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Judge won’t convert MF Global’s Chapter 11 to Chapter 7

New Jersey residents are no doubt aware of the troubles that have caused their former governor, John Corzine, much embarrassment over the last few years. Voters in 2009 rejected giving him a second term as governor, and in 2011 he oversaw the downfall of financial firm MF Global Inc., which last year filed the eighth-largest bankruptcy in U.S. history.

MF Global’s downfall has received a vast amount of news coverage, because the firm’s trustee says there is approximately $1.2 billion in customer money missing from the business. Customers are now trying to sue to convert the parent company of MF Global’s Chapter 11 bankruptcy into a Chapter 7 liquidation that would see customers get paid first.

But a U.S. Bankruptcy Court judge in New York ruled against the customers earlier this month, who wanted to be able to perform their own investigation of the firm’s bankruptcy if they couldn’t get the case converted to Chapter 7.

One of MF Global’s customers argued that customers should be paid before creditors. In the lawsuit, MF Global is charged with failing to protect brokerage-customer funds. The suit wants MF Global liquidated as a futures broker, which would allow customers to be paid first.

But the creditors have also yet to be paid, and they are arguing to get all the money they feel they deserve.

The bankruptcy judge argued that converting the case to Chapter 7 would increase administrative costs, and that numerous federal agencies and the bankruptcy trustee are already all thoroughly investigating the company’s collapse. The judge also ruled that customers can’t make claims for assets until any investigation is complete.

But the lack of assets for customers could cause many customers to themselves have to file for bankruptcy in the future.

Source: Bloomberg, “MF Global Holdings Judge Rejects Customer Bid for Conversion to Chapter 7,” Tiffany Kary, Feb. 1, 2012

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