In re: FTX TRADING LTD., et al.
Although examiners must be appointed on motion, the Third Circuit says that the bankruptcy court retains ‘broad discretion’ to fix the scope and cost of the investigation.
- Rochelle Quick Take
View Rochelle Summary- Case Type:
- Business
- Case Status:
- Reversed and Remanded
- Citation:
- 23-2297 (3rd Circuit, Jan 19,2024) Published
- Tag(s):
- Ruling:
- If a chapter 11's debtor's debts exceed $5 million and the bankruptcy court has not appointed a trustee for the debtor, the bankruptcy court must appoint an examiner if the United States trustee or a party in interest makes a timely motion under 11 U.S.C. § 1104(c). The bankruptcy court's discretion is limited to defining the scope of the examiner's duties.
- Procedural context:
- Following the collapse and bankruptcy of the cryptocurrency firm FTX Trading Ltd. and certain affiliates, the United States trustee asked the bankruptcy court to appoint an examiner under 11 U.S.C. § 1104(c)(2). The debtors, the creditors' committee and another party in interest objected, The bankruptcy court sustained the objections and denied the motion to appoint an examiner. The United States trustee appealed to the district court and moved to certify the bankruptcy court's opinion for direct appeal to the court of appeals under 28 U.S.C. § 158(d)(2). The certification motion was granted.
- Facts:
- FTX Trading Ltd., its affiliates (collectively with FTX, the "FTX Group"), and Alameda Research were cryptocurrency companies owned and controlled by Samuel Bankman-Fried. In November 2022, it was rumored that Alameda Research was "financially compromised," which led to questions about a conflict of interest between Alameda Research and the FTX Group. These rumors led to the withdrawal of billions of dollars from FTX and FTX's financial collapse. Mr. Bankman-Fried hired John J. Ray, III to replace Mr. Bankman-Fried as FTX's CEO. By November 14, 2022, Mr. Ray had caused FTX and affiliates to file chapter 11 bankruptcy petitions. Mr. Ray reported to the bankruptcy court and creditors that many of the companies in the FTX Group lacked appropriate corporate governance and financial controls. In addition to having failed to keep and maintain records of financial transactions, the companies engaged in self-dealing with certain corporate officers and employees. Mr. Ray reported that the lack of adequate financial records prevented him from accounting for billions of dollars of assets. The United States trustee moved for the appointment of an examiner under 11 U.S.C. § 1104(c) due to the FTX bankruptcy's broader implications on the entire cryptocurrency industry. In November 2022, Mr. Bankman-Fried was convicted of wire fraud, securities fraud, commodities fraud, and other charges.
- Judge(s):
- RESTREPO, BIBAS and SCIRICA, Circuit Judges
