Frederick Grede v. FCStone LLC

In the

United States Court of Appeals

For the Seventh Circuit

Nos. 13-1232 and 13-1278

FREDERICK J. GREDE, not individually

but as Liquidation Trustee of the Sen-

tinel Liquidation Trust, Assignee of

certain claims,

Plaintiff-Appellee, Cross-Appellant,

v.

FCSTONE, LLC,

Defendant-Appellant, Cross-Appellee.

Appeals from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 09 C 136 — James B. Zagel, Judge.

ARGUED DECEMBER 10, 2013 — DECIDED MARCH 19, 2014

Before MANION, ROVNER, and HAMILTON, Circuit Judges.

HAMILTON, Circuit Judge. Sentinel Management Group, Inc.,

was an investment management firm that filed for Chapter 11

bankruptcy protection on August 17, 2007. Sentinel was caught

in the midst of the credit crunch that heralded the beginning of

the financial crisis of 2008–09. The crunch Sentinel faced was

2 Nos. 13-1232 and 13-1278

much worse because, it is now clear, Sentinel managers

invaded for their own use the assets that Sentinel was legally

required to hold in trust for its customers.

These appeals focus on two transfers of assets. In the days

and even the hours just before the bankruptcy filing, Sentinel

shifted assets around to increase dramatically the assets

available to pay one group of its customers at the expense of

another group. Then, on the first business day after the

bankruptcy filing, Sentinel obtained the permission of the

bankruptcy court to have its bank distribute more than $300

million from Sentinel accounts to the favored group of custom-

ers. As a result of these pre-petition and post-petition transfers,

the customers in the favored pool have recovered a good

portion of their assets from Sentinel, while those in the

disfavored pool are likely to receive much less. For the benefit

of the disfavored pool of customers, Sentinel’s trustee in

bankruptcy has sought to avoid both transfers under 11 U.S.C.

§§ 547 and 549. Both transfers benefitted defendant FCStone,

LLC, one of the customers in the favored pool, and both

transfers to FCStone have been litigated as a test case. After a

trial, the district court allowed the trustee to avoid both

transfers. FCStone has appealed.

This case seems to be unprecedented, or at least unusual, in

one important respect. Sentinel’s managers violated federal

commodities and securities law by invading not just one but

two statutory trusts for customer assets, one under the Com-

modity Exchange Act and the other under the Investment

Advisors Act. Those federal statutes, their accompanying

regulations, and the two federal agencies charged with

enforcing them were not enough to stop Sentinel managers

Nos. 13-1232 and 13-1278 3

from removing securities from customer trust accounts and

using them for their own gain. (Federal criminal charges are

pending against two senior executives of Sentinel.) Two groups

of customers (not to mention the rest of Sentinel’s creditors)

have been wronged, large amounts of money are at stake, and

there are insufficient funds in the estate to make Sentinel’s

customers whole. Under these circumstances, there are no easy

answers, and the courts face hard choices in applying bank-

ruptcy law to the wreckage and the survivors.

The district court resolved the conflict between the two

groups of wronged customers in an equitable way. The court

“avoided” (a technical term meaning set aside) both the pre-

petition and post-petition transfers so as to share the available

assets as fairly as possible between the two groups who are

similarly situated, apart from Sentinel’s choices to favor one

group over the other. Grede v. FCStone, LLC, 485 B.R. 854 (N.D.

Ill. 2013). As we explain below, however, our review persuades

us that there are insurmountable legal obstacles to the avoid-

ance relief ordered by the district court. We therefore reverse

as to both transfers.

With respect to the pre-petition transfer, the bankruptcy

code provides for avoidance (sometimes also called a “claw-

back”) of so-called preferential transfers made by an insolvent

debtor in the 90 days before filing a bankruptcy petition.

11 U.S.C. § 547(b). The code has a broad exception from

avoidance or clawback, however, for payments made to settle

securities transactions. See 11 U.S.C. § 546(e). In this case,

Sentinel’s pre-petition transfer fell within the securities

exception in § 546(e) and therefore may not be avoided.

4 Nos. 13-1232 and 13-1278

The post-petition transfer of $300 million was authorized by

the bankruptcy court. That authorization means that the post-

petition transfer cannot be avoided under the express terms of

11 U.S.C. § 549. Although we do not reach all of the parties’

arguments under § 549, in an effort to provide guidance to the

district court for future related cases, we briefly discuss at the

end of this opinion whether the post-petition transfer involved

property of the bankruptcy estate.

I. Factual Background

The details of Sentinel’s illegal practices and eventual

collapse have been described well in the district court’s

findings in this case, Grede v. FCStone, LLC, 485 B.R. 854 (N.D.

Ill. 2013), and by our court in a related case, In re Sentinel Mgmt.

Grp., Inc., 728 F.3d 660 (7th Cir. 2013), so we set out only the

facts most relevant to these appeals.

Sentinel was an investment management firm that special-

ized in short-term cash management. Its customers included

hedge funds, individuals, financial institutions, and futures

commission merchants, known in the business as FCMs.

Sentinel promised to invest its customers’ cash in safe securi-

ties that would nevertheless yield good returns with high

liquidity. Under the terms of Sentinel’s investment agreement,

a customer would deposit cash with Sentinel, which then used

the cash to purchase securities that satisfied the requirements

of the customer’s investment portfolio. Customers did not

acquire rights to specific securities under the contract, but

rather received a pro rata share of the value of the securities in

their investment pool. Sentinel prepared daily statements for

customers that indicated which securities were in their

Nos. 13-1232 and 13-1278 5

respective pools and the customers’ proportional shares of the

securities’ value.

