The Seventh Circuit has reversed the district  court’s decision in the Sentinel matter and ruled that the Bankruptcy Court’s allowance of a pre-petition transfer and authorization of a post-petition transfer of assets by Sentinel to its FCM customers was permitted under the Bankruptcy Code.  The District Court had previously avoided the $22.5 million pre-petition transfer of funds to FCM customers and the $297 million post-petition transfer of funds authorized by the Bankruptcy Court.

Notably, the Seventh Circuit found that the pre-petition transfer was permitted under the safe harbor for securities transactions in § 546(e) because the transfer was settlements of securities transactions made to commodity brokers.  In support of its ruling on the pre-petition transfer, the Seventh Circuit held, “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.”

The Seventh Circuit also found that the post-petition transfer of $297 million was permitted by § 549 of the Bankruptcy Code.  Section 549 provides that a trustee may not avoid a transfer of property of the estate if the transfer was authorized by a bankruptcy court.  In this case, the Bankruptcy Court had authorized the transfer of FCM customer funds to the FCMs based on an emergency motion heard just three days after the filing of the bankruptcy petition.  Although in later proceedings, the Bankruptcy Court expressed regret about the transfer, due to questions over who was rightfully entitled to the assets, the Seventh Circuit nonetheless held that the Order authorizing the transfer was clear and unequivocal.