Brandt v. Horseshoe Hammond, LLC (In Re Equipment Acquisition Resources, Inc.)
803 F.3d 835
7th Cir.2015Background
- EAR engaged in a multi-year fraudulent scheme (2005–2009) that resulted in about $17 million being diverted to its principals, Sheldon Player and Donna Malone.
- Player and Malone spent over $8 million at Horseshoe Casino; Brandt (EAR’s plan administrator) alleges much of this derived from EAR’s fraudulent transfers.
- Horseshoe extended large credit lines to Player despite misstatements on credit applications, accepted deposits from an EAR-designated account, and observed gambling behaviors (e.g., "walking" and "passing" chips) that Brandt says were red flags.
- Brandt sued to avoid transfers under §§ 544, 548 and to recover under § 550; Horseshoe defended under § 550(b)(1), claiming it took transfers for value, in good faith, and without knowledge of voidability.
- District court granted Horseshoe summary judgment on both "without knowledge" and "good faith" grounds and denied Brandt’s motion to compel certain investigatory documents (Horseshoe invoked SAR confidentiality); Brandt appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether "the transfer avoided" in § 550(b)(1) includes downstream transfers to Horseshoe | Brandt: phrase covers the whole chain (EAR → Player → Horseshoe), so Horseshoe knew or should have known voidability | Horseshoe: statute refers only to the initial transfer from debtor to initial transferee (EAR → Player) | Court: "the transfer avoided" means the initial transfer only; focus is on what Horseshoe knew about the EAR→Player transfer |
| Whether Horseshoe acted "without knowledge" of voidability (inquiry notice standard) | Brandt: red flags (credit misstatements, chip passing/walking, EAR as source) put Horseshoe on inquiry notice | Horseshoe: no actual knowledge; even reasonable inquiry would not have revealed EAR’s fraud (fraud was hidden from EAR’s own advisors) | Court: Horseshoe acted without knowledge; red flags insufficient because a reasonable inquiry would not have uncovered EAR’s fraud |
| Whether Horseshoe acted "in good faith" separate from lack of knowledge | Brandt: Horseshoe’s conduct (extending credit despite misrepresentations, accepting EAR-linked funds) shows lack of good faith | Horseshoe: good faith satisfied; no evidence of deliberate blindness or intent to "wash" funds | Court: Good faith met; no separate basis to deny the § 550(b)(1) defense where lack of knowledge established |
| Whether denial of Brandt’s motion to compel (SAR-related documents) warrants reversal | Brandt: district court relied on ex parte filings and wrongly denied discovery of Horseshoe’s investigatory files | Horseshoe: SAR regulation bars disclosure; any investigatory files would not have shown EAR’s fraud or voidability | Court: Brandt waived procedural due-process challenge; even assuming error, no prejudice—those documents would not have shown voidability—so denial affirmed |
Key Cases Cited
- Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890 (7th Cir.) (interprets § 550(b)(1) to incorporate an imputed-knowledge/inquiry-notice standard)
- Conley v. Birch, 796 F.3d 742 (7th Cir.) (standard of review for summary judgment)
- A. Bauer Mech., Inc. v. Joint Arbitration Bd. of the Plumbing Contractors' Ass'n, 562 F.3d 784 (7th Cir.) (failure to raise due-process objection below waives appellate challenge)
- e360 Insight, Inc. v. Spamhaus Project, 658 F.3d 637 (7th Cir.) (appellate relief for denied discovery requires a showing of actual and substantial prejudice)