Sentinel classified all customers into segments depending

on the type of customer and the regulations that applied to that

customer. Sentinel then divided each segment into groups

based on the type of investment portfolio each customer had

selected. In all, Sentinel had three segments divided into eleven

groups. For our purposes, we focus on two segments: Segment

1, which consisted of FCMs’ customers’ funds, and Segment 3,

which contained funds belonging to hedge funds, other public

and private funds, individual investors, and FCMs investing

their own “house” funds. FCStone’s funds were in Segment 1.

Both Segment 1 and Segment 3 accounts were subject to

federal regulations requiring Sentinel to hold its customers’

funds in segregation, meaning separate from the funds of other

customers and Sentinel’s own assets. Customer funds could

not be used, for example, as collateral for Sentinel’s own

borrowing. The FCMs in Segment 1 were protected by the

Commodity Exchange Act and related CFTC regulations, while

Segment 3 customers were protected by the Investment

Advisors Act and related SEC regulations. Both sets of regula-

tions created statutory trusts requiring Sentinel to hold custom-

ers’ property in trust and to treat it as belonging to those

customers rather than to Sentinel. See 7 U.S.C. § 6d(a)–(b)

(statutory trust under the CEA); 17 C.F.R. § 275.206 (statutory

trust under the IAA).

Unfortunately for Sentinel’s customers, their investment

agreements with Sentinel and the federal regulations bore little

relation to what Sentinel actually did with their money. Rather

6 Nos. 13-1232 and 13-1278

than investing each segment’s cash in securities for the

segment, Sentinel lumped all available cash together without

regard to its source and used it to purchase a wide array of

securities, including many risky securities that did not comply

with customers’ investment portfolio guidelines. Risky

securities were used in “repo” transactions or assigned to a

house securities pool.1 At the end of each day, Sentinel would

assign securities to groups from its general pool of securities

and would issue misleading customer statements listing the

securities that were supposedly held in the customer’s group

account. Sentinel’s “house” securities bought in part with

customers’ money did not appear on customer statements.

Sentinel also allocated a misleading sort of “interest

income” to its customers on a daily basis. Under the terms of

their agreements with Sentinel, customers were entitled to a

pro rata share of the interest accrued by securities in their

respective pools. However, Sentinel instead would calculate

the interest earned by all securities, including those belonging

to other Segments and the house pool. Sentinel would then

guesstimate the yield its customers expected to receive on their

group’s securities portfolio, add a little extra so that the rate of

return seemed highly competitive, and report the customer’s

pro rata share of that amount, minus fees, on the customer’s

statement.

1

A “repo” transaction is like a short-term secured loan. One party sells a

security to another for cash with a simultaneous agreement to repurchase

the security at a later time for a slightly higher cash price. The difference in

price is equivalent to interest. Sentinel engaged in repo transactions in both

directions.

Nos. 13-1232 and 13-1278 7

Sentinel funded its securities purchases using not only the

customer cash in the segment accounts but also cash from repo

transactions and money loaned to it by the Bank of New York

(BONY), the bank where Sentinel housed the majority of its

client accounts. BONY required Sentinel to move securities into

a lienable account to serve as collateral for the loan. If Sentinel

were to move Segment 1 or Segment 3 customer assets into a

lienable account, meaning that BONY had a lien on those

customer assets to secure its loans to Sentinel, then Sentinel

would be violating the trust requirements of federal laws

meant to protect Segment 1 and Segment 3 customers from

precisely such a risk.

Originally, the BONY loan was meant to provide overnight

liquidity. As Sentinel expanded its leveraged trading opera-

tions, though, it used the BONY loan to cover the fees those

trades required. Sentinel’s BONY loan ballooned, growing

from around $55 million in 2004 to an average of $369 million

in the summer of 2007. As the loan grew, Sentinel began using

securities that were assigned to customers as collateral for its

own borrowing, moving them out of their segregated accounts

and into the lienable account overnight. This meant that

securities that were supposed to be held in trust for customers

were instead being used for Sentinel’s financial gain and were

subject to attachment by BONY, a flagrant violation of both

SEC and CFTC requirements.

Sentinel’s illegal behavior left customer accounts in both

Segment 1 and Segment 3 chronically underfunded, but

customers were none the wiser. The securities that were

serving as collateral for the BONY loan continued to appear on

customer statements as if they were being held in segregated

8 Nos. 13-1232 and 13-1278

accounts for their benefit even though Sentinel was routinely

removing them from those accounts.

The music came to a crashing halt in the summer of 2007 as

the subprime mortgage industry collapsed and credit markets

tightened. Many of Sentinel’s repo counter-parties began

returning the high-risk, illiquid physical securities that Sentinel

had loaned to them. They demanded cash in exchange.

Sentinel did not have the cash on hand to pay them and was

unable to sell the returned securities. It was also unable to sell

its own similar house securities to raise cash. So Sentinel

borrowed even more from BONY, putting at risk even more of

the supposedly segregated customer assets.

BONY soon notified Sentinel that it would no longer accept

physical securities as collateral. It began pressuring Sentinel to

pay down its gigantic loan balance. In response, Sentinel

moved $166 million worth of still-valuable corporate securities

out of Segment 1, where they were held in trust, to a lienable

account as collateral for the BONY loan, again violating federal

segregation requirements and exposing Segment 1 customer

assets to the risk of attachment by BONY. Sentinel also sold a

large number of Segment 1 and Segment 3 securities to pay

down the loan, again treating customer securities as if they

belonged to Sentinel itself and using them for its own financial

gain. On August 16, 2007, BONY asked Sentinel to repay its

loan in full immediately. The following day, BONY told

Sentinel that due to the failure to repay the loan, it would begin

Nos. 13-1232 and 13-1278 9

liquidating the loan’s collateral in a few days. Sentinel filed for

bankruptcy protection that same day.2

Sentinel took several actions as it approached bankruptcy

that dramatically improved the situation of the Segment 1

customers and worsened that of the Segment 3 customers. On

July 30 and 31, 2007, Sentinel returned $264 million worth of

securities to Segment 1 from a lienable account where they had

been placed in violation of segregation requirements. Sentinel

then moved $290 million worth of securities from the Segment

3 trust into the same lienable account. This virtually emptied

the Segment 3 trust and once again violated federal securities

laws. Then, even after informing its customers on August 13

that it would no longer honor requests for redemption,

Sentinel nevertheless paid out full and partial redemptions to

some Segment 1 customers. Sentinel also distributed cash to

two Segment 1 groups that constituted the full value of those

accounts. Finally, on Friday, August 17, mere hours before

filing for bankruptcy, Sentinel distributed $22.5 million in cash

to two additional Segment 1 groups, one of which included

FCStone. FCStone received $1.1 million in that distribution,

which is the pre-petition transfer at issue in these appeals.

