Three Arrows Capital Secures Court Approval to Boost FTX Claim to $1.53 Billion

In a significant development in the crypto industry, a United States bankruptcy court has granted Three Arrows Capital (3AC), a now-defunct crypto hedge fund previously run by Kyle Davies and Su Zhu, permission to expand its financial claim against the collapsed exchange FTX to $1.53 billion; FTX was previously run by Sam Bankman-Fried, now serving 25 years in prison for his role in one of the largest financial frauds in history.

This ruling, delivered on March 13, marks a substantial increase from the initial $120 million claim that 3AC’s liquidators sought nearly two years ago. The decision underscores ongoing legal tensions between the two entities, both of which unraveled amid the broader crypto market turmoil in recent years, and highlights the complexities of resolving financial disputes in bankruptcy proceedings.

The court’s approval stems from a prolonged legal struggle between 3AC’s liquidators and FTX’s bankruptcy estate. According to the court documents, the liquidators originally filed a $120 million claim in June 2023, asserting that FTX had wrongfully seized assets just before 3AC entered liquidation. Over time, however, they revised this figure upward, arguing that $1.53 billion in assets held on FTX’s platform were liquidated to cover $1.3 billion in liabilities owed to the exchange.

This adjustment, presented more than a year after the initial filing, sparked contention from FTX, which argued that the revised claim was untimely and introduced new issues unrelated to the original submission. FTX’s legal team further contended that approving such a change would complicate its ongoing restructuring efforts and impose an unreasonable financial strain, given that its bankruptcy plans had assumed the original claim would remain static.

Court Sides with 3AC Amid Transparency Concerns

Judge John T. Dorsey of the US Bankruptcy Court for the District of Delaware ultimately ruled in favor of 3AC, rejecting FTX’s objections. In his decision, he acknowledged that FTX raised valid points about the timing and scope of the revised claim but determined that the exchange failed to provide compelling evidence to block the amendment. The judge noted that 3AC’s initial filing had hinted at the potential for additional legal action, suggesting that the updated claim was not an entirely new development. He also dismissed FTX’s allegations that 3AC had deliberately delayed its filing, finding no indication of bad faith on the part of the liquidators.

A key factor in the ruling was FTX’s own conduct during the process. The court found that the exchange’s lack of transparency significantly hampered 3AC’s ability to accurately assess its losses in a timely manner. Judge Dorsey pointed out that 3AC’s liquidators encountered substantial obstacles, including incomplete records and restricted access to FTX’s internal systems. Compounding these difficulties, FTX limited interactions with individuals who could have provided clarity and supplied only raw transaction data, leaving the liquidators to piece together a complex financial puzzle with insufficient support. In his remarks, the judge emphasized that FTX’s approach placed an unfair burden on 3AC’s team, criticizing the exchange for faulting the liquidators’ pace when it had withheld critical assistance.

This ruling represents a pivotal moment for 3AC as it seeks to recover assets lost in the collapse of FTX, one of the most prominent casualties of the crypto downturn. For FTX, the decision adds another layer of complexity to its bankruptcy proceedings, as it navigates competing claims from creditors and stakeholders.