The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian aviation entrepreneur yesterday launched legal action against FTX's US chief to safeguard his ownership interest in two aircraft valued at a combined $28m

Paul Aranha, founder of Trans-Island Airways, and who described himself as "one of the largest Bahamian victims" of the crypto exchange's implosion, accused John Ray of exploiting his efforts to amicably resolve the fate of planes acquired with financing from FTX by forcing him to "shoulder all of the risk and expense" associated with maintaining them.

The aviation proprietor charged that Mr Ray, who controls the 134 FTX entities currently in Chapter 11 bankruptcy protection, of a last-minute intervention that thwarted his proposed settlement with the US Justice Department to resolve both planes' fate after he had incurred $5.93m in expenses to ensure their upkeep over the past two years.

With his bid to either sell or operate the aircraft frustrated, and costs continuing to mount, Mr Aranha and his attorneys have moved to counter Mr Ray by seeking multiple forms of relief from the Delaware Bankruptcy Court. Their first, and likely preferred outcome, is for Judge John Dorsey to find that the two planes are owned by the Trans-Island Airways chief - not Mr Ray and FTX Trading's estate - and order that the Chapter 11 asset freeze does not apply to them.

This would enable Mr Aranha to either sell or operate the planes, while also resolving any sums still owed to Mr Ray and FTX's creditors/investors. Alternatively, should Judge Dorsey not issue such an Order, the Bahamian aviation entrepreneur is asking the Delaware Bankruptcy Court to still lift the Chapter 11 freeze so he can "use, operate, preserve and maintain" both planes or sell them should he so choose.

And, in a third and final option should Judge Dorsey not go for either at the upcoming October 19 hearing, Mr Aranha and his attorneys are seeking an Order that would enable him to impose liens on both planes such that Mr Ray would be forced to compensate him for both past and future maintenance costs incurred with their upkeep.

Accusing Mr Ray of endangering the planes' value through the "limbo" he and his team created by their 11th hour claim that FTX Trading owns both aircraft, Mr Aranha's legal filings provide the first complete glimpse into the extent to which the crypto exchange's collapse has impacted Bahamian companies that did business with it and/or are still owed money.

Mr Aranha, who founded Trans-Island Airways as a Bahamian charter company, along with Island Air Capital, began his relationship with FTX when he "started flying Sam Bankman-Fried", its now-embattled founder, "to and from The Bahamas in 2021" after the crypto exchange relocated to this nation from Hong Kong.

"From approximately October 2021, Trans-Island Airways provided more than $15m worth of private charter and cargo flights, customised plane upgrades and other services to Sam Bankman-Fried and other FTX executives, employees, business associates, guests, family and friends," the Bahamian entrepreneur's lawsuit asserted.

"By January 2022, the volume of the Flight Services that Trans-Island Airways was providing to FTX required additional planes. FTX did not wish to own planes, and Trans-Island Airways' business model supported the acquisition of additional aircraft, so FTX agreed with Mr Aranha that he would purchase the planes.

"FTX would finance the purchase of those planes with an unsecured, no-interest loan, to which Sam Bankman-Fried agreed in a handshake deal with Mr Aranha. The latter purchased a Bombardier Global jet for $15.9m, acquiring title to it on March 2, 2022, followed by an Embraer Legacy on August 4, 2022, which cost a further $12.545m. The combined purchase price for both planes, just months before FTX's collapse, was $28.445m.

Mr Aranha alleged that he obtained prior approval for both purchases from FTX, with the latter wiring the necessary funds from accounts held by Alameda Research, Mr Bankman-Fried's private trading arm, and North Dimension, one of its affiliates.

"Mr Aranha was unaware of, and had no reason to suspect, the fraud at FTX, and he had no reason to question the source of funds FTX used to finance the aircraft," the lawsuit alleged. "FTX requested upgrades to the aircraft, such as state-of-the-art wifi and entirely new interiors.

"Trans-Island Airways arranged for the requested upgrades and other necessary maintenance to be performed at a facility in Florida promptly after Island Air Capital bought the Aircraft. Neither aircraft was ever used for any of the flight services - the aircraft were unavailable during the upgrades, which were still in progress in November 2022 when FTX collapsed. In other words, no one associated with FTX ever flew on the Global or the Legacy."

