American court hearing recordings and interviews - Season 2. Episode 15. February 22, 2024. In re FTX Trading Ltd., et al., chapter 11 bankruptcy case number 22-11068, audio of hearing held in the FTX/Alameda et al. bankruptcy proceedings pending in Delaware, USA #crypto

Episode Date: February 23, 2024

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Please receive. Good afternoon, Your Honor, and may it please the court. Adam Landis, from Landis Rath and Cobb, on behalf of FTCS Trading Limited and its affiliated debtors. Your Honor, this afternoon, we're going to be working off the amended agenda that we filed this morning. Items 1 through 9 have been adjourned. Number 10 was withdrawn. Items 11 through 20 have been resolved, and orders have been entered. I'm grateful for the entry of those orders.

And that takes us to two matters that are going forward. Item number 21 is the Anthropic Sale motion, and item number 22 is the status conference with respect to U.S. Trustees motion for an examiner. I'm going to yield the podium to Mr. Dietrich from Sullivan and Cromwell. The effect of item number 21, the Anthropic matter. Thank you. Good afternoon, Your Honor, for the record, Andy Deterick Sullivan and Cromwell.

Your Honor, item 21. One, the sale of Anthropic. We have resolved, as reflected in a revised form of order, submitted to the court, concerns of the US trustee, the official committee, the ad hoc committee of customers, and Anthropic. We have two pending objections, Your Honor. We have not had substantive contact with the objecting parties.

I'm not sure if they're here today and plan to speak or not. Someone raise our hand back there. From the debtors perspective, from the debtor's perspective, You know, we kind of stand by our position on the papers, which we think is relatively straightforward. I would note two things generally about the relief requested. First, we had originally sought pre-approval of the disposition of Anthropic, thinking we could be in a situation in which we might be dribbling the position out over time or making a number of small sale decisions.

I think after conversation with the stakeholders and in particular our investment banker, we would draw on the pre-approval request. So the motion in front of you now is effectively an arrangement to shorten notice to allow us to consummate the sale with a shorter period of time between signing and closing, which is helpful for the marketing process. But all stakeholders will have notice of the sale and an opportunity to be heard if they have any objection. The second thing I would note is we do believe, as the debtor, that we can, as of right, sell this position without unselfish consent. However, anthropic disagrees. and the current relief contemplates a consensual sale with Anthropic. And we've negotiated with Anthropic, a window where our disposition activity won't interfere with their own capital raising activity.

And that relationship between what we're doing and what they might be doing from a capital raising perspective in the future is an important consideration of, I would say, the collaborative method that we have to sell the anthropic position with the supportive anthropic. With that, Your Honor, I don't know if you have questions. but I would, you know, see the podium to anybody else who wishes to speak about today's motion. Okay, thank you. Good afternoon, Your Honor. Isaac Sasson from Paul Hastings on behalf of the Official Committee of Unsecured Creditors. Just to echo Mr. Dietrich said, we are supportive of the debtor's cell at this time.

With Your Honor's permission, we'd like to reserve our comments until after the objector speak. Okay, thank you. May it please the Court, Your Honor, Erin Broderick of Evershed Sutherland, on behalf the ad hoc committee of non-unus customers of FTX.com. We are also supportive approval with our motion, and I would similarly ask to make comments after the objections are heard. Okay, thank you. Anyone else before we go to the objectors?

Objectors. Good afternoon, Your Honor. May it please the court, Shan Homestead from Carter and English on behalf of certain customers of FtX.com. With me in the courtroom today is David Adler. His admission has been... He has been admitted pro hoc V-J in these proceedings and with the court's permission, I would like to see the podium to Mr. Adler. Okay, thank you.

Thank you. Good afternoon, Your Honor, David Adler from McCarton, English on behalf of certain FDX creditors. We had filed an objection to the proposed sale. Having heard the debtors' comments this morning, one of the thoughts that occurs to me is that if we are dealing with, with effectively a motion to shorten notice we would like to obtain some documents from the debtor and we think maybe if we're shortening time and we're going to have another hearing on this that might be the appropriate time for us to go forward but we're prepared to go forward today well I'm here from mr. Dieter you

can just sit there mr. thank you your honor no you can remain city you know It's awkward to bend over. Thank you, Your Honor. Very comfortable. I should be clear, right? We have a procedure to short notice for objections by objecting parties, but in the absence of an objection, there is no hearing. To the extent that the objecting parties seek to raise a property argument, we believe the

time for that has passed, and we like that resolved today. We don't intend to have a hearing on customer property issues on short notice, so I think the burden is very much on Mr. Adler as he expected today. to show why this train should be derailed because of the property interest in the assets being sold. Well, isn't the form of order that I saw says that any property interest that might attach to the assets being sold are passed through to the proceeds of that sale? Correct. So I don't know what's the issue, Mr. Adelaire.

sales is going to go forward if you have an objection to the sale process, how the sale proceeded, you think it's unfair for some reason, you have some basis for an objection other than property rights, you could raise those on the expedited basis. If you're going to object and say, well, it's our property, it's going to be subject to the proceeds are going to have that property interest attached to it, and you'll have the right at a later time to assert that claim. I think, Your Honor, that that latter issue was not very clear in the motion itself.

