American court hearing recordings and interviews - Season 6. Episode 25. March 27, 2024. In re BlockFi Inc. et al., chapter 11 bankruptcy case no. 2022-19361, audio of hearing held in the BlockFi bankruptcy proceedings pending in NJ, USA #crypto

Episode Date: April 15, 2024

hearing concerning request for bankruptcy court approval of the proposed BlockFi settlement with FTX/Alameda

Okay, good morning, everyone. This is Judge Kaplan, and we'll be hearing the Block 5 matter, 22-19-361. Let me give everybody time to adjust their videos. All right. Good morning. Let me turn to Debtors Council, and specifically we're addressing the request to approve the settlement between the wind-down debtors and FTX. Mr. O'Lek, good morning.

Good morning, Your Honor. For the record, Kenneth O'Lead of Brown-Rudnik, for the plan administrator and the Block 5 wind-down debtors. Your Honor, we're here both to give an update to the creditor community on the case and to seek approval of the FDX settlement. The FTCS settlement is, in every respect, a huge win. for the Block FI estate.

Even when the plan was confirmed, the Block FI was facing the prospect of significant clawback litigation that could reduce recoveries and its claims against FTCS. And as part of this settlement, we have now agreed with FTX that all of those affirmative clawback claims will be waived. The Block F5 Al-Meda loan claims will be allowed. in full. The BlockFi exchange claims will be allowed in full except for FTT tokens which have been estimated at zero and were in any event collateral for the Almeida loans.

And BlockFi will receive a 250 million secured claim in respect of all of its claims for collateral supporting the Almeida loan. This could not have been achieved without a huge effort from everybody involved. Planned Administrator, M3 partners, my co-counsel at Haynes and Boone, and, of course, my team that have all worked tirelessly to deliver this result. We're very pleased to be able to present this to your honor because not only is it a great result for the estate, but it's a great result that's achieved at a low cost.

By being able to reach this result within six months of the plan going effective, we are able to, once the PFTX plan is approved and goes effective, release substantial litigation reserves that we had to hold to litigate these issues. So I want to talk a little bit about what this settlement, if approved by your honor, would mean for customers and unfortunately what it would not mean. If this settlement is approved and FTX is able to hit the distribution targets that they have said that they'd like to hit, which is a full payment of all ALMATA loan claims and all customer claims, we would envision that customer claims against BlockFi International and BlockFi lending would ultimately, after we've received full payment. from FDX, which may take years, hit 100% of the allowed claimants. BlockFi Inc., which houses the BIA accounts for U.S.-based customers, would hit approximately 60 to 80% with potential upside if other matters go favorably for BlockFi-Winded FDERS. And there, I think it would be important to just explain to customers a little bit of why there's a difference between those three. BlockFi did business essentially through three entities that are

relevant, Inc., the parent company lending, which housed collateral accounts and BlockFine private client accounts in the U.S. and international. Each of those were three separate legal entities with separate assets, separate claims pools, and the plan had to respect the legal separateness of each of those three activities. The Almeida loan claim is owned mostly by international and partially by lending, and the exchange claim I believe is owned entirely by international. So if all three estates have different levels of recovery and will reach different levels at different times.

How the money actually flows through the estates, a little bit complicated, but International owes Inc. a very substantial amount of money that's disclosed in the disclosure statement. So as money is recovered from FDX, International will be able to pay over to Inc on its allowed claim. Once lending hits 100%, which I think we expect it would be the first estate to do so, funds would pour over from lending into ink to be used for further ink distributions. Unfortunately, that means that just based on how things were when the bankruptcy hit, that Inc. is looking at the lowest recoveries, and we will do everything you can to increase those, but we do not see at this point a realistic possibility that Inc. could hit 100%.

The other thing that we need to stress that, you know, Sam Bankman-Fried has in efforts to evade justice, has deliberately confused is, unfortunately, 100% distributions do not equal 100% in-kind distributions. People who are owed one Bitcoin will not receive one Bitcoin. The Block FI states simply will never have the funds to be able to do so, even if that was permitted on the plan. we submitted a victim impact statement to in SBF's criminal trial to stress that point, that although Mr. Bankman-Freet is trying to pretend to his criminal court that all FTCS creditors will be paid in full, again, they have the same as BlockFi as owed tens of thousands of Bitcoin. It will receive a dollar claim that is a fraction of what it is owed.

is what Blockby can claim under the bankruptcy code, but it will not make us whole. And unfortunately, we cannot make this trust. So that is what this settlement, if approved by this court, would mean. The 250 million secured claim, which is entitled to interest, would be paid shortly after the effective date allow us to make a second interim distribution. We would envision doing that as quickly as possible

after receipt of the funds. All further distributions would, unfortunately, be tethered to F.TX's process. They have a very, very considerable amount of work to do on reconcile their claims population. I believe they said that the customer claims they have are $21 quintillion. So we will return funds as quickly as we get them from F.TX, but unfortunately, that may be a year's long process. With that, unless Your Honor has any questions, we would ask, Your Honor, to approve the FDX settlement. And then I'd like to give a brief update on where we are with the pace of the first interim

distributions. Sure. Thank you, Mr. Olet. So just to clarify, in essence, BlockFi as a creditor in the FTCS proceeding, suffers from the same disadvantage that BlockFi's own creditors face in its proceeding, and that the return on the claim is pegged to the dollarization, dollarized value as of the petition filing date. So creditors can't, in the Block-by proceeding, cannot receive an in-kind distribution of 100 percent because Block-Fi itself is not receiving that as part of the FTX proceeding. Is that a fair summary?