Detailing the March 2022 discussions between Mr Aranha and Mr Bankman-Fried on their business relationship, and how the aircraft deals' financing would be structured, the lawsuit alleged that the FTX chief suggested the loans be repaid via an account opened in the Trans-Island Airways chief's name with the crypto exchange.

Besides funds deposited by Mr Aranha personally, FTX would also pay into the account the sums charged by Trans-Island for flight services provided to the crypto exchange. These sums, plus any trading gains, would be applied to pay down the loan. Mr Aranha agreed to the deal, especially since any trading losses would only extend the time for repayment.

While an unorthodox arrangement, Mr Aranha was said to have drawn further confidence after FTX Ventures, one of the crypto exchange's affiliates, signed a deal committing it to invest $17m in Trans-Island Airways for a total 40 percent equity stake in the charter operator. The terms involved an injection of $12m, plus the purchase of $5m of existing Trans-Island Airways shares from Mr Aranha, with the business valued at a total $42.5m.

"Thus, at the time of the aircraft loan, Sam Bankman-Fried and FTX were poised to become Mr Aranha’s business partners and joint owners of Trans Island Airways (and thus joint owners of the aircraft)," the legal filings alleged. "The aircraft loan agreement was not documented, but this was not unusual for Mr Aranha, who has financed other aircraft purchases in the past based on oral agreements.

"Sam Bankman-Fried did not ask for interest on the aircraft loan. In exchange, Mr Aranha agreed there would be no changes to FTX Ventures’ prior valuation of Trans-Island Airways." The FTX Ventures deal was never consummated, and no money changed hands. However, Mr Aranha continued to use the payments for FTX for aircraft services to pay down the loan, with the lawsuit saying he had no reason to suspect the financing may have come from the exchange's clients.

"In early November 2022, FTX’s financial problems came to light. Mr Aranha was warned to withdraw his funds from FTX, and he had multiple opportunities to do so before FTX suspended activity in his account. He did not because he was committed to repay the aircraft loan to FTX," the lawsuit asserted.

"As of the petition date, approximately $11m toward repayment of the aircraft loan was on deposit in the customer account. Additionally, as of the petition date, the Debtors owed Trans-Island Airways approximately $2.6m for unpaid flight services, bringing the balance of the aircraft loan to $14.845m, down from $28.445m within only eight months."

The $11m in the "customer account" was broken down into $6.339m worth of stablecoins; $4.566m in fiat currency; and $83,665 worth of Bitcoin. "Based on information and belief, Mr Aranha is one of the largest Bahamian victims of Sam Bankman-Fried's crypto currency fraud," the legal filings alleged.

With the loss of FTX as both client and investor, Mr Aranha was forced to "pivot". While he returned the Legacy jet to The Bahamas to prepare it for service here, he readied the Global for sale by de-registering it in The Bahamas and re-importing it into the US, with the idea of using the proceeds to pay-off the FTX loan. By early 2023, the Global had attracted "multiple offers" in excess of $15m.

All these plans, and details, were "voluntarily shared" with the Bahamian provisional liquidators who took control of FTX Digital Markets on November 10, 2022. Brian Simms KC, the Lennox Paton senior partner and one of the liquidator trio, allegedly contacted him on December 6, 2022, to say Mr Ray had assigned him to deal with the matter, and Mr Aranha alleged that sought to be "fully transparent" over the planes.

However, just as the $15m offers for the Global started coming in, US marshals seized the plane on March 8, 2023, as part of the US Department of Justice's forfeiture efforts to obtain compensation for FTX victims in the criminal case against Mr Bankman-Fried. The seizure has eerie similarities with how the Department of Justice snatched $150m in FTX Digital Markets' US bank accounts, which the liquidators claim belong to the estate here.

In response, Mr Aranha and Trans-Island Airways "voluntarily restrained" the Legacy from flight operations. They also sought to seek an amicable, consensual resolution to the ownership of both planes and repayment of the FTX loan. The US Department of Justice, though, has yet to file a forfeiture action against the Global aircraft.

