In the 

United States Court of Appeals 

For the Seventh Circuit ____________________

No. 14‐2174

IN RE:

EQUIPMENT ACQUISITION RESOURCES, INC.

      Debtor.

WILLIAM A. BRANDT, JR.,

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.

____________________

ARGUED SEPTEMBER 22, 2015 — DECIDED 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‐
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.
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
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).
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
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
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.
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
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.  
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‐
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
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.  
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.  
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
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‐
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 AFFIRM the judgment of the

district court.