FTX’d: Conflicting Public and Private Interests in Chapter 11

Chapter 11 of the Bankruptcy Code is often justified by vague assertions that reorganizing troubled companies is in the “public interest.” There has, however, been surprisingly little effort to consider seriously what this public interest is, how it should be operationalized, or who should pay for it. Based on a case study of the controversial bankruptcy of crypto complex FTX, this Article develops a three-part typology of public interests at stake in chapter 11 and shows how they can conflict with one another and with private interests: (1) the paramount public interest in the integrity of the judicial process; (2) bankruptcy-specific public interests in maximizing value through efficient, consolidated proceedings; and (3) “other” public interests, such as the prosecution and defense of serious crimes. We place FTX’s counsel, Sullivan & Cromwell (S&C), at the center of this triptych. We present evidence indicating that S&C had undisclosed potential conflicts of interest due to apparent errors, omissions, and deceptions in their work for the company and its founder, Sam Bankman-Fried, before, at, and during the bankruptcy, thereby undermining the first-order public interest in procedural integrity. S&C’s role as debtor’s counsel has cast a troubling shadow over puzzling and costly decisions in the case, thereby undermining a second, bankruptcy-specific form of the public interest: maximizing an estate’s value. S&C often justified its actions by reference to the third, “other” facet of the public interest. Namely, S&C touted that it supported the prosecution of disfavored insiders such as Bankman-Fried. But that pricey task—for which S&C billed millions of dollars—may have distorted the prosecutions without producing observable economic benefit to the bankruptcy estate. FTX is a cautionary tale about the power that lawyers have to frame, control, and profit from claims about the public interest in chapter 11. An examiner appointed late in the case largely exonerated S&C, although he engaged little of the evidence we present. This is not surprising because S&C’s resistance to that intervention left a narrow scope and little time for his investigation. We situate our findings in a nascent body of literature exploring the public interest in bankruptcy. We suggest that the experience with S&C in FTX may reflect larger patterns in reorganization reminiscent of historical concerns about distorted incentives in restructuring processes. To ameliorate these concerns, we offer guidance to improve the functioning of the principal custodians of the public interest in chapter 11. Courts should more carefully police prebankruptcy connections of estate professionals and should use preliminary examinations more frequently. We further believe that the United States Trustee should have greater independence from other government actors so it can fulfill its watchdog mandate without compromise.