We're not seeking to bring back the property to the customers today. We just want to make sure that our rights are preserved. And to the extent that the sale proceeds are kept in a segregated account and our rights are reserved to claim that these are the proceeds from customer property, I don't think we have an objection to the sale going forward, as long as we reserve our rights. To be clear, the proceeds are not segregated. We do have a substantial amount of cash in the estate. The paragraph four of the order does say that to the extent there's a property interest

that attaches to the proceeds of the sale. But we don't intend to hold them in a segregated account. We have sufficient cash that it won't be an issue. Well, I guess the question from, I'm anticipating Mr. Adler's question, is whether or not they can trace those funds later on, If there's a question about whether these particular proceeds are from the sale of assets that belong to somebody else. How do we trace those funds without running into the problem of the lowest intermediate balance test? Well, it's cash, right?

And we have an adequate amount of cash. So if you just look at it, you could look at it on lowest immediate balance kind of with that lens. we should have adequate cash in the estate to pay the willow much money it was. You've finally broken loose from work. Three friends, one tea time, and then the text. Honey, there's water in the basement. Not exactly how you pictured your Saturday.

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selling the Anthropic share or selling everything, there is no difference, I would think, between Mr. Adler's client instead of Anthropic, then that it's disposition of any other property interest of the estate, all of which are going in. There's been no allegation in his papers that Anthropic is special in any way

compared to the other assets that we're disposing up. There's no effort to trace how the source of funds was unanthropic. There's no discovery or information request for the debtors at any time over the last 14 months when we let the world know we're selling Anthropic from Mr. Adler-Ower's clients, asking for any information related to Anthropic.

So it's a little bit of a slippery slope if we start to say that everything we sell has to go in a segregated account when we're selling everything and putting all of the money in a blended account. Again, if there's something specific about Anthropics, as it relates to the holdings of Mr. Adler's clients, of which we're not aware, the burden is him to show it, he has not shown it.

So I would submit that on that basis, there's certainly an adequate protection of the interest in property by acknowledging that the proceeds will go into a segregated account, and if they're correct, we'll figure out what to do with it. Mr. Adler? Your Honor, I don't really see what the issue is about establishing a separate account with respect to these programs. respect to these proceeds but the second argument is there is something special about Amplom and we did say it in our papers which is that the the proceeds from the customer property from the customer accounts were literally traced by an

expert during the Sam Bankman free trial and there's an exhibit that the government put up literally tracing the five hundred million dollars from FTX trading down to Alameda Ventures, I believe. And this is one example, Your Honor, where the government and other parties have literally sat and traced the funds from customer accounts to the purchase of the Anthropics. So, you know, I'm not going to get into the issues

of really why we're here today. I'll just note that I've been retained in the last few weeks. I was involved in another related issue at the beginning of the case, but, you know, we haven't, we don't have a plan yet. You know, I mean, I don't see what the, where the prejudice is in the fact that this has gone on for, or the FDX case has been around for 14 months. They're selling Anthropic, Anthropic is a special category of an asset where the funds

were literally traced during the trial, and my request is that those funds be put in a segregated account? Well, I think one of the problems you might have is maybe there was, maybe there wasn't, I don't know, the tracing that occurred in the criminal trial in the Southern District. But it was only $500 million, and there were billions of dollars taken.

So how would I know your clients' funds were the ones that were transferred? I think you're on. this goes to a larger point about the claims of customers of that entity with respect to my group that's subject to a further tracing I suppose but you know we're talking about a fund here of customer property that is literally directly traceable to anthropic but you can't you can't speak on behalf of parties you don't represent That's correct.

There's no class action here. That's correct. But again, in order to, I think we can deal with that issue as we move forward towards confirmation, but I don't think it is a unreasonable request to have those funds put in a segregated account for the time being such that we can start the process that we have to start regarding tracing. Well, I think Mr. DeDerick's point is there's been a lot of sales of a lot of assets and if they set up separate accounts for each one of them is going to become unwieldy. I just don't think as long as there is a way to trace these particular funds to the account and as long as we don't have an issue of the funds in the account falling below the lowest intermediate balance test. then I think we're okay and I'm going to take Mr. Dieter and get his word that it's not

going to do that we're not going to fall below the low intermediate balance because there's plenty of money in the account how much do we have in the accounts at this point generally just a rough estimate well I'll give you something actually a good question and I don't have any of my usual crutches in court with me today we'll send a text right now to get a better answer for that right we have we have well over if it's 500 million dollars we have multiples of that same thing I know there's about other sales that have happened absolutely absolutely we have we have many billions of dollars and are are the are the expenses of the bankruptcy being paid out of

the same account or are these is this are these funds in a separate account that's not used to pay the proceeds of the bankruptcy process so we have we have a we have a master sweep account and then we have sweep accounts in the silo structure remember the silo structure from the beginning But the case expenses are being paid really on behalf of the various debtors under an allocation. So all of the cash is being charged administrative expenses. But again, when I say there's adequate cushion. I mean, on any projection of administrative expenses, we have billions of dollars of cash.

