IN R E : EQUIPMENT ACQUISITION RESOURCES, INC. Debtor. WILLIAM A. BRANDT , J R . v. Horseshoe Hammond , LLC

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14‐2174
IN R E :
EQUIPMENT A CQUISITION R ESOURCES, INC.
Debtor.
WILLIAM A. BRANDT , J R .,
Plaintiff‐Appellant,
v.
HORSESHOE HAMMOND , LLC,
Defendant‐Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 1:12‐cv‐00271 — Edmond E. Chang, Judge.
____________________
A RGUED SEPTEMBER 22, 2015 — D ECIDED OCTOBER 13, 2015
____________________
Before FLAUM, WILLIAMS, and HAMILTON, Circuit Judges.
FLAUM, Circuit Judge. In this adversary proceeding, Wil‐
liam Brandt, acting as plan administrator for Equipment Ac‐
quisition Resources (“EAR”), seeks to avoid and recover
fraudulent transfers made to the Horseshoe Casino (“Horse‐

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2 No. 14‐2174
shoe”). Brandt alleges that EAR made fraudulent transfers to
Sheldon Player, the original owner of EAR, and that Player
used these funds at Horseshoe. Horseshoe moved for sum‐
mary judgment under the statutory defense of good faith, 11
U.S.C. § 550(b)(1). The district court granted the motion. On
appeal, Brandt argues that the district court erred in inter‐
preting and applying § 550(b)(1). Brandt also argues that the
district court improperly denied his motion to compel pro‐
duction of documents related to any investigations Horse‐
shoe may have made concerning Player. Because we con‐
clude that the district court correctly interpreted and applied
§ 550(b)(1) and that Brandt did not suffer prejudice from the
denial of his motion to compel, we affirm.
I. Background
In 1997, Player and his wife, Donna Malone, established
EAR. Under its purported business model, EAR manufac‐
tured and refurbished machinery used in the high‐
technology industry. However, from at least 2005 to 2009,
EAR engaged in a scheme to defraud its creditors involving
its financing of equipment. As a result of this scheme, Player
and Malone received approximately $17 million in fraudu‐
lent transfers from EAR.
Initially, EAR’s creditors and advisors did not detect the
scheme. In July 2009, EAR hired FTI Consulting, a forensic
accounting firm, to review its books and records. FTI did not
uncover the fraud until September 29, 2009. Once EAR’s
fraud was exposed, the members of EAR’s board and its of‐
ficers resigned. EAR’s shareholders elected William Brandt
as the sole board member and Chief Restructuring Officer.
On October 23, 2009, EAR filed for Chapter 11 bankruptcy.

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No. 14‐2174 3
Before the fraud was detected, Player and Malone used
the fraudulent transfers for their personal benefit. In particu‐
lar, Player and Malone spent large amounts at the Horseshoe
Casino in Hammond, Indiana. From February 2007 to Au‐
gust 2009, Player and Malone made over $8 million in pay‐
ments to Horseshoe. Player was a frequent presence at
Horseshoe, at times spending over fifty hours per week at
the casino.
Player’s gambling activity at Horseshoe was often erratic.
In addition to spending large sums at the casino, Player was
known to “walk with chips.” Walking with chips is the prac‐
tice of leaving a casino with chips rather than cashing them
in. Similarly, Player was known by the casino to “pass
chips.” Passing chips is the practice of giving chips to a third
party to cash in. Neither walking with chips nor passing
chips is illegal, however, both practices are potentially indic‐
ative of “structuring” transactions to avoid triggering the
$10,000 reporting requirement, a federal crime. See 31 U.S.C.
§ 5324. In total, Brandt alleges that Player passed or walked
with over $6 million in chips at Horseshoe.
Player also made false statements on his Horseshoe credit
application. Both Player and Malone filled out Horseshoe
credit applications. Horseshoe ran credit checks on Player
and Malone showing that they had understated their indebt‐
edness by over $2 million. Although Horseshoe knew that
Player’s application misrepresented his debt, it still extended
credit to Player. Gradually, Horseshoe increased Player’s
credit line from $25,000 to $450,000. As Player’s credit line
increased, it exceeded the balance of Player’s on‐file check‐
ing account. Player also overstated his salary by more than
three times his actual salary and claimed to be the owner of

