fraud bankruptcy
Are customers who withdraw their profits and lending earnings from FTX during its last days before its bankruptcy liable to clawback from creditors?
<p>It seems that some companies and investors, such as Binance, are liable to pay creditors through clawback for FTX collapse as a result of fraud.</p>
<p><a href="https://cointelegraph.com/news/companies-and-investors-may-need-to-return-billions-in-funds-paid-by-ftx" rel="nofollow noreferrer">https://cointelegraph.com/news/companies-and-investors-may-need-to-return-billions-in-funds-paid-by-ftx</a></p>
<p>What about profitable customers? Suppose a customer made trading profits and earned interest from lending his cryptocurrencies on FTX. He managed to withdraw his funds just hours before FTX's collapse. Is he liable to for the clawback?</p>

<p><a href="/questions/tagged/united-states" class="post-tag" title="show questions tagged &#39;united-states&#39;" aria-label="show questions tagged &#39;united-states&#39;" rel="tag" aria-labelledby="united-states-container">united-states</a></p>
<blockquote>
<p>Are customers who withdraw their profits and lending earnings from FTX
during its last days before its bankruptcy liable to clawback from
creditors?</p>
<p>It seems that some companies and investors, such as Binance, are
liable to pay creditors through clawback for FTX collapse as a result
of fraud.</p>
</blockquote>
<p>If the right conditions are met the amounts paid can be clawed back.</p>
<p>There are a lot of special rules that apply but the most general is that if you receive money or property to pay an amount owed on a debt within 90 days of the bankruptcy petition being filed without providing substantially contemporaneous and equivalent value at the time that you receive the money, and the amount received is more than you would have received in a Chapter 7 bankruptcy, then the amount received may be clawed back into the bankruptcy estate.</p>
<p>Usually, in financial transactions, the dollar values in an account in your name are considered to be contractual debts owed by the financial institution to you, rather than &quot;your property&quot;. So paying amount the balance of an account (to the extent it has been at that level for at least 90 days before the filing of the bankruptcy petition) will usually be a preference and give rise to a clawback obligation if the bankruptcy estate choses to enforce that right (in a Chapter 7 that call is made by the bankruptcy trustee, in a Chapter 11 that call is made by the &quot;debtor-in-possession&quot;). If a clawback amount is not returned voluntarily, court action can be taken to recover it. This is what a court has ruled, for example, in <a href="https://www.washingtonpost.com/technology/2023/01/05/celsius-crypto-bankruptcy-ruling/" rel="nofollow noreferrer">one recent crypto bankruptcy case</a>.</p>
<p>The lookback period is 1 year rather than 90 days for &quot;insiders&quot;.</p>
<p>If the debt is backed by new collateral in this time period, even if not paid, the agreement to provide new collateral can be invalidated (certain additional technical rules apply to this provision).</p>
<p>Small amounts (up to $600 for consumer debtors and $5,000 for non-consumer debtors) are disregarded even if the payment would otherwise be a preference subject to being clawed back.</p>
<p>To make sure I have fully answered the question:</p>
<blockquote>
<p>What about profitable customers? Suppose a customer made trading
profits and earned interest from lending his cryptocurrencies on FTX.
