UNITED STATES DISTRICT COURT 

SOUTHERN DISTRICT OF NEW YORK

In re:

MF GLOBAL INC.,

Debtor.

Bankruptcy Case No. 11-2790 (MG)

(SIPA proceeding)

MEMORANDUM OF LAW IN SUPPORT OF CONOCOPHILLIPS’

MOTION TO WITHDRAW THE REFERENCE WITH RESPECT TO

THE TRUSTEE’S MOTION TO CONFIRM HIS TREATMENT OF

LETTERS OF CREDIT PROVIDED BY CONOCOPHILLIPS

August 3, 2012

WACHTELL, LIPTON, ROSEN & KATZ

51 West 52nd Street

New York, New York 10019

(212) 403-1000

CADWALADER, WICKERSHAM & TAFT LLP

700 Sixth Street, N.W.

Washington, D.C. 20001

(202) 862-2200

Attorneys for ConocoPhillips Company and

ConocoPhillips Canada Marketing & 

Trading ULC

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 1 of 30
-iTABLE OF CONTENTS

Page

PRELIMINARY STATEMENT .....................................................................................................1

BACKGROUND .............................................................................................................................5

A. ConocoPhillips Company and MF Global...............................................................5

B. ConocoPhillips Canada and MF Global ..................................................................6

C. The expiration of the foreign letters of credit ..........................................................7

D. The parties’ interim agreement ................................................................................7

E. The Trustee’s determination of ConocoPhillips’ claims .........................................8

F. The Trustee’s motion to confirm .............................................................................9

ARGUMENT...................................................................................................................................9

I. WITHDRAWAL OF THE REFERENCE IS MANDATORY WHEN A 

PROCEEDING REQUIRES SIGNIFICANT INTERPRETATION OF 

FEDERAL LAW OTHER THAN THE BANKRUPTCY CODE. .....................................9

II. WITHDRAWAL OF THE REFERENCE IS REQUIRED HERE TO 

ADDRESS NUMEROUS NOVEL ISSUES OF FEDERAL NONBANKRUPTCY LAW. .....................................................................................................12

A. Withdrawal of the reference is required in light of the Trustee’s 

unprecedented reliance on CFTC Rule 190.08(a) and related 

commentary............................................................................................................13

B. Withdrawal of the reference is required to resolve the direct

conflict between the Trustee’s interpretation of CFTC Rule 

190.08(a) and amendments to the Commodity Exchange Act that 

prohibit the CFTC from regulating letters of credit...............................................15

C. Withdrawal of the reference is required to address substantial 

preemption issues raised by the Trustee’s motion. ................................................17

D. Withdrawal of the reference is required to resolve conflicts 

between the Trustee’s interpretation of CFTC Rule 190.08(a) and 

provisions of the Bankruptcy Code. ......................................................................19

1. Section 541(a)............................................................................................19

2. Section 766(f).............................................................................................21

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-iiE. Withdrawal of the reference is required to address the Trustee’s 

novel theory that he is entitled to the value of letters of credit that 

he permitted to expire. ...........................................................................................22

CONCLUSION..............................................................................................................................23

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 3 of 30
-iiiTABLE OF AUTHORITIES

Page

Cases

Am. Freight Sys., Inc. v. ICC (In re Am. Freight Sys., Inc.),

150 B.R. 790 (D. Kan. 1993).................................................................................................... 17

Bear, Stearns Sec. Corp. v. Gredd,

2001 WL 840187 (S.D.N.Y. July 25, 2001)............................................................ 10-11, 15, 21

Brown v. Dellinger (In re Brown),

734 F.2d 119 (2d Cir. 1984) ..................................................................................................... 20

Chemtura Corp. v. United States,

2010 WL 1379752 (S.D.N.Y. Mar. 26, 2010).......................................................................... 10

Christensen v. Harris Cnty.,

529 U.S. 576 (2000).................................................................................................................. 19

City of New York v. Exxon Corp.,

932 F.2d 1020 (2d Cir. 1991) ..................................................................................................... 9

Cuomo v. Clearing House Ass’n,

557 U.S. 519 (2009).................................................................................................................. 16

Drake v. Lab. Corp. of Am. Holdings,

458 F.3d 48 (2d Cir. 2006) ....................................................................................................... 16

Enron Corp. v. J.P. Morgan Sec., Inc. (In re Enron Corp.),

388 B.R. 131 (S.D.N.Y. 2008).................................................................................................. 10

Enron Power Mktg., Inc. v. Cal. Power Exch. Corp. (In re Enron Corp.),

2004 WL 2711101 (S.D.N.Y. Nov. 23, 2004).................................................................... 10, 17

Farmer v. Crocker Nat’l Bank (In re Swift Aire Lines, Inc.),

30 B.R. 490 (B.A.P. 9th Cir. 1983) ..................................................................................... 20-21

FDA v. Brown & Williamson Tobacco Corp.,

529 U.S. 120 (2000).................................................................................................................. 16

Fed. Mar. Comm’n v. Seatrain Lines, Inc.,

411 U.S. 726 (1973).................................................................................................................. 16

Grede v. Fortis Clearing Americas LLC,

2009 WL 3518159 (N.D. Ill. Oct. 28, 2009) ............................................................................ 11

Ground Air Transfer, Inc. v. Westates Airlines, Inc.,

899 F.2d 1269 (1st Cir. 1990)................................................................................................... 13

In re Dana Corp.,

379 B.R. 449 (S.D.N.Y. 2007)............................................................................................ 10, 21

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 4 of 30
-ivIn re Policy Realty Corp.,

242 B.R. 121 (S.D.N.Y. 1999),

aff’d, 213 F.3d 626, 2000 WL 534265 (2d Cir. 2000).............................................................. 23

Itek Corp. v. First Nat’l Bank of Bos., 

730 F.2d 19 (1st Cir. 1984)....................................................................................................... 13

Janus Capital Grp., Inc. v. First Derivative Traders,

131 S. Ct. 2296 (2011).............................................................................................................. 19

Medtronic, Inc. v. Lohr,

518 U.S. 470 (1996).................................................................................................................. 17

N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co.,

514 U.S. 645 (1995).................................................................................................................. 18

Old Carco LLC v. Kroger (In re Old Carco LLC),

442 B.R. 196 (S.D.N.Y. 2010).................................................................................................. 19

Picard v. Avellino,

469 B.R. 408 (S.D.N.Y. 2012).................................................................................................. 12

Picard v. HSBC Bank PLC,

450 B.R. 406 (S.D.N.Y. 2011).................................................................................................. 12

Picard v. JPMorgan Chase & Co. (In re Bernard L. Madoff),

454 B.R. 307 (S.D.N.Y. 2011)....................................................................................... 10, 11-12