$6.4 billion is that. I would say one other thing, Your Honor, that the other observation I would offer is there's obviously no evidence of what Mr. Adler said today in the record. No, was there an attempt to put anything in evidence on his behalf on the record. But whatever we're – what purchased Anthropic was also funds that were not segregated for the benefit of customers. And so we're dealing with unsegregated funds, purchasing entropic, putting it back in the generally unsegregated accounts. But I think Your Honor makes an important observation, which is that with $6.4 billion of cash, we'll be able to apply the lowest, if there is a determination that, for some reason, Mr. Adler's clients had an interest in the anthropic shares, and that was sold, and those proceeds came in, and that interest is sufficient to give Mr. Adler's clients some kind of priority over everybody else. with respect to those proceeds, will know the amount of money that came in

and will have a $6.4 billion buffer because the $6.4 billion does not yet include the proceeds of the sale of anthropology. Mr. Havreuth. Just to listen to Mr. Diedrich about sweeps raises a concern to me that

these funds are whatever account they're in are getting swept back and forth and that could raise further tracing issues that I would, you know, don't think are appropriate or necessary. So I don't know if there's a way to, you know, to deal with that problem, but if there's money in one account that's getting swept into another account, and that's occurring on a daily basis, the process becomes, you know,

much, much more cumbersome to demonstrate, you know, the tracing. So I do have an issue with sweeping as well. Well, it does raise an interesting issue or a complicating issue. If the funds that come in from the sale of Anthropic go into a master account, and then those funds get swept into other accounts, The lowest intermediate balance test is going to apply to the funds that they originally went in, the account that it originally went into, which could be below the lowest intermediate balance, which creates a problem. Well, the way the system works is ultimately things are swept up in a master account, presumed in the cash management order. The, any, we're keeping obviously meticulous records of transfers during the case.

Each of the transfers constitutes a super priority administrative loan by one of state back to the other. So it's not like it's being transferred out. It's being collected for the purposes of running a consolidated account, which is in everybody's interest to run a consolidated account because it's cheaper and liquidity is pooled. We can't possibly run the case by having separate pools of liquidity corresponding to every asset we sell. And so the solution in the cash management order, which contemplated exactly this question, including customer property allegations, is that we have a master pooling account. It sucks up liquidity, again under meticulous record keeping.

that master account is the primary source of liquidity in the case. That's the $6.4 billion that I mentioned. But we know where it came from, and to the extent that anybody has a property interest, the effectively charge against the master pool. Well, here's my concern, because I was involved in the Diocese of Wilmington bankruptcy case when I was in private practice,

and this issue came up where the diocese was taking funds from the various parishes, putting it into a master account and then sending it off into individual accounts for each of the various parishes. Judge Sanchi ruled that the lowest intermediate balance test applied to the master account. Even though we had an expert who could trace those funds directly all the way through, he said, not good enough. You violated the lowest intermediate balance test, and all that money got swept up into the estate. So that's what I'm concerned about.

And, Your Honor, the difference there is that was presumably pre-petition. Yes, it's pre-petition. So in the administrative period, again, we're keeping records. Our job in the administrative period is to protect everybody's entitlements as of the petition date. And so we're able to recreate administratively what everyone's entitled to on the petition date. I don't think that we're going to take a position that people can't, you know, tracing as a relevant question for the pre-petition period, in the administrative period for how we use cash pursuant to the court order, the court's order applies. Your Honor has already held that to the extent we're taking money from one debtor under our cash management procedures,

and it belongs in a different place, we put it back with an administrative priority. That makes sense to me, Mr. Heidler. I'm a little confused, Your Honor, but I think that we're sort of talking about minutia here and what I think might serve everyone well is for me and Mr. Dietrich to work on the proposed form of order in terms of that provision keeps in the proceeds. I mean, I am also concerned that if it goes into an account and that account gets swept out, that the lowest intermediate balance will be zero. So but I do think that there is some benefit in the

I think the point Mr. Dietrich is making is that pursuant to my previous orders in this case that process has been approved by the court with the idea that funds that get transferred to one that or another turn out to be belong somewhere else will automatically be shifted back and forth without regard to the lowest intermediate balance test doesn't apply instead there is a super priority administrative claim that's between the between the debtors it sounds it sounds like it addresses the problem your honor but I'm trying to to run it through my head but I mean obviously the

easiest solution is a segregated account if there's not a segregated account then the cash management order presumably it sounds like protects these rights but you know I just want I don't want to be in a position where where if we do succeed on tracing that you know we're trying to then establish a tracing within the debtor structure that's my big concern well based on what I've heard today I'm going to be very upset if someone tries to argue well it's going to be a bounce test okay okay your honor on that note I think I would like an opportunity to just discuss the former order yeah we can we can take a break and maybe talk

about it and I'll come back on it in a minute but let me just see if anybody else wants to be heard on the issue you want to take a like a ten-minute recess mr. Deeter can speak to mr. Adler and we can do that thank you all right thank you thank you your honor Andy Dieterick for the debtors for the record your honor we have agreed language for the order we are going to make a little tweak because it occurred to me that we could be more precise and I think mr. Adler has agreed with this language after looking at the cash management order.

