Frederick Grede v. FCStone LLC

In the

United States Court of Appeals
For the Seventh Circuit
____________________
No. 16-1896 & 16-1916
FREDERICK J. GREDE, not individually but as Liquidation Trus-
tee of the Sentinel Liquidation Trust,
Plaintiff-Appellant / Cross-Appellee,

v.

FCSTONE, LLC,
Defendant-Appellee / Cross-Appellant.
____________________

Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 09 C 136 — James B. Zagel, Judge.
____________________

ARGUED JUNE 7, 2017 — DECIDED AUGUST 14, 2017
____________________

Before RIPPLE, ROVNER, and HAMILTON, Circuit Judges.
HAMILTON, Circuit Judge. The 2007 bankruptcy of Sentinel
Management Group, Inc. has echoed through the courts for
ten years now. This is our fifth appeal dealing with Sentinel.
In a pair of cases decided in 2013 and 2016, we addressed the
priority of a claim against the bankruptcy estate by the Bank
of New York, Sentinel’s largest (but no longer secured) credi-
tor. In re Sentinel Management Group, Inc., 728 F.3d 660 (7th Cir.
2 Nos. 16-1896 & 16-1916

2013); Grede v. Bank of New York Mellon Corp. (In re Sentinel
Management Group, Inc.), 809 F.3d 958 (7th Cir. 2016). Earlier
this year, we affirmed the convictions and sentence of Senti-
nel’s former president and CEO, who was prosecuted for wire
fraud and investment adviser fraud. United States v. Bloom, 846
F.3d 243 (7th Cir. 2017).
In Grede v. FCStone, LLC, 746 F.3d 244 (7th Cir. 2014)
(FCStone I), the direct predecessor to this appeal, we consid-
ered among other issues a distribution of $297 million to a
group of Sentinel customers a few days after Sentinel filed for
bankruptcy protection in August 2007. Following a bench
trial, the district court had allowed the trustee in bankruptcy
to avoid this post-petition transfer under 11 U.S.C. § 549. We
reversed, holding that relief under § 549 was unavailable to
the trustee because the bankruptcy court had authorized the
transfer. We rejected the trustee’s reliance on an October 2008
“clarification” through which the bankruptcy judge indicated
that he had not intended to foreclose a § 549 avoidance action.
Later statements by the judge about his subjective intentions
could not, we concluded, defeat the plain language of the or-
der authorizing the transfer. We remanded for further pro-
ceedings, which led to these new appeals.
Despite our holding in FCStone I that “the bankruptcy
court authorized the post-petition transfer” and that the trus-
tee “therefore cannot avoid the transfer,” 746 F.3d at 258, the
trustee argued on remand that the bankruptcy judge’s Octo-
ber 2008 “clarification” was entitled to preclusive effect. Since
FCStone did not appeal that “clarification” when it was made,
the trustee argued, FCStone should be bound by it and collat-
erally estopped from arguing that the post-petition transfer
Nos. 16-1896 & 16-1916 3

was authorized. The district court rejected the trustee’s argu-
ment on this point, and we affirm on two independent
grounds. First, pursuant to the mandate rule and the law-of-
the-case doctrine, the collateral estoppel theory was unavail-
able to the trustee on remand. Second, even if the theory were
available despite our unambiguous holding in FCStone I, the
bankruptcy judge’s “clarification” was not the sort of final rul-
ing that could be entitled to preclusive effect.
On cross-appeal, FCStone raises an issue that lingered in
the background but was not squarely presented during the
previous appeal. The question concerns the proper distribu-
tion of nearly $25 million held in reserve under the confirmed
bankruptcy plan. FCStone argues that these funds are trust
property belonging to it and other creditors in its customer
class who are protected by statutory trusts under the Com-
modity Exchange Act. The district court disagreed, treating
the funds instead as property of the bankruptcy estate subject
to pro rata distribution among all Sentinel customers and
other unsecured creditors. On this cross-appeal, we reverse.
Under the Bankruptcy Code, property held by the debtor in
trust for others is by definition not property of the bankruptcy
estate. Pursuant to the confirmed bankruptcy plan, FCStone
and similarly situated customers preserved their right to re-
cover their trust property. These creditors are entitled to the
benefit of reasonable tracing conventions. Moreover, FCStone
introduced essentially unrebutted evidence at trial showing
that it can trace a portion of the reserve funds back to its in-
vestment. FCStone is entitled to recover its proportionate
share of the reserve funds. The reserve funds should be dis-
tributed pro rata among FCStone and other members of its
customer class.
4 Nos. 16-1896 & 16-1916

I. Factual Overview and Procedural History
A. Sentinel’s Collapse
We review the most salient facts of the case, drawing from
the district court’s findings after the earlier bench trial. More
complete discussions of Sentinel’s downfall and the criminal
misconduct of senior executives are included in the district
court’s earlier opinion, Grede v. FCStone, LLC, 485 B.R. 854,
859–67 (N.D. Ill. 2013), and in our opinions in Bloom, 846 F.3d
at 246–50, and FCStone I, 746 F.3d at 247–51.
In brief, Sentinel managed investments for futures com-
mission merchants (FCMs) like FCStone, as well as for other
classes of investors. FCMs act as financial intermediaries be-
tween investors and futures markets. They are regulated un-
der the Commodity Exchange Act. Sentinel itself was an FCM
and so was regulated under the Act.
Sentinel organized its customers in different tranches
known as segments or “SEGs.” Within each SEG, customers
were further divided into investment groups based on their
risk appetites and financial goals. As relevant to this appeal,
FCM customer assets were held in SEG 1, with FCStone’s cus-
tomer assets placed in Group 7. SEG 3 contained assets be-
longing to hedge funds and other sophisticated investors, as
well as FCM proprietary or “house” funds.
When customers invested funds with Sentinel, those
funds were exchanged for securities and interest-bearing cash
through a process that Sentinel called “allocation.” Customers
did not own securities outright but instead held indirect pro
rata interests in the securities allocated to their group portfo-
lios, as determined by their level of investment.
Nos. 16-1896 & 16-1916 5

Both the SEG 1 and SEG 3 customers were entitled to spe-
cial protections under federal law. FCM customers who in-
vested their own clients’ funds in SEG 1 were protected by the
Commodity Exchange Act and regulations promulgated by
the Commodity Futures Trading Commission (CFTC). SEG 1
and SEG 3 customers alike were protected by the Investment
Advisers Act of 1940 and regulations promulgated by the Se-
curities and Exchange Commission (SEC). Both regulatory re-
gimes required Sentinel to hold customer funds in segrega-
tion, i.e., separate from funds belonging to other customer
classes and separate from Sentinel’s own or “house” funds.
Both regimes also created statutory trusts in the customers’
favor to protect their property from Sentinel and its other
creditors.
Sentinel, unfortunately, did not honor the statutory trusts
and comply with the segregation rules under the Commodity
Exchange Act and the Investment Advisers Act. Instead, as
the district court found, Sentinel routinely used hundreds of
millions of dollars in securities it had allocated to customers
as collateral to support Sentinel’s own borrowing to pursue its
leveraged trading strategy for its own benefit. It moved those
securities out of segregation and into a lienable account at the
Bank of New York, its main lender, putting customer property
at risk for Sentinel’s benefit. As Sentinel’s leveraged trading
increased, its outstanding debt ballooned, and it drew more
and more on its customers’ assets to support its borrowing
habit.
During the summer of 2007, Sentinel’s investment scheme
collapsed. As credit markets tightened and liquidity dried up
on Wall Street (this was the beginning of what would become
the financial crisis of the late 2000s), the market value of many
6 Nos. 16-1896 & 16-1916

Sentinel assets dropped. Sentinel’s trading partners began
making demands that forced it to borrow more heavily and in
turn to provide more collateral—which it did by using cus-
tomers’ property as collateral. In late June and July 2007, Sen-
tinel moved $250 million worth of securities allocated to SEG
1 to the lienable Bank of New York account. Then, in late July,
Sentinel swapped these securities with securities allocated to
SEG 3 customers, resulting in a “massive shift of loss expo-
sure” from SEG 1 to SEG 3. See Grede, 485 B.R. at 866.
That final manipulation proved fateful for SEG 3 custom-
ers in the looming bankruptcy. Sentinel’s wheeling and deal-
ing had bought it some time, but in the end the firm could not
keep up with redemption requests and demands from the
Bank of New York. On Monday, August 13, 2007, Sentinel ad-
vised its customers that it was halting all redemptions (i.e.,
payments to them from their accounts). On Thursday, August
16, Sentinel sold a large portfolio of securities then allocated
to SEG 1 to a firm called Citadel, depositing the proceeds in a
SEG 1 cash account at the Bank of New York. The next day,
Sentinel filed for Chapter 11 bankruptcy protection.
B. Chapter 11 Proceedings
1. Early Litigation
On Monday, August 20, 2007, the first business day after it
filed for bankruptcy, Sentinel (still under the control of its in-
siders) filed an emergency motion in the bankruptcy court
seeking an order approving payment of the Citadel sale pro-
ceeds to SEG 1 customers. After emergency hearings, the
bankruptcy court issued an order authorizing the Bank of
New York to disburse the funds, less an approximately five
percent holdback. The bank did so, and the SEG 1 customers
Nos. 16-1896 & 16-1916 7

