809 F.3d 958 (7th Cir. 2016), 15-1039, Grede v. Bank of New York Mellon Copr.
|Citation:||809 F.3d 958|
|Opinion Judge:||Posner, Circuit Judge.|
|Party Name:||IN RE SENTINEL MANAGEMENT GROUP, INC., Debtor. v. BANK OF NEW YORK MELLON CORP. and BANK OF NEW YORK, Defendants-Appellees FREDERICK J. GREDE, as Liquidation Trustee of the Sentinel Liquidation Trust, Plaintiff-Appellant,|
|Attorney:||For FREDERICK J. GREDE, as Chapter 11 Trustee for the Sentinel Management Group Inc., Appellant: Catherine L. Steege, Attorney, Jenner & Block LLP, Chicago, IL. For Bank of New York, Bank of New York Mellon Corporation, Appellees: Michele Odorizzi, Attorney, Sean T. Scott, Attorney, Mayer Brown L...|
|Judge Panel:||Before POSNER, EASTERBROOK, and ROVNER, Circuit Judges.|
|Case Date:||January 08, 2016|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Sentinel, a cash-management firm, invested customers' cash in liquid low-risk securities. It also traded on its own account, using money borrowed from BNYM, pledging customers’ securities; 7 U.S.C. 6d(a)(2), 6d(b)), and the customers’ contracts required the securities to be held in segregated accounts. Sentinel experienced losses that prevented it from maintaining its collateral with BNYM and... (see full summary)
Argued: November 10, 2015.
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 08 C 2582 -- James B. Zagel, Judge.
The plaintiff in this case, now in its eighth year, is the trustee of a bankrupt firm named Sentinel Management Group, Inc. Sentinel was what is called a cash-management firm: it invested cash, which had been lent it by persons or firms, in liquid low-risk securities. It also traded on its own account, using money borrowed from Bank of New York Mellon Corp. and Bank of New York (affiliates usually referred to jointly as BNYM) to finance the trades. BNYM required that its loans be secured by its borrowers, of whom Sentinel was one. Not owning enough assets to provide the required security, however, Sentinel pledged securities that it had bought for its customers with their money even though its loans from BNYM were used for trading on its own account--improperly. Federal law (7 U.S.C. § § 6d(a)(2), 6d(b)), as well as the contracts between Sentinel and its customers, required the securities to be held in segregated accounts, that is, accounts separated from Sentinel's own assets. Sentinel was forbidden to pledge the assets in the segregated accounts to BNYM as security for BNYM's loans to it.
In August 2007, with the securities markets becoming shaky (the following year, the year of the financial crash, segments of these markets would be even shakier), Sentinel experienced trading losses that prevented it from both maintaining its collateral with BNYM and meeting the demands of its customers for redemption of the securities that Sentinel had bought with their assets. Sentinel used its line of credit with BNYM to meet those demands. By June 2007 its loan balance with BNYM was $573 million; two months later it halted redemptions to its customers and declared bankruptcy, owing BNYM $312 million. A BNYM executive notified Sentinel that because of its inability to repay the bank's loan the bank planned to liquidate the collateral that Sentinel had pledged to secure the loan. The bankruptcy trustee (Grede, the plaintiff in our case) believed that the liquidation would deny Sentinel's customers more than $500 million in redemptions. He refused to classify the bank as a senior secured creditor with respect to the $312 million that the bankrupt Sentinel owed it. He considered the transfers of customer assets to accounts that Sentinel could (and did) use to collateralize its loans from BNYM to be fraudulent transfers, unlawful under 11 U.S.C. § 548(a)(1)(A).
The bank would have been in the clear had it accepted the pledge of the assets " in good faith," 11 U.S.C. § 548(c), but it would not have been acting in good faith had it had what's called " inquiry notice." In re Sentinel Management Group, Inc., 728 F.3d 660, 668 n. 2 (7th Cir. 2013). The term signifies awareness of suspicious facts that would have led a reasonable firm, acting diligently, to investigate further and by doing so discover wrongdoing. In re M & L Business Machine Co., 84 F.3d 1330, 1335-38 (10th Cir. 1996); In re Sherman, 67 F.3d 1348, 1355 (8th Cir. 1995); In re Agricultural Research & Technology Group, Inc., 916 F.2d 528, 535-36 (9th Cir. 1990). The trustee believed that officials of BNYM had been aware of suspicious facts that should have led them to investigate, and that an investigation would have revealed that the bank could not in good faith accept assets of Sentinel's customers as security for the bank's loans to Sentinel.
The district judge conducted a seventeen-day bench trial that convinced him that Sentinel was in the clear--that it had not been shown to have intended to defraud its customers, in violation of 11 U.S.C. § 548(a)(1)(A), when it transferred their segregated funds into clearing accounts, where they became collateral for the bank's loans to Sentinel. He therefore dismissed the trustee's...
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