Court Grants Liquidators Expanded Claim Against FTX

A U.S. bankruptcy court has permitted liquidators of the defunct hedge fund Three Arrows Capital (3AC) to expand their claim against FTX to $1.53 billion, dismissing objections from FTX’s debtors regarding the timing and fairness of the move.

Judge John T. Dorsey of the U.S. Bankruptcy Court for the District of Delaware ruled on Thursday that 3AC’s liquidators gave sufficient notice of their claim and were hindered in their investigation by FTX’s tardy sharing of relevant records.

> “The evidence suggests that the delay in filing the Amended Proof of Claim was, in large part, caused by the Debtors themselves,” Dorsey stated in the ruling.

FTX’s debtors, led by CEO John Ray III, objected to the amendment, arguing it introduced new legal theories and significantly increased the claim’s size. However, the court determined that 3AC’s original filing had already put FTX “on notice of the possibility of the later asserted claims,” thereby dismissing the debtors’ objections.

Legal representatives for FTX did not respond immediately to Decrypt’s request for comment.

3AC, which was once among the largest crypto hedge funds with over $3 billion in assets, collapsed in June 2022 amid a severe downturn in crypto markets. Founded by Kyle Davies and Su Zhu, the fund had made heavily leveraged bets on digital assets, including the TerraUSD stablecoin, which significantly lost its value in May 2022. This collapse triggered a chain reaction of liquidations across the crypto industry, impacting lenders such as Voyager Digital and BlockFi. The fund entered court-ordered liquidation in the British Virgin Islands in late June 2022.

According to court filings, 3AC held $1.53 billion in assets on FTX as of June 12, 2022. Those assets were liquidated over the following days to cover a $1.3 billion debt owed to FTX. Initially, 3AC’s liquidators filed a $120 million claim in the bankruptcy case in June 2023 but later expanded it, alleging breach of contract, unjust enrichment, and breach of fiduciary duty.

This ruling comes 15 months after 3AC’s liquidators secured a worldwide freeze on $1.4 billion in assets linked to the fund’s co-founders. A British Virgin Islands court issued an order in December 2023 blocking Zhu, Davies, and Davies’ wife, Kelly Chen, from accessing funds while claims against them progress. The liquidators argue that the founders should be held responsible for allegedly exacerbating 3AC’s financial issues in the weeks before its collapse.