Frederick J. Grede, Not Individually but as Liquidation Trustee of the Sentinel Liquidation Trust v. FCStone, LLC

In Cunningham v. Brown, 265 U.S. 1 (1924), this Court held that victims of a debtor’s fraud may not invoke trust remedies to secure repayment in a bankruptcy case if doing so will result in disproportionate individual recoveries amongst the victims of the fraud. Adopting “the principle that equality is equity,” the Court rejected the argument that those “who were successful in the race of diligence” should be allowed to retain their recoveries on the basis that they had succeeded in establishing their trust remedies while other victims of the debtor’s fraud had not. Id. at 13. Here, in conflict with Cunningham and the Second, Fifth, Sixth, Ninth, Tenth, and Eleventh Circuits, the Seventh Circuit has held that in mass fraud cases, Cunningham’s principle that “equality is equity” applies only to those fraud victims that pursue their trust remedies through litigation or self-help; whereas those fraud victims who chose to rely on the bankruptcy trustee to recover their claims will be deemed to have waived their rights to recover in equal shares with the proactive litigants. This case also presents an important question about the scope of federal preemption over state law claims related to the question presented in Deutsche Bank Trust Company Americas v. Robert R. McCormick Foundation, No. 16-317 (U.S. Sept. 9, 2016). With no support from the Court’s preemption jurisprudence and in conflict with the Sixth and Third Circuits, the Seventh Circuit here relied upon a novel “end run” theory of preemption to hold that 11 U.S.C. §546(e) preempted the ability of creditors to bring common law unjust