Three Arrows Capital vs FTX: Court Approves $1.5 Billion Claim

A U.S. Bankruptcy Court has approved Three Arrows Capital’s (3AC) bid to expand its lawsuit against the bankrupt exchange FTX, increasing the claim from $120 million to $1.53 billion. The ruling overrules FTX’s objections, in which the exchange argued that the claim was filed too late and would complicate its ongoing debt restructuring process for creditors.

3AC initially filed a $120 million claim against FTX in June 2023. However, the fund’s liquidators later revised the claim, adding allegations of breach of contract, unjust enrichment, fiduciary duty violations, and other damages.

FTX opposed the expanded claim, arguing that:

• Increasing the lawsuit amount would create financial risks for the creditor repayment process.
• 3AC introduced new legal arguments that were not included in the original filing.

However, Judge John T. Dorsey ruled that 3AC acted in good faith. He emphasized that the delay in submitting the updated claim was due to FTX’s refusal to provide key documents.

The Ties Between 3AC and FTX

3AC, once one of the largest crypto hedge funds, went bankrupt in 2022 following the collapse of the Terra (LUNA/UST) ecosystem. At that time, the fund managed $3 billion in assets.

According to court filings, 3AC held $1.53 billion in accounts on FTX. However, in June 2022, over just two days, FTX liquidated these assets to cover 3AC’s $1.3 billion debt. This liquidation is now the focus of 3AC’s lawsuit.

FTX, which has already begun creditor repayments, argues that the lawsuit could jeopardize its restructuring plan. However, the judge rejected this claim, noting that FTX was aware that 3AC might pursue a larger claim.

With the lawsuit now factored into FTX’s bankruptcy proceedings, creditor payouts and fund redistribution could face further delays.

Claims Against 3AC Founders and the Future of the Case

The court’s decision came 15 months after 3AC liquidators froze $1.4 billion in assets tied to the fund’s founders, Kyle Davies and Su Zhu.

The British Virgin Islands court prohibited Davies, Zhu, and Kelly Chen (Davies’ wife) from accessing these assets while legal proceedings continue. Meanwhile, liquidators argue that the founders exacerbated the fund’s financial troubles by continuing to take on high-risk loans just before the collapse.

Now, 3AC will seek to recover the full $1.53 billion through FTX’s bankruptcy proceedings, complicating the already complex process of repaying FTX’s creditors.

FTX will need to reconsider its restructuring strategy and potentially offer new terms for the distribution of funds. However, given the scale of 3AC’s claims, this conflict could stretch out for years.