By Nick Brown
NEW YORK (Reuters) - A former MF Global Holdings Ltd customer was rebuked on Friday by a judge for filing "frivolous" court papers attacking the mounting fees of Louis Freeh, the trustee unwinding the company's bankrupt estate.
U.S. Bankruptcy Court Judge Martin Glenn rejected arguments from customer leader James Koutoulas that Freeh should not be allowed to extend a Friday deadline to file financial data about the company. Koutoulas had argued the postponement would allow Freeh, a former FBI director, to rack up unreasonable fees.
Glenn stopped short of granting a request by Freeh's attorney, Brett Miller, to sanction Koutoulas, but warned he may impose such punishments for future frivolous acts.
"Be fair warned," Glenn told Koutoulas, a fund manager and lawyer who has assumed the de facto role of representing MF Global's former customers.
MF Global declared bankruptcy on October 31. Commodity traders with personal accounts lost billions of dollars when, according to investigators, the firm improperly used client money to cover corporate transactions as the firm sank.
A separate trustee working to recover money for customers has said client accounts may be facing a $1.6 billion shortfall.
Koutoulas' fight began when Freeh estimated this week that professionals in MF Global's bankruptcy have accrued nearly $25 million in fees. Freeh's report did not say how much of that figure was accrued by Freeh and his lawyers.
Freeh, who has not yet submitted formal compensation requests, would be paid from money he ultimately recovers on behalf of the MF estate through litigation and other means.
Freeh separately asked the court to extend by one month a Friday deadline to file financial data about the company's debts, assets, transaction history and personnel.
Koutoulas objected that Freeh, who has been granted five similar extensions in the past, acted in bad faith by drawing out his work while continuing to rake in fees.
In bankruptcy, legal fees are paid before other creditor claims, meaning each dollar Freeh accrues is a dollar taken away from creditors, Koutoulas said.
Glenn, though, said Koutoulas did not back up his "bad faith" claims with evidence that Freeh actually had an impure motive for seeking the extension.
There is also the question of whether customers would be eligible to be paid back from money recovered by Freeh. Money he recovers is designed to pay back creditors of MF Global's parent estate, not customers of its broker-dealer unit.
Koutoulas said after the hearing that his group, the Commodity Customer Coalition, will soon file a motion seeking to convert MF Global's bankruptcy from a Chapter 11 to a more streamlined liquidation, known as Chapter 7. The move, he says, would save the estate money.
In Chapter 7, a bankrupt estate is put in the hands of a trustee whose job is to sell assets as quickly as possible and distribute money to creditors.
Koutoulas said he initially planned to make the request at Friday's hearing but after being called "frivolous," the moment didn't seem right.
"The plan was to get that into today's hearing, but I ended up having to be a little more defensive than I thought," he said.
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; Editing by Martha Graybow and Jeffrey Benkoe)