received $297 million in what the parties describe as the
“post-petition transfer,” with FCStone receiving a little shy of
$15 million.
Frederick Grede was appointed as Chapter 11 trustee. The
bankruptcy court approved his appointment on August 29,
2007, within the fourteen-day window for appealing the order
authorizing the post-petition transfer. See Fed. R. Bankr. P.
8002. The trustee did not appeal. A year later, however, he
filed a “Motion to Clarify or in the Alternative to Vacate or
Modify the Court’s August 20, 2007 Order.” In essence, the
trustee argued that he should be permitted to bring avoidance
actions against FCStone and the other SEG 1 customers who
received, in the trustee’s view, a disproportionate payout
through the post-petition transfer.
A group of SEG 1 customers including FCStone opposed
the trustee’s motion. At the conclusion of a hearing on the mo-
tion, the bankruptcy judge declined to vacate or modify the
prior order. The judge said, however, that he was clarifying
the order in that he “did not decide on August 20 and … am
not deciding today whether or not any of the proceeds that
were the subject of that order are property of the estate … or
whether … they were trust funds.” The judge said that in his
August 20 order, he “did not intend to foreclose the trustee or
any party from any avoidance action whatsoever.”
2. FCStone I
The bankruptcy court entered an order confirming the
Fourth Amended Chapter 11 Plan of Liquidation in late 2008.
(We discuss several provisions of the confirmed Chapter 11
plan in Part II-B.) Around that same time, the trustee com-
menced adversary actions against FCStone and other SEG 1
8 Nos. 16-1896 & 16-1916

customers who had received distributions from the Citadel
security sale back in August 2007. The trustee sought to avoid
the post-petition transfers and to recover the Citadel sale pro-
ceeds (Count I), and he requested a declaration that funds
held in reserve are property of the bankruptcy estate (Count
III). 1 The district court withdrew the reference to the bank-
ruptcy court, see 28 U.S.C. § 157(d), and presided over the
case against FCStone as a test case.
Following a bench trial, the district court ruled in favor of
the trustee on Counts I and III. Grede, 485 B.R. at 889–90. The
court concluded that the Citadel sale proceeds should be
treated as property of the bankruptcy estate. Id. at 880. The
court reasoned that (1) both SEG 1 and SEG 3 customers were
protected by statutory trusts; (2) because the two classes of
customers were similarly situated and because there were in-
sufficient funds to satisfy all their claims, tracing fictions or
conventions were inappropriate; and (3) FCStone and other
SEG 1 customers could not trace the Citadel sale proceeds
back to their original investments given Sentinel’s coming-
ling and misappropriation of customer assets that should
have been segregated in trust for the customers. Id. at 873, 878,
880. The district court added that, for purposes of 11 U.S.C.
§ 549, and in light of the bankruptcy court’s 2008 “clarifica-
tion,” the 2007 post-petition transfer had not been “author-
ized” by the bankruptcy court. Id. at 881.

1 The trustee also sought to avoid a pre-petition transfer (Count II) and

to recover on a theory of unjust enrichment (Count IV). Those claims are
no longer at issue. The trustee also brought a disallowance claim under 11
U.S.C. § 502(d), but that claim turns on the outcome of Count I and re-
quires no separate consideration in this appeal.
Nos. 16-1896 & 16-1916 9

We reversed in FCStone I, 746 F.3d at 260. We explained
that the bankruptcy court’s after-the-fact “clarification” of its
subjective intentions concerning the post-petition authoriza-
tion order ran contrary to the plain language of the order and
amounted to an abuse of discretion. Id. at 255. “Whether the
property belonged to the estate or not,” we reasoned, “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.” Id.
Because the parties had focused on the post-petition trans-
fer, we did not specifically address the status of the funds held
in reserve. 2 For that matter, we declined to decide “whether
the funds at issue were, in fact, property of the estate,” id. at
258, though we agreed with the district court that there was

2 In the prior appeal, FCStone’s opening brief noted in passing the five

percent holdback from the post-petition transfer, and it cited reservation-
of-rights language appearing in the transfer authorization order. FCStone
also devoted a few sentences to the reserves created under the confirmed
Chapter 11 plan, but it did not discuss the composition of those reserves
or explain why a favorable ruling on the post-petition transfer issue would
not necessarily resolve the parties’ disagreement over the allocation of the
reserve funds. The trustee barely acknowledged the five percent holdback,
and he made no mention of the reserves. While the parties chide us more
or less gently for assuming that our resolution of the post-petition transfer
issue also resolved the trustee’s declaratory judgment request in Count III,
we believe the onus was on the parties to identify clearly each source of
disputed funds and the arguments relevant to the disposition of those
funds. E.g., Montgomery v. Amoco Oil Co., 804 F.2d 1000, 1004 n.8 (7th Cir.
1986) (issue raised in a “two-sentence reference in the statement of facts”
and through a citation to a statute was “hardly properly presented”); Pru-
dential Ins. Co. of America v. Sipula, 776 F.2d 157, 161 n.1 (7th Cir. 1985) (lit-
igant who attempted to incorporate by reference into his appellate brief
arguments he had raised in the district court assumed the risk that appel-
late court might overlook issues not clearly presented).
10 Nos. 16-1896 & 16-1916

no generally applicable legal basis for placing one statutory
trust ahead of another. We tentatively approved the district
court’s requirement that would-be trust claimants (such as
FCStone) must actually trace their investment property to the
disputed funds. Id. at 259. We remanded for further proceed-
ings.
3. The Decisions on Remand
On remand, the trustee moved for judgment on Counts I
and III, while FCStone sought judgment on Count I and sum-
mary judgment on Count III. With respect to Count I, the trus-
tee argued that FCStone should be collaterally estopped from
asserting that the post-petition transfer was authorized. In the
trustee’s view, the bankruptcy judge’s October 2008 “clarifica-
tion” was entitled to preclusive effect. The district judge disa-
greed, writing that our decision in FCStone I—holding that the
“clarification” was an abuse of discretion—stripped that rul-
ing of “any force and effect.” Grede v. FC Stone, LLC, 556 B.R.
357, 362 (N.D. Ill. 2016). The court entered judgment for
FCStone on Count I. The trustee appeals that decision.
The district judge then considered the status of the dis-
puted reserves. The judge reiterated his view that equity pre-
vented him from “favoring one statutory trust claim over an-
other” and that actual tracing is difficult if not impossible
given Sentinel’s egregious pattern of commingling. Id. at 365.
The judge concluded that the reserve funds should be treated
as property of the estate, subject to pro rata distribution ac-
cording to the confirmed Chapter 11 plan. Id. at 366. The court
entered judgment for the trustee on Count III. FCStone cross-
appeals that decision.
Nos. 16-1896 & 16-1916 11

II. Analysis
A. The Trustee’s Appeal — Collateral Estoppel
On the issue of collateral estoppel (also known as issue
preclusion) presented by the trustee’s appeal, no facts are dis-
puted, so we review de novo the district court’s decision on this
question of law. Adams v. Adams, 738 F.3d 861, 864 (7th Cir.
2013); Bernstein v. Bankert, 733 F.3d 190, 225 (7th Cir. 2013).
1. Mandate Rule and Law of the Case
The trustee’s collateral estoppel argument is straightfor-
ward, if improbable. In the trustee’s view, FCStone’s failure to
appeal the bankruptcy court’s oral “clarification” of its prior
written order means that FCStone should be bound by that
“clarification” rather than being able to rely on the underlying
order.
As a preliminary matter, we conclude that the collateral
estoppel argument was not even available to the trustee on
remand following our decision in FCStone I. We did not spe-
cifically address collateral estoppel in our prior opinion be-
cause the trustee did not raise the issue, even though he had
presented it earlier to the district court as an alternative argu-
ment in support of his § 549 avoidance action. But our broader
discussion of the post-petition transfer left nothing to the im-
agination on this point. We said that the transfer was author-
ized and that it therefore “cannot be avoided under the ex-
press terms of 11 U.S.C. § 549.” FCStone I, 746 F.3d at 247. We
repeated that the transfer was “clearly authorized” and that,
regardless whether the transferred property was part of the
bankruptcy estate, “in the absence of reversal, the authoriza-
tion order ended any discussion about its original ownership,
12 Nos. 16-1896 & 16-1916

