The primary advocate group for former MF Global customers is undertaking an effort to convert the commodities broker's bankruptcy status to one that allows a more streamlined liquidation process, saying it would preserve more potential payback for customers.

The Commodity Customer Coalition, which represents thousands of customers of the fallen broker, told Reuters on Friday it wants to ask the U.S. Bankruptcy Court to handle the case under Chapter 7 of the bankruptcy code, designed specifically for liquidation of assets.

A spokesman said the coalition has reached out to the Commodity Futures Trading Commission (CFTC), the U.S. futures regulator, in hopes of gathering support for a planned court filing to change the case from Chapter 11, which allows a company to keep operating while it tries to reorganize and negotiate with creditors.

MF Global Holdings Ltd collapsed after it revealed exposure to risky European sovereign debt. With liquidation the only realistic option, the money being spent to keep it afloat in Chapter 11 serves no purpose, coalition spokesman John Roe said on Friday.

The cost of the case has drawn harsh criticism, including from U.S. Congressional leaders, amid reports that the trustee managing MF Global's assets in bankruptcy may seek court approval of bonuses for three top executives still on the payroll.

Trustee Louis Freeh said last week he has made no decisions on bonuses.

Customers of MF Global's brokerage are missing an estimated $1.6 billion that investigators say was improperly used to cover corporate transactions and is now scattered among MF Global affiliates, banks, exchanges and other parties.

While Chapter 11 includes the option of liquidation if the company cannot renegotiate its debt, Roe said Chapter 7 would allow a more streamlined liquidation with no committee of creditors paid for from the bankrupt company's estate.

Chapter 7 would be cheaper and would guarantee that customers of MF Global's brokerage could pursue recoveries from the parent company's estate, an issue currently in dispute.

Chapter 7 better ensures customer priority if commingled funds are traced to the holding company, and the sooner we get there ensures there will be assets left to pay us, Roe said.

According to monthly expense filings, MF Global has spent more than $11 million since filing for bankruptcy on October 31. It is surviving on about $26 million in cash that had been pledged to JPMorgan Chase & Co as collateral on loans.

CHALLENGES

Obstacles stand in the coalition's way, not least among them cost.

Roe estimated that legal fees associated with a conversion motion would approach $100,000, and said the group has asked for donations from all its members.

According to a coalition term sheet obtained by Reuters, the group in particular has sought donations from three of MF Global's largest and most high-profile customers: oil giant ConocoPhilips, whose account topped $310 million when MF Global went bust; Carl Icahn, who had an $85 million account; and Coca-Cola Co, which had a roughly $17 million account.

A Coca-Cola spokesman declined to comment on Friday. Representatives for Icahn and Conoco could not immediately be reached.

The coalition is hoping the CFTC will file the motion itself, and has met with Commissioners Jill Sommers and Scott O'Malia to discuss the issue, according to the term sheet.

While O'Malia seemed more receptive to the idea than did Sommers, Roe said, neither commissioner could immediately say whether and to what extent the commission could help.

Calls to a CFTC spokesman were not immediately returned on Friday. A spokeswoman and a lawyer for Freeh declined to comment on Friday.

Prior court rulings are also stacked against the coalition.

Judge Martin Glenn has already rejected one attempt to convert the case, filed by commodities customer Sapere Wealth Management.

While the coalition could pose a different legal theory than the one that sunk Sapere -- for example, by arguing creditors would receive higher payouts under Chapter 7 -- Judge Glenn has indicated he would be hard-pressed to convert.

The judge in a January court ruling said he believes a Chapter 7 conversion would cause expenses to increase, rather than decrease.

While Chapter 7 is designed for liquidation, companies can liquidate under Chapter 11, as well. In complex cases involving many creditor factions, the more collaborative nature of Chapter 11 can be beneficial, as it gives creditors an active seat at the table.

The case is In re MF Global Holdings Ltd, U.S. Bankruptcy Court, Southern District of New York, No. 11-15059.

(Reporting By Nick Brown in New York; additional reporting by Tom Polansek in Chicago)

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