So I'll read it to you, and then we'll submit a revised form of order. Okay. In paragraph four of the order, we have the language that Your Honor cited about liens, claims, encumbrances, and interests attaching to the proceeds. But rather than just say that they'll attach to the proceeds of the sale, we're going to add a parentheses that says they also attach to any debtor's rights against any other debtor under the cash management order. closed plan, meaning that if the sale proceeds come into a debtor and the debtor uses the centralized

cash management system, the security interest attaches to that debtor's interest against the master pool. So effectively, the deposit becomes secured if that debtor banks with one of the other debtors. The other change that we would make is just at the very end of that paragraph where you see that rights to claims defenses and obligations of any of the debtors and all interested parties are reserved, we would agree to add at Mr. Adler's request the debtors, comma, the objectors, and all other interested parties. So I think that resolves at least the objection to Mr. Adler's clients, and we'll submit

a revised formal order. Okay. Thank you. I'm satisfied with it, too. Your Honor, David Adler, I just wanted to note for the record that I did go through that language, and based on my review of the cash management, where it looks like it does protect the interest and obviously based on that cash management order we're not talking about lowest intermediate test the way it's structured so that's all I have to say thank you thank you

thank you mr all right anything else on this motion I'm satisfied based on what I've heard in the representation score today that the proposed order is appropriate subject to receiving the revised formal order under COC I will enter the order I think The next item on the agenda is the status conference related to the examiner motion. Okay. Good afternoon, Your Honor. I may please the court then happen to the U.S. trustee. We asked for a status conference to update Your Honor on developments since the status conference we had last month

and to get clarification from Your Honor about next steps in the examiner appointment. Since the last status conference on January 24th, the parties to the examiner appeal asked the Third Circuit to expedite issuance of the mandate. The Third Circuit issued its mandate on February 12th. It's filed in the bankruptcy court docket at item 7301. The next day on February 13th, we reached out to the debtors, the official committee, ad hoc committee, and JOLs with a proposed form of order. It was one sentence. It directed the United States trustee to appoint an examiner under Section 1104.

C2. The debtors counsel advised that they did not agree to that form of order. The following day, on February 14th, the U.S. trustee proposed to add additional language to the order clarifying that scope, duration, and cost would be clarified at the appointment hearing. We did not receive a response to our proposal, and so we requested a status conference with your honor today to discuss the matter. At the January 24th status conference, we understood your honor to say that the United States

trustee identifies who the examiner is and appoints the person and then asks the court to approve the appointment. The United States trustee files an application to approve the appointment under Rule 2007.1c. We understood, Your Honor wanted to address approval of the appointment as well as scope, cost, and duration at one hearing versus coming back to set scope, cost. and duration later. The U.S. Trustee is trying to comply with the Third Circuit's instructions, with Your Honor's

comments, and with the bankruptcy code and rules. And to that end, we filed notice of a proposed form of order at docket item 7597. It directs the U.S. trustee to appoint an examiner. It says the scope, cost, degree, and duration will be addressed at the hearing on the U.S. application to approve the appointment. The debtors filed a competing form of order this morning at docket item 7.830. The U.S. trustee objects to entry of that order. The order is objectionable because it does not comply with Section 114D for bankruptcy rule 2007.1 .

The debtor's order says that the U.S. trustee is directed to, quote, seek the appointment, end quote. end quote, of an examiner. Section 11.04D of the bankruptcy code says the U.S. trustee shall appoint. It does not say the U.S. trustee shall seek to appoint. It says the U.S. trustee shall appoint an examiner subject to the court's approval. That takes us to Rule 2007.1c. It provides that an order approving the appointment of a trustee or an examiner under Section 11. of the code shall be made on application of the United States trustee.

The application shall state the name of the person appointed. Further down, it says the application shall be accompanied by a verified statement of the person appointed, setting forth the person's connections with the debtor, creditors, and the other party in interest, and so on. So Rule 2007.1c also does not refer to the U.S. trustee seeking the appointment. of an examiner. It says the U.S. trustee shall make an application, which application shall state the name of the person appointed.

It seems to us that the debtors want to have their hand in the U.S. trustee's selection process. The debtors do not have that right. They can consult with our office, and we have had consultation with them. But the debtors do not get a say in who the examiner is. To give the debtors a say in who the examiner is is highly problematic for a few reasons. First, it has no basis in the bankruptcy code or the bankruptcy rules. Second, the debtors have been steadfastly anti-examiner throughout this case.

And third, the Third Circuit wrote in its opinion that the code also forbids a debtor in possession, the quintessential insider, from performing the duties of an examiner and investigating itself. Finally, we think the debtor's proposed form of order is objection. objectionable because it leaves open who actually makes the appointment. The debtor's order would direct the U.S. trustee to seek the appointment of an examiner. Who actually makes the appointment? The court, someone else.

With respect, we think the language of the code and the legislative history make clear that the court does not have a role in deciding who the examiner is on the front end. Rather, the court approves the U.S. trustees' appointment of an examiner on the back end. As the First Circuit wrote in Reed Plaza, De Diego Shopping Center, Incorporated, it's 911 F-second 820 at 830. First Circuit, 1990, the power to nominate is not the power to appoint. And by relegating the U.S. trustee to the role of nominating three candidates for trustee, the court deprived the U.S. trustee of his right and power under the statute to appoint the operating trustee.

That, in essence, is what we understand the debtors are trying to do with their form of order here. Have the U.S. trustee nominate a candidate, but not appoint. The U.S. trustee has conducted his due diligence on the examiner appointment. We conducted and completed interviews. We performed the statutorily required conference. consultation with the parties. We will be in a position to file the Rule 2007.1c application soon. We do not want to delay it. Ideally, we would like to have that heard at the March 13th or March 20th hearing before your honor. But we have not yet been formally directed to a point.

We need an order directing us to do that. That is why we submitted to the form of order that we did. We think our form of order is simple, uncontroversial, and a necessary step in this process. But it seems that we're at an impasse with the debtors. We believe Your Honor can and should enter the form of order that we have filed at docket item 7597. We would respectfully submit that it effectuates the Third Circuit's instructions on remand and allows the U.S. trustee to proceed with the appointment. Unless Your Honor has any questions, that's all I have. That's all I have.