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4 No. 14‐2174
EAR even though he was not actually a shareholder of EAR
at the time. Horseshoe did not try to verify these statements.
In addition to Player’s claimed ownership of EAR in his
credit application, Horseshoe had other reasons to believe
that Player’s money came from EAR. Because Player’s credit
exceeded his personal checking account balance, Horseshoe
kept an EAR account on file as a “reference account.” More‐
over, Player and Malone paid some of their gambling debts
from a bank account in the name of “Donna Malone doing
business as EAR.” Horseshoe identified this account as a
business account, yet nonetheless accepted and deposited
checks from it. Finally, one of Player’s on‐file checking ac‐
counts listed EAR’s corporate address.
After the extent of EAR’s fraud was revealed, Brandt, act‐
ing as the bankruptcy court‐appointed plan administrator of
EAR, filed this adversary proceeding to avoid and recover
the transfers made to Horseshoe. Brandt seeks to avoid and
recover $8,248,000 in transfers to Horseshoe under §§
544, 548, and 550 of the Bankruptcy Code.
During pre‐trial discovery, Brandt filed a motion to com‐
pel production of documents related to any investigation
Horseshoe may have performed regarding Player’s gam‐
bling activities. Horseshoe objected to the motion to compel
under treasury regulation 31 C.F.R. § 1021.320(e). Section
1021.320 governs Suspicious Activity Reports (SARs), which
are filed by financial institutions, including casinos, to detect
money laundering and other violations of the Bank Secrecy
Act. Subsection (e) requires the confidentiality of a “SAR,
and any information that would reveal the existence of a
SAR ….” § 1021.320(e); see also 12 C.F.R. § 21.11(k) (imposing
the same requirement on banks).

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No. 14‐2174 5
At a status hearing on the motion to compel, Horseshoe
claimed that all investigatory documents (if any) were pro‐
tected by the regulation. The district court judge asked
Brandt’s counsel to leave the courtroom, which he did with‐
out objection. The district court then engaged in an ex parte
discussion under seal with Horseshoe’s counsel. Afterwards,
the district court ordered an ex parte filing by Horseshoe,
which was also inaccessible to Brandt. After this filing, the
district court ordered another ex parte filing by Horseshoe.
Although Brandt was permitted to dispute the appropriate
legal standard for confidentiality under § 1021.320(e), he was
not allowed to inspect the ex parte factual declarations. At no
point did Brandt object to any of these procedures.
On October 16, 2012, the district court denied Brandt’s
motion to compel. The court informed Brandt that it had
made a factual determination based on Horseshoe’s initial
and supplemental ex parte filings. After Brandt’s counsel
asked for a further explanation, the district court responded
that Brandt “basically won on the legal standard” but that
“even applying that standard … the motion is appropriately
denied.”
On August 23, 2013, Horseshoe filed a motion for sum‐
mary judgment seeking dismissal of all three counts of
Brandt’s complaint under the § 550(b)(1) good faith defense,
arguing it had acted without knowledge of the fraud at EAR.
On May 15, 2014, the district court granted Horseshoe’s
motion for summary judgment on all counts. The district
court found that Horseshoe accepted the transfers without
knowledge of the fraud at EAR and that Horseshoe could
not have uncovered the fraud even if it had investigated. As
a result, the court concluded that a reasonable jury must find

