UNITED STATES DISTRICT COURT 

SOUTHERN DISTRICT OF NEW YORK 

---------------------------------------- X 

USDCSDNY 

DOCUMENT 

ELECTRONICALLY FILED 

DOC#: 'f)~T 4 ~ DATE FILE 0 2012

.­

In re: MF GLOBAL, INC., 

12 Civ. 6014 

Debtor. 

---------------------------------------- X MEMORANDUM & ORDER 

CONOCOPHILLIPS COMPANY, et al., 

Plaintiffs, 

v. 

JAMES W. GIDDENS, Trustee for the SIPA 

Liquidation of MF Global, Inc., 

Defendant. 

---------------------------------------- X 

KATHERINE B. FORREST, District Judge: 

CononcoPhillips Company tt ("CPC ) and ConocoPhillips Canada 

Marketing & Trading ULC ("CPCMTtI and collectively with CPC, 

"ConocoPhillipstl) have moved for an order pursuant to 28 U.S.C. 

§ 157(d) withdrawing the reference from the United States 

Bankruptcy Court for the Southern District of New York (the 

"Bankruptcy Courttt ) with respect to a motion by James W. Giddens 

(the "Trusteett ), as trustee for the SIPA liquidation of MF 

Global, Inc. ("MFGItt ), seeking confirmation of the Trustee's 

treatment of ConocoPhillips' customer claims, including the 

treatment of certain letters of credit (the "Trustee's Motiontt). 

The Trustee opposes ConocoPhillips' motion. The Commodity 

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Case 1:12-cv-06014-KBF Document 26 Filed 10/04/12 Page 1 of 19
Futures Trading Commission ("CFTC") submitted a statement and 

appeared at oral argument in response to ConocoPhillips' motion. 

The motion to withdraw was fully submitted as of September 

II, 2012. 1 The Court heard argument on September 25, 2012. For 

the reasons set forth below, ConocoPhillips' motion is granted 

and the reference of the Trustee's Motion is withdrawn from the 

Bankruptcy Court. 

BACKGROUND 

A. Factual Background 

The instant motion arises out of the now-(in)famous 

collapse of MFGI. None of the relevant facts relating to the 

motion are in dispute. 

When MFGI was a fully operational commodities broker, 

ConocoPhillips was one of only nine MFGI customers that MFGI 

allowed to support its commodities trading by posting letters of 

credit in lieu of other collateral. 

Over time, ConocoPhillips obtained six letters of credit to 

support its various trading activities. CPC obtained two 

letters of credit to support its trading on foreign exchanges 

(the "Foreign LOCs"). The Foreign LOCs expired by their terms 

on November 23, 2011--shortly after MFGI entered bankruptcy in 

October 2011. See Decl. of Emil A. Kleinhaus (Dkt. No.3) 

1 On september 25, 2012, the CFTC filed a letter "clarifying" an issue raised 

at the oral argument (Dkt. No. 24), and ConocoPhillips submitted a brief 

response on September 27, 2012. 

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("Kleinhaus Decl.") Exs. D, E.) Prior to expiration, the 

Foreign LOCs could only be drawn down if MFGI certified that CPC 

"has defaulted in accordance with the terms and conditions of 

the [parties'] agreement. " (See, e.g., Kleinhaus Decl. Ex. 

D at 6.) It is undisputed both that no event of default ever 

occurred and, at expiration, neither of the Foreign LOCs had 

been drawn upon. 2 

CPC obtained three additional letters of credit to support 

its trading through MFGI on domestic exchanges (the "Domestic 

LOCs"). The terms of the Customer Agreement between MFGI and 

CPC required an event of default for MFGI to call any of the 

Domestic LOCs. (See Kleinhaus Decl. Ex. C at §§ 4-5.) There is 

no dispute that at the time MFGI commenced liquidation, no event 

of default had occurred and thus, MFGI had not drawn down any of 

the Domestic LOCs. By their terms, the Domestic LOCs expired on 

March 30, 2012. (Kleinhaus Decl. Exs. F-H.) Prior to the 

Domestic LOCs' expiration and subsequent to MFGI's bankruptcy, 

the Trustee and ConocoPhillips entered into an interim agreement 

by which the Domestic LOCs would be returned to ConocoPhillips-­

but frozen--pending a determination by a court on how to treat 

the proceeds of those LOCs (the "interim agreement"). Tr. of 

It is also undisputed that the two Foreign LOCs expired by their terms with 

no reservation of rights or other arrangement between ConocoPhillips and the 

Trustee. 