Ramos v. Baldor Specialty Foods, Inc.,

-- F.3d --, 2012 WL 2849656 (2d Cir. July 12, 2012) .............................................................. 19

Rockwell Int’l Sys., Inc. v. Citibank, N.A.,

719 F.2d 583 (2d Cir. 1983) ..................................................................................................... 13

Shugrue v. Air Line Pilots Ass’n, Int’l (In re Ionosphere Clubs, Inc.),

922 F.2d 984 (2d Cir. 1990) ..................................................................................................... 10

Sullivan v. Willock (In re Wey),

854 F.2d 196 (7th Cir. 1988) ................................................................................................... 23

Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co.,

549 U.S. 443 (2007).................................................................................................................. 20

Wyeth v. Levine,

555 U.S. 555 (2009).................................................................................................................. 19

Statutes and Administrative Materials

48 Fed. Reg. 8716 (Mar. 1, 1983).................................................................................14-15, 22-23

7 U.S.C. § 16(e)(2)........................................................................................................................ 18

7 U.S.C. § 24(a) ............................................................................................................................ 11

7 U.S.C. § 27(b)............................................................................................................................ 16

7 U.S.C. § 27a(a)(1).................................................................................................................. 3, 16

7 U.S.C. § 6d(a)(2).................................................................................................................... 8 n.2

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 5 of 30
-v11 U.S.C. § 108(b)........................................................................................................................ 23

11 U.S.C. § 541(a)(1)................................................................................................................ 4, 20

11 U.S.C. § 766(f)..................................................................................................................... 4, 22

11 U.S.C. § 766(h)........................................................................................................................ 21

11 U.S.C. §§ 761-767 ................................................................................................................... 11

15 U.S.C. § 78c note ................................................................................................................. 3, 16

17 C.F.R. § 190.02(f).................................................................................................................... 22

17 C.F.R. § 190.08(a)............................................................................................................. passim

17 C.F.R. § 30.7........................................................................................................................ 8 n.2

28 U.S.C. § 157(d)............................................................................................................ 1, 2, 9, 11

Gramm-Leach-Bliley Act of 1999, Pub. L. No. 106-102. 113 Stat. 1338.................................... 16

Legal Certainty for Bank Products Act of 2000, Pub. L. No. 106-554, 114 Stat. 2763 ............... 16

U.C.C. § 5-103(a).......................................................................................................................... 17

U.C.C. § 5-109..................................................................................................................... 2, 13-14

U.C.C. § 5-110(a)(2)................................................................................................................. 2, 13

Other Authorities

Feldman & Sommer, The Special Commodity Provisions of the New Bankruptcy Code,

37 Bus. Law. 1487 (1982) .................................................................................................. 15 n.3

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PRELIMINARY STATEMENT

ConocoPhillips Company and ConocoPhillips Canada Marketing & Trading ULC 

(together, “ConocoPhillips”) respectfully move this Court for an order pursuant to 28 U.S.C. 

§ 157(d) withdrawing the reference to the bankruptcy court of a motion to confirm made by the 

Trustee for MF Global Inc. The Trustee’s motion turns on significant and novel issues of federal 

non-bankruptcy law: It will require a court to decide the validity, meaning and effect of a 

regulation promulgated by the Commodity Futures Trading Commission pursuant to the 

Commodity Exchange Act. The Trustee’s motion must accordingly be decided by this Court, not 

the bankruptcy court.

ConocoPhillips was a customer of MF Global, and before MF Global’s

bankruptcy, ConocoPhillips procured $205 million in standby letters of credit for MF Global’s 

benefit. Under the governing customer agreements, MF Global was entitled to draw upon those 

letters of credit only in the event of a default by ConocoPhillips. No such default has occurred, 

and no such default will ever occur, because ConocoPhillips has moved all of its positions out of 

MF Global. 

In its motion before the bankruptcy court, the Trustee has taken the position that

— although the standby letters could only be drawn in the event of a default, and there has been 

no such default — a CFTC regulation allows him to treat the hypothetical “proceeds” of those

undrawn letters of credit as “customer property” subject to pro rata distribution. The Trustee 

does not dispute: (1) that his predecessor, MF Global, was legally barred, as a matter of contract 

and state law, from drawing upon the letters of credit; or (2) that two of the relevant letters of 

credit expired by their terms, after MF Global’s bankruptcy, without any action by the Trustee. 

The Trustee contends instead that the CFTC has effectively relieved him of any obligation to 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 7 of 30
2

comply with MF Global’s agreements or state law, and even of the obligation to present letters 

of credit for payment to realize their value. As a result of the Trustee’s flawed approach,

ConocoPhillips has not received distributions from the MF Global estate to which it is entitled as 

a customer with a valid claim; instead, the Trustee has improperly treated the return or expiration 

of letters of credit as “distributions” to ConocoPhillips and offset those “distributions” against 

payments owed to ConocoPhillips. 

Whoever is right about the letters of credit, only this Court may decide the 

question. Under 28 U.S.C. § 157(d), the referral of a proceeding to the bankruptcy court must be 

withdrawn if the proceeding requires significant interpretation of federal laws other than the 

Bankruptcy Code. This proceeding meets that requirement many times over. 

First, withdrawal of the reference is required because the Trustee has put forward 

a completely novel interpretation of a CFTC regulation that has never been addressed by any 

court. The Trustee has argued that, despite the absence of a required default on the part of 

ConocoPhillips, he is entitled to retain the face value of letters of credit based on a regulation 

stating that “[t]he full proceeds of a letter of credit” are treated as “customer property” in a 

brokerage liquidation. 17 C.F.R. § 190.08(a)(1)(i)(E). This regulation, rationally read, presumes 

lawful “proceeds” and on its face does not authorize a trustee to draw upon letters of credit —

thus generating “proceeds” — in violation of the debtor’s contracts and state law, which defines 

any such unwarranted draw as “material fraud” and breach of warranty. U.C.C. §§ 5-109 cmt. 1, 

5-110(a)(2). For that authority, the Trustee relies instead on a CFTC commentary known as a 

“Supplementary Information,” which purports to endorse the rather bizarre theory that a trustee

must draw upon letters of credit even if the bankrupt had no right to do so. The Trustee’s 

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3

invocation of both CFTC Rule 190.08(a) and related commentary as a license to flout contracts 

and state law presents an issue of first impression to be addressed by this Court. 

Second, withdrawal of the reference is required to resolve the direct conflict 

between the Trustee’s invocation of CFTC Rule 190.08(a) and amendments to the Commodity

Exchange Act that expressly prohibit the CFTC from adopting any regulation with respect to 

letters of credit. Congress has unambiguously legislated, in amendments to the CEA, that the 

CFTC has no authority to regulate “bank products,” including letters of credit. 7 U.S.C. 

