556 B.R. 357
N.D. Ill.2016Background
- Sentinel Management Group commingled customer funds from multiple regulatory segments (SEG 1 for FCMs like FC Stone; SEG 3 for hedge funds/individuals), misrepresented holdings, and used customer assets as collateral for loans and repo transactions.
- As markets seized in 2007, Sentinel moved significant Segment 1 and 3 securities into lienable accounts, sold assets, and made pre- and post-petition distributions to certain Segment 1 customers; FC Stone received ~$1.1M pre-petition and ~$14.5M post-petition (from Citadel sale proceeds).
- Sentinel filed bankruptcy on August 17, 2007; the bankruptcy court authorized distribution of Citadel sale proceeds to SEG 1 customers on August 20–21, 2007; funds were released the next day.
- Trustee Grede sued FC Stone seeking avoidance/recovery of the Post-Petition Transfer (§549), preferential transfers (§547), declaratory relief that SEG 1 account funds (including Plan Reserves) are estate property, unjust enrichment, and disallowance under §502(d).
- District court initially ruled for the Trustee on most counts; the Seventh Circuit reversed as to Counts I and II (holding bankruptcy court authorization precluded §549 avoidance) and affirmed denial on unjust enrichment, remanding for further proceedings. On remand the district court re-enters judgment for FC Stone on Counts I, II, IV, V and for the Trustee on Count III.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the $14,479,039 post-petition distribution (Aug 21, 2007) is avoidable under 11 U.S.C. §549 | Trustee: funds were estate property and the transfer was unauthorized, so §549 recovery is proper | FC Stone: bankruptcy court authorized distribution (Aug 20 order); transfer therefore not avoidable | Court: Seventh Circuit held the bankruptcy court authorized the transfer; judgment for FC Stone on Count I |
| Whether pre-petition distributions to FC Stone are preferential under §547 | Trustee: pre-petition transfers to FC Stone are avoidable preferences | FC Stone: contest; on appeal court rejected Trustee on this count | Court: Trustee concedes and court enters judgment for FC Stone on Count II |
| Whether funds held in SEG 1 accounts (including Plan Reserves) are property of the estate (declaratory relief) | Trustee: extensive commingling and record failures mean SEG 1 account funds are estate property and must be distributed per Plan reserves provisions | FC Stone: argues commingling plus plan votes mean SEG 1 customers (like FC Stone) preserved trust rights and should have priority over unsecured creditors | Court: finds tracing impossible given extreme commingling; treats SEG 1 funds/Reserves as estate property and orders distribution per Plan (judgment for Trustee on Count III) |
| Whether FC Stone's claim should be disallowed under §502(d) because it received avoidable transfers and did not return them | Trustee: seek disallowance if transfers avoidable and unpaid | FC Stone: no avoidable transfers as to post-petition distribution; thus §502(d) inapplicable | Court: because Seventh Circuit held transfers not avoidable, judgment for FC Stone on Count V |
Key Cases Cited
- Grede v. FC Stone, LLC, 746 F.3d 244 (7th Cir. 2014) (holds bankruptcy court order authorized post-petition distribution and outlines treatment of statutory trust tracing issues)
- Cunningham v. Brown, 265 U.S. 1 (1924) (discusses common law tracing principles in bankruptcy contexts)