Well, would you agree, I mean, if you look at 1104D, it says that the U.S. trustee shall appoint subject court approval. You're not saying that the debtors or any other party in interest doesn't have a right to object once you seek the appointment or once you appoint the examiner. I don't think we would contest that in this fact, in this case under these facts and circumstances. Given your honor's comments at the prior status conference, that you wanted the appointment as well as scope, cost, and duration to be addressed at one hearing. Right. Well, my point is that even though you get to appoint somebody,

I don't have an issue with that 1104D says the U.S. trustee appoint somebody. After consultation with the interested parties, so you should have consulted with the debtors and the committee. But it also says subject to court approval, which to me, indicates that if someone any party interest objects to a particular appointment they could raise that objection at the time of the appointment which would have to be done by motion I mean they're the only way to do it the only way to get in front of me is to file some kind of a motion that says here's we're appointing this person subject to

any objections parties might raise I don't know that we agreed that a 2007 1C motion application by itself would be a contested matter I think if it's simply seeking approval of the appointment, the court's role is to evaluate the disinterestedness of a candidate, confirm their qualifications that they're appropriate for the appointment. How do I do that unless parties can come forward and tell me, what if the debtor knows that the person you're appointing has a conflict? And they've got to tell me. I've got to know. I'm not going to know that unless they tell me.

So with the application, there would be a statement from the appointment. team affirming their disinterestedness and making a showing that they're a disinterested person as defined by the bankruptcy code. Well, there's instances where someone's been appointed and then they found out they actually did have a conflict that they didn't disclose. So if somebody has some information that they want to disclose that would lead me to believe this person is not disinterested, how do I get that information? I don't dispute that the debtors if they believe the person were not disinterested could raise that issue with your honor at the jury. So what is it? I'm just trying to, I mean, I wasn't actually satisfied with the language either party proposed. So how do we get this in front of me so that I can decide, one, this person meets the requirements of the code, he or she is disinterested, and I approve the appointment, and also address the issues of scope, duration, cost of any investigation that's going to happen.

How do I do that? There's nothing in the code tells me how to do that. The code says, well, at this point we have a directive from the Third Circuit to order the appointment of an examiner. Our view is that the U.S. trustee makes that appointment. I got that part. I believe the court could enter its own order directing the U.S. trustee to appoint if it wanted to.

I don't know that the appointment order itself needs to be a contested matter, but we need the order to say the U.S. trustee is directed to appoint. Well, I don't have an issue with that. I think the U.S. trustee does, I mean, the code is pretty clear. It says 11.04D says the United States trustee, after consultation with the parties in interest, shall appoint subject to the court's approval, one disinterested person. So, yes, you get to appoint somebody. But if someone, I have to have some kind of a mechanism that allows me to hear from people who think this particular, person that you have appointed is not disinterested or does not otherwise meet the requirements

of the code and so they can weigh in on issues of the scope duration and cost of the investigation because i do want to hear from parties on that i think it's important we anticipated that all of those issues would be addressed in the rule 2007.1c application that would be heard all at once as soon as Your Honor would be available. Okay. Well, I'm looking at, well, let me hear from the debtors on this issue. It does say shall appoint, and I've already been told by the Third Circuit, shall mean shall. So, Your Honor, I think it's important to look at what the Third Circuit said.

The Third Circuit said that as is appropriate, does not modify shall appointment. But the Third Circuit was very clear that the phrase as is appropriate in Section 1104C means the Court retains broad discretion to direct the examiner's investigation, including a scope degree, duration, and costs. And it cites in Norton's on bankruptcy. So what we have the Third Circuit having done here is done two things. has told us that 1104c2 says that shall appoint is not modified by as appropriate, but that the examination is modified by as is appropriate.

And so we are now somewhat upside down in process because going forward, I think it's clear in the Third Circuit under this decision that when a motion is made to appoint an examiner, you have to, one, seek the appointment of an examiner, and two, in that same motion, you have to ask and describe scope, degree, duration, and cost for the court in an 1104C2 hearing to determine whether or not the proposed scope, degree, duration, and cost are appropriate. In this circumstance, when we had the motion to appoint the examiner last year, we asked prior to the hearing, and you asked at the hearing what was the proposed scope that the U.S. trustee was looking for. Prior to the hearing, the U.S. trustee refused to tell us what the scope was. In the pretrial order, we mentioned in specific language that the U.S. trustee did agree to, that one of the questions for the court was whether or not scope mattered.

And, Your Honor, did ask counsel for the U.S. trustee about scope. the hearing but that was not addressed in the order what the Third Circuit has now said is that the order was entered by your honor which denied the appointment of an examiner is reversed and remanded so when we drafted this form of order we simply said that the motion that was up last year is granted now that motion did not seek any information any guidance at all with respect to scope degree duration of cost and now the Third Circuit has told us that when an examiner is being appointed,

you need to take that into account. So I don't mind, right, if the order says that under 1104D, the examiner, the US trustee is directed to appoint an examiner subject to court approval, and that there will be a subsequent hearing with respect to scope, degree, duration, and cost. The question is to the rest of the record. rest of what Mr. Hackman said is very troubling, right? Because the U.S. trustee's view of consultation is akin to the questioning that one might

have expected from a Soviet border guard. What we are talking about in consultation is basically here is a black box. In this black box, there are names. People have solicited interests. They have contacted the U.S. trustees' office. They have submitted statements of interest and perhaps applications. We don't know who is in that box. We don't know what has been submitted, what they have said.