3 

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Oral Arg. at 7:5-9, ConocoPhillips Co. v. Giddens, No. 12 Civ. 

6014 (S.D.N.Y. Sept. 25, 2012) (hereinafter "Tr."). 

CPCMT also obtained a sixth letter of credit (the "CPCMT 

LOC" and with the Foreign and Domestic LaCs, the "LOCs"), which 

likewise required MFGI to certify the occurrence of an event of 

default in order to draw upon it. (Kleinhaus Decl. Ex. Ji see 

also id. Ex. I § 4.) It is undisputed that no such default 

occurred and, prior to MFGI's bankruptcy, MFGI never drew upon 

the CPCMT LaC. The interim agreement also applies to the CPCMT 

LaC {which, by its terms expired on July 25, 2012).3 Tr. at 

7:5-9. 

On October 31, 2011, the Trustee was appointed to oversee 

MFGI's liquidation. As part of the liquidation proceedings, 

ConocoPhillips filed customer claims against MFGI's estate to 

recover cash that it had maintained at MFGI. (Kleinhaus Decl. 

Exs. L-M.) In its May 22, 2012, determination of 

ConocoPhillips' claims, the Trustee allowed CPC and CPCMT claims 

in certain amounts, but also determined that part of those 

claims had already been remitted in the amounts of CPC's and 

CPCMT's respective LaCs. See Kleinhaus Decl. Exs. N, 0.)4 

3 The parties also agreed to apply the interim agreement to the expired 

Foreign LOCs during the pendency of litigation over how the LOCs should be 

treated as part of ConocoPhillips' customer claims. See Tr. at 7:5-9. 

4 Specifically, the Trustee allowed CPC a claim of $267,415,560 of which, 

according to the Trustee, $195 million had already been paid (Kleinhaus Decl. 

Ex. N at I), and allowed CPCMT a claim of $36,413,371, of which--under the 

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Case 1:12-cv-06014-KBF Document 26 Filed 10/04/12 Page 4 of 19
The Trustee has asserted that the full proceeds of the six 

LOCs--which total $205 million--constitute customer property 

subject to ratable distribution. Accordingly, as to CPC, the 

Trustee credited $135 million--i.e., the face value of the 

Domestic LOCs--as already having been transferred to CPC with 

respect to its domestic futures accounts, and $60 million--i.e., 

the face value of the Foreign LOCs--as already having been 

transferred with respect to CPC's foreign futures accounts. 

See Kleinhaus Decl. Ex. N at 3.) Regarding CPCMT's claim, the 

Trustee credited $10 million i.e., the face value of the CPCMT 

LOC) with respect to CPCMT's foreign futures trading claim. 

(Kleinhaus Decl. Ex. 0 at 3.)5 

Given the Trustee's position that the full proceeds of the 

LOCs constitute customer property, it is possible that at some 

point ConocoPhillips will be required to return to MFGI's estate 

amounts in excess of the amounts that the Trustee determined 

each customer is entitled ratably to receive. In other words, 

if, by virtue of having received the full face value of the LOCs 

ConocoPhillips is later determined to have recovered more than 

Trustee's theory--$11,113,709 (which included the $10 million face value of 

the CPCMT LaC) had already been paid (Kleinhaus Decl. Ex. 0). The Trustee 

determined that the amount of the claims related to both the domestic and 

future "allowed to [ConocoPhillips] includes the face value of the letters of 

credit . . . that were posted by [ConocoPhillips] as margin for futures 

activity .... " (Kleinhaus Decl. Ex. Nat 3 nn.S-6.) 

5 ConocoPhillips seeks to recover a total of $40 million that is not covered 

by the LaCs. Tr. at 26:19-23. 

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Case 1:12-cv-06014-KBF Document 26 Filed 10/04/12 Page 5 of 19
its ratable share, it is possible that ConocoPhillips could end 

up owing the estate. See Tr. at 7:15-8:11. 

