Listen to the FTX bankruptcy court ruling re payout to an FTX customer on his claim (hearing of August 19, 2026)

According to the bankruptcy court's ruling in this podcast, which was docketed by the bankruptcy court on the record of the FTX bankruptcy case, an FTX customer/claimant brought a motion seeking reconsideration of the disallowance of his claim. His claim had been disallowed by the bankruptcy court because of complications with his submission of documents to satisfy Know Your Customer (KYC) requirements. These requirements typically require submission of documentation in order for claims to be allowed, in other words eligible for payout. Sometimes customers/claimants need to also submit signed Internal Revenue Service (IRS) tax forms.

This can be burdensome for U.S. based customers/claimants, and especially burdensome for customers/claimants of foreign companies that file for bankruptcy in the United States that did not go through a KYC process or fill out tax forms when they opened accounts.

People tend to think that, if their deposits and investments fail then they will be paid out in the ordinary course based on the information on file on apps through which they manage their accounts. Unfortunately this is not usually the case now typically. I am not sure but I think we would be pretty screwed if a bank or other institution holding deposit accounts failed - and I have applied to work for the FDIC because the government anticipates bank failure the FDIC will handle and I think I can help based on my bankruptcy experience.

But perhaps in the future, in bankruptcy cases and in bank failure cases outside of bankruptcy, there will be technological and other improvements such that depositors and other claimants need not go through a process at all to prove up their claims and be paid out.

For now, in bankruptcy cases, customers/claimants often find themselves either not submitting the KYC paperwork or trying to sell their claims to parties that are better able to cope with U.S. bankruptcy claims allowance/disallowance processes, including passing KYC requirements.

From the FTX ruling it's not clear what the alleged defect was with the KYC documentation submitted by the customer/claimant, but the ruling explains that the customer/claimant was concerned to receive a request for more information than he had submitted, through the mechanism for submitting the documentation. The claimant expressed to the court that he thought the request for information was possibly part of a PHISHing attempt (a cybersecurity data breach that can result in identity theft).

I am not clear what beyond a drivers license or other form of identification is needed to satisfy KYC in the FTX cases and whether the FTX customers/claimants had been KYC'd when opening accounts or thereafter.

And I think I heard the court explain in the ruling, but I am not sure, that 47,000 - forty seven thousand - customer claims have been disallowed on the same basis as the claim at issue before the court in the ruling. In other words the claims will not be paid out.

Can this possibly be correct? And how many FTX claims in total have been disallowed?

This is not a perfect analogy but practically speaking - Imagine a scenario where, instead of plaintiffs bringing class actions for fraud perpetrated on them leading up to a bankruptcy filing such as FTX's, the defendant companies that committed the fraud against the customers, whose CEO is jailed for fraud, are protected from prosecution/litigation for fraud and are bringing class actions defensively to avoid paying out customers on claims that would not exist but for the fraud and collapse of FTX.

For some context on claims allowance/disallowance processes in other bankruptcy cases, before FTX filed for bankruptcy relief in 2022... Twenty years ago or so, it became a practice in large bankruptcy cases that were not cases that followed frauds/fiascos like FTX, for the bankrupt companies' lawyers, to bring so called omnibus claims objections. The omnibus claims objection procedure is part of the claims allowance process, for large bankruptcy cases and enables bankrupt companies to more efficiently challenge claims on a common basis when there is a legitimate basis for a challenge affecting many claims.

Generally speaking, even outside of bankruptcies following frauds, the claims allowance process reverses the bankruptcy rules that creditor claims (including customer claims) are presumptively valid and allowable. So the process is backwards substantively.

And bankrupt companies can challenge claims on the basis of vague objections such as books and records objections, in other words challenging that the claim as filed by the customer/creditor is valid, on the basis the claim doesn't match the bankrupt companies' records. This can also be done with investor claims, which are a type of customer/creditor claim asserted in U.S. bankruptcy cases.

Typically, If the creditor does nothing in response to an omnibus claims objection concerning the creditor claim (and that of many other customers) then the claim will be disallowed, by default. The bankruptcy court will treat the objection to the claim as unopposed and enter an order disallowing/expunging/excluding the claims from payment in the bankruptcy. The claims may be listed on a schedule with many other claims in the same situation - claims that will not be paid out.