and the disputed property cannot later be clawed back by the
trustee.” Id. at 255.
Given our unambiguous resolution of the dispute over the
post-petition transfer, two closely related doctrines—the
mandate rule and the law-of-the-case doctrine—should have
precluded the trustee from resurrecting his collateral estoppel
theory in the district court and getting a second bite at the
§ 549 apple. Compare EEOC v. Sears, Roebuck & Co., 417 F.3d
789, 796 (7th Cir. 2005) (“In general, any issue conclusively de-
cided by this Court on appeal may not be reconsidered by the
district court on remand.”), and United States v. Polland, 56
F.3d 776, 777 (7th Cir. 1995) (“The mandate rule requires a
lower court to adhere to the commands of a higher court on
remand.”), with United States v. Adams, 746 F.3d 734, 744 (7th
Cir. 2014) (“The law of the case doctrine is a corollary to the
mandate rule and prohibits a lower court from reconsidering
on remand an issue expressly or impliedly decided by a higher
court absent certain circumstances.”) (emphasis added) (cita-
tion omitted).
The trustee argues that, as appellee in FCStone I, he was
“not required to advance every possible ground for affir-
mance.” See Door Systems, Inc. v. Pro-Line Door Systems, Inc.,
83 F.3d 169, 174 (7th Cir. 1996); see also Frank v. Walker, 819
F.3d 384, 387 (7th Cir. 2016). That is true as a general principle,
but it is difficult to understand why—when the legal weight
of the bankruptcy judge’s “clarification” was squarely at is-
sue—the trustee did not cover his bases by arguing in the al-
ternative that the ruling (even if erroneous) was entitled to
preclusive effect. In any event, the general privilege of the ap-
pellee to renew on remand arguments preserved in the dis-
trict court gives way to the mandate rule and the law of the
Nos. 16-1896 & 16-1916 13

case where the argument the appellee would raise is flatly in-
compatible with a prior mandate of this court. 3
While we need not go so far as to say, as the district court
did, that FCStone I rendered the bankruptcy judge’s “clarifica-
tion” a “legal nullity,” Grede, 556 B.R. at 362, we conclude that
the district court acted appropriately in declining to reach the
merits of an argument that, if decided in the trustee’s favor,
would have eviscerated our prior holding. 4

3 At oral argument, we asked the trustee whether any appellate court
has ever applied collateral estoppel to revive a trial court ruling it had
previously disapproved on the merits. The trustee cited Federated Depart-
ment Stores, Inc. v. Moitie, 452 U.S. 394 (1981), but that case is readily dis-
tinguishable. In Moitie, two plaintiffs in a consolidated case declined to
appeal the district court’s dismissal of their claims, while other plaintiffs
appealed and obtained relief in the Ninth Circuit after the Supreme Court
decided a case raising similar issues. The non-appealing plaintiffs re-filed
in state court; the defendants removed the actions, and the federal district
court dismissed the claims on res judicata grounds. In a subsequent ruling,
the Ninth Circuit held that the non-appealing plaintiffs could “benefit
from a reversal” since their litigating position was “closely interwoven”
with that of the appealing parties. Id. at 398 (citation omitted). The Su-
preme Court reversed that decision, declining to “countenance[] an excep-
tion to the finality of a party’s failure to appeal merely because his rights
are ‘closely interwoven’ with those of another party.” Id. at 400. Moitie is
not responsive to the question we asked at oral argument. It does not in-
volve a situation in which an appellate court applied preclusive effect to a
trial court ruling that the same appellate court previously rejected on its mer-
its. Moitie also fails to support the trustee’s position because, as discussed
below, FCStone could not have appealed the bankruptcy judge’s “clarifi-
cation” even if it had wanted to.
4 As a matter of appellate advocacy, it would ordinarily be prudent
for an appellee who deliberately chooses not to argue alternative grounds
for affirmance to alert the appellate court to the existence of those alterna-
tive grounds. The first time the trustee alerted us to his collateral estoppel
14 Nos. 16-1896 & 16-1916

2. Collateral Estoppel and the Requirement of Finality
Even if the trustee could have pursued his collateral estop-
pel theory on remand without running afoul of our mandate
in FCStone I, the theory would fail on the merits. A party is
constrained by collateral estoppel as a matter of federal law
only where four criteria are satisfied: “(1) the issue sought to
be precluded must be the same as that involved in the prior
litigation, (2) the issue must have been actually litigated, (3)
the determination of the issue must have been essential to the
final judgment, and (4) the party against whom estoppel is in-
voked must [have been] fully represented in the prior action.”
Matrix IV, Inc. v. American Nat’l Bank & Trust Co. of Chicago, 649
F.3d 539, 547 (7th Cir. 2011) (citation omitted).
The key criterion in this case is finality. Collateral estoppel
does not attach to tentative orders. See Loera v. United States,
714 F.3d 1025, 1028 (7th Cir. 2013) (“The doctrine of collateral
estoppel … teaches that a judge’s ruling on an issue of law or
fact in one proceeding binds in a subsequent proceeding the
party against whom the judge had ruled, provided that the
ruling could have been … challenged on appeal, or if not that
at least it was solid, reliable, and final … .”) (emphasis added);
Amcast Industrial Corp. v. Detrex Corp., 45 F.3d 155, 158 (7th Cir.
1995) (“[W]hether a judgment, not ‘final’ in the sense of 28
U.S.C. § 1291, ought nevertheless be considered ‘final’ in the
sense of precluding further litigation of the same issue, turns
upon such factors as the nature of the decision (i.e., that it was
not avowedly tentative), the adequacy of the hearing, and the

theory was in his petition for rehearing following our decision in FCStone
I. Even at that point, the trustee’s theory was quite underdeveloped. He
did not flesh out this theory until the remand proceedings.
Nos. 16-1896 & 16-1916 15

opportunity for review.”), quoting Lummus Co. v. Common-
wealth Oil Refining Co., 297 F.2d 80, 89 (2d Cir. 1961).
The trustee’s collateral estoppel argument fails because the
bankruptcy judge’s oral “clarification” was not the kind of
“solid, reliable, and final” order entitled to preclusive effect.
See Loera, 714 F.3d at 1028. The judge was ambivalent about
whether the post-petition transfer involved funds that should
be characterized as property of the estate. He said that he “did
not decide” the issue in 2007 and was “not deciding today” in
October 2008. By contrast, as we held in FCStone I, the August
2007 order itself unambiguously authorized the post-petition
transfer and “ended any discussion about … original owner-
ship.” 746 F.3d at 255–56. If any order was entitled to preclu-
sive effect, it was the August 2007 order authorizing the post-
petition transfer, not the bankruptcy judge’s later comments
about his subjective intentions.
The trustee points out that he brought his motion in the
bankruptcy court under Federal Rule of Civil Procedure 60(b)
and that the denial of Rule 60(b) relief is “appealable as a sep-
arate final order.” See Stone v. INS, 514 U.S. 386, 401 (1995). In
the trustee’s view, FCStone should have appealed from the
bankruptcy court’s ruling on the Rule 60(b) motion, and its
failure to do so should stop it from challenging the substance
of that ruling. But Rule 60(b) does not authorize a judge to
“clarify” the meaning of a prior order. The rule does authorize
a judge to “relieve a party … from a final judgment, order, or
proceeding” for good cause, and indeed the trustee asked the
bankruptcy judge in the alternative to vacate or modify the
August 2007 order. But the judge denied the motion. “For the rec-
ord,” he said, “I’m denying the Rule 60(b) motion. I am not
going to vacate or modify my order. It stands. I don’t think I
16 Nos. 16-1896 & 16-1916

made any mistake … .” In other words, though the trustee did
indeed bring a Rule 60(b) motion, he lost his motion. The court
took no firm action adverse to FCStone. It would have been
extraordinary for FCStone to have tried to appeal a decision
in its favor.
We acknowledge that the clarification aspect of the bank-
ruptcy judge’s oral ruling arguably was contrary to the posi-
tion argued by FCStone, but the clarification had no actual ef-
fect at that time. It was at best a helpful signal for the avoid-
ance claims the trustee then asserted against FCStone and
other SEG 1 customers seeking actual return of the money. It
was the district court’s later decision on the avoidance claim
against FCStone that would have moved money from one
party to another (and that we reversed on a timely appeal in
FCStone I).
The trustee cites no authority for the proposition that a
“clarification” that, as we previously held, runs “contrary to
the plain language” of the underlying order,” FCStone I, 746
F.3d at 255, is itself an appealable final order. It is not even
clear on what procedural basis the trustee brought his motion
to clarify. See Barton v. Uniserv Corp., No. 15 CV 4149, 2016 WL
4577033, at *3 (N.D. Ill. Aug. 30, 2016) (Federal Rules of Civil
Procedure do not expressly authorize “motion for clarifica-
tion”); Lou v. Ma Laboratories, Inc., No. 12-cv-05409 WHA (NC),
2013 WL 1615785, at *1 (N.D. Cal. Apr. 15, 2013) (same); United
States v. Philip Morris USA, Inc., 793 F. Supp. 2d 164, 168
(D.D.C. 2011) (same).
While the trustee cites a handful of cases illustrating the
breadth of potentially appealable orders, none involved a rul-
ing as vague, open-ended, and inconclusive as the “clarifica-
tion” here. E.g., Matrix IV, 649 F.3d at 549 (bankruptcy orders
Nos. 16-1896 & 16-1916 17