§ 27a(a)(1); see 15 U.S.C. § 78c note. Accordingly, as a matter of clear statutory law, the CFTC

lacks authority to adopt Rule 190.08(a)(1)(i)(E), at least as that rule has been “interpreted” by the 

Trustee. The Trustee’s attempt to rely upon a regulation that Congress has explicitly precluded 

the CFTC from adopting presents another substantial issue that mandates withdrawal. 

Third, withdrawal of the reference is required to address the preemption issues 

raised by the Trustee’s motion. Even if the CFTC were not statutorily prohibited from regulating

letters of credit, there is still a significant question as to whether CFTC Rule 190.08(a), if 

interpreted as the Trustee suggests, could operate to preempt state letter-of-credit law. Under 

uniform state law, as embodied in the Uniform Commercial Code, the beneficiary of a letter of 

credit commits “material fraud” and breach of warranty by presenting letters of credit without a 

right to do so. Putting aside the CEA’s express prohibition of any regulation with respect to

letters of credit, Congress has not by statute authorized the CFTC to adopt any regulation that

would operate to preempt such uniform state law, and there is: (a) a strong presumption against 

preemption of uniform state law; and (b) a serious question as to whether under any 

circumstance that presumption could be overcome by this “Supplementary Information” that 

lacks the force of law. Whether the CFTC has validly preempted state law, and whether it could 

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4

do so based on this mere commentary to a regulation, presents a substantial issue that mandates 

withdrawal. 

Fourth, withdrawal of the reference is required to resolve the conflict between the 

Trustee’s “interpretation” of CFTC Rule 190.08(a) and settled bankruptcy law. Section 541(a)

of the Bankruptcy Code provides that a trustee succeeds only to the “legal or equitable interests 

of the debtor in property.” 11 U.S.C. § 541(a)(1). In accordance with this provision, it is 

bedrock law that a bankruptcy trustee does not have greater rights than the pre-petition debtor 

under governing contracts and state law. The Trustee’s motion turns this principle on its head:

the Trustee argues that, by virtue of a commentary as to a CFTC regulation, he can step out of 

MF Global’s shoes and violate both the debtor’s contracts and state law. The Trustee even 

asserts that, unlike MF Global, he does not have to draw upon letters of credit at all to realize 

their value. It is for this Court to decide whether the CFTC regulation could have the dramatic 

effect that the Trustee claims, at odds with federal bankruptcy law. This Court also needs to 

decide whether the Trustee’s position that a CFTC regulation authorizes him to violate state law 

can be reconciled with the language in section 766(f) of the Bankruptcy Code that requires a 

trustee to reduce property to cash in accordance with “good market practice.” 

Fifth, withdrawal of the reference is required to address the Trustee’s entirely 

untenable position with respect to the letters of credit that expired by their own terms without 

any action by the Trustee. Of the letters of credit at issue, two of the letters of credit (with a face 

value of $60 million) expired on November 23, 2011, without the Trustee drawing upon those 

letters and without any agreement in place that relieved him of the requirement to do so. The 

Trustee’s argument that he is entitled under the CFTC regulation to treat the expiration of letters

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5

of credit he held in his own hands as “distributions” is contradicted by the regulation itself, the 

Supplementary Information and settled bankruptcy law, and should be considered by this Court. 

BACKGROUND

This proceeding arises out of the collapse of MF Global. MF Global was a 

commodity brokerage firm and futures commission merchant. ConocoPhillips Company and 

ConocoPhillips Canada Marketing & Trading ULC were at one time customers of MF Global. 

A. ConocoPhillips Company and MF Global

On June 18, 2001, ConocoPhillips Company entered into a customer agreement 

with MF Global (the “Customer Agreement”). Ex. C.

1

 In connection with the Customer 

Agreement, ConocoPhillips Company provided two standby letters of credit — which expired by 

their terms on November 23, 2011 — to support commodity contract trading by ConocoPhillips 

Company on certain foreign exchanges (the “Expired Foreign Letters of Credit”). As a 

prerequisite to presentment, each of the Expired Foreign Letters of Credit required an authorized 

representative of MF Global to certify that ConocoPhillips Company “has defaulted in 

accordance with the terms and conditions of the [parties’] agreement.” The Expired Foreign

Letters of Credit include:

• Irrevocable Standby Letter of Credit No. 083400-793 issued by Intesa 

Sanpaolo S.p.A. in an amount (as amended) of $15 million. Ex. D.

• Irrevocable Standby Letter of Credit No. 083399-793 issued by Intesa 

Sanpaolo S.p.A. in an amount (as amended) of $45 million. Ex. E. 

 1

 References to “Exs.” are to the exhibits to the accompanying Declaration of Emil A. 

Kleinhaus. The Trustee’s motion to confirm his treatment of the letters of credit is attached to 

the Declaration as Exhibit A. The declaration of Anson B. Frelinghuysen in support of the 

Trustee’s motion, along with the exhibits thereto, is attached to the Declaration as Exhibit B.

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6

ConocoPhillips Company also obtained three other standby letters of credit for the 

joint benefit of MF Global and Chicago Mercantile Exchange, Inc. These three letters of credit 

were due to expire on March 30, 2012, and were provided by ConocoPhillips Company to MF 

Global to support commodity contract trading on domestic exchanges (the “Domestic Letters of 

Credit”). The Domestic Letters of Credit include: 

• Irrevocable Standby Letter of Credit No. S11038, issued by Svenska 

Handelsbanken, New York Branch, in an amount (as amended) of $15 

million. Ex. F.

• Irrevocable Standby Letter of Credit No. S11037, issued by Svenska 

Handelsbanken, New York Branch, in an amount of $50 million. Ex. G.

• Irrevocable Standby Letter of Credit No. 777-52-0101408-L, issued by 

Standard Chartered Bank, in an amount of $70 million. Ex. H.

The Customer Agreement between ConocoPhillips Company and MF Global 

requires an event of default on the part of ConocoPhillips before MF Global can present any of 

these letters of credit or otherwise dispose of collateral. See, e.g., Ex. C §§ 4-5. There has been 

no such event of default; the Trustee does not claim otherwise. ConocoPhillips Company has 

transferred all of its positions out of MF Global and does not owe any amounts to MF Global. 

B. ConocoPhillips Canada and MF Global

On October 23, 2008, ConocoPhillips Canada Marketing and Trading ULC 

(“ConocoPhillips Canada”) entered into a Customer Agreement with MF Global (the “Canada 

Customer Agreement”). Ex. I. In connection with the Canada Customer Agreement, 

ConocoPhillips Canada provided MF Global with the following standby letter of credit: 

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7

• Irrevocable Standby Letter of Credit No. S06229, issued by Svenska 

Handelsbanken, New York Branch, in an amount (as amended) of $10 million 

(the “Canada Letter of Credit”). Ex. J. 