After filing for bankruptcy protection, Sentinel again acted

to protect the Segment 1 customers at the expense of its other

2

Federal criminal charges have been filed against Sentinel’s former

president and CEO Eric A. Bloom and former senior vice president

Charles K. Mosley in the Northern District of Illinois. See case No. 1:12-CR-

00409. So far, Mosley has pled guilty to two counts of investment advisor

fraud. Bloom’s jury trial began on February 25, 2014 and had not ended as

of March 17, 2014.

10 Nos. 13-1232 and 13-1278

customers and creditors. On Thursday, August 16, Sentinel

had sold a portfolio of Segment 1 securities to a company

called Citadel and deposited the proceeds of more than $300

million in a Segment 1 cash account. Sentinel filed for bank-

ruptcy the next day, on Friday, August 17.

On Monday, August 20, while still controlled by insiders,

Sentinel filed an emergency motion with the bankruptcy court

seeking an order allowing BONY to distribute the Citadel sale

proceeds to the Segment 1 customers. The SEC, CFTC, and at

least one Segment 3 customer appeared at an emergency

bankruptcy court hearing. They expressed concerns that

Sentinel might have been commingling funds and securities

(which was in fact the case), and that there was reason to

suspect that Segment 3 securities had been sold to Citadel.

After hearing from all who were present (including Sentinel,

Citadel, BONY, and some Segment 1 customers), the bank-

ruptcy court issued an order on August 20, 2007 allowing

BONY to release the funds. BONY did so on August 21.

FCStone received nearly $14.5 million in that distribution,

which is the post-petition transfer at issue here.3

The bankruptcy court later appointed Frederick Grede as

trustee of the Sentinel bankruptcy estate. The trustee filed

3

The trustee asserts that the money that was released by BONY was not

from the Citadel sale, but rather came from a Segment 3 cash account. If this

is correct, then Sentinel’s solicitousness for the Segment 1 customers over

the Segment 3 customers after its bankruptcy filing was even more

dramatic. Because we hold that the bankruptcy judge authorized the

transfer, however, it does not matter who is correct, so we adhere to the

district court’s findings of fact.

Nos. 13-1232 and 13-1278 11

adversary proceedings in the bankruptcy court seeking to

avoid Sentinel’s pre- and post-petition transfers to FCStone

and others. The district court withdrew the reference to the

bankruptcy court because it found the proceedings raised

significant and unresolved issues of non-bankruptcy law.

Grede v. Fortis Clearing Americas LLC, No. 09-C-138, 2009 WL

3518159, at *3–4 (N.D. Ill. Oct. 28, 2009). The current case

against FCStone was selected as a test case to resolve common

issues among the trustee’s adversary proceedings against other

FCMs who received pre-petition and post-petition transfers.

(We do not discuss the other FCMs further.) The trustee sought

to avoid Sentinel’s pre-petition transfer to FCStone under

11 U.S.C. § 547, and Sentinel’s post-petition transfer to FCStone

under 11 U.S.C. § 549. The trustee also alleged unjust enrich-

ment.

The district court held that the trustee could avoid the pre-

and post-petition transfers. Grede, 485 B.R. 854. The court

examined the post-petition transfer first, focusing on whether

the transfer involved property of the estate and was authorized

by the bankruptcy court, see 11 U.S.C. § 549, and whether

FCStone was an initial transferee or beneficiary of the transfer

as required by 11 U.S.C. § 550(a)(1) to avoid a transfer. In the

court’s view, the post-petition transfer involved property of the

estate. The court found that both the Segment 1 and Segment

3 customers were protected by statutory trusts and that the two

trusts stood on equal footing. Because there were thus two

equal trusts competing for an insufficient pool of assets, the

court applied Cunningham v. Brown, 265 U.S. 1 (1924), and

concluded that the Segment 1 customers would need to trace

their assets to specific bankruptcy estate assets to be able to

12 Nos. 13-1232 and 13-1278

claim rights to trust property. If just one trust had been

involved, the district court would have applied tracing

conventions to preserve the trust, but the court found tracing

conventions to be inappropriate in this case because of the

existence of two competing trusts. See Grede, 485 B.R. at 874–78

(discussing tracing conventions). The court then found that

FCStone was unable to trace its assets, which meant that its

trust failed and the transferred assets were property of the

estate, making their transfer subject to avoidance.

The district court also concluded that the bankruptcy court

did not authorize the post-petition transfer of the Citadel sale

proceeds within the meaning of 11 U.S.C. § 549(a) and that

FCStone was an “initial transferee” and beneficiary under

11 U.S.C. § 550(a)(1). The district court therefore concluded

that the trustee could avoid the post-petition transfer to

FCStone. 485 B.R. at 884.

Turning to the pre-petition transfer, the court held that the

transfer was not a “settlement payment” and was not made “in

connection with a securities contract” within the meaning of 11

U.S.C. § 546(e)’s safe harbor provision for such payments that

insulates them from most preference claims. The court con-

cluded that the trustee could therefore avoid the pre-petition

transfer as well. 485 B.R. at 887. Finally, the court held that the

trustee’s unjust enrichment claim was preempted by bank-

ruptcy law. Id. at 888.

