Could This Be a Victory for ConocoPhillips?

Because Houston-based ConocoPhillips (NYSE:COP) was one of nine MF Global customers allowed to post letters of credit rather than cash for their trading accounts, the energy company may escape the liquidation of the commodity broker without the losses suffered by other customers.

U.S. District Judge Katherine B. Forrest in Manhattan ruled on Thursday that the dispute over $205 million in letters of credit posted by the oil producer must be decided in district court, not by a bankruptcy judge, because it involves non-bankruptcy law, like the Commodity Exchange Act. Both sides must submit their briefs by December 3 and oral arguments will begin on December 19.

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The October 2011 bankruptcy of both the brokerage and its parent company, MF Global Holdings, could cause customers to lose $1.6 billion from their trading accounts, according to MF Global’s liquidator James Giddens.

Had ConocoPhillips posted cash, the company would only be entitled to receive the same percentage in distributions as other customers. However, ConocoPhillips has argued that because all of its letters of credit expired without being drawn, the letters should be canceled. If the letters are canceled the energy company will be spared any loss.

But Giddens has objected to ConocoPhillips’s claim because U.S. Commodity Futures Trading Commission regulations state that “proceeds” of letters of credit must be treated the same as other forms of customer collateral, like cash.

If ConocoPhillips loses the case, the company could be required to pay the trustee of MF Global, according to Forrest’s 19-page opinion.

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