Lawyers Tell Bankruptcy Court $1 Billion Is Owed to BlockFi from FTX and Alameda

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***This article is an update to a prior article published November 28, 2022: Nagoda, K. BREAKING It's Official - As Anticipated BlockFi Files Chapter 11 Bankruptcy. (Accessed November 30, 2022)].

A portion of the Bankruptcy proceedings 'first day hearing', a lawyer for BlockFi disclosed that the company had $355 Million 'stuck' on FTX and an additional $680 Million owed to it from FTX sister company Alameda Research having defaulted on a loan. [See, e.g. Huigsloot, L. Bankruptcy court told FTX and Alameda owe BlockFi $1B... but it's complicated. (Accessed November 30, 2022)].

In this 'first day hearing' on November 29, 2022, Block Fi brought 15 motions that were approved by the Bankruptcy Court. Several important outcomes from these motions merit a closer look:

  • permission granted for the personal information redaction of the 50 largest creditors;
  • the appointment of Kroll Restructuring Administration as BlockFi's claims and noticing agent' (parenthetically, Kroll is the identical firm chosen by FTX for its bankruptcy proceedings;
  • the Court approved BlockFi's request to continue with its 'core operations' during the bankruptcy restructuring; and
  • the Court granted BlockFi's request to continue to pay the wages of its employees and independent contractors (BlockFi estimated at the time of the filing on November 28, 2022 that it owed approximately $1.5 Million in wages to date and that going forward the wage bill on a monthly basis would approximate $5.8 Million.

Lawyers for BlockFi told the Court that it plans to reopen withdrawals as part of its effort to 'maximize client recoveries', and further the lawyers expressed 'optimism' that BlockFi is in a 'good' position to 'restructure and salvage' its business through utilization of the available bankruptcy procedures. [Goswami, R. and Sigalos, M. BlockFi lawyer tells bankruptcy court that the priority is to ‘maximize client recoveries’. (Accessed November 30, 2022)].

So far, everything seems in order for a proceeding of this sort and the monetary claims of BlockFi to be within the norm. But such simply is not the case as there is a huge monkey wrench waiting in the wings to complicate this matter.

It should be remembered that BlockFi's troubles commenced with the failure of Three Arrows Capital (which filed its own bankruptcy in July, 2022) as well as the large loans to Alameda Research. While these exposures caused client's run to withdraw their assets from BlockFi, the ultimate push into bankruptcy for BlockFi resulted from the failed $400 Million credit facility and potential offer to buy from FTX (parenthetically it should be noted that at that time, 89% of the shareholders of BlockFi were in favor of this FTX transaction.

So, the aforementioned monkey wrench complicating the BlockFi bankruptcy is the status of the collateral promised to BlockFi by FTX and SBF for the promised rescue plan. According to the Financial Times, BlockFi on Monday (November 28, 2022) filed a lawsuit in the same Court it filed its bankruptcy petition against SBF and SBF's Emergent Fidelity Technologies seeking to recover the collateral pledged to BlockFi just before the FTX ecosystem collapse. The Financial Times reported that the collateral in question is SBF's stake in Robinhood as evidenced by looking at the underlying loan documents. [See. e.g. Shubber, K., Gara, A. and Scaggs, A. BlockFi sues Sam Bankman-Fried over Robinhood shares. (Accessed November 30, 2022)].

This collateral dispute clearly accentuates the intertwined links between FTX and SBF and that of BlockFi and BlockFi's filing of the lawsuit is the first of many salvos to be fired by both sides of the controversy in untangling the mess left behind by the FTX collapse relative to the claims by BlockFi.

This definitely is not an easy bankruptcy matter. Complications seem to arise at each twist and turn once FTX enters the picture. And the instant matter clearly is not imnume from the FTX/SBF curse.

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