By Sarah Kent 
 

LONDON--Citigroup Inc. (C) and Swiss-based trader Mercuria Energy Group are battling in a London court over payments relating to metals-backed financing arrangements in China worth more than $270 million.

Banks have loaned hundreds of millions of dollars to commodities traders in China in recent years, using metals such as copper, iron ore and aluminum as collateral. However, evidence suggests large quantities of metal stored at the eastern ports of Qingdao and Penglai is unaccounted for and may have been used as collateral for multiple loans.

The case between Mercuria and Citigroup is one of several brought by companies scrambling to limit their exposure to potential losses after the Chinese government launched an investigation into allegations of loan fraud at the ports.

According to court documents seen by The Wall Street Journal, Citigroup is seeking expedited payments from Mercuria for forward sales of metal stored at Qingdao and Penglai worth more than $270 million, arguing that the closure of the ports as a result of the probe triggered its right to demand early settlement for the financing arrangements.

Mercuria contends there isn't enough information about the situation at the ports to allow Citigroup to claim early payment, and that the bank, which Mercuria argues currently holds title to the metal stocks, should bear any risk relating to them.

Neither company is thought to be under suspicion of any wrongdoing in relation to the alleged fraud.

"The purpose of the proceedings is to determine the rights and obligations of both parties under contractual arrangements they have relating to metal that is affected by the ongoing situation in Qingdao and Penglai," Mercuria said in a statement.

Citigroup declined to comment on the court case.

The case is due to be heard between late November and early December, Mercuria said.

In a hearing in London on Friday, the energy-focused commodities trader opposed a proposal by Citigroup to expedite proceedings and to hold a trial as soon as Oct. 20, arguing for more time to gather information about the situation in Qingdao and Penglai, the court documents show

Western banks have been shut out of warehouses in both ports, making it difficult to assess companies' exposure to the suspected fraud. The situation has already sparked a string of lawsuits, as companies seek to protect themselves against potential losses.

Africa's largest bank, Standard Bank Group Ltd. (SBK.JO), and China's largest securities firm, Citic Resources Holdings Ltd. (1205.HK), are among the companies that have filed lawsuits in China. Earlier this month, Standard Chartered PLC (2888.HK), which is conducting a separate lawsuit in Hong Kong to get control of stocks of metals in Chinese warehouses, said it had put aside $174 million in part to cover the fallout of the suspected lending fraud.

Write to Sarah Kent at Sarah.Kent@wsj.com

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