FCStone appeals the rulings avoiding both the pre- and

post-petition transfers. It contends that the transfers did not

involve property of the estate, that the pre-petition transfer fell

within § 546(e)’s safe harbor, that FCStone was neither an

Nos. 13-1232 and 13-1278 13

initial transferee nor a beneficiary of either transfer, and that

the post-petition transfer was authorized by the bankruptcy

court. The trustee cross-appeals seeking prejudgment interest.

He also argues for reinstatement of the unjust enrichment

claim in the event that we reverse on the avoidance claims. We

review the district court’s findings of fact for clear error, but

review both legal questions and mixed questions of law and

fact de novo. Mungo v. Taylor, 355 F.3d 969, 974 (7th Cir. 2004).

II. Analysis

These appeals present many questions, but we find that just

two are decisive. First, we conclude that the trustee cannot

avoid the pre-petition transfer because 11 U.S.C. § 546(e)’s safe

harbor provision applies. Second, we conclude that the

bankruptcy court authorized the post-petition transfer,

meaning that 11 U.S.C. § 549 bars the avoidance or clawback of

that transfer.

A. The Pre-Petition Transfer

In general, a bankruptcy trustee can avoid a transfer that (1)

was made to or for the benefit of a creditor, (2) was for or on

account of an antecedent debt, (3) was made while the debtor

was insolvent, (4) was made on or within 90 days before the

date of the filing of the petition, and (5) allowed the creditor to

receive more than it otherwise would have through the

bankruptcy. 11 U.S.C. § 547(b); Warsco v. Preferred Technical

Group, 258 F.3d 557, 564 (7th Cir. 2001). This general provision

is designed to prevent a debtor approaching bankruptcy from

choosing on its own to favor some creditors at the expense of

others in ways that are not consistent with the priorities and

preferences of bankruptcy law. Id. at 564.

14 Nos. 13-1232 and 13-1278

The trustee’s power to avoid transfers made on or within 90

days before a bankruptcy filing means that many financial

transactions are not really final until those 90 days have

passed. In securities and financial markets, however, such

uncertainty can have especially high costs. In 11 U.S.C.

§ 546(e), Congress enacted a special provision exempting many

payments in securities transactions from this power:

Notwithstanding sections 544, 545, 547, 548(a)(1)(B),

and 548(b) of this title, the trustee may not avoid a

transfer that is a margin payment, as defined in

section 101, 741, or 761 of this title, or settlement

payment, as defined in section 101 or 741 of this title,

made by or to (or for the benefit of) a commodity

broker, forward contract merchant, stockbroker,

financial institution, financial participant, or securi-

ties clearing agency, or that is a transfer made by or to

(or for the benefit of) a commodity broker, forward

contract merchant, stockbroker, financial institution,

financial participant, or securities clearing agency, in

connection with a securities contract, as defined in

section 741(7), commodity contract, as defined in

section 761(4), or forward contract, that is made

before the commencement of the case, except under

section 548(a)(1)(A) of this title.

(Emphasis added.)

The purpose of this safe harbor was “to ensure that honest

investors will not be liable if it turns out that a leveraged

buyout (LBO) or other standard business transaction techni-

cally rendered a firm insolvent.” Peterson v. Somers Dublin Ltd.,

Nos. 13-1232 and 13-1278 15

729 F.3d 741, 748 (7th Cir. 2013); see also Peter S. Kim, Navigat-

ing the Safe Harbors: Two Bright Line Rules to Assist Courts

in Applying the Stockbroker Defense and the Good Faith

Defense, 2008 Colum. Bus. L. Rev. 657, 663–64. Otherwise, one

firm’s bankruptcy could cause a domino effect as its clients

could similarly default on their obligations, which in turn

would trigger further bankruptcies, and so on. By preventing

one large bankruptcy from rippling through the securities

industry in this way, the § 546(e) safe harbor protects the

market from systemic risk and allows parties in the securities

industry to enter into transactions with greater confidence.

We agree with FCStone that Sentinel’s pre-petition transfer

fell within § 546(e)’s safe harbor. The district court’s findings

of fact show that the transfer to FCStone was a “settlement

payment” and was made “in connection with a securities

contract” within the meaning of § 546(e).

Section 546(e) states that the trustee may not avoid a pre-

petition transfer made to a commodity broker that is either a

“settlement payment, as defined in section 101 or 741 of this

title,” or “in connection with a securities contract, as defined in

section 741(7),” except under 11 U.S.C. § 548(a)(1)(A). The

parties agree that FCStone is a commodity broker and that the

transfer occurred before the commencement of the bankruptcy

case. The only disputed issues are whether the transfer was a

“settlement payment” or was made “in connection with a

securities contract” as those terms are defined in the statute. If

the answer to either question is yes, the safe harbor applies and

the pre-petition transfer may not be avoided. The answer to

both questions is yes.

16 Nos. 13-1232 and 13-1278

The statute defines a settlement payment in a broad if

rather circular manner as “a preliminary settlement payment,

a partial settlement payment, an interim settlement payment,

a settlement payment on account, a final settlement payment,

or any other similar payment commonly used in the securities

trade.” 11 U.S.C. § 741(8). We have held that swapping shares

of a security for money (as happens in a customer redemption)

is a settlement payment within the meaning of § 546(e). See

Peterson, 729 F.3d at 749. Here, Sentinel’s customers did not

have rights to specific securities, but they were entitled to pro

rata shares of the value of the securities in their groups’

portfolios. That meant that Sentinel could finance customer

redemptions by selling securities from their group’s portfolio

or by paying them with cash it had on hand. Regardless of how

Sentinel chose to fund customer redemptions, the redemptions

were meant to settle, at least partially, the customers’ securities

accounts with Sentinel. The pre-petition transfer to FCStone

thus qualified as a “settlement payment” under § 546(e).