confirming asset sale, denying creditor’s Rule 60(b) challenge
to asset sale, and resolving lien priority after full trial, were
final and appealable); Tidwell v. Smith (In re Smith), 582 F.3d
767, 776 (7th Cir. 2009) (bankruptcy order modifying dis-
charge injunction was final and appealable); Chase Manhattan
Mortgage Corp. v. Moore, 446 F.3d 725, 728 (7th Cir. 2006) (dis-
trict court order entering summary judgment in bank’s favor
but failing to order foreclosure was nevertheless final and ap-
pealable by mortgagor); In re UAL Corp., 411 F.3d 818, 822 (7th
Cir. 2005) (bankruptcy order vacating authorization allowing
airline to retain leases was final and appealable).
As a fallback, the trustee argues that “an order does not
need to be final to be preclusive, provided it is sufficiently
firm and not tentative and the parties were fully heard.”
That’s not quite right. Finality is critical to the application of
preclusion doctrines, though as we recognized in Gilldorn Sav-
ings Ass’n v. Commerce Savings Ass’n, 804 F.2d 390, 393 (7th Cir.
1986), “finality for collateral estoppel is not the same as that
required to appeal under 28 U.S.C. § 1291.” In Gilldorn Sav-
ings, however, we added that appealability is still an im-
portant factor in considering “whether a decision is ‘final’ for
collateral estoppel purposes.” Id. at 393, citing Miller Brewing
Co. v. Joseph Schlitz Brewing Co., 605 F.2d 990, 996 (7th Cir.
1979).
Even if FCStone’s inability to appeal the oral “clarifica-
tion” should not be treated as dispositive, nothing about that
ruling was firm or definite. The ruling did not even make
sense. As noted, the bankruptcy judge denied the trustee’s Rule
60(b) motion, declared that the August 2007 order “stands,”
and then asserted that he was unprepared to decide the prop-
erty-of-the-estate question.
18 Nos. 16-1896 & 16-1916

We are sympathetic to the bankruptcy judge’s situation
back in August 2007. He faced extraordinary pressure to
make a $300 million decision within a few hours. He was be-
ing told by numerous parties that failure to authorize the
transfer would force many of the SEG 1 FCMs into bank-
ruptcy themselves, with ripple effects throughout commodity
markets and other financial markets. The judge said on the
record that he “didn’t have the foggiest idea what was going
on in this very complicated case.” Still, in October 2008, the
judge could not undo his prior order (on which financial firms
and investors with significant exposure had relied) simply be-
cause, in retrospect, the order had consequences he may not
have fully appreciated at the time.
In essence, the trustee urges us to adopt a rule providing
that a trial court’s after-the-fact comments, however inconclu-
sive, should be entitled to preclusive effect so as to supersede
a prior binding order. That rule would be unrealistic, and we
decline to adopt it. The rule would create new ambiguities
that would set traps for parties who rely on court orders, and
it would create both incentives and opportunities for their op-
ponents to multiply litigation.
Not only was the bankruptcy court’s October 2008 ruling
unappealable by FCStone and other SEG 1 customers, it was
indefinite and internally inconsistent, and it is entitled to no
preclusive effect. Even if the trustee’s collateral estoppel argu-
ment were not barred by the mandate rule and the law of the
case, the argument would fail on its merits. We affirm Judge
Zagel’s decision rejecting the trustee’s collateral attempt to re-
vive his avoidance action against FCStone.
Nos. 16-1896 & 16-1916 19

B. FCStone’s Cross-Appeal — The SEG 1 Reserve
We now turn to FCStone’s cross-appeal. In authorizing the
post-petition transfer following the Citadel sale, the bank-
ruptcy court required the Bank of New York to hold back
$15.6 million (about five percent of the sale proceeds). That
amount, along with $4.9 million in proceeds from a late-set-
tling security and certain proceeds of subsequent liquida-
tions, remained in reserve in a SEG 1 account at the bank. As
of September 30, 2014, that SEG 1 reserve account had a bal-
ance of $24,551,622.
In Count III of his operative complaint, the trustee seeks a
declaration as to the ownership of these funds. The trustee ar-
gues, and the district court concluded, that the funds should
be treated as property of the estate that should be distributed
pro rata among all Sentinel customers and other unsecured
creditors (including the Bank of New York). Grede, 556 B.R. at
366. FCStone counters that the funds belong to it and other
SEG 1 customers (the “SEG 1 Objectors”) who opposed early
drafts of the Chapter 11 plan that would have treated all cus-
tomers uniformly as unsecured creditors. FCStone argues that
the funds are protected by a statutory trust and that it would
be improper to disburse that trust property to other claim-
ants—particularly the Bank of New York, which as we previ-
ously determined was on “inquiry notice of Sentinel’s fraud.”
In re Sentinel Management Group, Inc., 809 F.3d at 964.
This issue arose on cross-motions for judgment and sum-
mary judgment following a bench trial and subsequent re-
mand. We review for clear error the district judge’s factual
findings, but we review de novo his legal conclusions. Muham-
mad-Ali v. Final Call, Inc., 832 F.3d 755, 760 (7th Cir. 2016). We
hold that the funds in the SEG 1 reserve account are trust
20 Nos. 16-1896 & 16-1916

property belonging to FCStone and other SEG 1 Objectors.
These claimants preserved their statutory trust rights and are
entitled to the benefit of tracing conventions. Although there
are understandable reasons for wanting to treat SEG 3 cus-
tomers similarly based on their similar statutory protections,
we conclude that the SEG 3 customers surrendered those pro-
tections by agreeing to be treated as unsecured creditors un-
der the confirmed Chapter 11 plan. Further, FCStone has
shown that it can actually trace a portion of the reserve funds
back to its initial investment, strengthening its claim to those
funds. The district court’s reasons for rejecting the tracing
would also, we believe, undermine important statutory pro-
tections for FCM customers under the Commodity Exchange
Act in any future FCM bankruptcies. We reverse the district
court’s judgment on Count III and remand for entry of judg-
ment in FCStone’s favor.
1. Statutory Trusts and Tracing Conventions
We begin with a simple statutory proposition. Under the
Bankruptcy Code, property held in trust by the debtor for a
third party is not property of the debtor’s bankruptcy estate.
See 11 U.S.C. § 541(d) (“Property in which the debtor holds,
as of the commencement of the case, only legal title and not
an equitable interest … becomes property of the estate … only
to the extent of the debtor’s legal title to such property, but not
to the extent of any equitable interest in such property that the
debtor does not hold.”); Begier v. IRS, 496 U.S. 53, 59 (1990)
(“Because the debtor does not own an equitable interest in
property he holds in trust for another, that interest is not
‘property of the estate.’”); Marrs-Winn Co. v. Giberson Electric,
Inc. (In re Marrs-Winn Co.), 103 F.3d 584, 589 (7th Cir. 1996)
Nos. 16-1896 & 16-1916 21

(“From the plain language of the Code, one can easily con-
clude that the debtor’s bankruptcy estate does not include
property held in trust for another.”).
Trust property does not lose its trust character simply be-
cause, as in this case, the debtor misappropriated it or com-
mingled it with the debtor’s own property. E.g., Old Republic
Nat’l Title Ins. Co. v. Tyler (In re Dameron), 155 F.3d 718, 723–24
(4th Cir. 1998) (“courts have consistently rejected the notion
that commingling of trust property, without more, is suffi-
cient to defeat tracing”); Connecticut General Life Ins. Co. v. Uni-
versal Ins. Co., 838 F.2d 612, 619 (1st Cir. 1988) (“mere coming-
ling of the trust property with other property of the bankrupt
corporation … does not defeat [trust beneficiary’s] claim”);
Turley v. Mahan & Rowsey, Inc. (In re Mahan & Rowsey, Inc.), 817
F.2d 682, 684 (10th Cir. 1987) (the “trust pursuit will even al-
low tracing of trust funds into a commingled mass”); accord,
Universitas Education, LLC v. Nova Group, Inc., Nos. 11 Civ.
1590(LTS)(HBP) & 11 Civ. 8726(LTS)(HBP), 2013 WL 6123104,
at *12 (S.D.N.Y. Nov. 20, 2013); Appalachian Oil Co. v. Kentucky
Lottery Corp. (In re Appalachian Oil Co.), Bankr. No. 09-50259,
2012 WL 1067731, at *7 (Bankr. E.D. Tenn. Mar. 23, 2012); Han-
ley v. Notinger (In re Charlie’s Quality Carpentry, LLC), No. 02-
11983-JMD, 2003 WL 22056647, at *5 (Bankr. D.N.H. Aug. 25,
2003); Carlson Orchards, Inc. v. Linsey (In re Linsey), 296 B.R.
582, 586 (Bankr. D. Mass. 2003).
The trustee correctly acknowledges that FCStone and the
other SEG 1 customers were the beneficiaries of a statutory
trust. Under the Commodity Exchange Act, it is “unlawful for
any person to be a futures commission merchant unless …
such person shall … treat and deal with all … property re-
ceived by such person to margin, guarantee, or secure the
22 Nos. 16-1896 & 16-1916

