FTX Bankruptcy Estate Challenges $1.5 Billion Claim from Three Arrows Capital

The ongoing legal battle between the bankruptcy estate of FTX and the now-defunct hedge fund Three Arrows Capital (3AC) has escalated, with FTX pushing back against 3AC’s attempt to recover a $1.5 billion claim. FTX has labeled the claim as “illogical and baseless,” arguing that 3AC is trying to offset losses from its high-risk trading strategies by using funds owed to FTX creditors.

Dispute Over Account Balances and Liabilities

In a detailed 94-page objection filed on June 20 in the U.S. Bankruptcy Court in Delaware, FTX Recovery Trust attorneys requested that the judge disallow 3AC’s claim entirely. The dispute centers on the actual value of 3AC’s account balance with FTX at the time both companies collapsed in 2022.

3AC claims its account held nearly $1.6 billion in crypto assets, while FTX counters that the net value was significantly lower—approximately $284 million—after deducting $733 million in margin debt. According to FTX, 3AC has ignored its substantial liabilities and is unfairly seeking to shift its losses onto other creditors.

“FTX creditors should not be a backstop for 3AC’s failed trades,” the FTX estate emphasized in its objection.

Breakdown of Losses During Market Decline

Most of the $284 million balance reportedly vanished within two days in June 2022 as cryptocurrency prices plummeted. FTX outlined that $222 million was lost to market declines, while 3AC withdrew an additional $60 million itself. FTX stated it liquidated only $82 million of 3AC’s holdings, which was fully permissible under the terms of their agreement. This liquidation, according to FTX, was a necessary step to prevent the account from falling into a negative balance.

Inflated Claims and Disputed Calculations

3AC’s initial claim of $120 million in mid-2023 ballooned to $1.53 billion by November 2024. The hedge fund’s liquidators allege that FTX breached its fiduciary duties by delaying critical disclosures about the liquidations. While Chief Judge John Dorsey has previously ruled in favor of 3AC on certain discovery-related matters, the validity of the overall claim remains under scrutiny.

FTX strongly disputes 3AC’s calculations, stating that the hedge fund relied on inflated account balances and failed to account for its debts. According to FTX, the highest balance ever recorded in 3AC’s account was $1.02 billion—not $1.59 billion as claimed—and its liabilities amounted to $733 million rather than $1.3 billion.

FTX’s Position on Liquidations

FTX has argued that its liquidation of 3AC’s assets was not a seizure but a contractual action designed to convert volatile cryptocurrency holdings into U.S. dollars. This process, they assert, preserved the value of 3AC’s remaining assets instead of diminishing them.

If the court sides with FTX, 3AC’s claim could be denied entirely or reclassified as an unsecured claim. This would significantly reduce the hedge fund’s recovery amount, as unsecured creditors typically receive only a small portion of a bankruptcy estate’s payouts.

Upcoming Court Deadlines

The legal showdown is set to continue, with 3AC required to file its reply by July 11. A court hearing on the matter is scheduled for August 12, where the judge will weigh the arguments and potentially decide the fate of 3AC’s $1.5 billion claim.

This case highlights the complexities of cryptocurrency-related bankruptcies and the challenges of untangling financial disputes in a rapidly evolving industry. Investors and stakeholders are closely watching how the court will rule, as the outcome could set a precedent for future cases involving crypto firms and their creditors.

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