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Note: Koch Supply & Trading, LP (Applicant) was a commodity future customer of MF Global Inc. (Beneficiary). In accordance with the Commodities and Future Trading Commission's (CFTC) regulations, Applicant secured an irrevocable standby LC for USD 20,000,000 in favor of Beneficiary issued by JPMorgan Chase (Issuer) as posted margin to secure its trading position.

Applicant was a former customer of MF Global, Inc., a securities broker/dealer and commodities merchant involved in a highly publicized liquidation. When Beneficiary commenced bankruptcy proceedings, the court appointed James Giddens (Trustee) as trustee for Beneficiary. Trustee implemented a claims process for customers of Beneficiary to receive a pro rata portion of the customer property under Beneficiary's control at the time of the bankruptcy filing. The LC expired without having been drawn on before the deadline for customers to file a claim. Applicant did not file a claim. Trustee then determined that the LC was considered customer property at the time of bankruptcy filing and the expiration of the LC was an unauthorized transfer of customer property. Trustee took the position that Applicant was liable to Beneficiary's estate for the "full proceeds" of the LC.

Applicant then brought suit in the New York federal court for a declaratory judgment that it was not liable to Beneficiary or Trustee for the proceeds of the LC. The federal court referred the proceedings to the Bankruptcy Court. Applicant then moved to withdraw the reference to the Bankruptcy Court. The U.S. District Court for the Southern District of New York, Buchwald, J., granted the motion to withdraw the reference.

The Judge relied on 28 U.S.C. § 157(d), which requires the withdrawal of the reference when the underlying proceeding necessitates the interpretation of non-bankruptcy interstate commerce law. The Judge stated that the reviewing court must interpret CFCT regulation 17 C.F.R. 190.08(a)(1)(i)(E) to determine whether "full proceeds" means the full value of the LC, whether the regulation governs expired LCs, and whether the regulation gives sufficient notice to commodity future customers.

[JEB/mkg]

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