B. Procedural Background 

On June 22, 2012, ConocoPhillips filed an objection in the 

Bankruptcy Court to the Trustee/s claims determination. 

(Kleinhaus Decl. Ex. P.) Specifically, ConocoPhillips objected 

to the determination on the grounds that the "Trustee has 

miscalculated [ConocoPhillips/] claims by including the face 

value of letters of credit provided by ConocoPhillips to [MFGI] 

both in the allowed amounts of the claims and in the amounts 

supposedly 'distributed' to ConocoPhillips on account of the 

claims. II (Id. at 2.) According to ConocoPhillips, the 

Trustee's approach--i.e., treating the LaCs as if they "had been 

drawn in full and their proceeds were being held by the 

Trustee"--left ConocoPhillips with a shortfall in ratable 

distributions owed. 

On July 30, 2012, the Trustee filed a motion (what is 

referred to herein as the "Trustee's Motion") for an order 

seeking to confirm its determination as to ConocoPhillips' 

"claims to customer accounts margined with letters of credit." 

(Kleinhaus Decl. Ex. A at 1.) The Trustee's Motion relies upon 

the position that all customer account collateral--of whatever 

nature--in excess of a customer's margin obligations becomes 

"customer property" once a commodities broker goes into 

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Case 1:12-cv-06014-KBF Document 26 Filed 10/04/12 Page 6 of 19
liquidation. According to the Trustee, it would be 

inappropriate to treat LOCs differently from other collateral. 


In that vein, the Trustee relies upon CFTC Regulation 


190.08(a) (1) (i) (E), which provides that "the full proceeds of a 


letter of credit" must be treated as "customer property," 


subject to pro rata distribution. Id. at 2, 12-13.) 


DISCUSSION 

A. Legal Standard 


Section 157(d) provides: 


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 and other laws 

of the United States regulating organizations or 

activities affecting interstate commerce. 

28 U.S.C. § 157(d). Section 157(d) therefore provides for both 

discretionary withdrawal for cause (the first sentence of the 

statute), and mandatory withdrawal when a court must consider 

federal laws other than title 11 (the second sentence of the 

statute). Here, ConocoPhillips moves for mandatory withdrawal. 

Mandatory withdrawal "is reserved for cases where 

substantial and material consideration of non-Bankruptcy Code 

federal statutes is necessary for resolution of the 

proceedings." In re Ionosphere Clubs, Inc., 922 F.2d 984, 995 

(2d Cir. 1990). "Substantial and material consideration" means 

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Case 1:12-cv-06014-KBF Document 26 Filed 10/04/12 Page 7 of 19
"significant interpretation, as opposed to simply application, 

of federal laws apart from the bankruptcy statutes./I City of 

New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir. 1991) i see 

also In re Enron Corp., No. 04 Civ. 8177, 2004 WL 2711101, at *2 

(S.D.N.Y. Nov. 23, 2004) ("The purpose of § 157(d) is to assure 

that an Article III judge decides issues calling for more than 

routine application of federal laws outside the Bankruptcy 

Code. II (quotation marks and alteration omitted)). Although 

mandatory withdrawal does not require matters of first 

impression be involved, where they are, "the burden of 

establishing a right to mandatory withdrawal is more easily 

met." Picard v. JPMorgan Chase & Co., et al. ("JPMorgan"), 454 

B.R. 307, 312 (S.D.N.Y. 2011) (quotation marks omitted); Bear, 

Stearns Secs. Corp. v. Gredd, No. 01 CIV 4379, 2001 WL 840187, 

at *2 (S.D.N.Y. July 25, 2001) (same). Resolution of a motion 

to withdraw the reference does not, however, require an analysis 

of "the merits of the parties' positions concerning the statutes 

of th[e] property in dispute." Gredd, 2001 WL 840187, at *4; 

see also JPMorgan, 454 B.R. at 312. 

