Sid DeLong on FTX Bankruptcy and Asset Forfeiture
CLASH OF THE TITANS: FEDERAL ASSET FORFEITURE VS. FTX BANKRUPTCY TRUSTEE
Sidney W. DeLong
This story may remind the older readers of classic movies involving Godzilla vs. Mothra or childhood discussions about whether Batman could beat Superman. In one corner, the Justice Department with all the weight of federal criminal law behind it. In the other corner, the federal bankruptcy trustee for FTX, representing the unpaid creditors of an $8 billion fraud. In the middle is former FTX officer Nishad Singh.
On reflection forget Godzilla: The better metaphor is a lion and a hyena squaring off over the carcass of a wildebeest on the savannah. Singh is reported (through Bloomberg and The Seattle Times) to have forfeited a multi-million dollar home to the government as part of a plea bargain on charges including federal wire fraud. The federal government and the trustee seem likely to square off over the property. Like the wildebeest, Singh is probably indifferent as to which one prevails.
Civil asset forfeiture has long been a controversial weapon used to swell public coffers at the expense of criminal defendants and their sometimes-innocent families and friends. It is available in a civil action brought by the government against the owner of the property involved. Criminal asset forfeiture is available in a criminal proceeding as part of the sentence imposed upon conviction. Both kinds of forfeiture enrich the government at the expense of the owners of the forfeited property. The government may or may not elect to use the forfeited funds to compensate the victims of the fraud.
But what if there are other claims to the forfeited property? The Singh case reminds us that asset forfeiture can also infringe on the rights of unpaid creditors of the defendant.
Inspired in part by Squid Game
A bankruptcy trustee for FTX might have several claims against the property of its ex-officers such as Singh, including claims based on theories of negligence, misappropriation, fraudulent transfers, etc. The trustee represents the interests of the unsecured creditors of FTX, which includes all the innocent victims of its fraud. Any diminution of Singh’s assets reduces their potential ultimate recovery and increases their uncompensated loss.
The government’s asset forfeiture claim is, by contrast, not designed for compensation but as punishment. The report suggests that the government sees the forfeiture as a benefit to the victims of the fraud. If it simply turns the forfeited property over to the trustee, no problem results.
If it instead asserts an interest in the forfeited funds on behalf of the federal government, the trustee of FTX is likely to challenge the reported forfeiture. The results of the challenge will depend on bankruptcy law whose analysis is beyond the scope of this post. Such a case will likely raise issues involving priorities of distribution, preferential transfers, fraudulent transfers, and constructive trust theory.
Stay tuned for more developments.