trades or contracts of any customer of such person, or accru-
ing to such customer as the result of such trades or contracts,
as belonging to such customer.” 7 U.S.C. § 6d(a) (emphasis
added); see also 17 C.F.R. § 1.20(f)(3) (“No person … that has
received futures customer funds for deposit in a segregated
account … may hold, dispose of, or use any such funds as be-
longing to any person other than the futures customers of the
futures commission merchant which deposited such funds.”);
Marchese v. Shearson Hayden Stone, Inc., 822 F.2d 876, 878 (9th
Cir. 1987) (“The legislative history of the Act makes it clear
that [§ 6d] establishes a specific statutory trust … and this fact
has long been recognized.”).
There are powerful policy reasons for according robust
protection to investors whose trust property is covered by the
Commodity Exchange Act. The CFTC, the regulator responsi-
ble for enforcing the Act (and amicus in earlier proceedings),
explained:
The ability of participants in futures markets to
rely on the protections provided by section 6d
when an FCM becomes insolvent is critical to
the functioning of these markets. … In futures
transactions there is no equivalent of federal de-
posit insurance for bank depositors or the Secu-
rities Investor Protection Corporation Fund to
protect securities investors … . Instead, the re-
quirements of section 6d are the principal legal
protection for commodity customer funds
against wrongdoing or insolvency by FCMs and
their depositories. … Participants in the futures
market rely on this protection … and customers’
ability to rely on this protection when an FCM
Nos. 16-1896 & 16-1916 23

faces insolvency contributes to the stability of
markets in times of stress.
Supplemental Amicus Curiae Memorandum of CFTC at 7–8,
Grede v. FCStone, LLC, 485 B.R. 854 (N.D. Ill. 2013) (No. 09 C
136, Dkt. Entry 87), reprinted in FCStone App. at 839–40.
The Futures Industry Association, Inc., a trade organiza-
tion and amicus curiae in the current appeals, has made a sim-
ilar point, describing the district court’s decision on remand
as opening the door for “non-futures claimants in future FCM
bankruptcies to litigate rights to futures margin account prop-
erty, creating perilous delay and rendering unpredictable the
return of futures customers’ assets.” Brief of Amicus Curiae,
Futures Industry Ass’n, at 19.
The statutory trust assures futures customers that their
funds will be protected from an FCM’s general creditors and
other customer classes. The trust also assures futures custom-
ers that, in the event of an FCM failure, “funds and property
can be immediately transferred to the segregated customer
accounts of solvent FCMs to … support the ongoing obliga-
tions of open trades” and thus can prevent the bankruptcy of
a single FCM from starting a domino effect that overwhelms
other firms and the larger market. Id. at 20. Cf. In re JPMorgan
Chase Bank, NA, Comm. Fut. L. Rep. (CCH) ¶ 32,156, 2012 WL
1143791, at *5 (C.F.T.C. 2012) (“Without immediate access to
customer funds, the FCM is hindered in its ability to satisfy
margin requirements. In times where there is a market dis-
ruption, any impediment or restriction upon the ability to im-
mediately withdraw funds ‘could magnify the impact of any
market disruption and cause additional repercussions.’”) (ci-
tation omitted). We agree that the Commodity Exchange Act
24 Nos. 16-1896 & 16-1916

and Bankruptcy Code should be interpreted and applied with
these concerns in mind.
Though the trustee concedes that the SEG 1 customers
were entitled to statutory trust protection, he argues that (1)
the SEG 3 customers were likewise the beneficiaries of a stat-
utory trust and (2) the two customer classes are similarly sit-
uated under the confirmed Chapter 11 plan. The trustee is cor-
rect as to the first point: the Investment Advisers Act, like the
Commodity Exchange Act, creates a trust in favor of inves-
tors.5 With respect, however, we believe the trustee is mis-
taken as to the second point, and that undermines his argu-
ment.
This issue concerning the parallel statutory trusts presents
the most difficult equitable problem we have confronted in
these protracted bankruptcy proceedings. It was understand-
ably the focus of the district court’s thinking. As we suggested
in FCStone I, the default rule should be to treat customers pro-
tected by statutory trusts under the Commodity Exchange

5 See 17 C.F.R. § 275.206(4)–2(a) (“If you are an investment adviser …
it is a fraudulent, deceptive, or manipulative act … for you to have custody
of client funds or securities unless: (1) … A qualified custodian maintains
those funds and securities: (i) In a separate account for each client under
that client’s name; or (ii) In accounts that contain only your clients’ funds
and securities, under your name as agent or trustee for the clients.”). While
this trust language appears in regulations promulgated by the SEC
(whereas the Commodity Exchange Act trust is established by the Act’s
statutory language itself), we recognized in FCStone I that there is “no le-
gal basis for placing one trust ahead of the other,” 746 F.3d at 259; see also
Chrysler Corp. v. Brown, 441 U.S. 281, 295 (1979) (“It has been established
in a variety of contexts that properly promulgated, substantive agency
regulations have the ‘force and effect of law.’”) (footnote omitted).
Nos. 16-1896 & 16-1916 25

Act and those protected by statutory trusts under the Invest-
ment Advisers Act as similarly situated. In this case, the SEG
1 Objectors, including FCStone, steadfastly asserted their
rights under the Commodity Exchange Act. The SEG 3 cus-
tomers, however, agreed to be treated as unsecured creditors
without any carve-out or exception for any statutory trust
claim that they might otherwise have brought.
That agreement has consequences that we cannot over-
look. See Ernst & Young LLP v. Baker O’Neal Holdings, Inc., 304
F.3d 753, 755 (7th Cir. 2002) (“A confirmed plan of reorganiza-
tion is in effect a contract between the parties and the terms of
the plan describe their rights and obligations.”), citing In re
Chicago, Milwaukee, St. Paul & Pacific R.R. Co., 891 F.2d 159, 161
(7th Cir. 1989); see also 11 U.S.C. § 1141(a) (“[T]he provisions
of a confirmed plan bind … any creditor … whether or not the
claim or interest of such creditor … is impaired under the plan
and whether or not such creditor … has accepted the plan.”);
In re Harvey, 213 F.3d 318, 321 (7th Cir. 2000) (“[A] confirmed
plan acts more or less like a court-approved contract or con-
sent decree that binds both the debtor and all the creditors.”). 6
The plan’s language confirms that the SEG 1 Objectors and
SEG 3 customers are situated differently under the plan itself.

6 To the extent we suggested in dicta in FCStone I that the two cus-
tomer classes are similarly situated, that dictum is not controlling here.
We made clear that we were not deciding the property-of-the-estate issue
in our earlier opinion. We decided only that the post-petition transfer was
authorized by the bankruptcy court. While we believe our prior dictum is
correct as a general proposition, our earlier decision did not require us to
scrutinize the provisions of the confirmed Chapter 11 plan that, we hold
in this cross-appeal, treat the SEG 1 Objectors differently from the SEG 3
customers.
26 Nos. 16-1896 & 16-1916

Under Section 4.4(a), customer claimants are entitled to dis-
tributions as set forth in Section 4.5(a). That section in turn
provides that customer claimants and unsecured creditors are
entitled to pro rata distributions of “Cash and Cash proceeds
of all Property, including Customer Property, not allocated for
payment of Allowed Claims in other Classes.” Section 7.20(a)
then creates an exception: “Pending a determination by the
Court whether the assets held in the SEG 1 Property Of The
Estate Reserve … are property of the Estate, the Trustee shall
continue to maintain the Property of the Estate Reserve[].”
Section 7.20(a)(i) prescribes the “Seg 1 Property Of The Estate
Reserve” as follows:
On the Effective Date, the Liquidation Trustee
shall establish a reserve equal to the amount of
all funds held in any bank account denominated
as a SEG 1 account, multiplied by a fraction, the
numerator of which is the amount of Citadel
Beneficiary … Customer Claims attributable to
SEG 1 accounts … which voted against the Plan
and/or lodged objections thereto, and the de-
nominator of which is the total aggregate
amount of … Customer Claims attributable to
SEG 1 accounts.
As the trustee himself explained prior to plan confirma-
tion, “the Plan Proponents have established reserves to ad-
dress the Seg 1 Objectors’ contention that certain funds are not
property of the estate, see Plan § 7.20, and, as such, Customers
will share pro rata with Holders of General Unsecured Claims
only in property that the Court determines is property of the
estate.” There are no similar provisions for SEG 3 customers.
Nos. 16-1896 & 16-1916 27