B. Analysis 

In order for mandatory withdrawal to be appropriate under 

section 157(d), this Court must find that at least one issue 

requires "substantial and material consideration" of federal 

non-bankruptcy law. Here, there are three such issues. All 

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three implicate Regulation 190.08(a) (1) (i) (E). That provision 

provides, in pertinent part: 

The property of the debtor's estate must be allocated 

among account classes and between customer classes as 

provided in this section, except for special 

distributions required under appendix B to this part. 

The property so allocated will constitute a separate 

estate of the customer class and the account class to 

which it is allocated, and will be designated by 

reference to such customer class and account class. 

(a) (1) Customer property includes the following . . 

(i) All cash, securities, or other property or the 

proceeds of such cash, securities, or other property 

received, acquired, or held by or for the account of 

the debtor, from or for the account of a customer, 

including a non-public customer, which is: ... 

(E) The 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). The CFTC promulgated the Part 

190 Regulations pursuant to the CEA, 27 U.S.C. § 24(a) i.e., a 

statute not part of title 11 of the Bankruptcy Code) . 

ConocoPhillips concedes that the CFTC enacted the Part 190 

Regulations to implement or supplement the commodity broker 

liquidation provisions of the Bankruptcy Code. (See Mem. of Law 

in Support of ConocoPhillips' Mot. to Withdraw (Dkt. No.2) ("CP 

Mem. ") at 11.) 

Once MFGI entered bankruptcy, the Trustee interpreted CFTC 

Regulation 190.08(a) (1) (i) (E) as not only allowing, but also 

requiring, that the "full proceeds" of the undrawn LOCs be 

included with all other customer property, subject to ratable 

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Case 1:12-cv-06014-KBF Document 26 Filed 10/04/12 Page 9 of 19
distribution. The Trustee then referenced those "proceeds" 

(which had not been reduced to proceeds in fact) as fulfillment 

of a substantial portion of ConocoPhillipsl customer claims. 

The Trustee readily concedes that outside of the liquidation 

context I MFGI could not have drawn upon any of the LOCs. 

According to the Trustee I their treatment of the full proceeds

of the LOCs as customer property is appropriate because I as 

evidenced by the Part 190 Regulations I "everything changes in 

bankruptcy" such that the Trustee can count the full proceeds of 

an undrawn letter of credit as part of the estate/s overall 

customer property. 

ConocoPhillips argues that the Trustee/s treatment of the 

LOCs raises three issues that require "substantial and material 

considerationll of federal non-bankruptcy law: (1) the correct 

interpretation of "full proceedsll in CFTC Regulation 

190.08(a) (1) (i) (E); (2) whether the Trustee/s interpretation of 

Regulation 190.08(a) (1) (i) (E) conflicts with the CEA/s 

prohibition on the CFTC regulating bank products; and 

(3) whether the Trustee/s interpretation of Regulation 

190.08(a) (1) (i) (E) conflicts with state law regarding letters of 

creditl and therefore implicates the federal law of preemption. 

1. Interpretation of Regulation 190.08(a) (1) (i) (E) 

The Trustee/s treatment of the LOCs requires judicial 

interpretation of the meaning of "full proceedsll in Regulation 

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Case 1:12-cv-06014-KBF Document 26 Filed 10/04/12 Page 10 of 19
190.08(a) (1) (i) (E) as applied to undrawn LaCs. ConocoPhillips 

argues that the Trustee's use of Regulation 190.08(a) (1) (E) to 

treat the LaCs as if they had been fully drawn (i.e., to "treat 

the face of letters of credit as 'customer property' subject to 

pro rata distribution" (CP Mem. at 14)) is novel--and that 

consideration of that interpretation is a matter of first 

impression. At oral argument, the Trustee conceded that a court 

has not "answer [ed] this question before." Tr. at 56:8-19. 6 

The Trustee argues that this interpretative issue does not 

require "substantial and material consideration" of federal 

non-bankruptcy law because the Part 190 Regulations are 

effectively (although not literally) part of the Bankruptcy Code 

because they were intended to regulate liquidation of 

commodities brokers. (Tr.'s Mem. of Law in Opp'n to 

ConocoPhillips' Mot. to Withdraw the Ref. (Dkt. No. 18) ("Tr. 

