In a recent decision in the bankruptcy case of FTX Trading, Case No. 22-11068 (JTD), the U.S. Bankruptcy Court for the District of Delaware permitted the amendment of a timely filed proof of claim after the bar date even though the amendment increased the original proof of claim by more than 12 times its face value.

In this case, the claimant, the duly authorized liquidators (the liquidators) of a British Virgin Islands company, Three Arrows Capital Ltd. (Three Arrows), filed an initial proof of claim against the FTX debtors and their bankruptcy estate in the amount of $120 million (the original claim). More than a year later, the liquidators moved to amend the original claim (the motion to amend) to increase the amount of the claim to $1.53 billion (the amended claim). The motion to amend was highly contested by the FTX debtors, who not only objected to the motion to amend but also to the original claim itself. After extensive briefing and argument, the Bankruptcy Court overruled the FTX debtors’ objections and granted the motion to amend.

In support of its decision, the Bankruptcy Court highlighted the unusual facts and circumstances of the case. For example, when Three Arrows’ liquidation proceeding was commenced and the liquidators were appointed, there were no corporate records for them to rely on. As noted by the Bankruptcy Court, “the liquidators were initially denied access to Three Arrows’ office and once they gained access (which required the help of the court in Singapore), they discovered that hard drives had been removed from desktop computers, laptops were missing, and very few hard copy records existed. Essentially the liquidators were left with little more than a two-page list of assets that the company still held.” The liquidators then tried to obtain information from the founders of Three Arrows (the founders), but these efforts were also futile. Again, as noted by the Bankruptcy Court, the “lack of cooperation from the founders forced the liquidators to proceed through the court system in multiple countries to obtain orders compelling cooperation. Accordingly, the liquidators needed to recreate the books and records of Three Arrows through discovery with third parties across the globe.”

As a result of their discovery efforts, the liquidators eventually discovered that Three Arrows had accounts with FTX. The liquidators tried to work with FTX to obtain additional records to determine the extent of the relationship between Three Arrows and FTX. However, the liquidators were unsuccessful, and when FTX filed for bankruptcy, the liquidators’ access to the FTX platform had been revoked.

After the commencement of the FTX bankruptcy case, the liquidators retained the former fund administrator for Three Arrows, Ascent Fund Services (Singapore) Pte, Ltd. (Ascent), to provided them with an overview of the finances of Three Arrows for the period from February 2022 through June 2022. On April 24, 2023, Ascent provided the liquidators with documentation which suggested that Three Arrows may have owed $120 million to FTX as of May 31, 2022. However, since FTX did not file a claim against Three Arrows in its liquidation proceeding, the liquidators concluded that Three Arrows must have repaid the loan to FTX prior to the commencement of the liquidation proceeding. As a result, the lLiquidators filed the original proof of claim in the FTX bankruptcy case on June 30, 2023, which was the applicable bar date in the FTX bankruptcy case.

In the original proof of claim, the Liquidators reserved the right to file additional claims against the FTX debtors “based on conduct, acts, omissions, and transactions between and among Three Arrows, the debtors and the debtors’ affiliates” with such additional claims remaining “subject to the liquidators’ ongoing evaluation and investigation.” The original proof of claim expressly states that the liquidators “hereby preserve such claims and reserve all rights with respect thereto.”

Thereafter, the liquidators and the FTX debtors engaged in discovery that was both protracted and litigious. During discovery, the liquidators learned that as of June 12, 2022, Three Arrows had approximately $1.53 billion worth of assets on the FTX platform and that between the close of business on June 12, 2022, and the close of business on June 14, 2022, nearly all of those assets were liquidated. In light of this discovery, on Nov. 6, 2024, more than one year following the bar date in the FTX cases, Three Arrows filed the motion to amend along with a copy of its amended proof of claim.

In the amended proof of claim, the liquidators asserted two categories of claim: preference claims held by the Liquidators on behalf of Three Arrows under the law of the British Virgin Islands (BVI); and claims turnover, conversion, unjust enrichment, breach of trust/fiduciary duty, breach of contract, proprietary restitutionary, and undervalue transaction claims held by the liquidators on behalf of Three Arrows under BVI, U.S. Bahamian and English law. As noted above, the FTX debtors objected to the motion to amend and to the original proof of claim.