U.S. Trustee says, do you have any views on who should be appointed as an examiner? We specifically said, would you please tell us who has submitted indications of interest. Some people contacted us, but certainly not all of them. We don't have the information except in a couple of circumstances that people had submitted. We have no context whatsoever. We made two formal requests to Mr. Hackman and his colleagues on the phone. Please tell us who has submitted indications of interest and please tell us who you're interviewing. Once we have that information, we can give you a reaction.

We'll take that under advisement. We received silence in response. We don't know who's been interviewed. We don't do know people have been interviewed because Mr. Hackman just told us that people have been interviewed. On that phone call, which was the quote consultation phone call, we have been interviewed. phone call we said when are you going to file a motion answer is the mandate had not yet issued so we don't know okay let's assume the mandate is going to

issue you please tell us when you'll file that motion after the issue of the mandate we don't have any authorization to tell you that we said are you going to seek this on expedited approval for seek expedited approval we can't tell you that we are prepared as the debtor to sit down with whoever is approving by the court with the scope that's determined by the court immediately to help that examiner get up to speak. We are not, as Mr. Hackman suggested, seeking to take over the role of examiner. We have read the Third Circuit's decision, but we also read Section 1104 , which

says consultation. The word consultation means a conversation, not an interrogation, and it doesn't mean silence on the other side. So where we stand today, Your Honors, we have no idea what the U.S. trustee is thinking about anything, because they have very clearly told us, and now they have told the Court they have no intention of sharing that with us whatsoever. We don't really think that's consultation. That being the case, what we think right now is that there should be an order entered.

It should say that the U.S. We're fine with it saying that the U.S. trustee is directed to a point, but it is subject to approval of the Court and the Court. It is, as you said at this last status conference, and as we believe to be the case, this will be on notice. We will have all parties in interest will have the right to say whatever they'd like to say with respect to whoever is selected in this black box Kafkaesque exercise run by the United States trustee, notwithstanding the clear language of the statute, and we will have whatever rights we have to say about scope, duration, cost, and the way. We were asked specifically on the phone call, what did we think of scope, duration, degree, and cost. And we said that we were in alignment with what your honor stated at the last status conference,

which is that this should be 30 to 45 days. This should first look at the things that have already been done by whoever has done them and determine whether or not those things that have been done were done appropriately. And if there's anything else left to be done, what is left to be done? And how is that going to benefit the estates? We said that and we said to the United States trustee, do you have a reaction to that? No, we don't. No answer.

We're not authorized to tell you anything. So, Your Honor, we're happy to have the order entered and have a hearing on appropriate notice with the ability to review and comment not just for us, but all parties and interest, and to do it at the 13th or the 20th or whatever the court is available. And at that point in time, you know, once we know the secret, we'll be able to then have some intelligent conversation, perhaps of the U.S. trustee's office, but certainly with respect to our pleadings and arguments to the court.

So I think it's pretty simple. I think if you took our order and said, the United States trustee is here by directed to appoint an examiner, on notice, I'm sorry, subject to court approval, on notice, is directed to file a motion on notice to the parties, seeking the hereby directed to appoint an examiner subject to court approval and directed to file a motion on notice to the parties and interest setting forth the

proposed scope degree cost and duration of the examination to be conducted by such person that is our suggestion on how to deal with it we are not looking to go again to the Third Circuit on these issues we want to move this along quickly we would like the US trustee to look at Webster's and see what consultation says and how it's defined but your honor I think that solves the problem for the moment and then we can be back in front of you next month and talk about everything else thank you thank you thank you thank you very quickly Ken Pascuali from all for the committee. Your Honor has already said, and I think you're happy with either form

of order. We're agnostic on the order on the two that were submitted. We think they both go to the same effect at the end of the day. I did want to mention, however, we do agree, and I think Your Honor has said it. I don't really think there's a dispute, but to the extent that there is, we certainly, as the committee, want an opportunity to be heard in response to a motion to the court on the examiner's appointment and on the scope. duration and cost of the investigation. But I think I heard Your Honor already say that, but wanted to be clear. Thank you, Your Honor. Thank you. Thank you. Good afternoon, Your Honor. I may please the court Matthew Harvey from Morris Nichols-Arson Tunnel on behalf of the ad hoc committee. We'd echo the official committee's

comments. We're, again, agnostic on the formal order, but would like the opportunity to weigh in at the hearing on the application or the motion, Your Honor. Thank you. Thank you. Thank you, Your Honor. Ben Hackman for the U.S. trustee. Your Honor, I generally don't have an issue with, I would have to see the order, but what I believe Mr. Brownlee said was he was agreeable to the order directing the U.S. trustee to appoint,

and that is what we want. We are not required to tell the debtors who we've been interviewing. We do not need to tell them who has been giving us expressions of interest. Well, what does it mean in 1104D when it says after consultation with the interest department? What does that mean? Ask me something.