Mem.") at 3, 7-10.) That overlooks--despite the Trustee's 

concession on this point (id. at 8)--that the regulations were 

6 The Trustee argues that interpreting "full proceeds" as anything other than 

the face value of the letters of credit renders the regulation nugatory. 

Although this is an issue to be resolved at the merits stage of this 

proceeding, the Court noted at oral argument that the regulation could apply 

to a situation where "there has been a trigger for a letter of credit and the 

trigger may have actually occurred thereby making the CFTC provision live and 

actually relate to real proceeds as opposed to the generation of proceeds." 

Tr. at 5:15-18. 

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Case 1:12-cv-06014-KBF Document 26 Filed 10/04/12 Page 11 of 19
promulgated pursuant to powers granted to the CFTC under the 

CEA, which indisputably is not part of title 11.7 

Further, the Trustee argues that to hold that interpretive 

questions relating to Regulation 190.08 require reference to 

"other laws of the United States" would require vast numbers of 

questions go to the district courts that more properly belong in 

the bankruptcy court. See Tr. Opp'n at 9-10} i see also Tr. at 

54:9-55:12. This Court is mindful of the Second Circuit's 

admonition that withdrawal should be "construed narrowly." See 

In re Ionosphere Clubs, Inc., 922 F.2d at 995. Under the 

circumstances here, however, the interpretive issues relating to 

the differing treatment of letters of credit in and out of 

liquidation is a larger question that potentially implicates a 

host of non-liquidation issues--~, how financial transactions 

are structured and risks allocated. This interpretative issue 

is substantial and material insofar as Regulation 

190.08(a} (1) (i) (E) only is concerned--not all applications of 

Regulation 190.08 will require substantial and material 

consideration of laws outside of title 11. 8 

7 That the Part 190 Regulations are "closely connected to the Bankruptcy Code" 

(see Tr. Mem. at 8) does not change the Court's analysis. 

8 If the Trustee consistently is--and has been--applying the Part 190 

Regulations to various types of property held at MFGI and cannot cite to 

other instances where district courts have withdrawn the reference (in the 

MFGI liquidation or others) that demonstrates to this Court that withdrawal 

here--in these narrow circumstances relating to letters of credit under 

Regulation 190.08(a) (i) (E) only--will not create a sideshow to the Bankruptcy 

12 


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The second sentence of section 157(d) is clear: if a court 

must consider title 11 and others laws of the United States, the 

Court must withdraw the reference from the Bankruptcy Court. 28 

U.S.C. § 157(d). The CFTC is not title 11; it is "other laws" 

of the United States. Interpreting the meaning of "full 

proceeds" in this factual context requires "substantial and 

material consideration" of federal non-bankruptcy law. Thus, 

this Court must withdraw the reference. See, e.g., JPMorgan, 

454 B.R. at 312; Gredd, 2001 WL 840187, at *2. 

2. Resolving the Conflict between Regulation 

190 . 08 (a) (1) (i) (E) and the CEA 

Even if the Part 190 Regulations were considered to 

effectively be part of title II, there is an additional, 

independent basis for mandatory withdrawal. ConocoPhillips 

argues that the Trustee's use of Regulation 190.08(a) (1) (i) (E) 

to "generate" the "full proceeds" of letters of credit upon a 

commodities broker's liquidation conflicts with the CEA's 

prohibition on the CFTC regulating "bank products." (CP Mem. at 

15.) The CEA bars the CFTC from "exercis[ing] regulatory 

authority under the [CEA] with respect toe] an identified 

banking product." 7 U.S.C. § 27a(a) (1). An "identified banking 

product" statutorily includes "a letter of credit issued 

by a bank." Pub. L. No. 106-102, 113 Stat. 1338 § 206(a) (3) 

Court's administration of MFGI's estate. Regardless, the Court's ruling on 

the instant motion to withdraw should be construed narrowly. 

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(codified at 15 U.S.C. § 78c note.)9 Thus, according to 

ConocoPhillips, this Court must withdraw the reference to 

determine whether Regulation 190.08(a) (1) (i) (E), as interpreted 

by the Trustee, has allowed the CFTC to exceed the scope of its 

regulatory authority by regulating what the CEA has defined as a 

"bank product." 