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6 No. 14‐2174
that Horseshoe took transfers from Player in good faith and
without knowledge of the fraud.
In this appeal, Brandt argues that the district court erred
by (1) granting summary judgment to Horseshoe under the
good faith defense, § 550(b)(1); and (2) denying Brandt’s mo‐
tion to compel based on ex parte communications with
Horseshoe’s counsel.
II. Discussion
Brandt seeks to avoid and recover transfers made to
Horseshoe. In order to succeed, Brandt must prove that the
transfers are voidable under § 544 or § 548 and recoverable
under § 550 of the Bankruptcy Code. In general, transfers are
voidable if they were made with intent to hinder, delay, or
defraud creditors or if the debtor was under financial dis‐
tress at the time of the transfer. See § 548(a)(1).
Transfers that are voidable are generally recoverable un‐
der § 550. Section 550 permits a trustee to recover any trans‐
fer avoided to an “initial transferee” or to “any immediate or
mediate transferee of such initial transferee.” § 550(a). How‐
ever, § 550(b)(1) provides a defense to recovery:
(b) The trustee may not recover under sec‐
tion (a)(2) of this section from—
(1) a transferee that takes for value, including
satisfaction or securing of a present or
antecedent debt, in good faith, and without
knowledge of the voidability of the transfer
avoided;
§ 550(b)(1) (emphasis added). Therefore, this “good faith”
defense applies if the transferee: (1) is an immediate or me‐
diate transferee under § 550(a)(2); (2) took the transfers for

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No. 14‐2174 7
value; (3) took the transfers “in good faith;” and (4) took the
transfers “without knowledge of the voidability of the trans‐
fer avoided.” Id.
The parties do not dispute that Horseshoe satisfies the
first and second elements of this defense. At issue is whether
Horseshoe took the transfers “in good faith” and “without
knowledge of the voidability of the transfer avoided.”
This Court reviews a district court’s grant of summary
judgment de novo. Conley v. Birch, 796 F.3d 742, 746 (7th Cir.
2015). In deciding a motion for summary judgment, this
Court must examine the record in the light most favorable to
the nonmoving party, in this case, Brandt. Id. Summary
judgment is appropriate if there is no genuine dispute of ma‐
terial fact and the nonmoving party is entitled to judgment
as a matter of law. Id.
A. Without Knowledge
Turning first to whether Horseshoe took the transfers
“without knowledge,” this Court previously examined this
requirement in Bonded Financial Services, Inc. v. European
American Bank, 838 F.2d 890 (7th Cir. 1988). In Bonded, the
debtor, Bonded Financial Services, sent the European Ameri‐
can Bank a transfer of $200,000 with instructions to deposit it
in the account of one of Bonded’s executives, Mike Ryan. Af‐
ter it did this, Ryan instructed the bank to use the amount to
reduce an outstanding loan he had with the bank. Once
again, the bank did as instructed. A month later, Bonded
filed for bankruptcy. Bonded’s trustee sought to recover the
$200,000 transferred from Bonded to the bank via Ryan as a
fraudulent transfer. The bank asserted § 550(b)(1) as a de‐
fense.

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8 No. 14‐2174
The Bonded Court found that § 550(b)(1) codified an im‐
puted knowledge or inquiry notice standard. 838 F.2d at 898.
Accordingly, knowledge in § 550(b)(1) means less than
“complete understanding of the facts and receipt of a law‐
yer’s opinion that such a transfer is voidable ….” Id. Never‐
theless, inquiry notice must be sufficient to enable the party
to have gained actual knowledge by inquiring. If a reasona‐
ble inquiry would not have led to actual knowledge of void‐
ability, a court cannot impute knowledge. Id. (“Since the in‐
quiry would have turned up nothing pertinent to voidability,
the Bank’s failure to make it does not permit a court to at‐
tribute to it the necessary knowledge.”).
Applying this interpretation to the facts in Bonded, this
Court held that § 550(b)(1) applied to the transfer from Ryan
to the Bank because the Bank acted without knowledge. Id.
The Court noted that “[n]othing in the record of this case
suggests that the Bank knew of Bonded’s financial peril or
Ryan’s plan.” Id. Moreover, we declined to impute any
knowledge to the bank because even if it had made a rea‐
sonable inquiry into the transfer, the bank would have only
learned “that the instrument was authorized by the appro‐
priate corporate officials.” Id. Consequently, the inquiry
would not have revealed that the transaction was voidable.
In the case at hand, the parties disagree over how exactly
to apply Bonded to a two‐step transaction. Here, the money
flowed from EAR to Player and Malone as a result of fraud
and then to Horseshoe. Section 550(b)(1) provides that the
transferee must act “without knowledge of the voidability of
the transfer avoided.” § 550(b)(1) (emphasis added). Brandt
contends that “the transfer avoided” refers to the entire
chain—from EAR, to Player and Malone, to Horseshoe. We