"Movants are confident that the ultimate trier of fact will find that they acted in good faith, that they were without reason to know the aircraft were financed with the proceeds of fraud, and that they have a significant equity interest in the aircraft, having repaid more than $11m of the aircraft loan before FTX collapsed," Mr Aranha and his attorneys alleged. "

"However, in an effort to avoid costly litigation, movants have tried for months to seek a global resolution of competing claims to the assets without success. The debtors [Mr Ray], claiming their hands are tied due to the government’s pending forfeiture action, to date have refused to discuss a resolution.

"Paradoxically, the government, citing the debtors’ interest in the aircraft, have said that they cannot resolve movants’ claims without the debtors’ participation, and that any such negotiations must await the conclusion of Sam Bankman-Fried's October 2023 criminal trial. In the meantime, the costs of maintaining and preserving the aircraft continue to mount and will thus impact the net proceeds of any sale."

Eventually, Mr Aranha secured an agreement from the US Department of Justice whereby the latter would return custody of the Global jet to him so that he could market and sell it, with the proceeds - net of costs - deposited with the US marshals until the forfeiture claim was resolved. Trans-Island Airways also obtained an agreement in principle that it could "operate the Legacy without restraint" to offset the maintenance costs.

However, just as the US Justice Department deal was on the point of being finalised, Mr Ray and his team "for the first time" on August 7, 2023, alleged that the planes belonged to FTX Trading's estate.

"In essence, the debtors have taken the position that while the aircraft belong to them, movants should bear the financial risk and responsibility for all maintenance, storage, insurance and other costs of maintaining the aircraft, as well as all of the considerable expense of preparing and marketing the aircraft for sale," Mr Aranha and Trans-Island Airways alleged.

"Obviously, the debtors’ one-sided posture is unreasonable and unfair to movants. As a result of this impasse, the proposed settlement with the Government to sell the Global and operate the Legacy is now on hold.... The consequences of this untenable situation are particularly acute for the Legacy. As of the date of this motion, more than $800,000 in unavoidable expenses are due for that plane.

"The Legacy is currently in the middle of required maintenance, which needs to be finished. Components and finishings removed for that maintenance are in climate-controlled storage that, together with the fuselage, are taking up 3,000 feet of movants’ hangar space," they continued.

"Movants have other needs for the hangar space that the Legacy is occupying. Even if movants do not operate the Legacy, that aircraft has significant ongoing monthly costs of at least $66,500, and that figure does not even cover scheduled inspections, maintenance of life-limited parts or work needed to preserve the Legacy."

As for the Global, Mr Aranha and Trans-Island alleged they received an August 21, 2023, e-mail from Rolls Royce threatening to terminate the plane's engine maintenance unless an unpaid bill of $480,000 is settled immediately. "Cancellation of the Rolls Royce engine programme would result in the reduction of value of the Global to prospective purchasers by many millions of dollars," they warned.

"The cost to any purchaser of reinstating the engine programme would entail retrospective re-enrollment of the engines in a new warranty programme for all of the hours accrued on the engine since its manufacture, regardless of the prior coverage.

"Movants informed the debtors of this urgent situation by e-mail on August 22, 2023. In response, the debtors only reiterated their assertion of ownership over both aircraft and expressed support for selling the aircraft, but declined to engage with movants on how the ongoing costs of maintaining and preparing the aircraft for sale would be borne. No payment was ever made to Rolls Royce."

Warning that damage to both planes may become "irreversible" without the Delaware court's intervention, Mr Aranha and Trans-Island Airways said: "Movants’ business is not limited to owning the aircraft. They own and operate a fleet of eight to ten planes providing superior service to a multitude of clients and passengers travelling to and from The Bahamas. They also manage client-owned aircraft, caring for the managed planes at the highest level of service.

"As such, their reputation as a premier airline and aircraft manager in The Bahamas is critical to the success of their ongoing business. They cannot retain that reputation without properly maintaining their aircraft, including the Global and the Legacy, which means they cannot simply ignore the maintenance schedule and abandon the aircraft to corrosion...

"If the Legacy is the debtors’ property, the debtors owe Movants $2.531m for the Legacy for all of the above-described services since the petition date, and the debtors also owe movants $3.398m for maintaining and preserving the Global since the petition date if the debtors own the Global."

Mr Ray's intervention, Mr Aranha and Trans-Island warned, leaves them "without a clear path forward" and a risk that the aircraft will become "worthless" - effectively "extinguishing" their ability to repay the FTX loan and costing them their investment.