The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas' status as a non-nuclear power did not influence the decision to refuse FTX's local liquidators relief from the worldwide asset freeze imposed by Chapter 11 bankruptcy proceedings, a Delaware judge has asserted.

Judge John Dorsey, in Friday's ruling on the bid by the failed crypto exchange's Bahamian liquidators to have this stay lifted, reassured all sides and their attorneys that he did not arrive at his verdict based on perceptions that this nation wields relatively little clout and influence internationally,

Christopher Shore, of the US law firm White & Case, who represents FTX Digital Markets' liquidator trio, had suggested in legal arguments last week that the Delaware Bankruptcy Court would be less dismissive of judicial systems in nuclear-powered states such as France but Judge Dorsey reiterated that he "would not defer to any court" when it comes to decisions on the multi-billion crypto, fiat and other assets under his court's jurisdiction.

Peter Greaves and his fellow PricewaterhouseCoopers (PwC) partner, Kevin Cambridge, together with Brian Simms KC, the senior Lennox Paton partner, had asked Judge Dorsey to confirm that the "directions" they are seeking from Sir Ian Winder, the Supreme Court's chief justice, over FTX Digital Markets' winding-up do not violate the automatic worldwide stay or freeze imposed by the Chapter 11 proceedings.

Or, alternatively, if they do that the "stay" be lifted to enable them to progress the Bahamian liquidation. However, Judge Dorsey refused to grant the relief sought on multiple grounds, including that the FTX Digital Markets trio's legal application

"goes well beyond merely asking the Bahamian court for directions" and was, in reality, an attempt to gain "substantive relief" that affects assets under his jurisdiction and that of John Ray, who heads the 134 entities in Chapter 11.

The Delaware judge added that his overriding concern was to maximise the value of asset recoveries for FTX's worldwide creditors and customers, the Bahamian liquidators having received 46m claims alone, and that having the same issues litigated before himself and Sir Ian in The Bahamas would inevitably involve increased costs, "confusion" and delays with all expenses ultimately paid by the collapsed crypto exchange's clients.

As for the Bahamian liquidators' concerns that the Chapter 11 freeze will prevent them from fulfilling their legal duties to the Supreme Court, Judge Dorsey even suggested that they might fulfill these obligations by going back to Sir Ian and telling him they had "lost".

However, while the verdict appears to be a comprehensive loss for the Bahamian liquidation trio, Tribune Business understands that they have been greatly encouraged and comforted by various aspects of Judge Dorsey's ruling. For:

• Judge Dorsey ruled that there are serious legal issues to be determined before assets can be distributed and returned to FTX creditors. These include who are customers of FTX Trading and the other entities under Mr Ray's control, and who are the customers of FTX Digital Markets in The Bahamas.

Other questions, he noted, are whether assets are held by the Chapter 11 entities or FTX Digital Markets, the latter of which was supposed to take over as operator of FTX's international platform, and if these assets '"are held on trust for the benefit of creditors" or if they belong to the respective companies and liquidation estates. These are all questions that have been raised by the Bahamian provisional liquidators.

• And, as a result, Judge Dorsey effectively applied the brakes to Mr Ray and his team's efforts to liquidate assets, confirm a reorganisation plan to reimburse creditors and bring FTX out of Chapter 11 bankruptcy protection. According to Mr Ray's attorneys, his team had been hoping to achieve this by the 2024 second quarter, but the judge said the unanswered questions he listed will have to be resolved before this can happen.

"In my view, you can put forward a proposed plan, but nothing is going to happen until we know who owns the assets. You cannot confirm the plan until we know whose assets they are," Judge Dorsey said.

• He also ordered that the Bahamian provisional liquidators and Mr Ray's team "retain a good mediator" with experience of digital assets and crypto currency to try and resolve their disputes and come up with co-operation protocols and agreements that the case is "begging for".

• And, significantly given the Bahamian provisional liquidators' funding concerns about being down to less than $1m of operating cash, Judge Dorsey affirmed that the Supreme Court has "in rem jurisdiction" over all FTX assets in The Bahamas. This would include the $250m worth of Bahamian real estate acquired by FTX Property Holdings, plus the $45m worth of stablecoins held by Tether.

This gives the Bahamian liquidators assets that they can secure and liquidate, or potentially leverage and borrow against, should they need to raise financing to fund their activities. "At least Ray has to stop ignoring them," one source, speaking on condition of anonymity, told Tribune Business.

Judge Dorsey admitted that he had a virtually sleepless night on Thursday trying to work out how to deal with the "mess" and "tangle" created by the dispute between the Bahamian provisional liquidators and Mr Ray. "'I've been thinking about this lying in bed at 3am this morning trying to figure out what I'm going to do with this mess," he started off.

"I was thinking: 'What is the most important thing here? What do I have to consider? What's the most important thing to consider?' The most important issue in this case is what's in the best interests of the customers and the creditors. Because that's what this case is all about. Getting value back to the customers and creditors.

"That should inform all my decisions, and particularly this decision of whether or not to lift the automatic stay. So what are the issues involved here, and it's a tangle of issues involved here." Besides determining which customers and assets belong in which liquidation, The Bahamas or Delaware, Judge Dorsey said he may also have to rule on whether fiat and crypto assets sent to FTX Digital Markets are "subject to claw back as fraudulent advances".

"Where are the assets located?" he asked. "Are they located in the US, which gives me in rem jurisdiction over them, or are they located in The Bahamas, which give The Bahamas court in rem jurisdiction. As I said yesterday, I am not going to defer, and would not defer, to any other court, the question of what constitutes assets of the creditors in the case before me.

"Contrary to Mr Shore's colourful request, it's not based on the fact The Bahamas does not have nuclear weapons. I would do that even if that was France as he referred to.... This is the only court that can grant complete relief regarding the assets that are under the jurisdiction of this court."

However, Judge Dorsey said it was "an open question" as to whether some of the assets held by Mr Ray and his team really belong in The Bahamas with FTX Digital Markets and vice versa. Acknowledging that the Supreme Court and Sir Ian have "in rem jurisdiction" over all Bahamas-based assets, he also conceded that the Chief Justice can ignore any rulings in Delaware and "I have no basis to order the Bahamian court to do or not do anything. I have no control over that court".

However, he added: "The joint provisional liquidators are proposing to make a filing to the court in The Bahamas which, according to their arguments, goes well beyond merely asking the Bahamas court to establish protocols. My reading of the application is they're asking the court to make a decision about whose assets are they? Are they the assets of the US debtors or the Bahamian debtors?

"That's not just the assets located in The Bahamas, but all the assets, including those located here in the US. So what the joint provisional liquidators are doing is asking the court in The Bahamas for substantive relief. That obviously has an effect on the debtors in this case."

Judge Dorsey said Mr Ray and his team had established that there were "several forms of harm" to their estate by lifting the Chapter 11 stay and allowing the proceedings to go ahead in The Bahamas, especially the delays, cost and confusion that creditors would suffer from having to participate in and fund two different legal proceedings. A joint hearing between The Bahamas and Delaware courts would be just as expensive.

In contrast, Judge Dorsey said the only harm to the Bahamian liquidators would be an inability to fulfill their obligations under the Supreme Court-supervised liquidation here. "But as the debtors [Mr Ray and his attorneys] pointed out yesterday that is not the issue here," he added. "The harm to the joint provisional liquidators is not the issue. It's the harm to the customers and the creditors."

The judge admonished both sides: "Let's get the case moving. Let's get these cases moving forward..... The case is begging for some kind of protocol between the parties...." Hence the decision to order a mediator's appointment.