Both the Trustee and the CFTC argue that the regulation at 

issue does not implicate the CFTC's authority because the rule 

at issue (190.08(a) (1) (i) (E)) is not "regulating" an identified 

banking product. (Tr. Mem. at 19; Stmt. of the CFTC in Resp. to 

ConocoPhillips' Mot. to Withdraw the Ref. (Dkt. No. 20) ("CFTC 

Mem.") at 11-12.) However, it is clear that the Part 190 

Regulations may well "regulate." There is no dispute that there 

is a difference between how LOCs are treated in and out of 

liquidation. 

To explore that point, at oral argument the Court inquired 

of the Trustee how, in fact, the estate could draw upon any of 

the LOCs at issue here. Tr. at 42-43. Under "normal" i.e. 

non-bankruptcy) circumstances, a letter of credit may only be 

drawn if the holder presents the requisite documentation, as 

specified by the letter. Here, the LOCs require that an event 

of default have occurred for the letter to be drawn--and the 

9 The Trustee concedes, as it must, that "Congress intended to exempt certain 

banking products, including letters of credit, from regulation as futures 

contracts.- (Tr. Mem. at 19.) 

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Foreign and CMPCMT LOCs even require presentation of a 

certificate from MFGI that an event of default has occurred. 

See Kleinhaus Decl. Exs. D, E, F, G, H, J; see also id. Exs. C, 

I.} 

In response to the Court's questions about how a letter of 

credit held by a the trustee of a bankrupt commodities broker 

could be drawn upon, the Trustee explained that it would present 

one or more of the LOCs, all of which require an event of 

default have occurred and three of which additionally require a 

certificate of an event of default, without any documentation, 

to the bank, along with information certifying the commodities 

broker's bankruptcy. Tr. at 43:12-44:4. The Trustee conceded 

that it was unclear how the bank would respond. Tr. at 44:5-10. 

This line of questioning highlighted the unresolved 

question with respect to whether in liquidation a commodities 

broker's trustee use of Regulation 190.08(a} (I) (i) (E) somehow 

generates "proceeds" from letters of credit used to secure 

margin at the broker, rather than marshals them. If this is so, 

there is an argument that Regulation 190.08(a} (I) (i) (E) might 

"regulate" LOCs by changing their treatment--and thus, might 

contravene the CEA's prohibition. Such an inquiry necessarily 

requires "substantial and material consideration" of federal 

non-bankruptcy law--i.e., to determine whether the CFTC is 

"regulating" an identified banking product or acting within the 

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Case 1:12-cv-06014-KBF Document 26 Filed 10/04/12 Page 15 of 19
scope of its regulatory authority under the CEA. 10 The Court 

will have to consider the CEA in order to determine whether the 

CFTC has exceeded its regulatory authority--i.e., whether there 

is a conflict between the Part 190 Regulations and the CEA 

because the CEA prohibits, but that Rule 190.08{a) (I) (i) (E) may 

require, "regulation" of an identified banking product. ll 

Interpreting the CEA--which is undoubtedly not part of title 11­

-and whether the CFTC is regulating letters of credit 

unquestionably requires "substantial and material consideration" 

of federal non-bankruptcy law. 

3. 	 Resolving Whether the Regulation 

190.08{a) (I) (i) (E) (or the Supplementary 

Information) Preempts State Law 

ConocoPhillips argues that the third issue that requires 

"substantial and material consideration" of federal 

non-bankruptcy law relates to the alleged tension between 

10 The CFTC argues that it has not exceeded its regulatory authority because 

it is possible that the LOCs are not identified banking products unless there 

has been a determination by a banking agency "in consultation with the CFTC" 

that such products constitute "swaps." (CFTC Mem. at 11.) That is an issue 

that goes to the merits, rather than the question of what laws this Court 

will need to apply to resolve the issue--and to what extent. 

