A US bankruptcy judge has ordered the crypto hedge fund Three Arrows Capital (3AC) and crypto lender BlockFi to enter into mediation to resolve a $284 million claim. The mediation process, set to begin in January, will be facilitated by a neutral third party and aims to reach a mutually agreeable settlement. If mediation fails, the case will proceed to trial in February 2024.
The dispute stems from “preferential payments” made by 3AC to BlockFi before declaring bankruptcy. Preferential payments are payments made to creditors ahead of a bankruptcy filing, allowing them to collect more than they would have received in a bankruptcy proceeding.
In a confidential report, 3AC’s liquidator expressed intentions to reclaim $1.2 billion from Digital Currency Group (DCG) and BlockFi. The claim against BlockFi specifically amounts to $284 million. BlockFi’s bankruptcy estate has countered the claim by alleging fraudulent activities by the hedge fund.
The Mediation and Potential Resolution
If the mediation process fails, a two-day hearing is scheduled for February 5, 2024, during which the parties will determine the precise amount of funds to be returned. The judge presiding over the proceedings, Judge Kaplan, expressed his commitment to swift resolution, recognizing the significant financial implications of the case. He emphasized the need to finalize the matter quickly to support the desperate creditors involved.
BlockFi and FTX both filed for Chapter 11 bankruptcy in late November. BlockFi is contesting efforts by FTX and Three Arrows Capital to reclaim billions of dollars from transactions made prior to their bankruptcy filings. BlockFi argues that it is being unfairly targeted and has revealed losses exceeding $1 billion due to alleged fraud at FTX.
Despite opposition from FTX’s legal team, the judge recently approved a partial repayment plan for BlockFi’s creditors. FTX lawyers condemned the plan as unfair and detrimental to their creditors’ interests.
Allegations and Bankruptcy Protection
In a separate filing, BlockFi accused Three Arrows Capital (3AC) of using fraudulent means to borrow money. BlockFi asserts that Three Arrows owes them for deficiencies resulting from a margin call. 3AC, on the other hand, claims that BlockFi owes them over $220 million, raising concerns about violating bankruptcy protection regulations.
Three Arrows Capital has invoked a bankruptcy pause under Chapter 15 protection to safeguard its assets in the United States, arguing that BlockFi’s attempts to reduce their claims could infringe upon the protection granted by Chapter 15.
