The future of Terraform Labs hinges on the upcoming Chapter 11 reorganization hearing

Terraform Labs (TFL), the bankrupt cryptocurrency company co-founded by Do Kwon, will face a Chapter 11 bankruptcy reorganization hearing on September 19.

The hearing will be crucial in shaping the company’s future as it navigates the aftermath of the dramatic collapse of Earth’s ecosystem in 2022, which led to major legal and financial challenges.

Fallout from TerraUSD and LUNA Collapse

The court’s ruling will essentially decide whether Terraform Labs can successfully restructure and potentially recover from bankruptcy or whether it will be forced to liquidate its assets and shut down operations permanently.

Terraform Labs is the company behind the Terra blockchain, known for its ill-fated algorithmic stablecoin TerraUSD (UST) and LUNA. On May 9, 2022, UST began to lose its peg to the US dollar, causing its price to plummet 90% in a week, while LUNA, once one of the top ten cryptocurrencies, it dropped to almost zero from a high of over $100.

The collapse wiped out nearly $45 billion in market value. Terraform Labs halted the Terra blockchain on May 13 as attempts to stabilize the system failed. The incident eroded investor confidence and led to increased regulatory scrutiny, eventually leading to a lawsuit filed by the US Securities and Exchange Commission (SEC) in February 2023.

The latest development comes exactly eight months after Terraform Labs filed for Chapter 11 bankruptcy in Delaware in January 2024, beginning a complicated legal process. Kwon also faced legal action, leading to a $4.5 billion settlement with the SEC in July, which banned both Terraform and the crypto industry co-founder.

The company is now looking to sell assets such as Pulsar Finance, Station, Enterprise and Warp.

3AC Liquidators Sue Terraform Labs

Last week, liquidator Three Arrows Capital (3AC) sued Terraform Labs for $1.3 billion, alleging market manipulation of Luna and UST, prompting the now-defunct hedge fund to invest long before the chips collapse. This lawsuit aims to recover funds for 3AC’s creditors following the hedge fund’s collapse.

3AC’s collapse followed shortly after the fall of Terra, prompting a court in the British Virgin Islands to appoint Teneo as liquidator to recover assets and pay creditors. The lawsuit against TerraForm Labs is one of several actions, along with claims against 3AC founders Su Zhu and Kyle Davies.

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