11 The Trustee argues--based upon the legislative history of the Part 190 

Regulations (referred to as the "Supplemental Information")--that its 

treatment of ConocoPhillips' customer claims is in accord with the CFTC's 

intent with respect to letters of credit. (Tr. Mem. at 14-15.) Such history 

is not reflected within the regulation itself. In addition, having 

determined that the Part 190 Regulations are outside of title 11 necessarily 

takes the legislative history outside of title 11 as well. Thus, to the 

extent the Trustee believes this Court must recognize or use the legislative 

history of the Part 190 Regulations to interpret the Trustee's treatment of 

the LOCs, that is additional "substantial and material consideration" of 

federal non-bankruptcy laws that requires mandatory withdrawal. Further, the 

Supplemental Information does not address how a Trustee should treat expired 

letters of credit (which the Foreign LOCs are) and thus, the Court will have 

to address that issue--another matter of first impression--as well. 

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Case 1:12-cv-06014-KBF Document 26 Filed 10/04/12 Page 16 of 19
federal and state law--and implicates the preemption of the 

latter by the former. Neither party disputes that under the 

Uniform Commercial Code (and interpretative case law), drawing 

upon a letter of credit without meeting the terms of the letter 

(having made a misrepresentation--express or implied--that the 

terms of the letter had been met) could constitute "material 

fraud." U.C.C. § 5-109 cmt.1i see also Ground Air Transfer, 

Inc. v. Westates Airlines, Inc., 899 F.2d 1269, 1273 (1st Cir. 

1990) (Breyer, J.). According to conocoPhillips, the Trustee 

cannot draw on the LOCs without stating that the terms or 

trigger for the LOC have been met, namely a default (and in some 

instances, a certificate thereof). Because the parties agree 

that no default has occurred, according to conocoPhillips 

drawing on the LOCs must therefore require a material fraud on 

the bank. The Trustee has stated that it in no way intends to 

mislead a bank regarding a state of default. Instead, as 

discussed above, in order to draw upon one of the LOCs, the 

Trustee (or a designee) would approach the banking institution, 

inform it that MFGI was in liquidation and state the bank must 

honor the LOCs pursuant to Regulation 190.08(a) (1) (i) (E). 

According to the Trustee, what happens next (at the bank) is 

unclear. ConocoPhillips argues that even that course of action 

creates a difference between how letters of credit are treated 

under non-liquidation state contract law and how they are 

17 

Case 1:12-cv-06014-KBF Document 26 Filed 10/04/12 Page 17 of 19
treated in liquidation of a commodities broker under the CFTC 

Regulation. 

This scenario raises the question of whether the CFTC 

Regulation is preempting, or can appropriately preempt, state 

law (which the statute does not purport to do on its face) .12 

Consideration of that issue will require the Court to 

"substantial [ly) and material [ly] consider[]11 law relating to 

federal preemption. The Court will have to consider, for 

example, whether Congress, in providing the CFTC with authority 

to promulgate the Part 190 Regulations under the CEA, intended 

to preempt state law regarding treatment of letters of credit in 

liquidation. See, e.g., Cipollone v. Liggett Grp., Inc., 505 

U.S. 504, 516 (1992) (congressional intent is "the ultimate 

touchstone" of preemption analysis). The Court will likewise 

have to consider whether the "scope, structure, and purpose" of 

the Part 190 regulations "implicitly" manifests such an intent. 

See New York SMSA Ltd. P'ship v. Town of Clarkstown, 612 F.3d 

97, 104 (2d Cir. 2010). Accordingly, mandatory withdrawal is 

appropriate on this basis as well. 

12 The Supplementary Information, however, would seem to have the regulation 

at issue preempt state law. 

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CONCLUSION 

For the aforementioned reasons, ConocoPhillips' motion to 

withdraw the reference of the Trustee's Motion from the 

Bankruptcy Court is GRANTED; the reference is WITHDRAWN. 

Despite the agreed-upon briefing schedule the parties 

submitted to the Bankruptcy Court, the parties should confer 

and, no later than October 10, 2012, submit a briefing schedule 

on the Trustee's Motion that has it fully briefed no later than 

December 3, 2012. The Court will hear oral argument on the 

motion on December 19, 2012, at 9:30 a.m. 

The Clerk of the Court is directed to terminate the motion 

at Docket No.1. 

SO ORDERED: 

Dated: 	 New York, New York 

October <f-, 2012 

KATHERINE B. FORREST 


United States District Judge 


19 


Case 1:12-cv-06014-KBF Document 26 Filed 10/04/12 Page 19 of 19