Section 7.20(c)(i) explains how the disputed funds should
be disbursed if the court “determines that the property … is
not property of the estate.” In that event, “Sections 4.4 and 4.5
of the Plan shall be deemed modified to provide that Cus-
tomer Property shall be distributed to the rightful owners of
such property or to the Estate, as determined by the Court.”
Reading all these provisions together, as we must, we find
that while the confirmed plan treats SEG 1 and SEG 3 custom-
ers by default as unsecured creditors, the SEG 1 Objectors
alone preserved their right to recover trust property held in
reserve, and the plan specifically contemplates that such
property may be restored to those customers. SEG 3 custom-
ers simply did not preserve a comparable right.
The trustee argues that the final phrase of Section
7.20(c)(i)—“as determined by the Court”—authorizes the
court (1) to find that the reserve funds are trust property be-
longing to the SEG 1 Objectors, yet nevertheless (2) to distrib-
ute the property pro rata to all customers and unsecured cred-
itors. Though the text in a vacuum offers some support for the
trustee’s reading, that reading would lead to a nonsensical re-
sult. If the reserve funds belong to the SEG 1 Objectors, the
court cannot simply disregard that fact and split the funds
among differently situated creditors. For that matter, if the
court were vested with such unfettered discretion, what
would be the point of the extended adversarial proceedings
that have already taken place?
We decline to interpret the confirmed Chapter 11 plan as
authorizing an absurd outcome or inviting futile litigation.
E.g., BKCAP, LLC v. Captec Franchise Trust 2000-1, 572 F.3d 353,
360 (7th Cir. 2009) (where literal application of text would
“lead to absurd results” and “thwart the obvious intentions of
28 Nos. 16-1896 & 16-1916

its drafters,” we cannot rely solely on plain language) (cita-
tions and internal quotation marks omitted). In context, the
phrase “as determined by the Court” refers to the threshold
determination whether property is correctly characterized as
trust property or property of the estate. Only property of the
estate could and should be distributed pro rata to creditors.
Property belonging to others must be returned to them.
Since only the SEG 1 Objectors preserved their status as
trust claimants with respect to the SEG 1 reserve funds, the
problem of co-equal trust claimants addressed in Cunningham
v. Brown, 265 U.S. 1 (1924), the key case on which the district
court relied, is absent here. In its original opinion, the district
court indicated that, if it were dealing with a single class of
trust claimants, it would “apply every reasonable tracing fic-
tion available to preserve the … trust.” Grede, 485 B.R. at 878.
The district court’s original view is consistent with our dictum
in FCStone I: we emphasized the “national interest” in protect-
ing statutory trust claimants, and we suggested that, in a case
involving competing trusts, claimants who cannot actually
trace might still be entitled to priority over at least unsecured
creditors. 746 F.3d at 259.
Because this case no longer involves competing trust
claims by SEG 1 customers under the Commodity Exchange
Act and SEG 3 customers under the Investment Advisers Act,
we need not rely on our proposed rule of priority. Instead, to
ensure that the goals underlying the Commodity Exchange
Act are honored, we should accord FCStone and the other
SEG 1 Objectors every reasonable opportunity to recover their
trust property. If such a customer can trace its initial invest-
ment to funds remaining under the control of the Sentinel Li-
Nos. 16-1896 & 16-1916 29

quidation Trust, that customer should be entitled to its pro-
portionate share of those funds. And if the customer cannot
actually trace, it should nevertheless be entitled to rely on rea-
sonable tracing conventions (or “fictions”). Though a variety
of tracing conventions might be helpful in a case like this, the
CFTC proposed that “assets in the Sentinel Seg 1 accounts and
portfolios at the time of the Sentinel bankruptcy must be con-
sidered to have been held in a trust under the [Act] independ-
ent of any requirement on the part of customers to trace par-
ticular assets.” Supplemental Amicus Curiae Memorandum of
CFTC at 7–8, Grede v. FCStone, LLC, 485 B.R. 854 (N.D. Ill. 2013)
(No. 09 C 136, Dkt. Entry 87), reprinted in FCStone App. at
842. We agree with the CFTC’s view, though that logic would
have extended to customers protected by the Investment Ad-
visers Act as well, at least if they had not agreed to relinquish
any such rights. 7
The securities Sentinel sold to Citadel in August 2007 were
(with limited exceptions) segregated for the benefit of SEG 1
prior to the sale; the proceeds of that sale were deposited in
segregation for SEG 1; and funds attributable to the five per-
cent holdback and subsequent liquidations were likewise

7 We recognize that, unlike SEG 1, SEG 3 customers did not have hun-

dreds of millions of dollars in securities or proceeds in their segregated
accounts when Sentinel filed for bankruptcy protection. As the last cus-
tomer class Sentinel raided before going belly-up, SEG 3 was in an inher-
ently weaker negotiating position than SEG 1. But by agreeing to a plan
that treated them as unsecured creditors, SEG 3 customers gave up what-
ever trust claims they might otherwise have asserted. As a practical mat-
ter, these customers may ultimately recover less than some other creditor
classes. We cannot cover their losses with funds rightfully belonging to
SEG 1 customers.
30 Nos. 16-1896 & 16-1916

kept in segregation. Pursuant to the tracing convention pro-
posed by the CFTC and urged by the Futures Industry Asso-
ciation and FCStone, the funds should be disbursed pro rata
among the SEG 1 Objectors. 8
2. Actual Tracing
As set forth above, FCStone and other SEG 1 Objectors are
entitled to the full benefit of reasonable tracing conventions to
recover their trust property. But even apart from those con-
ventions or presumptions, FCStone has shown an independ-
ent basis for its claim to a share of the SEG 1 reserves. It can
actually trace its initial investment to the proceeds of the Cit-
adel security sale (both those proceeds disbursed in the Au-
gust 2007 post-petition transfer and those remaining in re-
serve). FCStone has done so through the essentially unrebut-
ted report and testimony of its key expert, Frances McCloskey,
a certified public accountant with extensive experience in fo-
rensic accounting. For this additional reason, FCStone is enti-
tled to judgment on Count III of the trustee’s operative com-
plaint.
a. Trial Testimony
McCloskey testified at trial that she had traced (1) all cash
and securities within all of Sentinel’s records (not only those

8 At oral argument, FCStone contended that beneficiaries of a statu-
tory trust should enjoy an “irrebuttable” presumption of entitlement to
assets held in a segregated account “no matter how they got there.” We
need not and do not endorse this view. Suppose, for example, that a seg-
regated trust account were shown to contain at the time of a bankruptcy
filing a balance exceeding its beneficiaries’ contributions and earnings. In
such a scenario, an irrebuttable presumption of entitlement obviously
would be unjustified.
Nos. 16-1896 & 16-1916 31

assets allocated to SEG 1) for 2007, the year Sentinel failed; (2)
all customer deposits during that same year to the securities
allocated on customers’ statements; and (3) the allocation of
all securities included in the Citadel sale back to their original
dates of purchase (as early as 2004). She then explained how
she accomplished this task. Securities are identified by Com-
mittee on Uniform Security Identification Procedures
(CUSIP) numbers, which are similar to serial numbers. Using
these CUSIP numbers, McCloskey was able to test and prove
the accuracy of two different accounting ledgers that Sentinel
maintained on a daily basis.
One of these two ledgers, the customer ledger, reflected all
securities that had been allocated to a particular customer
group. The securities allocated to—meaning owned by—a
group would change to reflect the value of clients’ cash depos-
its or redemptions. In other words, Sentinel “would exchange
customer balances for an exact interest in the market value of
a security.” Sentinel frequently participated in repurchase or
“repo” transactions, that is, transactions where “one party …
sells a security to a counterparty … with an agreement to re-
purchase the security later with interest. “ Bloom, 846 F.3d at
248. McCloskey found that the customer ledger never re-
flected “repo” transactions in which securities that Sentinel
had loaned to counterparties. Nor did it include unallocated,
house-owned securities.
Sentinel’s accounting system also included a securities in-
ventory, which, in contrast to the customer ledger, listed by
CUSIP number every security controlled by Sentinel, includ-
ing “repo” securities out on loan and Sentinel’s own ever-
32 Nos. 16-1896 & 16-1916

expanding pool of riskier securities not allocated to custom-
ers. The securities inventory contained no information rele-
vant to customer transactions. According to McCloskey, how-
ever, the customer ledger accurately “reflected every cus-
tomer and every group and each security’s allocation or each
customer’s interest in a security.”
McCloskey testified that she performed extensive testing
to verify the accuracy of these ledgers and could trace, “to a
reasonable degree of accounting certainty, the value that cus-
tomers deposited at Sentinel, the balances that Sentinel held
for their … benefit, and the securities that Sentinel held each
day.” She found no instances of missing, fictitious, or double-
allocated securities. To the contrary, Sentinel’s customer state-
ments reflected to the penny the “economic exchange that oc-
curred between the customers and Sentinel for an interest in
a pool of securities valued at market for that day” and repre-
sented a “true economic transaction.”
McCloskey acknowledged, of course, that Sentinel had
improperly commingled and illegally pledged customer-
owned securities as collateral for its own loan. Even so,
McCloskey did not find, after validating the accounting for all
of Sentinel’s securities inventory for more than 200 business
days, any misappropriation of customer assets apart from
those segregation violations. Sentinel’s misuse of customer as-
sets, although illegal, did not impede McCloskey’s ability to
trace the assets. The assets still belonged to the respective cus-
tomers despite having been placed, illegally and temporarily,
at risk.
The securities Sentinel sold to Citadel, with few excep-
tions, had been out of segregation for no more than two brief
periods—but long or short, those periods of unlawful conduct
Nos. 16-1896 & 16-1916 33