The pre-petition transfer was also made “in connection

with a securities contract,” which is an independent basis for

applying the safe harbor of § 546(e). Section 741(7) defines

“securities contract” very broadly, including but not limited to

“a contract for the purchase, sale, or loan of a security.”

Although Sentinel’s investors like FCStone did not have rights

to specific securities under their investment agreements, the

agreements did authorize (and expect) Sentinel to purchase

and sell securities as it saw fit for the benefit of its customers as

long as it complied with the portfolio’s investment guidelines.

The fact that the Segment 1 customers were entitled to cash

rather than to the securities themselves does not change the

Nos. 13-1232 and 13-1278 17

fact that these customers’ investment agreements were

contracts for the purchase and sale of securities. Additionally,

although Sentinel could and did partially redeem FCStone’s

account without selling securities from the Segment 1 portfolio,

the redemption still served in part to satisfy Sentinel’s obliga-

tions to FCStone under the investment agreement. So the pre-

petition transfer to FCStone in partial redemption of its account

was made “in connection with” the investment agreement, and

therefore “in connection with a securities contract” within the

meaning of § 546(e).

The district court came to different conclusions based not

on the text of § 546(e) but on policy grounds, concluding that

Congress could not have intended the safe harbor provisions

to apply to the circumstances of this case. Grede, 485 B.R. at

885–86. The court distinguished between an insolvent debtor

selling a security to a buyer just before going bankrupt and an

insolvent debtor distributing the proceeds of the sale of a

customer’s security. In the district court’s view, shielding the

transaction between debtor and buyer serves § 546(e)’s

purpose of preventing destructive ripple effects in the case of

a bankruptcy, whereas shielding the debtor’s distribution of

sale proceeds to customers would destabilize the financial

system because it would be impossible to predict who would

receive money in the event of a bankruptcy. Because the court

did not think Congress could have intended this result, at least

under the circumstances shown here, it held that § 546(e) did

not protect Sentinel’s pre-petition transfer to FCStone from

avoidance.

We understand the district court’s powerful and equitable

purpose, but its reasoning runs directly contrary to the broad

18 Nos. 13-1232 and 13-1278

language of § 546(e). The text of § 546(e) does not include an

exception for preferential transfers, although it does make an

exception for actual fraud. See 11 U.S.C. § 546(e), citing

11 U.S.C. § 548(a)(1)(A) (trustee’s power to avoid fraudulent

transfers). We have explained that “[t]he presence of an

exception for actual fraud makes sense only if § 546(e) applies

as far as its language goes.” Peterson, 729 F.3d at 749. Its broad

language reaches this case, and there has been no claim of

actual fraud in the challenged pre-petition transfer.

As important as the statutory text is, we hope we are not

understood as applying a wooden textualism to the issue. We

also do not see any persuasive reason to depart from the

deliberately broad text of § 546(e). We are not persuaded that

Congress could not have intended to protect even pre-petition

transfers like the one in this case. Congress enacted § 546(e) to

prevent a large bankruptcy from triggering a wave of bank-

ruptcies among securities businesses. Section 546(e) applies

only to the securities sector of the economy, where large

amounts of money must change hands very quickly to settle

transactions. Those dealing in securities have an interest in

knowing that a deal, once completed, is indeed final so that

they need not routinely hold reserves to cover the possibility

of unwinding the deal if a counter-party files for bankruptcy in

the next 90 days. Also, even a short term lack of liquidity can

prove fatal to a commodity broker or other securities business.

By enacting § 546(e), Congress chose finality over equity for

most pre-petition transfers in the securities industry—i.e., those

not involving actual fraud. In other words, § 546(e) reflects a

policy judgment by Congress that allowing some otherwise

avoidable pre-petition transfers in the securities industry to

Nos. 13-1232 and 13-1278 19

stand would probably be a lesser evil than the uncertainty and

potential lack of liquidity that would be caused by putting

every recipient of settlement payments in the past 90 days at

risk of having its transactions unwound in bankruptcy court.

The Supreme Court recently reminded us that Congress has

balanced many of the difficult choices that must be made in

bankruptcy cases, and that courts may not decline to follow

those policy choices on equitable grounds, however powerful

they may be in a particular case. Law v. Siegel, 571 U.S. —, —,

134 S. Ct. —, —, 2014 WL 813702, at *8 (2014). Given the broad

statutory language and Congress’ evident and understandable

policy choice, we hold that Sentinel’s pre-petition transfer to

FCStone fell within § 546(e)’s safe harbor and that the trustee

cannot avoid the pre-petition transfer under 11 U.S.C. § 547.4

B. The Post-Petition Transfer

A bankruptcy trustee can avoid a transfer of property of the

estate that occurs after the commencement of the case if it was

not authorized under the bankruptcy code or by the bank-

ruptcy court. 11 U.S.C. § 549. FCStone contends that the post-

petition transfer of $300 million from one of Sentinel’s BONY

4

FCStone argues that the pre-petition claim was not actually part of the

trial in the district court so that the court’s decision deciding that claim

violated its due process rights. The record shows that the pre-petition

transfer claim and § 546(e) issues were fully briefed at summary judgment,

and that the district court declined to rule on the summary judgment

motion until after trial. We think the parties had ample reason to under-

stand that the district court considered the claim ripe for ruling, so we reject

FCStone’s due process argument.

20 Nos. 13-1232 and 13-1278

accounts to Segment 1 customers, including FCStone, was

authorized and did not involve property of the estate.5

As discussed above, on the first business day after the

bankruptcy petition was filed, Sentinel asked the bankruptcy

court for an emergency order allowing BONY to disburse

funds to Segment 1 customers, including FCStone. Sentinel

claimed that the funds belonged to the Segment 1 customers

and were not property of the estate because they were the

proceeds of the sale of Segment 1 securities to Citadel. The SEC

cautioned, and the CFTC conceded, that there was evidence

that Sentinel had commingled Segment 1 and Segment 3 funds

and that Sentinel had sold Segment 3 securities to Citadel. The

SEC opposed the order on that basis. Despite these concerns,

the bankruptcy judge approved the transfer, which was carried

out very quickly.