This is the default scenario, where a creditor who has timely notice of a claims objection, might reasonably assume creditors with larger claims will come forward. But the creditor doesn't consider those larger claimants may be dealing with the bankrupt company via arriving at one off deals reflected in stipulations and orders presented to the court, concerning the extent to which claims will be allowed and paid out.

If the creditor does not default - and timely or untimely responds to the omnibus claims objection - which will typically necessitate hiring counsel, then the hearings on the customer claim are likely to be adjourned because the bankrupt company controls the agenda for hearings presented to the court. In other words, the claimant is not going to win and have a claim eligible for payout, even if the claimant responds to the claim objection.

If the bankrupt company doesn't want to confront an issue that can be raised by other customers, which is a recurring scenario in bankruptcy cases, then the bankrupt company can adjourn hearings on a claim for months.

In the Lehman Brothers bankruptcy case in the United States, filed in 2018, I represented foreign nationals who entrusted Lehman Brothers investment vehicles with funds before Lehman Brothers collapsed, then these individuals had to deal with the claims allowance process for customers/creditors/investors trying to collect on Lehman Brothers guarantees in the U.S.

Few if any people would have invested in the Lehman Brothers feeder funds soliciting money overseas, without the Lehman Brothers guarantee probably, but when it came time to pay out on the Lehman Brothers guarantees - Lehman Brothers did not pay out in its chapter 11 bankruptcy proceedings, filed in New York. Lehman Brothers brought waves of omnibus claims objections challenging claims, hundreds of them.

The bankruptcy judge presiding over the Lehman Brothers case at the time, who was the judge who had dealt with the nightmare of the case since the case filing in 2008, ruled that objections of one claimant would apply to all claimants, in effect giving us class action type status, recognizing the common issues (being defrauded into investing into a Lehman Brothers feeder fund with specious documentation causing it to be unclear what level of priority the claims should receive in an unthinkable bankruptcy scenario where Lehman Brothers, which had guaranteed payout to investors itself bankrupted then challenged the payout obligations).

After the bankruptcy judge presiding over the Lehman Brothers case helped the parties procedurally and substantively with instructions for how the trial/hearing on the claims would proceed, the lawyers for the bankrupt company caused an adjournment of the hearing on our claims "sine die" - which means an adjournment of the trial on the claims without date/indefinitely.

The bankrupt companies kept the claims off the bankruptcy court's agenda while the judge who wanted a trial on the merits was the bankruptcy judge presiding over the Lehman Brothers bankruptcy.

After the judge retired from the bench and another judge took over the case, Lehman Brothers found a way to avoid trial on the claims again and make sure they wouldn't be paid. I remember the substitute judge, who has since retired, telling the Lehman Brothers' lawyers, who she saw in court repeatedly over the course of the year, how great it was to work with them and she wished happy holidays as it was year end. I have the transcript somewhere and look at it every few years, missing appearing before the judge who initially presided over the Lehman Brothers case then retired into private practice where he does great dispute resolution work including mediation.

The omnibus claims objection process for disallowing claims was extraordinary in the Lehman Brothers case which was in New York, but the case was abnormally large with a lot of foreign investment and resulting bankruptcy claims.

Over time, the disallowance process via omnibus claims objections has become normal in some cases in Delaware like FTX and, in that context, perpetuates bankrupt companies' representations their bankruptcy plans are paying creditors decently high percentages on their claims, when really the percentages would be low if the claims in the claims pool were allowed and paid out.

I do not know the circumstances of the claimant in FTX whose rights were impacted by the FTX ruling in this episode of the podcast, or how much crypto or money he lost, or how much he stands to gain if his claim is allowed, or whether he transferred his claim or continues to hold. I commend him on coming forward to a court of justice to defend his rights. He can proceed further and appeal if he thinks it worthwhile or do what the other claimants do and deal with the loss, unfair as it seems to be following the fraudulent collapse of FTX and good faith customer attempts to comply with the claims process including KYC requirements.

An interesting question is can the many other FTX claimants whose claims have been disallowed due to alleged failure to satisfy KYC requirements appeal join in an appeal or will they too hear that their objections are untimely and will not be paid out?

Thoughts on how FTX claimants can be helped are welcome on the YouTube channel accompanying this audio stream, when I post the FTX hearing there later today.

www.youtube.com/@the-comi