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.