The Canada Letter of Credit was due to expire on July 25, 2012 and, prior to presentment, once 

again required an authorized representative of MF Global to certify that ConocoPhillips Canada 

“has defaulted in accordance with the terms and conditions of the contracting party’s 

agreement.” 

The Canada Customer Agreement permits MF Global to draw on letters of credit 

or otherwise exercise remedies only if specified default events occur. Ex. I § 4. None of those 

events has occurred; again, the Trustee does not clam otherwise. ConocoPhillips Canada has 

transferred all of its positions out of MF Global and does not owe any amounts to MF Global. 

C. The expiration of the foreign letters of credit

On October 31, 2011, the Trustee was appointed. On November 23, 2011, the 

Expired Foreign Letters of Credit (with a face value of $60 million) expired by their terms 

without being drawn upon by the Trustee, even though they were in his possession. At that time, 

the Trustee and ConocoPhillips had not entered into any agreement staying the effect of such 

expiration or otherwise reserving the Trustee’s rights. Rather, the Trustee simply permitted the 

letters of credit to expire and they are no longer extant in any way. 

D. The parties’ interim agreement

In advance of the expiration of the Domestic Letters of Credit on March 30, 2012, 

the parties engaged in discussions regarding an arrangement that would avoid the need for 

litigation regarding the Domestic Letters of Credit prior to their expiration. On March 26, 2012, 

the Trustee and ConocoPhillips entered into an Interim Agreement. Ex. K. The interim 

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8

agreement provided for the return to ConocoPhillips of all letters of credit, including both 

expired and unexpired letters of credit, and reserved without prejudice all of the parties’ claims, 

positions and defenses as of that time. Id. ¶¶ 1, 6. 

E. The Trustee’s determination of ConocoPhillips’ claims

On December 16, 2011, ConocoPhillips Company and ConocoPhillips Canada 

filed customer claims against the MF Global estate. Exs. L-M. The customer claims seek to 

recover cash that ConocoPhillips held at MF Global at the time of its bankruptcy. 

On May 22, 2012, ConocoPhillips received the Trustee’s determination of its 

claims. The Trustee determined that ConocoPhillips Company has an allowed claim to “Section 

4d” property (i.e. for domestic futures accounts)2 totaling $175,790,952, and that ConocoPhillips 

Company has already received $135,000,000 in satisfaction of that claim. Ex. N. Included in 

both the allowed claim amount and the amount supposedly received by ConocoPhillips Company 

is the face value of the Domestic Letters of Credit (totaling $135,000,000).

The Trustee also determined that ConocoPhillips Company has an allowed claim 

to “Rule 30.7 Property” (i.e. for foreign futures accounts) totaling $85,755,528, and that 

ConocoPhillips Company has already received $60,000,000 of that amount. Included in both of 

those calculations is the face value of the Expired Foreign Letters of Credit (totaling 

$60,000,000). 

In addition, the Trustee determined that ConocoPhillips Canada has an allowed 

claim to “Rule 30.7 Property” totaling $34,866,553, and that ConocoPhillips Canada has already 

 2

 Domestic futures accounts are governed by Section 4d(2) of the Commodity Exchange Act

(codified at 7 U.S.C. § 6d(a)(2)). Foreign futures accounts are governed by 17 C.F.R. § 30.7. 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 14 of 30
9

received $10,000,000 in respect of that claim. Ex. O. Included in both of the Trustee’s 

calculations is the face value of the Canada Letter of Credit ($10,000,000). 

F. The Trustee’s motion to confirm

On June 22, 2012, ConocoPhillips filed an objection to the Trustee’s 

determinations. Ex. P. On July 30, 2012, the Trustee then filed a motion seeking to confirm his 

determination of ConocoPhillips’ claims, including his treatment of the letters of credit. Ex. A. 

ConocoPhillips now seeks to withdraw the reference with respect to that motion. 

ARGUMENT

Section 157(d) of the Judicial Code provides for mandatory withdrawal of the 

reference when certain requirements are met: 

The district court may withdraw, in whole or in part, any case or 

proceeding referred under this section, on its own motion or on 

timely motion of any party, for cause shown. 

The district court shall, on timely motion of a party, so withdraw a 

proceeding if the court determines that resolution of the proceeding 

requires consideration of both title 11 [the Bankruptcy Code] and 

other laws of the United States regulating organizations or 

activities affecting interstate commerce.

28 U.S.C. § 157(d) (emphasis added). Because the Trustee’s motion to confirm plainly requires 

“consideration of . . . other laws of the United States regulating organizations or activities 

affecting interstate commerce,” it is subject to mandatory withdrawal of the reference. 

I. WITHDRAWAL OF THE REFERENCE IS MANDATORY WHEN 

A PROCEEDING REQUIRES SIGNIFICANT INTERPRETATION 

OF FEDERAL LAW OTHER THAN THE BANKRUPTCY CODE.

Section 157(d) requires withdrawal of the reference of any proceeding that 

involves “significant interpretation, as opposed to simple application, of federal laws apart from 

the bankruptcy statutes.” City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir. 1991). 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 15 of 30
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A motion for withdrawal must accordingly be granted whenever “substantial and material 

consideration of non-Bankruptcy Code federal statutes is necessary for resolution of the 

proceedings.” Shugrue v. Air Line Pilots Ass’n, Int’l (In re Ionosphere Clubs, Inc.), 922 F.2d 

984, 995 (2d Cir. 1990). As judges in this District have repeatedly held, if a court must “engage 

itself in the intricacies of non-[b]ankruptcy law, as opposed to routine application of that law,” 

withdrawal of the reference is required. Chemtura Corp. v. United States, 2010 WL 1379752, at 

*1 (S.D.N.Y. Mar. 26, 2010) (quoting Shugrue, 922 F.2d at 995) (internal quotation marks 

omitted); accord, e.g., Picard v. JPMorgan Chase & Co. (In re Bernard L. Madoff), 454 B.R. 

307, 312 (S.D.N.Y. 2011); Enron Power Mktg., Inc. v. Cal. Power Exch. Corp. (In re Enron 

Corp.), 2004 WL 2711101, at *2 (S.D.N.Y. Nov. 23, 2004). 

For withdrawal to be mandatory under section 157(d), “the district court is not 

required to find that novel or unsettled questions of non-bankruptcy law are presented in order to 

withdraw the reference.” Enron Corp. v. J.P. Morgan Sec., Inc. (In re Enron Corp.), 388 B.R. 

