ConocoPhillips Dispute in MF Global Case Set for Hearing

ConocoPhillips Co. may learn from a U.S. district court judge in December whether it will escape the liquidation of commodity broker MF Global Inc. without losses suffered by other customers.

U.S. District Judge Katherine B. Forrest in Manhattan agreed yesterday with ConocoPhillips that a dispute over $205 million in letters of credit posted by the oil producer must be decided in her court, not by a bankruptcy judge. She told both sides to submit all briefs by Dec. 3 so she can hear oral arguments on Dec. 19.

ConocoPhillips, based in Houston, was one of nine MF Global customers allowed to post letters of credit rather than cash as margin for their trading accounts. James Giddens, the commodity brokerage’s liquidator, has said customers may face a $1.6 billion gap in those accounts.

Had ConocoPhillips posted cash, it would only be entitled to receive the same percentage in distributions as other customers. Because all of ConocoPhillips’s letters of credit expired after bankruptcy without being drawn, the company argued that they should be canceled, sparing it from losses.

Giddens has objected to ConocoPhillips’s claim, citing a U.S. Commodity Futures Trading Commission regulation that says “proceeds” of letters of credit must be treated the same as other forms of customer collateral, such as cash.

A victory by Giddens might eventually require ConocoPhillips to write a check to the trustee, Forrest said in her 19-page opinion. She didn’t say how she might rule.

CFTC Authority

Forrest said the dispute must be resolved in district court because it involves non-bankruptcy law, particularly the Commodity Exchange Act. The case also deals with the question of whether the CFTC exceeded its authority in regulating bank letters of credit, she said.

The brokerage and its parent company, MF Global Holdings Ltd., went into separate bankruptcies on Oct. 31. The parent is under control of a Chapter 11 trustee, while the broker is overseen by Giddens, who was selected by the Securities Investor Protection Corp.

Conoco’s motion to remove the claim dispute to district court is In re MF Global Inc., 12-cv-06014, U.S. District Court, Southern District of New York (Manhattan). The holding company’s Chapter 11 case is In re MF Global Holdings Ltd., 11-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The liquidation of the broker is In re MF Global Inc., 11-02790, in the same court.

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