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No. 14‐2174 9
disagree. The statute and our case law reveal that “the trans‐
fer avoided” refers only to the first transfer from the debtor
to initial transferee, in this case, from EAR to Player and
Malone.
First, the language of § 550(b)(1) supports this interpreta‐
tion. The phrase “the transfer avoided” in § 550(b)(1) refers
back to the transfer described in § 550(a). Section 550(a), in
turn, explicitly refers to this transfer as the transfer avoided
under § 544 or § 548. Section 548 makes clear that this trans‐
fer is only the transfer from the debtor to the initial transfer‐
ee. See § 548 (“The trustee may avoid any transfer … if the
debtor voluntarily or involuntarily made such transfer ….”
(emphasis added)). In other words, the statutory context lim‐
its “the transfer avoided” to the transfer between the debtor
and the initial transferee. Indeed, it is only the transfer from
the debtor to the initial transferee that is avoided under
§ 548. Subsequent transfers are not avoided under § 548,
they are recovered under § 550.
Second, our reasoning in Bonded supports this reading.
Bonded’s analysis focused on what the bank knew about the
transfer from the debtor, Bonded, to the initial transferee,
Ryan. In particular, we concluded that the bank did not
know that the transfer was voidable because it had no
knowledge of “Bonded’s financial peril or Ryan’s plan.”
Bonded, 838 F.3d at 898. The circumstances did “not hint at a
fraudulent conveyance by a firm on the brink of insolvency”
and “the Bank had no reason to think Ryan an embezzler.”
Id. As in Bonded, our analysis here must focus on what
Horseshoe knew about the first link in the chain, from EAR
to Player and Malone.

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10 No. 14‐2174
The economic justification underpinning fraudulent con‐
veyance law also supports this interpretation. In Bonded, we
explained that fraudulent conveyance law saves creditors
monitoring costs by protecting them against last‐minute
diminutions in their debtors’ assets. Id. at 892. Yet, we
acknowledged that there are limits on the pursuit of trans‐
fers and there remains an important role for creditors to
monitor debtors:
If the recipient of a fraudulent conveyance uses
the money to buy a Rolls Royce, the auto deal‐
er need not return the money to the bankrupt
even if the trustee can identify the serial num‐
bers on the bills. The misfortune of the firm’s
creditors is not a good reason to mulct the
dealer, who gave value for the money and was
in no position to monitor the debtor. Some
monitoring is both inevitable and desirable,
and the creditors are in a better position to car‐
ry out this task than are auto dealers and the
many others with whom the firm’s transferees
may deal.
Id.
Since § 550 should efficiently allocate monitoring costs
between creditors and transferees, it makes sense to provide
a defense to liability for subsequent transferees who act
without knowledge of the fraudulent transfer from the debt‐
or. Horseshoe, like the Rolls Royce dealer, is a subsequent
transferee. Compared with the creditors, Horseshoe is a less‐
er monitor of the debtor, EAR. Therefore, unless Horseshoe
had some reason to know that it was receiving funds result‐

