtor was insolvent at the time of transfer [11 USC 547(b)(3), (f)].
[Edit to add] You think the grantee can only be reached under 11 USC 550(a)(2) as the “immediate or mediate transferee of [an] initial transferee,” and the grantee can meet the requirements of the (b)(1) defense as someone who received the transfer “for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided.”
[why can’t I end bullets?] Part of the reason for the uncertainty is that we don’t know when FTX started running into trouble. If everything in FTXland was fine until a week ago when Alameda incurred a huge loss, then those “ordinary course” and “not insolvent” arguments look stronger to me. If FTX was in serious trouble at the time the transfers were made and/or there was an existentially risky amount of shady stuff going on, those arguments are harder to make.
Concepts like “new value”—as well as how bankruptcy law generally deals with partially-executed contracts—are vaguely behind my suggestions in this forum that there may be a difference between pre- and post-insolvency expenditures on a grant. In particular, new value must be “in fact a substantially contemporaneous exchange.” That’s . . . vague, but it tells me that you’re not likely to shoehorn a multiyear grant into the new value defense.
None of this is to provide anyone with legal advice—it is merely to explain why you should be cautious in evaluating comments by anyone who is too confident about the final outcome for grantees in general at this stage. Molly’s post does a good job not being too confident, while I am skeptical of anyone who says “less than 10% chance” unless they provide the reasoning and supporting caselaw research to back up that claim.
I’m a little skeptical of the “new value” point. The rationale behind the exception is that, “because new value is given, a contemporaneous exchange does not diminish the debtor’s estate.” In re JWJ Contracting Co., Inc., 371 F.3d 1079, 1081 (9th Cir. 2004). A grantee might provide value in a philanthropic sense, by doing charitable work, but that work wouldn’t restore the financial value to FTX, which is what the bankruptcy court cares about.
(This is not legal advice; I am not a lawyer; I very much agree with Jason’s caution against overconfidence in either direction.)
Yes, that’s definitely a drawback of that theory. The potential argument for would be that we ordinarily employ some degree of presumtpion that the business decisions of a corporation are rational (e.g., the “business judgment rule”), and that principle might justify starting with some belief that the transaction generated something of value for the corporation. Cynically: enhancement of its reputation.