131, 139 (S.D.N.Y. 2008); accord Enron Power Mktg., 2004 WL 2711101, at *2. But if such 

questions do exist, they weigh heavily in favor of withdrawal: “where matters of first impression 

are concerned, the burden of establishing a right to mandatory withdrawal is more easily met.” 

Bear, Stearns Sec. Corp. v. Gredd, 2001 WL 840187, at *2 (S.D.N.Y. July 25, 2001) (internal 

quotation marks omitted). Similarly, although the court is not required to find a conflict between 

bankruptcy and non-bankruptcy law to withdraw the reference, the standard for mandatory 

withdrawal is met when a non-bankruptcy statute or regulation even “‘arguably conflicts’ with 

the Bankruptcy Code.” In re Dana Corp., 379 B.R. 449, 459 (S.D.N.Y. 2007) (emphasis added) 

(quoting Gredd, 2001 WL 840187, at *2). 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 16 of 30
11

In deciding whether withdrawal is mandatory, a district court “need not evaluate 

the merits of the parties’ claims”; rather, it is sufficient for the court to determine that the 

proceeding will “involve consideration of federal non-bankruptcy law.” JPMorgan, 454 B.R. at 

312 (quoting Gredd, 2001 WL 840187, at *4) (internal quotation marks omitted). Withdrawal of 

the reference is appropriate not only to interpret statutes that govern commerce, such as the 

Commodity Exchange Act, but also to interpret regulations promulgated by administrative 

agencies under such statutes. E.g., Grede v. Fortis Clearing Americas LLC, 2009 WL 3518159, 

at *3-4 (N.D. Ill. Oct. 28, 2009) (granting motion to withdraw to resolve “open and unresolved 

issue[s]” relating to the interpretation of the Commodity Exchange Act and CFTC regulations); 

Gredd, 2001 WL 840187, at *4 (granting motion to withdraw “to interpret the various provisions 

of the federal securities laws,” including SEC rules and regulations).

Here, there can be no question that the CFTC Part 190 Rules, on which the 

Trustee has predicated his motion, are non-title 11 “laws of the United States regulating 

organizations or activities affecting interstate commerce.” 28 U.S.C. § 157(d). The Trustee 

acknowledges that the CFTC promulgated those regulations under 7 U.S.C. § 24(a), a provision 

of the CEA that is codified in the title of the U.S. Code pertaining to “Agriculture” and the 

chapter pertaining to “Commodity Exchanges” — and not in title 11. Ex. A ¶ 27. 

The fact that the CFTC rules supplement the commodity broker liquidation 

provisions of the Bankruptcy Code, 11 U.S.C. §§ 761-767, does not change the analysis. 

Directly on point are the cases arising out of the Madoff liquidation. The trustee for Madoff’s 

brokerage firm recently argued that “SIPA is effectively a bankruptcy statute and, therefore, 

interpretation of SIPA does not satisfy the mandatory withdrawal requirement of Section 

157(d).” JPMorgan, 454 B.R. at 316. Judge McMahon found this argument “not persuasive”:

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 17 of 30
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[W]hile a SIPA liquidation proceeding may be maintained in the 

bankruptcy court, and SIPA incorporates provisions of the 

Bankruptcy Code, SIPA expressly provides that it is part of the 

securities laws and is codified in Title 15, not Title 11. Section 

157(d) requires mandatory withdrawal if a proceeding “requires 

consideration of both title 11 and other laws of the United 

States . . . .” Thus, an issue that requires significant interpretation 

of SIPA undoubtedly requires consideration of laws other than 

Title 11. Regardless of a bankruptcy court’s familiarity with a 

statute outside of Title 11, the requirements for mandatory 

withdrawal are satisfied if the proceeding requires consideration of 

a law outside of Title 11.

Id. (citations omitted); accord, e.g., Picard v. Avellino, 469 B.R. 408, 411-12 (S.D.N.Y. 2012); 

Picard v. HSBC Bank PLC, 450 B.R. 406, 410 (S.D.N.Y. 2011). Here, likewise, the CEA is 

codified in title 7 of the U.S. Code, not title 11, and the CFTC regulations at issue were 

promulgated under the CEA, not title 11. 

II. WITHDRAWAL OF THE REFERENCE IS REQUIRED HERE TO 

ADDRESS NUMEROUS NOVEL ISSUES OF FEDERAL NONBANKRUPTCY LAW.

Since both the Commodity Exchange Act and the CFTC regulation invoked by 

the Trustee unquestionably constitute non-bankruptcy laws, the only issue on this withdrawal 

motion is whether the Trustee’s motion requires significant interpretation of those laws. It surely 

does. The Trustee’s interpretation of the CFTC regulation at issue is the sole basis for his 

claimed right to the value of the letters of credit. That interpretation is both novel and debatable, 

to say the least. It also conflicts with numerous federal statutes, including both the CEA itself 

and the Bankruptcy Code, and raises substantial preemption issues. 

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13

A. Withdrawal of the reference is required in light of the 

Trustee’s unprecedented reliance on CFTC Rule 190.08(a)

and related commentary.

To begin with, the Trustee’s interpretation of CFTC Rule 190.08(a) is 

unprecedented, and deciding whether that interpretation is correct presents a significant issue of 

federal non-bankruptcy law. 

There is no dispute that the relevant customer agreements required a default on 

the part of ConocoPhillips before MF Global could draw upon them and that ConocoPhillips did 

not default under those agreements. Ex. A ¶¶ 20, 30. Accordingly, there is no question that the 

Trustee, as successor to MF Global, would have violated the parties’ contractual arrangements 

by drawing upon any of the standby letters of credit. Under the Uniform Commercial Code, the 

Trustee, as successor to MF Global, would also have committed both “material fraud” and 

breach of warranty had he presented the letters of credit. Section 5-109(b) of the Uniform

Commercial Code provides that presentment of a letter of credit may be enjoined if “honor of the 

presentation would facilitate a material fraud by the beneficiary on the issuer or applicant.”

Section 5-110(a)(2) of the U.C.C. further provides that if a letter of credit “is honored,” then “the 

beneficiary warrants . . . [t]o the applicant that the drawing does not violate any agreement 

between the applicant and beneficiary.” Under long-established case law, presentation of a letter 

of credit constitutes material fraud where, as in this case, “the circumstances plainly show that 

the underlying contract forbids the beneficiary to call a letter of credit” or “where they show that 

the contract deprives the beneficiary of even a colorable right to do so.” Ground Air Transfer, 

Inc. v. Westates Airlines, Inc., 899 F.2d 1269, 1273 (1st Cir. 1990) (Breyer, J.) (internal 

quotation marks omitted); accord, e.g., Itek Corp. v. First Nat’l Bank of Bos., 730 F.2d 19, 25 

(1st Cir. 1984); Rockwell Int’l Sys., Inc. v. Citibank, N.A., 719 F.2d 583, 585, 588-89 (2d Cir. 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 19 of 30
14

1983); see also U.C.C. § 5-109 cmt. 1 (beneficiary commits “material fraud” by presenting a 

letter of credit despite having “no colorable right to expect honor and where there is no basis in 

fact to support such a right to honor”).

