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Bankrupt cryptocurrency lender BlockFi is attempting to obstruct efforts by the similarly bankrupt FTX and Three Arrows Capital (3AC) to recover hundreds of millions of dollars intended for repaying their creditors.
In an Aug. 21 submission to a New Jersey bankruptcy court, BlockFi asserted that its own creditors should not be relegated to a lower priority because FTX’s creditors were adversely affected by the exchange’s alleged misappropriation of $5 billion that BlockFi had lent.
“FTX aims to reclaim over $5 billion in claims filed against the BlockFi estates at the direct expense of the ultimate victims of FTX’s fraud: BlockFi’s clients and other legitimate creditors.”
“To avert further injustice to the creditors of BlockFi’s estates, the Court should reject the FTX Claims under the doctrine of unclean hands,” BlockFi stated.
Additionally, FTX provided $400 million to BlockFi in June 2022 and acquired BlockFi equity as part of a loan agreement, according to the filing.
However, BlockFi contended that this was not a conventional loan agreement — it was an unsecured, 5-year term with interest rates significantly below market levels, and repayments were not required until the firm was expected to mature.
BlockFi characterized FTX’s investment as a “gamble” for which BlockFi creditors should not be held accountable.
“The fact that FTX’s fraudulent actions led to the failure of FTX’s bet does not imply that BlockFi’s creditors are now somehow responsible for refunding the purchase price,” it argued.
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BlockFi indicated that a loan from FTX was a “gamble” based on the expectation of market stabilization. Source: Kroll
Estimates indicate that BlockFi owes as much as $10 billion to over 100,000 creditors, including $1 billion to its three largest creditors and $220 million to the bankrupt crypto hedge fund 3AC.
BlockFi alleged that 3AC engaged in fraudulent activities with the funds it borrowed and contended that it should not be entitled to any potential repayment.
BlockFi asserts that its legal disputes with FTX, 3AC, and other entities could cost it up to $1 billion — affecting the total amount owed to its creditors.
Related: BlockFi opens crypto withdrawals for eligible US users following court order
Several BlockFi creditors previously accused the company of ignoring multiple warning signs before engaging in transactions with FTX and its trading firm Alameda Research in the months leading up to FTX’s collapse in November 2022.
Nonetheless, creditors reached a settlement with BlockFi last month to proceed with a repayment plan.
BlockFi filed for Chapter 11 bankruptcy on Nov. 28, approximately two weeks after FTX similarly filed for bankruptcy.
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