Grede v. FCStone LLC, No. 16-1896 (7th Cir. 2017)Annotate this Case
Sentinel managed investments for futures commission merchants (FCMs) like FCStone, which act as financial intermediaries between investors and futures markets. Sentinel itself was an FCM. Sentinel organized its customers into “SEGs.” FCM customer assets were held in SEG 1. SEG 1 and SEG 3 customers have special protections under the Commodity Exchange Act, the Investment Advisers Act, and SEC regulations, which required Sentinel to hold customer funds separately. Sentinel, however, routinely used securities it had allocated to customers as collateral for Sentinel’s own borrowing and trading. In 2007, Sentinel’s scheme collapsed. Sentinel halted redemptions and sold a large portfolio of SEG 1 securities, depositing the proceeds in a SEG 1 Bank of New York (BNY) cash account. The next day, Sentinel filed for Chapter 11 bankruptcy. The bankruptcy court authorized BNY to disburse funds to SEG 1 customers, less a five percent holdback ($25,000,000). The trustee waited a year before challenging that transfer but the district court allowed its avoidance under 11 U.S.C. 549. The Seventh Circuit reversed. rejecting the trustee's argument that an after-the-fact “clarification” by the bankruptcy judge was entitled to preclusive effect. “Whether the property belonged to the estate or not,” the Seventh Circuit reasoned, the disbursal order “ended any discussion ... the disputed property cannot later be clawed back.” The $25 million held in reserve under the confirmed bankruptcy plan was not estate property subject to pro rata distribution. FCStone and similarly situated customers preserved their right to recover their trust property.