A trustee may not avoid a transfer of property of the estate

under 11 U.S.C. § 549 if the transfer was authorized by the

5

FCStone also argues that it was neither an initial transferee nor a

beneficiary under 11 U.S.C. § 550(a)(1), and that the trustee therefore cannot

avoid the transfer. Because we hold that 11 U.S.C. § 549 bars avoidance of

the transfer, we do not resolve FCStone’s arguments under § 550(a)(1).

However, we believe it is evident that FCStone was either an initial

transferee or a beneficiary, as FCStone’s own inconsistent arguments show.

To argue that it was not an initial transferee, FCStone claims that it was a

mere conduit for the Citadel money, which belonged to its customers and

not to FCStone. But then, to argue that it was not a beneficiary of the

transfer, FCStone asserts that it was under no obligation to pay those

customers in the event of a shortfall. FCStone cannot have it both ways. We

need not decide which position is correct, but FCStone was necessarily

either an initial transferee or a beneficiary under § 550(a)(1).

Nos. 13-1232 and 13-1278 21

bankruptcy court. Over a year after the order had been

approved and acted upon, the trustee moved the court to

“clarify” the order and to declare that it had not actually

authorized the transfer under § 549 to clear the way for the

avoidance action. By that time, the consequences of the post-

petition transfer were better understood. The trustee’s motion

to clarify asserted that the disbursed property turned out to

have been property of the estate after all, and he asked the

court to clarify that the order did not affect the trustee’s right

to avoid the post-petition transfer. In ruling on the motion to

clarify, the bankruptcy court knew that its emergency order

was a barrier to a more equitable distribution of Sentinel’s

property. After full briefing and oral argument, the bankruptcy

court held that its order had not authorized the transfer within

the meaning of § 549 and thus did not prevent avoidance of the

post-petition transfer.

The trustee argues and the district court held that although

the bankruptcy court allowed BONY to disburse the funds to

Sentinel’s customers, including FCStone, the bankruptcy court

did not authorize the transfer within the meaning of 11 U.S.C.

§ 549. See Grede, 485 B.R. at 881. In the trustee’s view, to

authorize the transfer under § 549, the bankruptcy court

needed to decide whether the property belonged to the estate,

which the court did not do. The trustee also argues that the

order explicitly reserved the debtor’s right to avoid the

transfers.

We conclude that the post-petition transfer was clearly

authorized by the bankruptcy court. That court’s later “clarifi-

cation” of its order ran contrary to the plain language of its

order. We also are not persuaded that the bankruptcy court

22 Nos. 13-1232 and 13-1278

order actually authorizing the transfer somehow managed not

to authorize the transfer within the meaning of 11 U.S.C. § 549.

It was an abuse of discretion for the bankruptcy court to have

reached that conclusion as part of its clarification.

For starters, we do not think that the bankruptcy court must

first decide that the property at issue belongs to the estate in

order to authorize the transfer within the meaning of § 549. The

section states that “the trustee may avoid a transfer of property

of the estate … that is not authorized under this title or by the

court.” This merely requires that, before an earlier transfer can

be avoided, the court must find that it was “a transfer of

property of the estate.” It does not require that a court autho-

rizing a transfer decide at that time that the transfer involves

property of the estate.

For instance, if a bankruptcy trustee wishes to disburse

funds that do not belong to the estate, nothing prevents it from

asking the bankruptcy court, out of an abundance of caution,

to issue a comfort order authorizing the disbursement of

admittedly non-estate funds. It cannot be the case that request-

ing the court’s authorization would somehow subject that

transfer to additional scrutiny (and potential clawback) that

would not apply if the trustee had simply disbursed the funds

to their owners, as he would have been perfectly entitled to do.

See In re Kmart Corp., 2006 WL 952042, *7 (Bankr. N.D. Ill. April

11, 2006) (§ 549 protects all transfers “under court orders,

whether erroneously entered or not, that are not subsequently

reversed;” as long as the authorization order remains in effect,

§ 549 protects distributees from collateral attack).

Nos. 13-1232 and 13-1278 23

Whether the property belonged to the estate or not, in the

absence of reversal, the authorization order ended any discus-

sion about its original ownership, and the disputed property

cannot later be clawed back by the trustee. See Vogel v. Russell

Transfer, Inc., 852 F.3d 797, 800–01 (4th Cir. 1988) (rejecting

trustee’s argument that bankruptcy court authorization of a

post-petition transfer was meaningless because transfer did not

involve property of the estate; if no estate property was

involved, then § 549 does not apply at all, meaning post-

petition clawback is unavailable). Whether the transfer was

authorized for purposes of § 549 did not depend on whether

the bankruptcy court made a concurrent finding about whether

the property was property of the estate.

The text of the order did not reserve the trustee’s right to

avoid the transfer. Such a reservation would be illogical if the

order authorized the transfer under § 549, because § 549 allows

the trustee to avoid transfers only if they have not been

authorized by the court. Reserving the trustee’s right to avoid

the (authorized) transfer would thus suggest that, however

illogical it may seem, the order authorized the transfer without

authorizing it under the bankruptcy code. Since the order

refers to the distribution as being “authorized” by the order,

that argument is difficult to make. If the trustee were correct

that the order reserved his right to avoid the transfer, it would

go a long way towards establishing this seemingly illogical

proposition.