He managed to withdraw his funds just hours before FTX's collapse. Is
he liable to for the clawback?</p>
</blockquote>
<p>Yes. If the conditions described above are met. The logic is that people who pull out money at the last minute due to luck or insider information should not be treated differently than those who do not do so.</p>
<p>The relevant section of the bankruptcy code is <a href="https://www.law.cornell.edu/uscode/text/11/547" rel="nofollow noreferrer">11 U.S. Code § 547</a> (Preferences). It states:</p>
<blockquote>
<p>(a)In this section—</p>
<p>(1)“inventory” means personal property leased or furnished, held for
sale or lease, or to be furnished under a contract for service, raw
materials, work in process, or materials used or consumed in a
business, including farm products such as crops or livestock, held for
sale or lease;</p>
<p>(2)“new value” means money or money’s worth in goods, services, or new
credit, or release by a transferee of property previously transferred
to such transferee in a transaction that is neither void nor voidable
by the debtor or the trustee under any applicable law, including
proceeds of such property, but does not include an obligation
substituted for an existing obligation;</p>
<p>(3)“receivable” means right to payment, whether or not such right has
been earned by performance; and</p>
<p>(4)a debt for a tax is incurred on the day when such tax is last
payable without penalty, including any extension.</p>
<p>(b)Except as provided in subsections (c), (i), and (j) of this
section, the trustee may, based on reasonable due diligence in the
circumstances of the case and taking into account a party’s known or
reasonably knowable affirmative defenses under subsection (c), avoid
any transfer of an interest of the debtor in property—</p>
<p>(1)to or for the benefit of a creditor;</p>
<p>(2)for or on account of an antecedent debt owed by the debtor before
such transfer was made;</p>
<p>(3)made while the debtor was insolvent;</p>
<p>(4)made— (A)on or within 90 days before the date of the filing of the
petition; or (B)between ninety days and one year before the date of
the filing of the petition, if such creditor at the time of such
transfer was an insider; and</p>
<p>(5)that enables such creditor to receive more than such creditor would
receive if— (A)the case were a case under chapter 7 of this title;
(B)the transfer had not been made; and (C)such creditor received
payment of such debt to the extent provided by the provisions of this
title.</p>
<p>(c)The trustee may not avoid under this section a transfer—</p>
<p>(1)to the extent that such transfer was— (A)intended by the debtor and
the creditor to or for whose benefit such transfer was made to be a
contemporaneous exchange for new value given to the debtor; and (B)in
fact a substantially contemporaneous exchange;</p>
<p>(2)to the extent that
such transfer was in payment of a debt incurred by the  debtor in the
ordinary course of business or financial affairs of the debtor and the
transferee, and such transfer was— (A)made in the ordinary course of
business or financial affairs of the debtor and the transferee; or
(B)made according to ordinary business terms;</p>
<p>(3)that creates a security interest in property acquired by the
debtor— (A)to the extent such security interest secures new value that
was— (i)given at or after the signing of a security agreement that
contains a description of such property as collateral; (ii)given by or
on behalf of the secured party under such agreement; (iii)given to
enable the debtor to acquire such property; and (iv)in fact used by
the debtor to acquire such property; and (B)that is perfected on or
before 30 days after the debtor receives possession of such property;</p>
<p>(4)to or for the benefit of a creditor, to the extent that, after such
transfer, such creditor gave new value to or for the benefit of the
debtor— (A)not secured by an otherwise unavoidable security interest;
and (B)on account of which new value the debtor did not make an
otherwise unavoidable transfer to or for the benefit of such creditor;</p>
<p>(5)that creates a perfected security interest in inventory or a
receivable or the proceeds of either, except to the extent that the
aggregate of all such transfers to the transferee caused a reduction,
as of the date of the filing of the petition and to the prejudice of
other creditors holding unsecured claims, of any amount by which the
debt secured by such security interest exceeded the value of all
security interests for such debt on the later of— (A) (i)with respect
to a transfer to which subsection (b)(4)(A) of this section applies,
90 days before the date of the filing of the petition; or (ii)with
respect to a transfer to which subsection (b)(4)(B) of this section
applies, one year before the date of the filing of the petition; or
(B)the date on which new value was first given under the security
agreement creating such security interest;</p>
<p>(6)that is the fixing of a statutory lien that is not avoidable under
section 545 of this title;</p>
<p>(7)to the extent such transfer was a bona fide payment of a debt for a
domestic support obligation;</p>
<p>(8)if, in a case filed by an individual debtor whose debts are
primarily consumer debts, the aggregate value of all property that
constitutes or is affected by such transfer is less than $600; or</p>
<p>(9)if, in a case filed by a debtor whose debts are not primarily
consumer debts, the aggregate value of all property that constitutes
or is affected by such transfer is less than $5,000.<a href="https://www.law.cornell.edu/uscode/text/11/547" rel="nofollow noreferrer">2</a></p>
<p>(d)The trustee may avoid a transfer of an interest in property of the
debtor transferred to or for the benefit of a surety to secure
reimbursement of such a surety that furnished a bond or other
obligation to dissolve a judicial lien that would have been avoidable
by the trustee under subsection (b) of this section. The liability of