did not affect the tracing analysis. McCloskey explained that
the potential risks associated with Sentinel’s improper use of
customer assets did not “have anything to do with what the
customer accounting and customer records reflect in terms of
the allocation of securities and the exchange of customer bal-
ances for interests [in] pools of securities.”
For his part, the trustee argued that the customer records
on which McCloskey relied should be disregarded in their en-
tirety because Sentinel’s segregation violations rendered its
record-keeping “a complete fraud” that “can’t be the starting
point for a tracing analysis.” The trustee grounded this asser-
tion in expert testimony by James Feltman, also a CPA. Felt-
man conceded that Sentinel’s customer ledger consistently
matched the allocation of securities on customers’ statements,
but he rejected that data as meaningless because “billions of
dollars of [house-owned] securities that are in Sentinel’s in-
ventory … don’t show up on customer statements,” and be-
cause Sentinel kept customers in the dark about the risk in-
herent in its improper pledging of customer assets to secure
the Bank of New York loan. Feltman opined that tracing was
inappropriate even for securities that had never been coming-
led or subject to a lien in the bank’s favor because the securi-
ties Sentinel allocated to customer groups typically had been
purchased years earlier. In Feltman’s view, the allocation pro-
cess was “arbitrary and didn’t have real economic meaning.”
McCloskey countered (without contradiction) that Felt-
man had analyzed only the omnibus custodial account rec-
ords at the Bank of New York and the Sentinel securities in-
ventory, which, McCloskey said, by their “very nature” are
not designed to reflect balances or transactions on a customer-
34 Nos. 16-1896 & 16-1916

by-customer basis. She contended that Feltman had disre-
garded the “fundamental concept of book-entry customer ac-
counting” and “look[ed] in the wrong place” by simply ignor-
ing Sentinel’s detailed customer ledgers. McCloskey added
that Feltman’s conclusions were “inaccurate and misleading”
because he had focused on the risks from collateralizing cli-
ent-owned securities, which had no bearing on the ownership
of those securities. She opined that his “notion that the cus-
tomer ledger is somehow fiction or it doesn’t represent reality
is just wrong,” because it ignores the consistent accuracy of
Sentinel’s record-keeping.
b. First District Court Opinion
In its initial opinion, the district court concluded that, us-
ing the ledgers and data identified by McCloskey, “it is possi-
ble to identify: 1) the custodial location of every Sentinel se-
curity held at [the Bank of New York] for all relevant time pe-
riods; and 2) the indirect beneficial ownership interest in these
securities that Sentinel assigned its customers.” Grede, 485
B.R. at 864. Nonetheless, the court rejected McCloskey’s testi-
mony, calling “nonsensical” her claim to have traced “custom-
ers’ indirect beneficial ownership in securities” and finding
that “tracing is not possible in this case.” Id. at 878–79 (citation
omitted).
The district judge did not, as we read his decision, ques-
tion McCloskey’s credibility. He said explicitly that he did not
“disparage the work of Ms. McCloskey, who is an accountant
not an attorney” and therefore “should not be expected to un-
derstand arcane common law tracing rules.” Id. at 879 n.20.
The judge then explained why, in his view, tracing was not
possible:
Nos. 16-1896 & 16-1916 35

But for tracing purposes the critical shortcom-
ing of Ms. McCloskey’s report is that it fails to
adequately account for the fact that none of Sen-
tinel’s customers held specific ownership inter-
ests in securities. Rather, they owned pro rata
portions of investment portfolios, which Senti-
nel was free to fill with any of the securities in
its pool of assets so long as those securities met
the portfolio’s investment criteria. Further, these
securities were generally purchased [originally]
with commingled funds … . The upshot is that
the securities held in a given customer group
portfolio at any time were not necessarily—in-
deed, were most improbably—the converted
form of the original trust property (i.e. cash de-
posits) of the customers within that group.
Id. at 879. The judge also asserted that the “fungible nature of
cash alone makes it impossible to trace specific securities back
to original customer deposits,” and thus, “commingling
aside, Sentinel’s investment model makes tracing essentially
impossible because, upon deposit, customer funds were im-
mediately converted into an abstract ownership interest.” Id.
In other words, according to the district court, “Sentinel’s
pooled investment model renders tracing impracticable be-
cause there is no specific form of converted trust property to
trace.” Id. (emphasis omitted).
c. Remand Proceedings
After our remand in FCStone I, the parties resumed their
battle over the reserves and submitted dueling motions for
judgment and summary judgment. FCStone filed an affidavit
from McCloskey addressing specifically the district court’s
36 Nos. 16-1896 & 16-1916

reasons for rejecting her tracing analysis. She contended that
the district court had misunderstood both tracing principles
and “how securities markets actually function.” The court,
she asserted, had overlooked her testimony that customers’
cash deposits were exchanged for an ownership interest in
specific, identifiable securities held in Sentinel’s inventory,
which became the traceable trust res. She provided a detailed
description of tracing methodology in financial services firms.
McCloskey then explained why the fungible nature of cash
does not defeat tracing. Customer funds were wired into seg-
regated accounts, and these cash deposits were exchanged
daily for ownership interests in CUSIP-identifiable securities,
all verifiable through time stamps.
McCloskey also challenged the district court’s conclusion
that the use of a single clearing account impedes tracing. She
clarified that the use of such an account is standard industry
practice, pointing out that if the “use of a single clearing ac-
count precluded the ability to trace, FCMs and broker-dealers
nationwide would not be able to account for or hold customer
assets,” a result “contrary to accounting principles and indus-
try recordkeeping requirements.” Finally, she explained how
the use of pooled FCM customer securities accounts is stand-
ard industry practice and consistent with CFTC regulations.
The district court’s remand opinion again rejected McClos-
key’s testimony. The court declared tracing “difficult here, if
not impossible, because Sentinel’s commingling prior to its
bankruptcy filing was so appalling.” Grede, 556 B.R. at 365.
The court was particularly troubled by Sentinel’s use of “SEG
1 securities in an unauthorized repo transaction,” id. at 364,
but did not otherwise give reasons for rejecting McCloskey’s
unrebutted analysis.
Nos. 16-1896 & 16-1916 37

d. Discussion
We agree with FCStone that the district court’s explanation
for rejecting Frances McCloskey’s tracing analysis is not
sound and would have troubling implications for protection
of FCM customers more broadly. McCloskey testified that “it
was actually pretty easy” to follow the trail of assets given the
accuracy of Sentinel’s customer ledger. The trustee not only
failed to rebut this analysis but conceded the consistency of
the customer records during closing argument at trial.
Instead of pointing to evidence to rebut McCloskey’s anal-
ysis, the trustee continues to argue that FCStone relied on
“phony” records and a “fictional, arbitrary allocation process
with no basis in reality.” The trustee is arguing in essence that
because Sentinel unlawfully used customer assets as collat-
eral for its own borrowing, all of its records amount to noth-
ing more than smoke and mirrors. The trustee also contends
that Sentinel’s customer ledgers are unreliable because they
do not show securities owned by the house (which seems un-
surprising to us since these are customer ledgers), and because
customer statements did not disclose the risk to customers
from Sentinel’s use of their assets as collateral to support its
own leveraged trading strategy. But the trustee cites no legal
authority to show that these facts render Sentinel’s internal
records meaningless, and he cites no record evidence to show
that McCloskey’s tracing analysis was flawed. In our view,
McCloskey’s forensic analysis therefore remains unrebutted.
The trustee insists that tracing is “improper” because it is
“merely fortuitous” that Sentinel, on the eve of bankruptcy,
had swapped improperly collateralized SEG 1 securities for
assets owned by SEG 3 clients. This argument, though central
to the trustee’s position and the district court’s analysis, is a
38 Nos. 16-1896 & 16-1916

red herring. All parties to this case agree that Sentinel broke
the law by using client assets as collateral for its Bank of New
York loan. (Two of Sentinel’s executives are serving prison
sentences, after all.) But that fact does not mean that FCStone
cannot prove what it owned. Sentinel risked customer assets
by pledging them as collateral, but that misconduct did not
affect McCloskey’s ability to trace those assets. The fact that
SEG 3 customers happened to be the last victims of Sentinel’s
machinations does not confer upon the district court broad
equitable discretion to remedy their injury at the SEG 1 cus-
tomers’ expense.
The trustee also argues that the district judge found “that
FCStone’s tracing expert lacked credibility,” but the judge said
no such thing. Rather, the judge characterized McCloskey’s
work as valuable to an “understanding of the facts” and ex-
pressly avoided disparaging her work or her credibility.
Grede, 485 B.R. at 879 n.20. The judge rejected McCloskey’s
conclusion that beneficial interests in pooled securities can be
traced easily because, as “an accountant not an attorney,”
McCloskey “should not be expected to understand arcane
common law tracing rules.” Id. With respect, that assertion is
mistaken: McCloskey is a forensic accountant, an expert in fi-
nancial tracing. As an expert witness in this case, it was her
task to break down complex accounting principles for the
trier of fact. She did so, tracing customer assets through the
pooled investment portfolios for each group of customers,
just as FCMs and other financial institutions do routinely. The
ability to do so is critical to the day-to-day operation of FCMs
and commodity markets and to customer confidence that
their property will be protected in the event of an FCM bank-
ruptcy.
Nos. 16-1896 & 16-1916 39

