A consortium of FTX creditors, spearheaded by Sunil Kavuri, has lodged a formal objection against FTX's proposed bankruptcy reorganization plan, raising several pertinent issues, including potential taxation implications that could adversely affect the creditors' interests.

Among the primary grievances outlined in the objection is the contention that the reorganization plan, if implemented, would trigger a taxable event for the creditors if they were to be reimbursed in cash. To mitigate this concern, the creditors advocate for the possibility of receiving reimbursement in the form of assets, thereby averting the tax liabilities associated with cash settlements.

Additionally, the creditors express opposition to the allocation of funds to the debtors—the FTX estate—citing Chapter 11 bankruptcy laws. They assert that the proposed distribution of funds to the debtors amounts to the dispersal of allegedly misappropriated assets, a claim that further complicates the resolution of the bankruptcy proceedings.

These objections mark the culmination of longstanding tensions between the FTX bankruptcy estate, former customers, and creditors. In 2023, the Official Committee of Unsecured Creditors (UCC) representing FTX creditors voiced disappointment with the initial reorganization plan, citing a lack of consultation during its drafting phase.

Moreover, the UCC raised concerns about the provisions outlined in the plan, cautioning that they could prolong the already protracted bankruptcy process, thereby increasing both time and cost burdens on the settlement efforts.

The rift between former FTX customers and creditors reached a boiling point in January 2024, as demands for reimbursement at current market prices intensified. This demand contrasts with the valuation of assets during the collapse of FTX in 2022, amidst the depths of the crypto bear market, presenting a fundamental disagreement between stakeholders regarding property rights and settlement terms.

Further exacerbating tensions, FTX creditors initiated legal action against Sullivan & Cromwell, the law firm overseeing the FTX bankruptcy, in February 2024. Allegations were levied against the firm, accusing it of complicity in the FTX fraud and failing to address the exchange's precarious financial situation prior to its collapse.

However, an independent investigation subsequently absolved Sullivan & Cromwell of any wrongdoing, affirming the firm's lack of prior knowledge regarding the fraudulent activities at FTX. Despite these findings, discord persists between FTX creditors and the bankruptcy estate, underscoring the complexities inherent in resolving the aftermath of the exchange's demise.