BlockFi filed for bankruptcy in late November last year, in part because of the ripple effects of the sudden collapse of FTX, which triggered an automatic stay that halted proceedings between the two.

A U.S. judge ordered the end of an automatic stay on proceedings between bankrupt crypto firms FTX and BlockFi, meaning the two can start negotiating a claims settlement.

BlockFi, a lender, filed for bankruptcy in late November last year, in part because of the ripple effects of the sudden collapse of FTX earlier that month. That triggered the automatic stay, halting proceedings between the two. BlockFi had an estimated $355 million frozen on the crypto exchange’s platform and was owed a further $671 million by FTX’s sister company, Alameda Research.

The stay has been modified to allow FTX debtors to make “arguments, defenses, counterclaims, setoffs, or otherwise … with respect to the BlockFi claims in the FTX bankruptcy proceeding,” according to a Nov. 13 court order by U.S. bankruptcy judge Michael Kaplan.

Sam Bankman-Fried, the founder of the now bankrupt FTX, was found guilty on all seven counts of defrauding his customers and lenders at the start of this month following a five-week trial.

BlockFi CEO Zac Prince testified against Bankman-Fried as part of the trial, detailing how the firm was forced to declare bankruptcy when it did because of its involvement with FTX and Alameda, having lost “a little over a billion dollars.”

In late September, BlockFi’s creditors approved a bankruptcy restructuring plan that would, in theory, allow it to recover the assets lost to FTX as well as those it lost when crypto hedge fund Three Arrows Capital collapsed in the summer of 2022.

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Multiple defunct crypto companies are now scrambling to resolve complex financial ties as they seek to repay creditors and customers

Proposals put forward by defunct crypto lender BlockFi are an abuse of bankruptcy rules, according to a Wednesday legal filing made by FTX, with over a billion dollars of disputed transactions at stake.

BlockFi’s plans, set to be discussed at a July 13 New Jersey court hearing, were also opposed by liquidated hedge fund Three Arrows Capital (3AC) and by federal regulator the Securities and Exchange Commission (SEC).

FTX, which bailed out the troubled lender last year before itself filing for bankruptcy in November, says its sizable claims against BlockFi have been unfairly downgraded by the proposed plan.

“BlockFi Debtors believe some bankruptcy wand can be waived to make the FTX Debtors’ claims disappear… without satisfying basic procedural fairness and due process requirements” in a proposed wind-up plan filed in June, FTX said. “This is abuse of the plan process.”

FTX cites hundreds of millions of dollars of repayments and collateral linked to a loan with FTX’s trading arm Alameda Research, and $1 billion in collateral pledges made by Emergent Fidelity, a company set up by FTX chief Sam Bankman-Fried to hold shares in Robinhood (HOOD).

The filings are an attempt to unravel complex financial transactions among crypto companies which are now undergoing separate bankruptcy cases as they attempt to repay customers and other creditors. BlockFi may also have claims against FTX in parallel proceedings being held in Delaware, to which FTX’s lawyers “expect to object,” the filing said.

Three Arrows Capital, which says it’s owed over $220 million by BlockFi, also protested that it wasn’t being given a chance to contest fraud allegations, while the SEC said proposed clauses to release BlockFi and its management were overly vague and broad.

After the SEC voiced similar objections in relation to crypto lender Voyager, legal delays meant Binance.US pulled out of its offer to buy the company. BlockFi’s creditors have also argued that its bankruptcy plan is a costly and elaborate way to free executives from legal responsibility for poor financial decisions, and have said the company should simply be liquidated.

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The regulator agreed to forego the payment, owed as part of a settlement of charges against BlockFi, to maximize and speed up payments to investors.

The U.S. Securities and Exchange Commission (SEC) has agreed to forego a $30 million fine from bankrupt crypto lender BlockFi until after investors are repaid, a court filing from Thursday shows.

The sum is what’s left over from a $50 million penalty owed to the SEC by BlockFi to settle charges of failing to register with the regulator for the offering and sale of its crypto lending product. The platform agreed to the settlement in February 2022 but filed for bankruptcy in November following the collapse of crypto exchange FTX.

The regulator asserted its claims should be counted as part of “general unsecured claims” in the ongoing Chapter 11 bankruptcy proceedings, but agreed to forego the payment “in order to maximize the amount that may be distributed to investors and avoid delay in such distribution,” according to the agreement reached on June 22.

The SEC was likely among the first creditors in line to receive payment from BlockFi, Sasha Hodder, founder of Hodder Law, a firm that specializes in crypto law, told CoinDesk in November.

“The customers are really at the bottom of the list here,” Hodder said at the time.

In May, a New Jersey bankruptcy court judge said BlockFi customers can be repaid $300 million in funds held in custodial wallets on the platform. While the bankrupt estate has presented a reorganization plan to the court due for a hearing in July, BlockFi has said $1 billion in claims against fallen crypto enterprise FTX and its sister trading firm Alameda will be the “largest driver” of fund recoveries for customers and creditors.

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Source: Vietnam Insider