In urging us to affirm the district court’s ruling on
FCStone’s cross-appeal, the trustee argues that mixed ques-
tions of law and fact not involving constitutional issues are
generally reviewed for clear error, see United States v. Freder-
ick, 182 F.3d 496, 499 (7th Cir. 1999), and that we accordingly
owe substantial deference to the district court’s findings. The
trustee’s explanation of the standard of review is consistent
with the weight of authority. See, e.g., Isby v. Brown, 856 F.3d
508, 521 (7th Cir. 2017); Muhammad-Ali, 832 F.3d at 760; Trovare
Capital Group, LLC v. Simkins Industries, Inc., 794 F.3d 772, 778
(7th Cir. 2015); Morisch v. United States, 653 F.3d 522, 528 (7th
Cir. 2011). But see Mungo v. Taylor, 355 F.3d 969, 974 (7th Cir.
2004) (“Both questions of law and mixed questions of law and
fact … are reviewed de novo.”); FCStone I, 746 F.3d at 251
(same); In re Longview Aluminum, L.L.C., 657 F.3d 507, 509 (7th
Cir. 2011) (same).
Our primary disagreement with the district judge’s analy-
sis on this tracing issue, however, concerns not his factual
findings (most of these are undisputed) but rather his legal
conclusions stemming from and relating to those findings.
Those legal conclusions are subject to de novo review.
The district judge concluded that tracing is impossible be-
cause Sentinel’s customers held only pro rata interests in a
pooled investment portfolio (i.e., a share of the securities allo-
cated to each investment group) rather than discrete interests
in particular securities. Sentinel’s investment model does not
render tracing impossible. It is undisputed that pooling and
allocation is standard industry practice, and CFTC regula-
tions expressly permit FCM customer funds to be held and
invested in this manner. See 17 C.F.R. §§ 1.20–1.23. The district
court’s grounds for rejecting McCloskey’s tracing run contrary
40 Nos. 16-1896 & 16-1916

to the regulations that protect FCM customers’ funds. If ac-
cepted more broadly, that view could disrupt the futures mar-
ket by thwarting the ability of investors to trace assets held in
a trust in which multiple beneficiaries maintain undivided in-
terests. The likely result would be to undermine confidence of
FCM customers that they would actually receive the prom-
ised statutory protection in a future FCM bankruptcy.
The district court also concluded that the fungible nature
of cash renders tracing impossible, a contention the trustee
defends by insisting that “because cash is fungible, FCStone
is necessarily confusing actual tracing with tracing with the
benefit of a fiction.” That logic would hold, however, only if
Sentinel maintained customer assets as one undifferentiated
pool of cash—similar to the original Ponzi scheme discussed
in Cunningham, 265 U.S. at 7–9. Instead, Sentinel exchanged
customer deposits for a beneficial ownership interest in iden-
tifiable securities on a daily basis. The trustee makes much of
the fact that securities allocated to customers often were pur-
chased by Sentinel much earlier. But the fact that Sentinel
used a buy-and-hold strategy for its securities is irrelevant.
The process of converting cash deposits into identifiable secu-
rities was unaffected by whether Sentinel already owned the
securities or purchased them on the open market in response
to new customer deposits.
For similar reasons, the district court erred by concluding
that Sentinel’s use of a single clearing account impeded the
ability to trace customer ownership of securities. McCloskey
testified not only that use of a single clearing account is stand-
ard industry practice but also that if this practice impeded the
ability to trace, “FCMs and broker-dealers nationwide would
not be able to account for or hold customer assets,” a result
Nos. 16-1896 & 16-1916 41

“contrary to accounting principles and industry recordkeep-
ing requirements.” The trustee did not address this problem
on appeal.
The trustee has cited as supplemental authority our deci-
sion in Bloom, 846 F.3d 243, which was issued after the briefing
in these appeals. See Fed. R. App. P. 28(j). He contends that
our “detailed discussion of Sentinel’s fraudulent operation
supports the Trustee’s position that FCStone failed to meet its
burden of tracing its property to the reserve account because
Sentinel’s fraudulent conduct made tracing impossible with-
out the benefit of tracing fictions.” On the contrary, our dis-
cussion in Bloom undermines James Feltman’s opinion that
Sentinel’s allocation of securities within its customer ledgers
amounted to a fiction. Eric Bloom, Sentinel’s former president
and CEO, challenged the sufficiency of the evidence support-
ing his fraud conviction. The government had offered three
theories of fraud, one of which was that Bloom had intention-
ally manipulated customer yield rates to inflate the returns to
SEG 1 customers while attributing less interest to SEG 3 than
those customers’ securities actually earned. Bloom, 846 F.3d at
252. To prove its theory, the government had to show which
securities were owned by each customer group on a given day
and to compare the market interest earned by those securities
with the amounts reflected on customer statements. Although
the jury’s guilty verdicts in Bloom do not establish that
McCloskey’s tracing analysis must be accepted, these verdicts
do undercut the trustee’s position that Sentinel’s fraud ren-
dered tracing impossible.
In short, the district court’s rationale for rejecting McClos-
key’s detailed tracing analysis turned on flawed legal conclu-
42 Nos. 16-1896 & 16-1916

sions, not factual determinations, and the trustee failed to re-
but FCStone’s evidence of actual tracing. FCStone is therefore
entitled to judgment on Count III, and FCStone and the other
SEG 1 Objectors are entitled to share pro rata in the SEG 1 re-
serve.
C. Disputed Claims Reserve
Before we conclude, we address briefly the Section 7.20(b)
“Disputed Claims Reserve,” a separate reserve fund estab-
lished under the confirmed Chapter 11 plan that contained
about $3.7 million as of September 30, 2014. FCStone acknowl-
edges the Disputed Claims Reserve in its appellate brief, but
it does not discuss the reserve at length, and the trustee ig-
nores the reserve completely.
The Disputed Claims Reserve consists of funds that “any
Citadel-Beneficiary Customer Claim which voted against the
Plan and/or lodged objections thereto[] would be entitled to
receive” but for language in Section 4.5(a) that requires SEG 1
Citadel sale beneficiaries to wait on further distributions until
other customers catch up to their level of recovery. The Dis-
puted Claims Reserve was designed to capture the pro rata
portions of litigation recoveries and similar distributions that
SEG 1 Objectors would have received had the parties agreed
up front that the Citadel sale proceeds were SEG 1 trust prop-
erty (and therefore should not count against the SEG 1 Objec-
tors’ pro rata share in the property of the estate).
As discussed in Part II-B, however, we conclude that the
SEG 1 reserve funds are trust property belonging to the SEG
1 Objectors both because these statutory trust claimants are
entitled to the benefit of tracing conventions and because
FCStone has shown that it is possible to trace portions of the
Nos. 16-1896 & 16-1916 43

reserve back to the customers’ initial investment. Likewise,
FCStone has shown that it is possible to trace the $297 million
post-petition transfer to the Citadel security sale and further
to trace the beneficial ownership of those securities all the way
back to the dates they were first acquired by Sentinel. Those
securities were overwhelmingly allocated to (and segregated
for) SEG 1 customers as of the Citadel sale date.
The confirmed Chapter 11 plan accounted for the possibil-
ity that the courts might ultimately side with the SEG 1 Ob-
jectors on the property-of-the-estate dispute. In addition to
Section 7.20(c)(i), which, as discussed above, modifies the
plan’s distribution provisions if a reviewing court determines
that the SEG 1 reserve is not property of the estate, Section
7.20(c)(ii) provides:
In the event the Court determines that the Cita-
del Sale Distributions did not constitute distri-
butions of property of the estate, the Claims of
Citadel-Beneficiary Customers shall, to the ex-
tent such Claims become Allowed Claims, be
entitled to pro rata distributions with all other
Holders of Allowed … Claims with respect to
all Property other than Customer Property,
without regard to … Plan provisions which pro-
vide that until all Holders of Allowed … Cus-
tomer Claims that are NonCitadel-Beneficiary
Customers shall have received a Percentage Re-
covery on account of such Claims equivalent to
the applicable Citadel-Beneficiary Customer,
such Citadel-Beneficiary Customer shall not be
entitled to a distribution.
44 Nos. 16-1896 & 16-1916

Section 7.11, which governs disputed claims reserves gener-
ally, similarly provides that “to the extent any … Disputed
Claim becomes an Allowed Claim by Final Order, the relevant
portion of the Cash held in the Disputed Claims Reserve
therefor shall be distributed … to the Claim Holder in a man-
ner consistent with distributions to similarly situated Al-
lowed Claims.” In light of these provisions and our conclu-
sions about the post-petition transfer and the SEG 1 reserve
funds, the Section 7.20(b) Disputed Claims Reserve should be
liquidated and the funds disbursed to SEG 1 Objectors who
would have received these funds but for the property-of-the-
estate dispute.
For the reasons we have explained, we AFFIRM the dis-
trict court’s judgment as to Counts I and V of the trustee’s op-
erative Second Amended Complaint. We REVERSE with re-
spect to Count III and REMAND with instructions to enter
judgment for FCStone on that count and for further proceed-
ings consistent with this opinion.