The Trustee’s basic theory is that, once a commodity broker files for bankruptcy,

CFTC regulations operate to supplant both controlling contracts and state law, permitting him to 

treat the face value of letters of credit as “customer property” subject to pro rata distribution. 

For this theory, the Trustee relies upon CFTC Rule 190.08(a), in which the CFTC has defined

“customer property” — the category of property that is distributed pro rata to brokerage 

customers — to encompass “[t]he full proceeds of a letter of credit if such letter of credit was 

received, acquired or held to margin, guarantee, secure, purchase or sell a commodity contract.” 

17 C.F.R. § 190.08(a)(1)(i)(E) (emphasis added). 

The regulation is completely silent, however, on the question of how the

“proceeds” of a letter of credit are to be created. Although the regulation defines “customer 

property” to include the “proceeds” of letters of credit, there is no fair reading of the regulation 

under which it calls for unlawful conduct on the part of a trustee: the words of the regulation do

not so much as hint that “customer property” in the form of “proceeds” may be generated 

through “material fraud” or breach of warranty. For that proposition, the Trustee relies instead 

upon a CFTC commentary called the “Supplementary Information,” in which the agency 

expressed the view that, under CFTC Rule 190.08(a), the trustee of a bankrupt futures 

commission merchant is “required to draw the full value of a letter of credit posted as margin and 

treat the funds received as customer property, irrespective of the margin obligation secured 

thereby.” 48 Fed. Reg. 8716, 8718 (Mar. 1, 1983). Accordingly, in purporting to “interpret” the 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 20 of 30
15

regulation, the Supplementary Information in fact dramatically alters the regulation, suggesting 

for the first time that a trustee must draw upon letters of credit “irrespective of their terms.” Id. 

The Trustee’s reliance on both the regulation and the Supplementary Information 

is unprecedented and raises issues of first impression. As noted above, the CFTC regulation 

itself does not authorize the Trustee to draw upon letters of credit, generating “proceeds,” in 

violation of contracts and state law. And the Supplementary Information, rather than 

“interpreting” the regulation, essentially creates a new — and astonishing — rule that would 

“require” a trustee to provide false warranties and commit “material fraud” to draw upon letters 

of credit. Withdrawal of the reference is plainly required to decide whether the Trustee has 

properly construed and relied upon CFTC Rule 190.08(a) and the related commentary. See, e.g.,

Gredd, 2001 WL 840187, at *3 (granting motion to withdraw the reference to consider issue that 

was “arguably novel” under securities laws and related regulations).3

B. Withdrawal of the reference is required to resolve the direct 

conflict between the Trustee’s interpretation of CFTC Rule 

190.08(a) and amendments to the Commodity Exchange Act

that prohibit the CFTC from regulating letters of credit.

Withdrawal of the reference is also required to resolve the blatant conflict 

between the Trustee’s reliance on CFTC Rule 190.08(a), which was adopted pursuant to the 

Commodity Exchange Act, and the statutory provision of the CEA itself that categorically 

prohibits the CFTC from regulating “bank products,” including “letters of credit.” 

 3 From the time the CFTC Part 190 regulations were proposed, commentators have questioned 

whether the CFTC exceeded its regulatory authority in purporting to alter contractual 

arrangements governing letters of credit. See, e.g., Franklin Feldman & Judah C. Sommer, The 

Special Commodity Provisions of the New Bankruptcy Code, 37 Bus. Law. 1487, 1511 (1982) 

(“The [CFTC’s] proposed treatment of letters of credit [in 190.08(a)(1)(E)] may exceed the 

commission’s authority” because there is “no suggestion in the statutory definition of customer 

property, or the CFTC’s rulemaking power with respect thereto, that Congress intended to 

override private contractual arrangements.”).

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In 2000, Congress enacted the Legal Certainty for Bank Products Act to exclude 

certain banking products from the CEA and from the CFTC’s regulatory authority. Pub. L. No. 

106-554, 114 Stat. 2763. That Act, as amended in 2010 by the Dodd-Frank Wall Street Reform 

and Consumer Protection Act, states that “the Commodity Exchange Act . . . shall not apply to, 

and the Commodity Futures Trading Commission shall not exercise regulatory authority under 

the Commodity Exchange Act . . . with respect to, an identified banking product,” subject to 

exceptions not relevant here. 7 U.S.C. § 27a(a)(1). For purposes of this exclusion, Congress has 

defined “identified banking product” to include a bank-issued letter of credit. 7 U.S.C. § 27(b) 

(cross referencing definition of that term in section 206(a) of the Gramm-Leach-Bliley Act of 

1999, Pub. L. No. 106-102, 113 Stat. 1338, which includes “a letter of credit issued or loan made 

by a bank,” id. § 206(a)(3), 113 Stat. at 1393) (codified at 15 U.S.C. § 78c note). Accordingly, 

Congress has stated in clear and unambiguous terms — in a statutory amendment to the CEA 

itself (which is codified in chapter 1 of title 7) — that letters of credit are outside the scope of the 

CFTC’s regulatory authority.

To state the obvious, an agency may not “exercise its authority in a manner that is 

inconsistent with the administrative structure that Congress enacted into law.” FDA v. Brown & 

Williamson Tobacco Corp., 529 U.S. 120, 125 (2000) (internal quotation marks omitted); 

accord, e.g., Fed. Mar. Comm’n v. Seatrain Lines, Inc., 411 U.S. 726, 745 (1973) (“an agency 

may not bootstrap itself into an area in which it has no jurisdiction by repeatedly violating its 

statutory mandate”). As a result, the effect of an agency’s actions can in no case “exceed the 

agency’s delegated authority.” Drake v. Lab. Corp. of Am. Holdings, 458 F.3d 48, 63 (2d Cir. 

2006); accord, e.g., Cuomo v. Clearing House Ass’n, 557 U.S. 519, 531-33, 536 (2009). 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 22 of 30
17

The CFTC’s manifest lack of statutory authority to regulate letters of credit 

defeats any argument that the CFTC can authorize bankruptcy trustees to draw on letters of 

credit in violation of contracts and state law. Thus, this matter presents substantial questions of 

first impression as to the scope of the CFTC’s authority requiring withdrawal of the reference. 

