FTX Bankruptcy Plan: What's with the "Consensus" Interest Rate?

The FTX bankruptcy plan proposed today has gotten a lot of attention for the fact that it is promising to pay (over time) 118% of allowed customer claims. That's not quite as great as it sounds given that customer claims were locked in at their November 2022 values. Getting 118% isn't nearly as good as getting 300% (roughly the appreciation of Bitcoin since November 2022), but it's a heckuva lot better than getting the typical "cents on the dollar" bankruptcy treatment.

But there is something here that could be controversial:  the payment of post-petition interest on customer claims at a 9% "Consensus Rate." (The 118% is with two years of 9% interest.)

Confirmation of a Chapter 11 plan requires that the plan comport with the "best interests" test, meaning that impaired, non-consenting creditors must receive at least as much in the Chapter 11 as they would receive in a Chapter 7 liquidation. In a Chapter 7 liquidation, after all claims are paid in full, then interest is paid to be paid on all claims "at the legal rate." Most courts have interpreted "at the legal rate" to mean at the federal judgment rate—the rate paid on judgments in federal court—which is currently 5.17%. There's no Third Circuit opinion on this issue that binds the Delaware bankruptcy court, but other Delaware bankruptcy judges have previously held in Washington Mutual, Energy Futures Holding, and Hertz that the "legal rate" is the federal judgment rate. FTX, however, is proposing paying interest at a massively higher rate, 9%.

If "the legal rate" is the "federal judgment rate," then the FTX plan is paying customer claims more than they would receive in a Chapter 7 liquidation. That means that there's extra value going to those claims that should be trickling down to other classes, such as the preferred shareholders. Maybe there'll be a best interests objection.

Now I suspect that FTX's argument will be that if it were a liquidation, they wouldn't have settlements with the IRS and CFTC under which various government claims were capped and subordinated, so those governmental creditors' claims would have eaten up any excess value, meaning that there wouldn't be anything for the preferreds. Of course, if there weren't a settlement there would still be a question about resolution of FTX's claim allowance objections. My guess is that if there is a best interest objection that FTX will prevail here—the customers are the sympathetic folks, while the equity holders are seen as suspect, even though some of them had nothing to do with the fraud, like folks who sold their operations to FTX for equity.

In any event, it's been clear quite a while that FTX has no intention of letting value flow down to equity. FTX is an unusual case, but management's hostility to equity (beyond SBF) is a bit weird because FTX proposes its plan as the debtor, not as the debtor in possession, and in that role FTX's managers owe a duty of loyalty to the company, which should mean acting in the interests of the shareholders when possible. 

Comments

[David]

If the Consensus Rate seems sus, what about the Supplemental Remission Fund? It's de-facto interest above and beyond the Consensus Rate!