The FTX estate is pushing back hard against a $1.5bn claim filed by collapsed crypto hedge fund Three Arrows Capital (3AC), calling it a “fantasy” built on misrepresented account balances and reckless leverage, according to a report by DLNews.

In a 94-page filing submitted to the Delaware bankruptcy court on Friday, the FTX Recovery Trust urged the judge to disallow 3AC’s claim entirely, arguing it is “unreasonable and unsupportable.” The objection outlines how 3AC’s alleged holdings on FTX – worth $1.6bn, according to the fund – were in fact a heavily margined $284m position at the time of its mid-2022 implosion.

FTX contends the hedge fund piled on over $733m in margin debt and failed to respond to margin calls as markets turned. “FTX creditors should not be a backstop for 3AC’s failed trades,” the filing states, accusing the fund of trying to reclassify a leveraged and deteriorating book as creditor-worthy value.

The objection highlights how most of the account’s value was wiped out over just two days, with $222m lost to collapsing token prices and another $60m withdrawn by 3AC. FTX says it only stepped in to liquidate $82m in assets to prevent a negative balance – a move it claims was contractually permitted.

The legal battle pits two of crypto’s most prominent failures against one another, with billions in potential recoveries at stake for their respective creditors. If FTX prevails, 3AC’s claim could be dismissed entirely or downgraded to an unsecured claim – meaning it would likely recover only pennies on the dollar.

A court hearing is scheduled for 2 August.