MF Global Holdings Ltd. and Litigation Trustee of the MF Global Litigation Tru

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK 	NOT FOR PUBLICATION
In re
MF GLOBAL HOLDINGS LTD., et al.,
Debtors.
Case No. 11-15059 (MG)
MEMORANDUM OPINION APPROVING USE OF
CASH COLLATERAL ON A FINAL BASIS
A P P E A R A N C E S:
PEPPER HAMILTON LLP
Proposed Special Counsel for Louis J. Freeh, Chapter 11 Trustee
Hercules Plaza, Suite 5100
1313 N. Market Street, P.O. Box 1709
Wilmington, Delaware 19899
By: 	David B. Stratton, Esq.
David M. Fournier, Esq.
MORRISON & FOERSTER LLP
Proposed Counsel for Louis J. Freeh, Chapter 11 Trustee
1290 Avenue of the Americas
New York, New York 10104
By: 	Brett H. Miller, Esq.
HUGHES HUBBARD & REED LLP
Counsel for James W. Giddens, Trustee for the SIPA Liquidation of MF Global Inc.
One Battery Park Plaza
New York, New York 10004
By: 	Jeffrey S. Margolin, Esq.
DEWEY & LEBOEUF LLP
Proposed Counsel for the Statutory Creditors’ Committee of MF Global Holdings Ltd., et al.
1301 Avenue of the Americas
New York, New York 10019
By: 	Martin J. Bienenstock, Esq.
Irena Goldstein, Esq.
SIMPSON THACHER & BARTLETT LLP
Counsel to JPMorgan Chase Bank, N.A.
425 Lexington Avenue
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New York, New York 10017
By: 	Peter v. Pantaleo, Esq.
STUTZMAN, BROMBERG, ESSERMAN & PLIFKA
Attorneys for Certain MF Global Inc. Claimants
2323 Bryan Street, Suite 2200
Dallas, Texas 75201
By: 	Sander L. Esserman, Esq.
JAMES L. KOUTOULAS
Counsel for the Commodity Customer Coalition
190 S. LaSalle St., #3000
Chicago, IL 60603
By: 	James L. Koutoulas, Esq.
HALPERIN BATTAGLIA & RAICHT, LLP
Attorneys for Queen’s Quay Avante Limited
555 Madison Avenue, 9th Floor
New York, New York 10022
By: 	Walter Benzija, Esq.
McGUIREWOODS LLP
Attorneys for Virginia Power Energy Marketing, Inc. Dominion Energy Marketing Inc., and
Virginia Electric and Power Company
1345 Avenue of the Americas, 7th Floor
New York, New York 10105
By: 	Dion W. Hayes, Esq.
Shawn R. Fox, Esq.
FORD MARRIN ESPOSITO WITMEYER & GLESER, L.L.P.
Attorneys for Sapere
Wall Street Plaza
New York, New York 10005
By: 	John J. Witmeyer III, Esq.
J. CHRISTOPHER GIORDANO
Pro Se
WILLIAM SOMERS
Pro Se
MARK KEELE
Pro Se
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MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Louis J. Freeh, the Chapter 11 Trustee (the “Chapter 11 Trustee”) of MF Global Holdings
Ltd. and MF Global Finance USA Inc. (collectively, the “Debtors”), seeks an order approving
the continued use of cash collateral on a final basis. An order approving interim use of $8
million of cash collateral was approved as part of the first-day motions in this case before the
Chapter 11 Trustee was appointed. (ECF Doc. # 26.) A series of stipulations and orders of the
Court thereafter extended the time period for use of the same $8 million of cash collateral, while
adjourning the date of the final hearing. (ECF Doc. ## 65, 118, 204, 255.) Approximately $25
million remains on deposit in JPMorgan Chase Bank (“JPMC”) in an account held in the name of
Man Group Finance Inc., a predecessor to MF Global Finance USA Inc. (“MFGF”). The
Chapter 11 Trustee has reached a proposed stipulation and order with JPMC permitting the
continued use of the full amount of cash collateral in the account. Numerous objections have
been filed; all but one has been resolved, pressed by customers of MF Global Inc. (“MFGI”).
The customers’ objection alleges that “customer property” which was supposed to be held in
segregated accounts by MFGI was improperly transferred in the days or weeks before the
collapse of the Debtors. The objectors suspect but have no proof to support their assertion that
some or all of the $25 million in the JPMC account derives from “customer property.”
The Chapter 11 Trustee persuasively argues that funds on deposit in an account in the
name of the Debtors are presumed to be property of the Debtors’ estate. (ECF Doc. # 257 ¶¶ 1–
7.) See McHale v. Boulder Capital LLC (In re 1031 Tax Group, LLC), 439 B.R. 47, 70-71
(Bankr. S.D.N.Y. 2010); L.F.D. Operating Inc. v. Ames Dep’t Stores, Inc. (In re Ames Dep’t
Stores, Inc.), 274 B.R. 600 (Bankr. S.D.N.Y. 2002) (AJG) (“As a general rule, once funds are
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deposited in a bank account, the account holder is presumed to have title to and control over
those funds.”). JPMC, in turn, has argued that, under section 553 of the Bankruptcy Code, it has
a right of setoff to funds on deposit in the account. JPMC is the administrative agent and a
lender on a $1.2 billion unsecured revolving credit facility to the Debtors. Section 506(a)(1) of
the Bankruptcy Code provides that an allowed claim of a creditor on property in which the estate
has an interest is subject to setoff under section 553 and “is a secured claim to the extent of the
value of such creditor’s interest in the estate’s interest in such property, or to the extent of the
amount subject to setoff . . . .” 11 U.S.C. § 506(a)(1). Under section 363(a), “cash collateral”
includes deposit accounts “in which the estate and an entity other than the estate have an interest
. . . .” 11 U.S.C. § 363(a). Under section 363(c)(2), a trustee may not use cash collateral unless
“(A) each entity that has an interest in such cash collateral consents; or (B) the court, after notice
and hearing, authorizes such use . . . in accordance with the provisions of this section.” 11 U.S.C.