Unfortunately for the trustee and the interests he repre-

sents, however, the order did not preserve such a right to avoid

the transfer. In negotiations about the order, the parties agreed

to reserve a five percent “holdback” to cover any unanticipated

24 Nos. 13-1232 and 13-1278

claims that might arise. The order then stated that it was

“without prejudice to all rights, defenses, claim [sic] and/or

causes of action, if any, of the Debtor or any such third parties

(including Citadel) against any Distributee, with respect to the

Holdback and/or with respect to any claim for priority under

Section 761–767, or other applicable law.” (Sections 761–767 of

the bankruptcy code deal with the liquidation of a commodity

broker; no argument has been made that the avoidance claim

is based on any of those sections.) The trustee contends that the

comma before “or other applicable law” means that the

sentence protected the debtor’s rights against distributees (1)

with respect to the five percent holdback contemplated in the

order, (2) with respect to claims for priority under 11 U.S.C. §§

761–767, or (3) with respect to other applicable law. Under that

reading, the order reserved all of the debtor’s legal rights

against distributees, allowing the debtor to avoid the post-

petition transfer.

The trustee’s reading is not correct. The placement of “with

respect to” twice in the sentence divided the sentence into two

parts: (1) the holdback, and (2) claims for priority under

sections 761–767 or other applicable law. The use of “and/or”

between the holdback claims and the priority claims, but not

between priority claims under sections 761–767 and “other

applicable law,” also indicates that “other applicable law”

modifies only the types of priority claims that can be brought.

It follows that the sentence should be read to protect the

debtor’s rights against distributees (1) with respect to the five

percent holdback contemplated in the order, and (2) with

respect to claims for priority under 11 U.S.C. §§ 761–767 or

other applicable law. The reservation of a five percent

Nos. 13-1232 and 13-1278 25

holdback signaled quite clearly that the rest of the distribution

was not subject to avoidance. If it had been, then the holdback

would not have been needed. The text of the order did not

preserve the trustee’s ability to avoid the funds under 11 U.S.C.

§ 549.

The trustee contends that we should interpret the order in

light of the transcript of the hearing leading to the order

authorizing the transfer. In general, there should be no need to

go beyond the text of a court order unless its meaning is

unclear. Mendez v. Republic Bank, 725 F.3d 651, 663 (7th Cir.

2013); cf. Oneida Tribe of Indians of Wisconsin v. Wisconsin,

951 F.2d 757, 760–61 (7th Cir. 1991) (we look beyond the text of

a statute only if it is inconclusive or clearly contravenes express

congressional intent). Relying on the hearing transcript rather

than the text of the resulting court order to decide what the

order meant can raise serious problems. See Mendez, 725 F.3d

at 663. Parties and non-parties alike should be able to rely on

the text of a court order where the text is clear, rather than

having to dig through the docket and record to determine the

order’s true meaning. See id. Especially where, as here, the

issues were urgent and the stakes were high (including, in this

case, the potential collapse of a dozen FCMs and wide ripple

effects), parties and non-parties should be able to act in

reliance on the order itself, without waiting for a transcript or

inquiring further.

In this case, FCStone and other parties needed BONY to

release the money within hours of the order being issued so

that they could in turn pay their obligations to their own

customers. Requiring FCStone to pore through the court record

before deciding whether the transfer was authorized and

26 Nos. 13-1232 and 13-1278

whether it could transfer the money on to its own customers

without risk of having to return the money to Sentinel would

have effectively nullified the emergency order. The amounts

were large enough that if FCStone could not transfer the

money to meet its obligations to its customers, it would have

been insolvent itself. So, finding the text of the order unambig-

uous, we do not base our decision on the transcript of the

hearing where the order was approved.6

The trustee also argues that we should defer to the bank-

ruptcy court’s later interpretation of its order. The district court

deferred to the bankruptcy court’s later interpretation of the

order, citing In re Resource Tech. Co., 624 F.3d 376, 386 (7th Cir.

2010), which in turn cited In re Airadigm Communications, Inc.,

547 F.3d 763, 768 (7th Cir. 2008), for the broad proposition that

we will leave the interpretation of a bankruptcy court’s order

to that court's discretion. At the same time, we have raised

concerns about such deference to an issuing court’s interpreta-

tion, especially when the issue affects reliance interests and the

interests of non-parties, rather than just issues such as case

management. See In re Trans Union Corp. Privacy Litigation,

741 F.3d 811, 816 (7th Cir. 2014). “Litigants as well as third

parties must be able to rely on the clear meaning of court

orders setting out their substantive rights and obligations, and

6

We have examined the hearing transcript at the parties’ request. It would

not change our interpretation of the bankruptcy court’s order. As discussed

above, the court was acting under extreme time pressure and may not have

fully appreciated the legal consequences of authorizing the transfer.

Nevertheless, the transcript shows quite clearly that the bankruptcy court

authorized the transfer, notwithstanding its later regrets. Consideration of

the transcript would not change our interpretation of the order’s plain text.

Nos. 13-1232 and 13-1278 27

appellate courts should interpret those orders in the same

manner.” Id. These concerns are particularly acute in a situa-

tion like the bankruptcy court’s order authorizing payments to

non-parties.

Too much deference to a bankruptcy court’s much-later

interpretation would undermine the ability of parties and non-

parties to rely on a court order and creates the risk that

interpretation of an order becomes a means to rewrite it after

unintended consequences have given rise to regrets. When the

order here was issued, the parties acted in reliance on its text.

That means that the FCMs like FCStone passed the BONY

money along to their customers in satisfaction of their trades

and accounts, and both the FCMs and their customers were

entitled to assume the money was unencumbered. That

allowed the FCMs to settle their transactions and to stay afloat

rather than filing for bankruptcy protection themselves back in

2007.

If we were to conclude now that the authorized transfer

was not authorized after all, FCStone would face the resulting

liquidity crunch now. The losses would fall not on its clients

and creditors of 2007 but on its later clients and creditors,

meaning that losses would fall quite differently than they

would have in 2007. In other words, the bankruptcy court’s

later interpretation of its order would change the allocation of

the loss stemming from Sentinel’s bankruptcy, shifting it away

from one group of FCStone customers and onto another.

