- Grede v. Bank of New York Mellon Corp., et al. (In re Sentinal Mgmt. Group, Inc.), Case No. 15-1039 (7th Cir. January 8, 2016).
- When a transferee is on “inquiry notice,” it has a duty to make further investigations into the facts surrounding a transfer to it and the failure to make such investigations renders its acceptance of the transfer to be in bad faith and subject to avoidance under 11 U.S.C. § 548.
- Procedural context:
- This is a second appeal from the District Court for the Northern District of Illinois in which a chapter 11 liquidating trustee’s fraudulent transfer claims were dismissed. In the first appeal, a 7th Circuit panel reversed the district court’s finding that the debtor’s transfers were not fraudulent under § 548 and remanded with directions to find out whether the appellee banks were on inquiry notice in its dealings with debtor. On remand, the district court did not conduct an evidentiary hearing or make further findings but merely issued a supplemental opinion to clarify the earlier opinion and findings of fact. Findings of fact are reviewed for clear error. In the second appeal, the 7th Circuit found that the banks were clearly on inquiry notice and reversed the district court. The district court also rejected trustee’s § 510 equitable subordination argument which decision was reversed in the first appeal but affirmed in this second appeal. In this second appeal, the 7th Circuit also remanded the case for further proceedings.
- Debtor was a cash-management firm investing cash lent to it by third parties in liquid, low risk securities. It also traded on its own account using $500 million that it borrowed from the banks. The banks’ loans needed to be secured and because debtor had very few assets to pledge, it pledged $312 million in securities bought for debtor’s clients although debtor was contractually forbidden to pledge the securities. The liquidating trustee sought to avoid the banks’ lien under 11 U.S.C. § 548. The 7th Circuit found that the banks were on inquiry notice to further investigate whether debtor could pledge the securities since the evidence clearly showed that the banks, prior to accepting the collateral, questioned whether debtor could pledge the securities.
- Posner, Easterbrook, Rovner (Posner)
In re Artem Koshkalda
Summarizing by Lars Fuller
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