§ 363(c)(2). JPMC has consented to the Chapter 11 Trustee’s use of cash collateral on the terms
stated in a proposed order, but the objectors argue that they may have an interest (indeed, a
superior interest) in the cash collateral and they object. Under section 363(p)(2) of the
Bankruptcy Code, “the entity asserting an interest in property has the burden of proof on the
issue of the validity, priority, or extent of such interest.” 11 U.S.C. § 363(p)(2). Speculation that
customer funds may have been transferred into the account is not sufficient to carry the
customers’ burden of proof. See id.
As the objectors argue, under section 541(d), property of the estate does not include
“property in which the debtor holds, as of the commencement of case, only legal title and not an
equitable interest . . . .” 11 U.S.C. § 541(d). Section 761(10)(A)(viii), one of the Bankruptcy
Code sections specifically dealing with liquidation of commodity futures merchants, provides
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that “customer property” means cash or proceeds of cash from an account of a customer
including “property that was unlawfully converted from and that is the lawful property of the
estate.” 11 U.S.C. § 761(10)(A)(viii). Thus, in the event that customers are able to establish that
customer property was unlawfully converted from segregated customer accounts at MFGI and
deposited into the MFGF account at JPMC, the property would remain customer property, as to
which at most the Debtors hold only legal title, with the equitable interest remaining with
customers.
Moreover, according to the Statement of the SIPA Trustee Regarding the Cash Collateral
Motion (the “Statement”) (ECF Doc. # 263), James W. Giddens (the “SIPA Trustee”) does not
object to entry of the proposed order because it contains “a broad reservation of rights and will
not impact the rights of the MFGI estate and the SIPA Trustee . . . .” (Statement ¶ 4.) The SIPA
Trustee argues that if improper transactions involving customer property did occur, the SIPA
Trustee may avoid those transactions under both the Bankruptcy Code and the Securities
Investor Protection Act. (Statement ¶ 3.) See 11 U.S.C. § 764(a); SIPA § 78fff-2(c)(3).
In light of public disclosures concerning MF Global, including those of the SIPA Trustee,
the customers’ speculation may (or may not) turn out to have some basis in fact, but it has not
been established so far and certainly does not overcome the legally recognized presumption that
the funds in the MFGF account are property of the Debtors. The Court will not make any
determination at this time of the ultimate property rights to the funds in the account. The
proposed cash collateral order recognizes that no final determination is being made at this time.
The proposed order includes a very broad and appropriate reservation of rights. Specifically,
paragraph 6(i) of the proposed order fully preserves the rights of all parties-in-interest if it is later
determined that as of the petition date the funds in the JPMC account were not property of the
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estate or were subject to a constructive trust or equitable lien in favor of any former customer of
MFGI.
The Court recognizes that the customers have not had an opportunity to take discovery.
Under present circumstances and at the present time, the Court will not permit the objectors to
take formal discovery. Both the SIPA Trustee and the Chapter 11 Trustee—along with
investigators and lawyers from the FBI, Department of Justice, SEC, CFTC, and perhaps other
agencies—are laboring under enormous strain from the collapse of MF Global and are fully
engaged in their own investigations. Now is not the time to permit private parties to take their
own formal discovery.
In these circumstances, however, MFGI’s customers are entitled to know whether
segregated customer property is on deposit in the JPMC account. Consequently, the Court
directs the Chapter 11 Trustee to undertake a limited investigation and thereafter report to the
Court on the narrow issue whether the funds on deposit in the MFGF account at JPMC, as of the
petition date, included “customer property,” and if so, how much. The Court expects that the
SIPA Trustee will cooperate with the Chapter 11 Trustee in this investigation and report. The
Court believes that, at least, a preliminary report can be filed with the Court within sixty days
from the date of the order granting the use of cash collateral on a final basis. For good cause
shown, the Chapter 11 Trustee may apply for additional time to complete the preliminary report.
Cash collateral may only be used in accordance with a budget. A rolling four-week
budget has been provided with the proposed order, and weekly, updated budgets will be
prepared. Subsequent budgets must be filed in accordance with the order.
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The Chapter 11 Trustee’s need for the use of cash collateral is obvious. The Chapter 11
Trustee must operate the Debtors’ estate with the goal of maximizing the recovery of all
creditors. Expenses of operating the Debtors’ estate—and, therefore, the need for cash—has
been significantly and prudently reduced. Whether MFGI’s customers have any priority on
recovery from the Chapter 11 estate raises important issues that will have to be determined later
in the case. But all creditors benefit from maximizing the value of the estate.
The record further establishes that the negotiation of the final cash collateral order was
conducted in good faith, entitling JPMC to the good faith finding under section 364(e) of the
Bankruptcy Code included in the order.
The one remaining objection is overruled and the motion for use of cash collateral is
granted. A separate order will be entered.
Dated: December 14, 2011
New York, New York.
_____/s/Martin Glenn_______
MARTIN GLENN
United States Bankruptcy Judge
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