In re Sentinel Management Group, Inc.

Citation:
Frederick Grede v. Bank of New York Mellon, Case Nos. 10-3787, 10-3990 & 11-1123 (7th Cir. Aug. 9, 2012)
Tag(s):
Ruling:
Order and judgment of the District Court are affirmed: Investment manager's illegal pledge of client funds to secure short-term loans supporting manager's trading activity for its own account and in an effort to survive a financial crisis did not constitute a transfer made with "actual intent to hinder, delay or defraud" manager's creditors. Bank's acceptance as additional collateral for investment manager's obligations, funds obtained from manager's customers was, at worst, negligence by bank officials, but did not constitute the kind of egregious conduct necessary to sustain trustee's claim for equitable subordination of bank's liens. Contract between bank and investment manager permitting pledge of previously segregated third-party funds was not inherently illegal so as to permit invalidation of lien on such funds which manager granted in violation of the Commodity Exchange Act.
Procedural context:
Liquidating plan trustee's appeal of (i) order by U.S. Dist. Ct. for the N.D. of Ill. dismissing on the pleadings trustee's claim for invalidation of bank's lien, and (ii) judgment, after a bench trial, in bank's favor on trustee's claims for avoidance of lien as an actually fraudulent transfer and for equitable subordination of the bank's claim.
Facts:
Sentinel Management, an investment manager for clients in the commodites trading industry, held over $1.5 billion in customer funds which were to be held in segregated accounts, as required by the Commodity Exchange Act. Sentinel also actively traded on its own account. It financed both businesses with the Bank of New York Mellon, under a facility that was modified by 2007 to permit Sentinel to pledge some customer funds to secure short-term borrowing from the Bank, a practice that is permitted in certain circumstances and that Sentinel represented it was authorized to do. In fact, Sentinel's pledges to secure overnight loans required for Sentinel's own trading activity were not legal. As the financial crisis began, Sentinel's pledges of customer funds increased to some $312 million, when in August of 2007, Sentinel was finally forced to file its Chapter 11 petition.
Judge(s):
Manion, Rovner and Tinder, Circuit Judges.

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