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No. 14‐2174 11
ing from a fraudulent transfer, it should not be liable to
EAR’s creditors.
Applying this standard, the undisputed facts show that
Horseshoe acted “without knowledge of the voidability of
the transfer avoided.” Both parties agree that Horseshoe
lacked actual knowledge that the transfers from EAR to
Player and Malone were voidable. That is, Horseshoe had no
actual knowledge that the transfers arose from fraud at EAR
or that EAR was under financial distress.
Brandt, however, argues that Horseshoe was on inquiry
notice that these transfers were voidable. Brandt points to
various “red flags,” which he claims should have alerted
Horseshoe that it was receiving fraudulent transfers. Specifi‐
cally, Horseshoe knew about Player’s erratic gambling hab‐
its, including walking with and passing chips, that Player
made false statements on his credit application, and that
Player received his money from EAR.
We are not convinced that these red flags are sufficient to
impose a duty on Horseshoe to investigate transfers from
EAR to Player. Most of these red flags only relate to Player
and lack a clear connection to EAR. Even Brandt’s own ex‐
perts testified that nothing about Player’s gambling activities
would have alerted Horseshoe to EAR’s fraud.
Although Horseshoe had some indication that Player’s
money came from EAR, it had no reason to suspect that this
money was obtained by fraud. Player claimed to be the
owner of EAR and so the fact that Player’s money came from
EAR would not have been of special significance to Horse‐
shoe. As we said in Bonded, a transfer of money from a com‐
pany to one of its executives “does not hint at a fraudulent

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12 No. 14‐2174
conveyance by a firm on the brink of insolvency ….” 838
F.3d at 898.
Regardless, even if Horseshoe had investigated, it is un‐
likely—in fact, virtually impossible—that Horseshoe would
have uncovered the fraud or EAR’s financial distress. As this
Court stated in Bonded, when a subsequent transferee’s rea‐
sonable inquiry “would have turned up nothing pertinent to
voidability, the [transferee’s] failure to make it does not per‐
mit a court to attribute to it the necessary knowledge.” Id.
Even assuming that Horseshoe was put on inquiry notice of
a fraudulent transfer, a reasonable inquiry would have
turned up nothing indicating that the transfers were voida‐
ble. At the time of these transfers, EAR’s creditors and advi‐
sors, who had complete access to EAR’s books and records,
were unaware of the ongoing fraud and financial distress. It
took FTI Consulting, a forensic accounting firm, nearly three
months to discover the fraud. Horseshoe knew that Player’s
funds might have come from EAR, but § 550(b)(1) and Bond‐
ed make clear that knowledge of the transfers’ origin is insuf‐
ficient. Therefore, the district court correctly determined that
a reasonable jury would find that Horseshoe acted “without
knowledge of the voidability of the transfer avoided.”
B. Good Faith
Brandt also argues that the district court erred by not
separately considering whether Horseshoe acted “in good
faith.” In Bonded, this Court expressly reserved the question
of whether good faith operated as a discrete requirement
from “without knowledge.” 838 F.3d at 897. But the Court
noted that “the recipient of a voidable transfer may lack
good faith if he possessed enough knowledge of the events
to induce a reasonable person to investigate.” Id. at 897–98.

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No. 14‐2174 13
The district court declined to analyze good faith separate‐
ly from “without knowledge.” The court reasoned that even
if the two elements were considered separately, good faith is
satisfied because Horseshoe could not have known about
EAR’s fraud or financial distress.
On appeal, Brandt argues that the district court erred by
not separately considering good faith. In doing so, Brandt
asks this Court to adopt a standard of good faith distinct
from without knowledge. In particular, Brandt contends that
Horseshoe did not act in good faith by extending credit to
Player despite misrepresentations on his credit application,
continuing to do business with Player even though his activ‐
ities suggested he was laundering money through the casi‐
no, and accepting funds from a checking account that Horse‐
shoe believed to be an EAR business account. To support his
reading, Brandt points to the legislative history of
§ 550(b)(1), which states that:
The phrase “good faith” in [§ 550(b)] is intend‐
ed to prevent a transferee from whom the trus‐
tee could recover from transferring the recov‐
erable property to an innocent transferee, and
receiving a transfer from him, that is, “wash‐
ing” the transaction through an innocent third
party. In order for the transferee to be excepted
from liability … he himself must be a good
faith transferee.
H.R. Rep. No. 95‐595, at 376 (1977); S. Rep. No. 95‐989, at 90
(1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5876. Brandt seiz‐
es on the reference to “washing” a transaction to argue that
Player used Horseshoe to “wash” his fraudulently obtained
assets, and thus Horseshoe did not act in good faith.