FCStone, the other FCMs, their customers, and all other

affected parties have strong reliance interests in not allowing

28 Nos. 13-1232 and 13-1278

the bankruptcy court or the trustee to rewrite history in this

way.7

The situation might be different if the bankruptcy court had

clarified its order before parties and others had relied on the

order’s plain meaning to their detriment. However, deferring

to the bankruptcy court’s clarification made so long after the

fact, when the money has already been disbursed to the FCMs

and distributed to their customers, would upset the strong and

reasonable reliance interests of those parties.

In this case, the text of the original order was sufficiently

clear to find that the bankruptcy court’s clarification, to the

effect that the authorized transfer was not actually authorized

for purposes of § 549, was an abuse of discretion. We would

reach the same result if the appropriate standard of review is

de novo.

We conclude, then, that the bankruptcy court authorized

the post-petition transfer within the meaning of 11 U.S.C. § 549.

The trustee therefore cannot avoid the transfer. We doubt

whether a bankruptcy court can ever authorize a transfer

without authorizing it under § 549, but that’s a larger puzzle

we leave for another day. If such a thing is possible, it did not

occur in this case. We thus do not decide whether the other

elements of § 549 are satisfied, including whether the funds at

7

The reliance interests here are not purely speculative. Several parties at

the hearing on the trustee’s motion to clarify said that they had relied on the

order’s plain meaning, which in their view did not require clarification.

They also stated that at the time the order was issued on August 20, 2007,

they understood the court to have decided that the funds at issue were not

property of the estate and thus not subject to avoidance by the trustee.

Nos. 13-1232 and 13-1278 29

issue were, in fact, property of the estate. (The property-of-the-

estate question is also academic in this case because Sentinel’s

approved bankruptcy plan treats all customers as part of a

single class of unsecured creditors, and the time to appeal it

has passed. That means that FCStone and the other Segment 1

and Segment 3 customers will be treated as unsecured credi-

tors whether they can establish their trusts or not.) Because the

case before us is a test case, though, we will say a few words

about that question in an effort to provide guidance to the

district court in future related cases.

Both the Segment 1 and Segment 3 funds were subject to

statutory trusts. Segment 1 was protected by the Commodity

Exchange Act and related CFTC regulations, while Segment 3

was protected by the Investment Advisors Act and related SEC

regulations. We agree with the district court that there is no

legal basis for placing one trust ahead of the other, despite

FCStone and the CFTC’s attempts to argue otherwise. See

Grede, 485 B.R. at 871–72. This bankruptcy therefore presented

two equal pools of statutory trust claimants battling over an

insufficient pool of commingled funds. The district court found

the situation analogous to that in Cunningham v. Brown,

265 U.S. 1 (1924), where common law trusts were battling over

the insufficient commingled assets of Charles Ponzi, who gave

his name to so many later Ponzi schemes. FCStone, however,

argues that the proper analogy is to Begier v. I.R.S., 496 U.S. 53

(1990), where the IRS benefitted from a statutory floating trust

for tax payments it was owed by the debtor. (A floating trust

is a trust in an abstract dollar amount rather than a trust in

specific property. Begier, 496 U.S. at 62.)

30 Nos. 13-1232 and 13-1278

Between these two options, we think the district court had

the better answer and that Cunningham and its progeny

provide useful insight for resolving the competing trust claims

in this case. (We do not think that Begier applies here because

it involved a floating trust.) That would suggest that the

Cunningham requirement that claimants trace their assets to

establish their trusts (without the benefit of tracing conven-

tions) would apply here as well. See Cunningham, 265 U.S. at

11. FCStone rightly notes, though, that Cunningham did not

involve statutory trusts, and we too find the difference

significant. Where Congress has acted to establish a trust for

certain customers to strengthen their confidence in capital

markets, the trust may be more robust than one imposed by a

court’s equitable powers. The congressional protection

indicates a national interest in protecting those customers. In

short, we agree with the district court’s discussion of this

problem. See Grede, 485 B.R. at 874–78.

A new rule may be in order for competing statutory trust

claimants that splits the difference between the harsh conse-

quences of failing to trace under Cunningham, and the lax

tracing requirements under Begier. One such rule might be to

require trust claimants to trace without the benefit of tracing

conventions, but to place trust claimants who fail to trace in a

class ahead of at least unsecured creditors, giving them priority

in bankruptcy proceedings. Again, we are not required to

resolve the issue today, both because we reverse on other

grounds and because the Sentinel bankruptcy plan (which

treats all creditors as a single class of unsecured creditors) has

been approved and the time to appeal it has run out.

Nos. 13-1232 and 13-1278 31

C. The Trustee’s Cross-Appeal

The trustee cross-appealed for reinstatement of his unjust

enrichment claim if we reversed the district court, and for pre-

judgment interest. We agree with the district court that the

trustee’s unjust enrichment claim is preempted by federal

bankruptcy law. To allow an unjust enrichment claim in this

context would allow the trustee or a creditor to make an end

run around the bankruptcy code’s allocation of assets and

losses, frustrating the administration of the bankruptcy estate

under federal bankruptcy law. See Contemporary Industries

Corp. v. Frost, 564 F.3d 981, 988 (8th Cir. 2009); Pertuso v. Ford

Motor Credit Co., 233 F.3d 417, 426 (6th Cir. 2000). We therefore

will not reinstate the trustee’s unjust enrichment claim. We also

do not award the trustee pre-judgment interest because he is

not the prevailing party. See, e.g., In re Oil Spill by the Amoco

Cadiz Off Coast of France on Mar. 16, 1978, 954 F.2d 1279, 1331

(7th Cir. 1992).

The judgment of the district court is REVERSED and the

case is remanded to the district court for further proceedings

consistent with this opinion.