In its decision, the Bankruptcy Court noted that “the bar date is an important deadline in bankruptcy cases” and absent a claim being filed by the bar date, the claimant is incapable of recovering from the debtor or the reorganized debtor. The Bankruptcy Court also noted that “amendments to proofs of claim should be freely allowed, but ‘once the deadline to file claims has passed, an amendment to a claim filed post bar-date must be scrutinized to assure that is not an attempt to file a new claim,’” (quoting Plains Marketing v. Bank of America (In re Semcrude), 443 B.R. 472, 477 (Bankr. D.Del. 2011) (quoting Hatzel & Buehler v. Station Plaza Association, 150 B.R. 560, 562 (Bankr. D. Del. 1993))). Recognizing that courts typically apply a two-pronged inquiry when considering whether to allow post-bar-date amendments to proofs of claim, the Bankruptcy Court needed to: first determine whether there was “a timely assertion of a similar claim or demand evidencing an intention to hold the estate liable;” and assuming the first prong is satisfied, it needed to determine whether it would be equitable to allow the amendment.” Id. at pp. 8-9.

Applying the first prong of the test, the Bankruptcy Court analyzed whether the original proof of claim provided the FTX debtors with reasonable notice of the amended proof of claim. The debtors asserted that the amended proof of claim did not sufficiently relate back to the original proof of claim and that the two claims were fundamentally different.

However, the Bankruptcy Court disagreed. While it recognized that the dollar value asserted in the amended proof of claim is much larger than that of the original proof of claim, the Bankruptcy Court found that “the facts and circumstances that form the basis for the claims are essentially unchanged.” The Bankruptcy Court noted that the claims in both the original proof of claim and the amended proof of claim arose out of the same event, namely, the liquidation of Three Arrows’ accounts on the FTX platform between June 12, 2022, and June 14, 2022.

In addressing the huge discrepancy between the dollar amount asserted in the original proof of claim and the amended proof of claim, the Bankruptcy Court opined that the description of the facts contained in the original proof of claim “was based on the limited information that the Liquidators had available to them at the time.” In addition, the Bankruptcy Court noted the significant difficulties the liquidators had in obtaining Three Arrows’ books and records and the fact that the FTX debtors had all the requisite information at least a year before the amended proof of claim was filed but failed to share that information with the Liquidators despite their request. Indeed, the Bankruptcy Court noted that even the limited description set forth in the original proof of claim regarding the nature and extent of the original proof of claim “prompted the debtors to evaluate the full scope of the relationship between [Three Arrows] and FTX” and, as such, demonstrated that the original proof of claim “served its intended purpose.” As such, the Bankruptcy Court held that the first prong was satisfied, a decision which was bolstered by fact that the debtors essentially withheld producing certain documentation which would have enabled the liquidators to file the amended proof of claim much earlier.

Applying the second prong of the test, consideration of the equities, the Bankruptcy Court found that it would not be inequitable to permit the amended proof of claim to be filed. In addressing this issue, the Bankruptcy Court rejected the debtors’ arguments that the amended proof of claim “would impose significant prejudice on the debtors,” and that their negotiated plan of reorganization could be disrupted given significant size of the amended proof of claim.

While the Bankruptcy Court noted that “these arguments may be sound in theory,” it found that the debtors failed to put forth any evidence to support them. Noting that the test is prejudice, the Bankruptcy Court opined that in order to show prejudice, the “nonmoving party must do more than merely claim prejudice; it must show that it was unfairly disadvantaged or deprived of the opportunity to present facts or evidence which it would have offered had the ... amendments been timely.” (quoting Plains Marketing v. Bank of America (In re Semcrude), 443 B.R. 472, 481 (Bankr. D. Del. 2011)). The Bankruptcy Court also stressed that the evidence presented to it demonstrated that the liquidators were “diligent” in trying to obtain the requisite information but that “the debtors repeatedly delayed giving it to them.” As a result, the Bankruptcy Court found that the “balance of equities” weighed in favor of allowing the amended proof of claim and, as such, the court denied the debtors’ objections thereto.

Although the facts and circumstances relied upon by the Bankruptcy Court in granting the motion to amend are unique and case specific, the decision serves as a valuable reminder for practitioners on how a bankruptcy court, as a court of equity, will not condone deliberate or evasive practices, and that such practices may have a prejudicial effect on what ultimately might otherwise be legitimate concerns to post bar date claim amendments. This decision also underscores the premise that bankruptcy courts may look beyond rigid procedural rules when circumstances justify it especially when issues of “fair play” (or lack thereof) are present.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.