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14 No. 14‐2174
However, this interpretation takes the reference to
“washing” out of context. The legislative history states that
“good faith” prevents a transferee from escaping liability by
“washing” the transaction through an innocent third party.
Here, Horseshoe is the innocent third party, not the money‐
washing transferee. In contrast, Player, who allegedly laun‐
dered his money through Horseshoe, would seem to lack
good faith under this interpretation.
Still, without pointing to any other authority, Brandt in‐
vites this Court to embrace a different definition of good
faith, one that excludes Horseshoe’s conduct. We decline this
invitation. Horseshoe had no way of knowing the transac‐
tions from EAR to Player were voidable, and thus, was not
closing its eyes to the creditors’ plight. There is no indication
that any alleged lack of diligence was the product of bad
faith. In sum, a reasonable jury would conclude that Horse‐
shoe acted “in good faith and without knowledge of the
voidability of the transfer avoided.” Hence, the district court
properly granted summary judgment in favor of Horseshoe.
C. The Motion to Compel
Brandt also asks this Court to reverse summary judgment
because the district court denied his motion to compel. Dur‐
ing pre‐trial discovery, Brandt moved to compel production
of documents from Horseshoe relating to any investigation
into Player’s gambling activities. Horseshoe opposed the
motion under § 1021.320(e), which requires the confidentiali‐
ty of SARs and information revealing the existence of a SAR.
Horseshoe claimed that all investigatory documents, if any,
were protected under the regulation. The district court ulti‐
mately agreed with Horseshoe and denied Brandt’s motion
to compel. In deciding the motion, the district court relied on

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No. 14‐2174 15
a number of ex parte under seal communications with Horse‐
shoe’s counsel.
First, Brandt argues that the district court’s decision im‐
properly relied on ex parte communications with Horseshoe’s
counsel, depriving him of a full and fair hearing in violation
of his due process rights. This argument is waived. Brandt
never raised an objection to the district court’s use of ex parte
communications. See A. Bauer Mech., Inc. v. Joint Arbitration
Bd. of the Plumbing Contractors’ Ass’n, 562 F.3d 784, 792 (7th
Cir. 2009) (holding that due process arguments are waived if
not raised before the district court). Brandt claims that he
never had an opportunity to object, but the record reflects a
different story. At every step of the way, Brandt was in‐
formed of the ex parte procedures and had an opportunity to
object to them. In fact, after the district court made its ruling
on the motion to compel, Brandt even stated that he was
“not really asking for reconsideration ….” Therefore, this ar‐
gument is waived, and we need not address it.
Second, Brandt argues that the district court should have
granted the motion to compel and required Horseshoe to
turn over all documents related to any investigation of Play‐
er. Brandt is forced to make this argument in the dark, as the
ex parte communications are still under seal and inaccessible
to him. According to Brandt, under the correct legal stand‐
ard, the motion to compel should have been granted. How‐
ever, the motion only pertains to Horseshoe’s investigations
into Player. Even assuming the confidentiality requirement
does not apply, these documents, if any, have nothing to do
with EAR’s fraud or financial distress. At most, they would
have shown that Player was laundering money through the
casino, but not that Player obtained the money by perpetrat‐

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16 No. 14‐2174
ing a fraud against EAR’s creditors. In other words, the mo‐
tion to compel could not have revealed that Horseshoe had
knowledge of the voidability of the transfers or acted with‐
out good faith. As a result, assuming arguendo that the dis‐
trict court did err by denying the motion to compel, Brandt
did not suffer any prejudice. e360 Insight, Inc. v. Spamhaus
Project, 658 F.3d 637, 644 (7th Cir. 2011) (“[W]e will not grant
any relief ‘absent a clear showing that the denial of discov‐
ery resulted in actual and substantial prejudice.’” (quoting
Searls v. Glasser, 64 F.3d 1061, 1068 (7th Cir. 1995))). Because
Brandt cannot demonstrate that he suffered any prejudice,
we affirm the denial of the motion to compel.
III. Conclusion
For the foregoing reasons, we A FFIRM the judgment of the
district court.

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