Seventh Circuit Reversal of Grede v. FCStone, LLC Shields Cash Payments to Customers of Sentinel Under § 546(e) Safe Harbor

April 1, 2014

On March 19, 2014, the U.S. Court of Appeals for the Seventh Circuit ruled that pre- and post-petition cash transfers from investment management firm Sentinel Management Group, Inc. (“Sentinel”) to futures commission merchant FCStone, LLC (“FCStone”) are protected from avoidance, while recognizing that the illegal actions of Sentinel’s managers make this case unprecedented. See Grede v. FCStone, LLC, Nos. 13-1232, 13-1278, 2014 WL 1041736 (7th Cir. Mar. 19, 2014). Applying a plain reading of the “deliberately broad” text of the Bankruptcy Code’s § 546(e) safe harbor, the court held that a $1.1 million pre-petition cash distribution to FCStone was protected from avoidance as a settlement payment and a transfer in connection with a securities contract. The court also concluded that a payout of almost $300 million to a group of customers including FCStone, made pursuant to a bankruptcy court emergency order obtained on the first business day after the petition was filed, could not be avoided as an unauthorized transaction under § 549 of the Bankruptcy Code. The present case—a test case to resolve common issues in proceedings against other customers of Sentinel—overturns a district court ruling that held that to permit the “grossly inequitable” last minute distribution of Sentinel customer funds would “fly in the face of justice.”