So in Capital Services and Investments, Inc. It's a 90B.R. 383, Pennsite 35. Bankruptcy Central District of Illinois in 1988. The court wrote that consultation is not defined in the bankruptcy code. The dictionary defines consult as to seek advice or information from or guidance from. consultation and then further down it says consultation with parties and interest is required to apprise the United States trustee of the special requirements of the case respectfully it does not require us to waive deliberative process it does not require us to tell the

debtors what we're thinking so we would reserve all rights on that issue when our office moved for an examiner originally mr. Bromley scoffed at the United States trustee for wanting bleach and sunshine during the exam, in requesting that relief. The debtors complained to the district court and the Third Circuit that the U.S. trustee was on a, quote, policy crusade, end point, end quote, in seeking an examiner. They complained to the Third Circuit at oral argument that the U.S. trustee wanted to, quote, boil the ocean, end quote.

They criticized the Third Circuit's decision after it came down and announced it had erroneous dicta in it. They told the U.S. trustee at last month's status conference that he should sit down and be quiet and take the win. And today they're referencing this process as Kafkaesque. The Third Circuit wrote in its opinion that the examiner's requirement of disinterestedness quote is particularly salient here where issues of potential conflicts of interest arising from debtors' counsel serving as pre-petition

advisors to FTX have been raised repeatedly. In enacting subsection 114C2, Congress made certain that neither the bankruptcy court nor the appellees could deem these issues unworthy of an outside investigation in this particular bankruptcy, end quote. So, Your Honor, I – and one other thing, to be clear, our expectation is that when we file once your honor enters an order assuming your honor enters an order directing us to appoint an examiner we would file an application under 2007.1c that seeks approval of the appointment that lays out what the proposed scope cost duration would be and parties and interests have an

ability to be heard at the hearing on that application unless your honor has any questions for me that's all i have go ahead ms i just want to object in the strongest terms possible since they're reference to anything relating to my law firm. As Mr. Hackman knows, his office withdrew an objection to our attention and agreed that the firm is disinterested. And for Mr. Hackman today to say anything otherwise is completely inconsistent with the record. And the statement of his colleague from the Department of Justice Appellate Division at oral argument in front of the Third Circuit was equally erroneous. We just want to make that clear on the record. The U.S. trustee's office withdrew their objection and agreed to the entry of the order.

That is the record. I think the one issue I think is clear, that the order should say that the U.S. trustee is appointing the examiner. They have the ability to select the examiner and appoint them subject to court. approval that should be the order as well subject to court approval rule 2007 point one e or excuse me see only addresses the question of the actual appointment doesn't talk about scope duration costs of any investigation to be conducted by the examiner it says an order approving the appointment of a trustee or examiner under 1104 D of the code shall be made on application of the United States

trustee the application The application shall date the name of the person appointed and to the best of the applicant's knowledge, all the person's connections with debtor, et cetera, et cetera. The application shall state the names of the parties and interest with whom the United States trustee consulted regarding the appointment. Who have you consulted with, Mr. Hackman? Your Honor, we've consulted with the debtors, the official committee, the ad hoc committee, joint official liquidators, state agencies who had originally filed joiners to the motion for an examiner. There have been others.

We would state who all the people who have consulted with are in the application. And did you say you've already selected somebody? I don't know that I'm authorized to comment on that, Your Honor. I think... Well, you can say whether you did or you've selected someone or not. Sorry, Your Honor. You can say whether you've selected someone or not. There's nothing in the code that you can't tell me.

that you whether or not you've selected something. So I don't know if the final decision has been made at this point. My understanding is that once there is an order directing us to a point that will be finalized and an application will be ready in short order. Yeah. Well, how much time are we talking about here? Because otherwise I'm going to give you a time. If Your Honor were to enter an order today, I would expect early next week we could have an application filed.

by Monday or Tuesday. All right. Then 11, excuse me, 2007.2 goes on to say the application shall be accompanied by a verified statement of the person appointing, setting forth the person's connections with the debtor, et cetera, et cetera. But nothing about scope, duration, and cost of the investigation. So there's nothing in the code that tells me how to do that part of this. All the code talks about is the appointment of the examiner. So the order, I think, should be along the lines of what Mr. Bromley was talking about, that the U.S. trustee shall appoint subject to court approval and examiner.

The court, or the U.S. trustee will also file a motion seeking approval of the scope, duration, and costs of any investigation to be conducted by that examiner. And that will be put out on notice so that parties can can be heard on those issues. Does that make sense? You don't have to get something? Your Honor, just so I'm clear, there would be one application under 2007.1C

that addresses appointment as well as scope duration of cost. Is that what Your Honor is saying, or do you want separate that? Well, 2007.1 does not address the issue of scope duration and costs. It just says the appointment, and that you have to submit information to show who you consulted with, and that the person has no conflict or they're disinterested. So it doesn't address that issue.

So the question is, and I'm thinking out loud here, do I do that as a part of a 2007.1 order, or do I have you file a separate motion seeking the scope duration and cost of the investigation? I know we've done this before in Cred Inc. we did as a two-step process, right? We did the appointment, and then we had a second-step process. And then we had a separate, was there a motion that was filed in crediting on the scope duration and costs? I'm not entirely sure, Your Honor, but I believe it was a two-step process. Ms. Rich and Dürfer, you recall.

