In January of this year, a District Court in Illinois issued a highly controversial opinion in the Sentinel bankruptcy case. Grede v. FCStone, 485 B.R. 854 (N.D. Ill. 2013). The district court refused to apply §546(e) of the Bankruptcy Code to bar a preference action brought by the Sentinel trustee against FCStone, a futures commission merchant (FCM), concluding that application of §546(e) would produce a result "demonstrably at odds with the intention of its drafters."1 Litigation concerning §546(e) has taken center stage in some of the most prominent bankruptcies of recent times, including in Lehman Brothers2 and Madoff,3 with billions of dollars at stake.
Since the FCStone decision is inconsistent with the decisions of the bankruptcy court and the district court of the Southern District of New York in these, as well as other cases, it could sow tremendous uncertainty as to the scope of the protection that §546(e) actually provides. Rather than simply contrasting the FCStone decision with other relevant precedents, however, we find it more useful to test its soundness by examining the reasoning underlying it. (This article reflects the author’s views only.)
