This post is authored by Casey Watters and Akshaya Kamalnath
Headlines about FTX forcing charities to return donations have created confusion and controversy. How could the courts force a charity to give back a donation? On its face, this seems unfair but the issue is more complicated and comes down to the issue that it was not the donor’s money to give away in the first place.
FTX and the Charity Conflict
Charity in the corporate world is always complicated. We want companies to be charitable and contribute positively to the community but at the same time there is a conflict of interest. Company executives manage the company for the benefit of shareholders. In spite of the fact that the idea of a shareholder may conjure the image of a wealthy billionaire with a top hat swimming in a pool of gold coins (aka Scrooge McDuck), many are retirees with modest investments and pension funds paying the retirements of people who contributed to the funds their entire lives. If the executives give away company money, they will receive positive press and be invited to various social events. However, the cost of these donations is passed to the shareholders (and not only the wealthy ones). This conflict of interest is mediated by the fact that the shareholders can fire the executives. However, when a company owes creditors money, the creditors cannot fire the executives. To prevent harm from company executives giving away money that should belong to creditors, the US Bankruptcy Code allows anything given away or sold for less than fair market value during a specified time before a bankruptcy filing to be reclaimed by the company and used to pay back creditors.
In the case of FTX, the exact numbers are as of yet unknown, but it appears customers (who are now creditors) are owed billions of dollars. Therefore, FTX and its executives did not truly donate to these charities but instead gave customer money away. Whether or not it is fair, this places the donated funds at risk of being “clawed back” to help pay customers.
Political Donations and Subsequent Transferees
For ordinary individuals, donating money to a charity in someone else’s name is a way to honour them. For politicians, donating campaign contributions to a charity is a way to distance themselves from the original donor. In the wake of the FTX collapse and fraud charges against its CEO, politicians have tried to distance themselves from FTX and its executives including by donating the money to charity against the warnings of the new CEO, an experienced insolvency professional who is taking the company through Chapter 11 bankruptcy. Seeing as these charities received the donations from campaign funds and not from FTX, are the funds safe? That is a more complicated question.
Political donations made within the clawback period (and note that the Chapter 11 Bankruptcy filing was just after the 2022 election) are subject to clawback under the Bankruptcy Code and 11 U.S.C. s 550 allows clawback of property even if it has been transferred to a subsequent party. (There are similar clawback provisions in the relevant part of the Corporations Act, 2001 in Australia as well.) One important question that needs to be asked then is whether the amounts donated to charity from politicians are the property that came for FTX or merely a separate donation of the same monetary value. If a friend gave us five dollars and a month later we gave that to someone else, no one would claim that what we were giving was the first friend’s money. These would be two independent gifts. On the other hand, if we were given a unique item or very large sum of money, it would likely be viewed as the same. Once the donated funds were mixed into the campaign account, was it still possible to say a subsequent gift involved the same funds? This is a question that will need to be answered by the courts. There is a body of law covering tracing; however, it may be distinguishable from the current case where a mixture of good faith political and charitable donations were made. As a matter of policy, when selecting between a charity that did not know the donation was intended to come from FTX funds and a donor who did know, the courts should arguably not require repayment from the innocent charity. If, however, the charity knew that the funds were intended as being from FTX and rightfully belong to harmed FTX customers, an argument could be made for clawback from the charity. The good news for the charities is that the obligation is on the trustee (or, in this case, FTX through its new CEO) to prove the source of funds. In the end, there is no ideal answer as the harm done to FTX customers ripples through charities trying to make the world a better place and politicians who did nothing wrong by accepting donations from a company they reasonably believed to be solvent. The important lesson in this is that if you want to distance yourself from a gift, give it back to whom it belongs. Charity is important, but debtors must be just before they are generous, and so must recipients of other people’s money.
Nothing in this commentary should be taken as legal advice. If you are impacted by the FTX insolvency, you should seek legal advice from a qualified attorney.
 Boston Trading Group, Inc. v. Burnazos, 835 F.2d 1504, 1508 (1st Cit. 1987)