such surety under such bond or obligation shall be discharged to the
extent of the value of such property recovered by the trustee or the
amount paid to the trustee.</p>
<p>(e)(1)For the purposes of this section— (A)a transfer of real property
other than fixtures, but including the interest of a seller or
purchaser under a contract for the sale of real property, is perfected
when a bona fide purchaser of such property from the debtor against
whom applicable law permits such transfer to be perfected cannot
acquire an interest that is superior to the interest of the
transferee; and (B)a transfer of a fixture or property other than real
property is perfected when a creditor on a simple contract cannot
acquire a judicial lien that is superior to the interest of the
transferee.</p>
<p>(2)For the purposes of this section, except as provided in paragraph
(3) of this subsection, a transfer is made— (A)at the time such
transfer takes effect between the transferor and the transferee, if
such transfer is perfected at, or within 30 days after, such time,
except as provided in subsection (c)(3)(B); (B)at the time such
transfer is perfected, if such transfer is perfected after such 30
days; or (C)immediately before the date of the filing of the petition,
if such transfer is not perfected at the later of— (i)the commencement
of the case; or (ii)30 days after such transfer takes effect between
the transferor and the transferee.</p>
<p>(3)For the purposes of this section, a transfer is not made until the
debtor has acquired rights in the property transferred.</p>
<p>(f)For the purposes of this section, the debtor is presumed to have
been insolvent on and during the 90 days immediately preceding the
date of the filing of the petition.</p>
<p>(g)For the purposes of this section, the trustee has the burden of
proving the avoidability of a transfer under subsection (b) of this
section, and the creditor or party in interest against whom recovery
or avoidance is sought has the burden of proving the nonavoidability
of a transfer under subsection (c) of this section.</p>
<p>(h)The trustee may not avoid a transfer if such transfer was made as a
part of an alternative repayment schedule between the debtor and any
creditor of the debtor created by an approved nonprofit budget and
credit counseling agency.</p>
<p>(i)If the trustee avoids under subsection (b) a transfer made between
90 days and 1 year before the date of the filing of the petition, by
the debtor to an entity that is not an insider for the benefit of a
creditor that is an insider, such transfer shall be considered to be
avoided under this section only with respect to the creditor that is
an insider.</p>
<p>(j) (1)In this subsection: (A)The term “covered payment of rental
arrearages” means a payment of arrearages that— (i)is made in
connection with an agreement or arrangement— (I)between the debtor and
a lessor to defer or postpone the payment of rent and other periodic
charges under a lease of nonresidential real property; and (II)made or
entered into on or after March 13, 2020; (ii)does not exceed the
amount of rental and other periodic charges agreed to under the lease
of nonresidential real property described in clause (i)(I) before
March 13, 2020; and (iii)does not include fees, penalties, or interest
in an amount greater than the amount of fees, penalties, or interest—
(I)scheduled to be paid under the lease of nonresidential real
property described in clause (i)(I); or (II)that the debtor would owe
if the debtor had made every payment due under the lease of
nonresidential real property described in clause (i)(I) on time and in
full before March 13, 2020. (B)The term “covered payment of supplier
arrearages” means a payment of arrearages that— (i)is made in
connection with an agreement or arrangement— (I)between the debtor and
a supplier of goods or services to defer or postpone the payment of
amounts due under an executory contract for goods or services; and
(II)made or entered into on or after March 13, 2020; (ii)does not
exceed the amount due under the executory contract described in clause
(i)(I) before March 13, 2020; and (iii)does not include fees,
penalties, or interest in an amount greater than the amount of fees,
penalties, or interest— (I)scheduled to be paid under the executory
contract described in clause (i)(I); or (II)that the debtor would owe
if the debtor had made every payment due under the executory contract
described in clause (i)(I) on time and in full before March 13, 2020.
(2)The trustee may not avoid a transfer under this section for— (A)a
covered payment of rental arrearages; or (B)a covered payment of
supplier arrearages.</p>
</blockquote>

<h2>Possibly</h2>
<p>Clawbacks are required if the payment was preferential or if the company was insolvent when they were made.</p>
<p>A preferential payment is one made to a creditor when payments to other creditors in similar circumstances were denied. For example, assume that a company has a number of 30-day creditors that they habitually pay in 60 days. However, one creditor is particularly diligent in pursuing its debts and, as a result, is paid 30-35 days. Such a payment might be recovered as preferential. This is, of course, massively unfair but that’s how it is.</p>
<p>Once a company becomes insolvent - that is, unable to pay its debts as and when they fall due - it <strong>must</strong> cease trading immediately and apply for bankruptcy. Any transactions after that point are potentially revocable. Pinpointing that exact instant is tricky but it occurs when it should have been apparent to reasonably competent directors of the company.</p>
<p>In this particular case, there appears to have been massive fraud to disguise the fact that the company was insolvent. As a result it’s likely that insolvency happened a long time ago so many transactions may have occurred after that point. As the article points out, the clawback is limited to 90 days prior to filing so potentially all payments made within that period are fair game.</p>
