BlockFi argues its creditors, not FTX’s, are the “ultimate victims” of FTX’s alleged fraud.
Bankrupt cryptocurrency lender BlockFi is trying to block attempts by the similarly bankrupt FTX
and Three Arrows Capital (3AC) that aim to retrieve hundreds of
millions of dollars to pay back their creditors.
BlockFi claimed in an Aug. 21 filing to a New Jersey bankruptcy court that its own creditors
shouldn’t be pushed to the back of the line because FTX’s creditors were harmed
by the exchange allegedly misappropriating $5 billion BlockFi lent it.
“FTX seeks to recover on over $5 billion of claims filed against the BlockFi estates at the
direct expense of the ultimate victims of FTX’s fraud: BlockFi’s clients and other legitimate creditors.”
“To prevent further injustice to the creditors of BlockFi’s estates,
the Court should disallow the FTX Claims under the doctrine of unclean hands,” BlockFi added.
FTX also provided $400 million to BlockFi in June 2022 in addition to buying BlockFi equity pursuant to a loan agreement, the filing stated.
However, BlockFi claimed it wasn’t a standard loan agreement — it was an unsecured,
5-year term that was well below market interest rates and repayments weren’t due until the firm would supposedly mature.
BlockFi referred to FTX’s investment as a “gamble” that BlockFi creditors shouldn’t be liable for.
“Just because FTX’s fraudulent actions caused FTX’s bet to fail does not
mean BlockFi’s creditors are now somehow liable to refund the purchase price,” it argued.
BlockFi suggested a loan from FTX was a “gamble” that the market would stabilize.
Source: Kroll
Estimates show BlockFi owes up to $10 billion to over 100,000 creditors,
including $1 billion to its three largest creditors and $220 million to bankrupt crypto hedge fund 3AC.
BlockFi claimed 3AC committed fraud with the money it borrowed and
argued it also shouldn’t be entitled to a potential repayment.
BlockFi claims its litigation with FTX, 3AC and other firms could cost
it up to $1 billion — impacting the amount its creditors are owed.
Several BlockFi creditors previously accused the firm of overlooking several red flags
before transacting with FTX and its trading firm Alameda Research in the months prior to FTX’s
collapse in November 2022.
Despite this, creditors settled with BlockFi last month to move forward with a repayment plan.
BlockFi filed for Chapter 11 bankruptcy on Nov. 28, about two weeks after FTX similarly filed for bankruptcy.