That's correct, Your Honor. If FTCs is able to pay out above that, on post-petition interest or something else, if that could boost Block-Fi's recoveries, but just looking at what FTCS has made, public, we see no realistic prospect. That could get us close to the amount of Bitcoin that we were owed under the agreements with FDX. My understanding is that Judge Goldblatt and Delaware worked hard to facilitate the settlement between FTC and BlockFi? Yes, Your Honor, and I'm very embarrassed. They didn't note that. Judge Goldblatt did an

incredible job bringing the parties together to a fair settlement that it's a huge, I mean, not just for Block 5, but also for FTCR creditors, as now, you know, both the states save considerable costs, and these were extremely, extremely complex issues that could have spawned years of litigation that his honor was able to cut through. Well, I want to extend my appreciation to Judge Goldblatt. for his services. I do believe that the professionals have achieved for both estates, an extraordinary result in avoiding the significant litigation costs and delays and ensuring that there will be meaningful returns for both the states. Much higher percentages than were envisioned

at the time a plan was filed and confirmed before I go further. Let me ask, I see representatives from the Office of the U.S. trustee, either Ms. Bilski or Mr. Sponder, do you have any concerns or issues to raise? Good morning, Your Honor. Lauren Bielski with the Office of the United States Trustee. Our office does not have any objections to the settlement and also recognize the benefits to the creditors. There's no question that the settlement satisfies the Third Circuit standards for approving a settlement.

It certainly cannot be questioned that it's in the best interest of the estate to bring in these dollars without the expenditure of substantial professional fees and costs and delays. I think it's fair to say that the Blockby proceeding has been undertaken in a substantially cost-effective manner. compared to ongoing proceedings in other jurisdictions. I think the professionals have again achieved tremendous results. And I think that I'm going to approve the settlement and keep my fingers crossed that the distributions can be made time and let's move on to that issue. Thank you, Your Honor. So with respect to the first interim distribution, which is essentially all of the

assets that were on block were available for distribution. We have opened up over 315,000 accounts to receive their first interim distribution, which represent over 1.5 billion in customer claim value. That population is substantially all of the allowed claims. There are a number of claims on the 17th omnibus objection, and there are, I believe, with stragglers on the 18th or 19th, but with rare exceptions, essentially all customers within a loud claim are able to receive their first interim distribution. There has been a concern over the deadline for withdrawal of May 31st, March 31st.

The plan administrator is going to be extending that deadline into April to allow all customers time to submit a withdrawal request for Blockify's platform and to give everybody on the 17th omnibus objection a fair opportunity to receive the same in-kind distribution as everybody who has a currently allowed play. We anticipate that all of these distributions will be complete by the end of April. The next thing to mention is the plan envisions that The plan requires that in-kind distributions continue for six months, but assumes that unless the plan administrator is able to find an alternative that future distributions will exclusively

be in catch. The plan administrator is in the process of working with third parties to, if possible, allow for continued further crypto distributions for additional distributions or for parties that we're unable to receive their first interim distribution in kind or whatever reason. If we have something to announce on that, we will file something up the docket. There have been, unfortunately, a considerable uptake and scan emails, and so we'd urge that everybody be vigilant about any emails they receive reporting to be from BlockFi. Any emails will only come from BlockFi.com or scroll.com.

And if any party suggests that they are the new distribution agent, we'd urge people to check the docket and check the news before clicking on any links and their emails. In general, not to click on any link to any emails they receive reporting to be for BlockFi and unless they are absolutely sure that the email is legitimate. Let me take this moment to recognize and express the court's appreciation for these assistance of counsel for the Windown Administrator. The Chamber has throughout this case received countless emails from frustrated customers, confused customers, concerned customers regarding information they were receiving.

We have forwarded the emails directly to counsel, and the Court does appreciate the responsiveness of counsel in addressing these individualized concerns. concerns. It's been a barrage on the court, but I'm sure it's also been even a greater amount of work placed upon counsel. Thank you, Your Honor. We appreciate your honor forwarding those emails. We make an effort to respond to every request that comes in. My co-counsel, Lauren Sisson, has – responds to dozens a day, it seems. But – We understand this is a confusing process and it's not easy on the customers. It's our goal to be able to make it.

It's not going to be easy for people to make it as easy as possible for the customer base. All right. Anything else on our plate for this morning? Not from the Windan debtors, Your Honor. All right. Then absent any other concerns raised, The Court will adjourn. Thank you again for the update. And will you be submitting a form of order on the approval of the settlement? I believe that we submitted one, but we will get another – we'll get another copy to chambers.

Great. All right. Thank you very much. Thank you, counsel.