E.g., Enron Power Mktg., 2004 WL 2711101, at *4 (mandatory withdrawal warranted to 

consider whether the Federal Energy Regulatory Commission had authority to determine 

whether letter-of-credit proceeds must be turned over to a bankruptcy estate); Am. Freight Sys., 

Inc. v. ICC (In re Am. Freight Sys., Inc.), 150 B.R. 790, 795 (D. Kan. 1993) (mandatory 

withdrawal warranted where action required determination of whether the Interstate Commerce 

Commission “had the authority under the Interstate Commerce Act to promulgate the recent 

regulations at issue”). 

C. Withdrawal of the reference is required to address substantial 

preemption issues raised by the Trustee’s motion.

Even on the assumption that the CFTC were not barred (as it is) from regulating 

letters of credit, and that the “Supplementary Information” can alter the terms of the CFTC

regulation as claimed by the Trustee, there would be serious questions presented here as to 

whether the CFTC has validly preempted state law. For numerous reasons, ConocoPhillips 

submits that the supposed rule set forth in the Supplementary Information would not validly 

preempt state law. 

In preemption cases, courts must “start with the assumption that the historic 

police powers of the States were not to be superseded by the Federal Act unless that was the 

clear and manifest purpose of Congress.” Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996) 

(ellipses and internal quotation marks omitted). Letters of credit have long been governed by 

Article 5 of the Uniform Commercial Code as a matter of state law. See U.C.C. § 5-103(a). 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 23 of 30
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Nothing in the CEA affords the CFTC the power to preempt uniform state letterof-credit law by regulation or in any other way. Questions of preemption, like other matters of 

statutory construction, must “begin . . . with the text of the provision in question.” N.Y. State 

Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655 (1995). 

The CEA contains only one provision that explicitly preempts state law. That provision states 

that the CEA “shall supersede and preempt the application of any State or local law that prohibits 

or regulates gaming or the operation of bucket shops” to the extent those laws apply to certain 

contracts. 7 U.S.C. § 16(e)(2). By contrast, the CEA does not say a word about preempting 

letter-of-credit law; to the contrary, the CEA prohibits the CFTC from regulating letters of credit. 

See Point II.B, supra. In addition, as discussed above, Rule 190.08(a) defines “customer 

property” to include the “proceeds” of letters of credit, but likewise says nothing about 

preemption of state letter-of-credit law. 

The Trustee points out that the House Report accompanying the CEA states that 

“the authority in the Commodity Exchange Act (and the regulations issued by the Commission) 

would preempt the field insofar as futures regulation is concerned.” Ex. A ¶ 37 (citing H.R. Rep. 

No. 93-1383 (1974) (Conf. Rep.), reprinted in 1974 U.S.C.C.A.N. 5894, at 5897). Putting aside 

that this House Report antedates by more than 25 years Congress’s express prohibition against 

CFTC authority over letters of credit, the House Report only begs the question: What does the 

field of “futures regulation” encompass? Both the CEA itself and the presumption against 

preemption suggest that this “field” does not include letter-of-credit law. 

The only source identified by the Trustee that suggests any intent to preempt state 

letter-of-credit law is the Supplementary Information issued by the CFTC. But the 

Supplementary Information, mere agency commentary, cannot evince Congressional intent to 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 24 of 30
19

preempt state law. Moreover, that commentary does not itself have preemptive effect because 

agency commentary lacks the “force of law.” Wyeth v. Levine, 555 U.S. 555, 576-80 (2009); 

accord, e.g., Ramos v. Baldor Specialty Foods, Inc., -- F.3d --, 2012 WL 2849656, at *4 (2d Cir. 

July 12, 2012). 

Although the Trustee has argued for deference to the CFTC’s “interpretation” of 

its own regulation, such deference is potentially warranted “only when the language of the 

regulation is ambiguous.” Christensen v. Harris Cnty., 529 U.S. 576, 588 (2000); accord, e.g., 

Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2303 n.8 (2011). CFTC 

Rule 190.08(a) is not ambiguous: it says nothing to indicate that a trustee is authorized to breach 

agreements, provide false warranties or engage in material fraud to draw upon letters of credit. 

Moreover, as will be demonstrated in briefing on the merits, the process by which the 

Supplementary Information was promulgated precludes any notion that it is entitled to deference. 

See Wyeth, 555 U.S. at 577 (“The weight we accord the agency’s explanation of state law’s 

impact on the federal scheme depends on its thoroughness, consistency, and persuasiveness.”). 

Once again, at a minimum, the preemption issues discussed above mandate 

withdrawal of the reference. See, e.g., Old Carco LLC v. Kroger (In re Old Carco LLC), 442 

B.R. 196, 202 (S.D.N.Y. 2010) (mandatory withdrawal warranted where the movant raised 

“substantial and material” issues concerning federal preemption).

D. Withdrawal of the reference is required to resolve conflicts

between the Trustee’s interpretation of CFTC Rule 190.08(a)

and provisions of the Bankruptcy Code.

1. Section 541(a)

The Trustee’s interpretation of CFTC Rule 190.08(a) conflicts with provisions of 

the Bankruptcy Code — thereby raising additional issues that require withdrawal of the 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 25 of 30
20

reference. The crux of the Trustee’s argument in the Motion is that the CFTC regulation grants

the trustee for a bankrupt commodity broker greater rights with respect to letters of credit than 

the broker had prior to its bankruptcy. Indeed, according to the Trustee, a trustee does not even 

have to present a letter of credit in order to seize its value. Adoption of the Trustee’s position 

would represent a fundamental departure from established bankruptcy law. 

Section 541(a) of the Bankruptcy Code provides that the commencement of a 

bankruptcy case “creates an estate,” which is comprised of “all legal or equitable interests of the 

debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Under that

provision, a “bankruptcy estate can have no greater interest in property included in it than the 

debtor had when the petition was filed.” Brown v. Dellinger (In re Brown), 734 F.2d 119, 124

(2d Cir. 1984); see also Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 

450-51 (2007) (“[W]e have long recognized that the basic federal rule in bankruptcy is that state 

law governs the substance of claims, Congress having generally left the determination of 

property rights in the assets of a bankrupt’s estate to state law.” (internal quotation marks 

omitted)). 

The bedrock rule that a trustee has no greater rights than the pre-petition debtor 

has been squarely applied to debtors who are beneficiaries under letters of credit. In Farmer v. 

Crocker Nat’l Bank (In re Swift Aire Lines, Inc.), 30 B.R. 490 (B.A.P. 9th Cir. 1983), a 

Bankruptcy Appellate Panel held that where a bankruptcy trustee succeeds to a debtor’s rights in 

a letter of credit, “the Bankruptcy Code [does] not give the trustee the power to automatically 

enforce payment thereunder if state law requiring strict compliance of tender documents would 

dictate otherwise.” Id. at 495. Farmer upheld a bank’s refusal to honor a trustee’s attempt to 

draw on a letter of credit issued in favor of the debtor, where the letter specified that the debtor’s 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 26 of 30
21

corporate secretary had to sign a statement before the letter could be drawn. Because the

bankruptcy filing eliminated the power of the corporate secretary to act on behalf of the debtor, 

the Court held that the required statement could no longer be provided, and therefore the letter 

could not be drawn by the trustee. Id. 