Good afternoon, Your Honor, Linda Richendurfer from the Office of the United States Trustee. I do believe that there was first the application and then with the name of the examiner. And then there was a second document that was filed. I think it was even called, might even have been called a notice. because the plan, the work plan, if you will, was put together to a great degree by the examiner in that case. And when we talked about this at the status conference before, Your Honor noted that you wanted to, I'm just looking at page 25,

you said you wanted to shortcut the process of it. And so you gave us your preliminary views on what you thought should be the scope, I think duration also, and even, I think you've even mentioned, mentioned yeah about low sudden figure number is what you said so you talked about addressing all of those together in one document so I think we anticipated filing an application as soon as possible hopefully hearing it before your honor on the 13th of March and it would include the identity and would also address

scope duration and costs so then the issue is teed up for your honor and people can put their thoughts and comments and documents followed the court and or during the hearing because we have what your honor has said about this and I think that you know this is information that everyone would be taking into account what your honor said about scope duration and cost right mindful of what the code says the code says that shallow point and I forget the exact language that follows but basically the discretion regarding the scope shallow point subject to court approval subject to court approval that's right your honor and so that's what without

your honor's order we don't have the authority to point anybody once we get your honors order we were seeking directed by the Third Circuit we can appoint and then we could file all of the information and everyone can do what they want to do with it. The consultation, we received very good comments from everybody. Debtors, we received some comments and we try to take all the comments into consideration. So the consultations occur. If they don't like the result, Your Honor gets it decided, I guess.

Well, I guess the question is only on the appointment issue is, does the person meet the requirements of the code? Right. interested and I guess all of that your honor will be in the application I guess if you tried to appoint somebody who I thought was completely inexperienced in the process or had no basis for being able to do this type of an investigation in the time frame necessary but that again I go back to I might not know who this person is I might need somebody else to tell me those things and your honor again that's why we would hopefully submit it early next

week I say hopefully only because I plan to be on an island off the coast of Mexico next week where I can't be reached but that it will be submitted next week I should say and then again listing it for the hearing on the 13th I am sure that if anyone has anything to say we will all be hearing it so we're gonna do this as a as a motion how are we gonna I'm trying to figure out application your honor is the word that's used throughout so um rather than the three-step process and Craig which was motion for permission to appoint and then um your honor issued the order saying okay go appoint someone we then filed the application your honor issued the order

for the appointment issued the order approving the appointment of that particular person who in that instance was mr. Stark from brown run back and that included the scope it did not include the sculpture it did not because then there was a a third submission which in large part was developed by mr. Stark himself in addition with the United States trustee and I was not involved in that portion of it there may have been some input from committee at the time I don't know but there was a a very lengthy document and it included scope and included a work plan and included ideas about interviewing people.

It was a very, very developed one. Here I don't think because of the length of time that it can be even developed in terms of allowing that much to occur because Your Honor has stated that you would like to see it limited to reviewing of the examiner report or the examinations that have already occurred and then And if there are issues, the examiner or others can come back to the court and see further time. So I think that's what we envisioned was taking steps two and three, buying them together, as Your Honor had suggested. And that's why we appreciate Your Honor's comments at the conference regarding what you thought

an appropriate scope duration to cost with it. So let me ask you this question. since I entered an order denying the appointment of examiner, and I was reversed by the Third Circuit, the question is, do I need to enter an order saying that an examiner shall be appointed? Yes, Your Honor, and that's all we were trying to accomplish with the form of order that we had submitted

to the parties in interest. I don't have it right in front of me here now, and maybe it needed a little bit more wordsmithing, or Your Honor would like some more wordsmithing. Well, I think the debtor's version of it, included an additional sentence at the beginning that says the motion of the United States trustee for entry and order directing appointment room examiner is hereby granted your order just went right to that the US trustee is hereby directed to appoint I guess

it's the same thing I mean you know we try to be low on the language because every time you write a word other people have different ideas about what it means so we got directly to the point your honor but again it's after the third yeah just that you're directing us to a point that's all we need mean in order that says we're directed to a point and then the process breaks open and hopefully we're back here then on the 13th and people can start okay so I think then the form of order should say something along the lines of that the United States trustee is directed to appoint a an examiner pursuant to

section 1104 D subject to approval of the court and to include in the application the proposed scope duration and costs of the investigation to be conducted by the examiner yes I think that would accomplish the purpose yes there I just I want I want to be careful because the You know, the scope duration cost, that is related to 1104 C2, right? Because the Third Circuit said, well, what is as appropriate modify? The examination. So the application with respect to scope duration cost is not an application under Rule 2007.

Okay, so I think what we can do then is just include the U.S. trustee shall shall appoint an examiner pursuant to 1104d and pursuant to section 1104 c2 shall set forth in the application the proposed scope duration and cost that that would work yeah that's accepted that's what we envisioned it's a shame we got tied up in the wordsmithing here but yes your honor I think that's the appropriate relief and then We move from there. Okay. And Your Honor, we do not have a hearing scheduled for the 13th. We have one scheduled for the 20th, so that's when the next hearing is scheduled.

I'm not suggesting, I just, yeah, if we're all planning on being here for the 13th, there's nothing on the calendar right now. The 20th is fine. Your Honor, we apologize. For some reason, we had an old, we had something that looked like it was scheduled for the 13th, and I guess that's, the 20th is fine. The 20th is an extra. Oh, the 13th is the interim fee application. And then that's been pushed to the 20th now, so that's why the 13th has come off and we're all going to be here on the 20th. Is that fine?

Is that an acceptable date? That's acceptable. Okay. All right, so let's do that. Okay. I think this is the longest I've spent on a one paragraph. So you just submit another CLC. Anything else then for today?

All very much. We're adjourned.