Here, the relevant customer agreements and letters of credit gave MF Global the 

right to draw on the letters only if certain conditions were met. That conditional contract right —

and nothing else — became property of MF Global’s estate under section 541(a) of the 

Bankruptcy Code. By contrast, the hypothetical “proceeds” of the letters of credit never became 

“property of the estate,” because the conditions for drawing upon those letters did not occur. 

It is for this Court to decide whether, in contravention of section 541(a) of the 

Bankruptcy Code, the CFTC has validly expanded the trustee’s rights under letters of credit 

beyond those of the pre-petition debtor. See, e.g., In re Dana Corp., 379 B.R. at 459 (withdrawal 

required “even where a non-bankruptcy federal statute only ‘arguably conflicts’ with the 

Bankruptcy Code”); Gredd, 2001 WL 840187, at *4 (granting withdrawal motion to resolve an 

“arguabl[e] conflict[]” between the Bankruptcy Code and “other federal regulations”).

2. Section 766(f) 

If accepted, the Trustee’s interpretation of CFTC Rule 190.08(a) would also 

create a conflict with the provision of the Bankruptcy Code and the CFTC rule that govern the 

Trustee’s conduct in liquidating collateral held by a bankrupt commodity broker. 

Sections 761 through 767 of the Bankruptcy Code establish the framework for the 

liquidation of a commodity broker. Subject to exceptions not relevant here, section 766(h) 

requires that “customer property” be distributed ratably to customers in the form of (1) cash or

(2) the return of certain “specifically identifiable” property. To facilitate the cash distributions, 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 27 of 30
22

section 766(f) directs the trustee, “[a]s soon as practicable after the commencement of the case,” 

to “reduce to money, consistent with good market practice, all securities and other property . . . 

held as property of the estate” except for specifically identifiable customer property. 11 U.S.C. 

§ 766(f) (emphasis added). The CFTC regulations are consistent with this requirement, as they 

direct the trustee to liquidate, subject to “applicable procedures under the Bankruptcy Code,” all 

“property held by or for the account of a debtor” except for certain specified forms of property 

not relevant here. 17 C.F.R. § 190.02(f) (emphasis added). 

Here, had the Trustee attempted to draw on the letters of credit, he would have 

engaged in breach of contract, material fraud, and breach of warranty under applicable law. 

Such unlawful conduct cannot be squared with any notion of “good market practice.” Whether 

CFTC Rule 190.08(a) should be read to supplant section 766(f) of the Bankruptcy Code and 

CFTC Rule 190.02(f) is another issue of first impression to be decided by this Court. 

E. Withdrawal of the reference is required to address the 

Trustee’s novel theory that he is entitled to the value of letters 

of credit that he permitted to expire.

The Trustee’s treatment of the Expired Foreign Letters of Credit raises issues 

beyond his treatment of the letters of credit that were unexpired at the time of the parties’ interim 

agreement of March 26, 2012. The Trustee has argued that the expiration of these letters resulted 

in a “distribution” to ConocoPhillips to which the Trustee is entitled. Ex. A. ¶ 34.

The Trustee’s position is both unprecedented and entirely devoid of legal support. 

By its plain terms, CFTC Rule 190.08(a) provides that the “proceeds” of a letter of credit should 

be treated as “customer property,” making patently clear that a letter of credit must be drawn in 

order for a trustee to distribute its value as “customer property.” Even the Supplementary 

Information states that a trustee is “required to draw the full value of a letter of credit posted as 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 28 of 30
23

margin and treat the funds received as customer property.” 48 Fed. Reg. at 8718 (emphasis 

added). Yet here, the Trustee, who held the Expired Foreign Letters of Credit, never drew upon 

them prior to their expiration, and thus forfeited any possible right to their “proceeds.”4

Moreover, the Trustee has again taken a position that conflicts with settled 

bankruptcy law, which does not protect a trustee from the consequences of a contractual 

expiration. Under the Bankruptcy Code, “[p]ossession of expired rights is the equivalent of the

possession of no rights.” Sullivan v. Willock (In re Wey), 854 F.2d 196, 199 (7th Cir. 1988). 

“[T]he automatic stay does not toll the running of time under a contract and does not prevent the 

automatic termination of a contract.” In re Policy Realty Corp., 242 B.R. 121, 126 (S.D.N.Y. 

1999), aff’d, 213 F.3d 626, 2000 WL 534265, at *2 (2d Cir. 2000). 

The Trustee’s suggestion that he was excused indefinitely from presenting letters 

of credit likewise conflicts with the Bankruptcy Code. Section 108(b) of the Bankruptcy Code 

states that a trustee may file any “pleading, demand, notice, or proof of claim or loss, cure of 

default, or perform any similar act” before the later of the date set by agreement or 60 days after 

a bankruptcy filing. 11 U.S.C. § 108(b). The statute, accordingly, expressly tolls certain notice 

periods until 60 days after a bankruptcy, no more. The Trustee’s apparent claim that CFTC 

regulations override section 108(b) — without saying so — should be addressed by this Court. 

CONCLUSION

It is respectfully submitted that this Court should order that the reference of this 

proceeding to the bankruptcy court be withdrawn.

 4

 As ConocoPhillips will demonstrate, the Trustee’s argument (Ex. A ¶ 34) that the expiration of 

letters of credit would have resulted in a margin call outside of bankruptcy is totally irrelevant. It 

is also flatly wrong in a situation such as this, where the broker’s customer no longer has any 

positions at the broker that require margin. 

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 29 of 30
24

Dated: New York, New York

August 3, 2012

WACHTELL, LIPTON, ROSEN & KATZ

By: __/s/ Herbert M. Wachtell

 Herbert M. Wachtell

 George T. Conway III

 Emil A. Kleinhaus

 Daniel A. Rubens

 Dana J. Brusca

51 West 52nd Street

New York, New York 10019

(212) 403-1000

HMWachtell@WLRK.com

 -andCADWALADER, WICKERSHAM & TAFT LLP

Mark C. Ellenberg

700 Sixth Street, N.W.

Washington, D.C. 20001

(202) 862-2200

Attorneys for ConocoPhillips Company and

ConocoPhillips Canada Marketing & 

Trading ULC

Case 1:12-cv-06014-KBF Document 2 Filed 08/06/12 Page 30 of 30