In re Sentinel Management Group, Inc. (Appeal of Frederick J. Grede)

Summarized by Mazyar Hedayat , M. Hedayat & Associates, PC
12 years 6 months ago

Citation:

10‐3787, 10‐3990 & 11‐1123

Tag(s):

Ruling:

The 7th Circuit affirmed the District Court's denial of the illegal contract claim that had been filed by the Trustee but reversed the lower court's denial of fraudulent transfer and equitable subordination claims, remanding the case back to the District Court for further proceedings.

Procedural context:

In 2007 a Chapter 11 case was filed before the Bankruptcy Court, Northern District of Illinois, Eastern Division, on behalf of Sentinel. Subsequently an action was brought by the Trustee of the Sentinel Liquidating Trust in District Court for the Northern District of Illinois, Eastern Division, where it was heard by Judge James Zagel. See Grede v. Bank of N. Y. Mellon, 441 B.R. 864 (N.D.Ill. 2010). The instant case was argued before the 7th Circuit Court of Appeals on Sept. 08, 2011 and decided Aug. 26, 2013.

Facts:

Sentinel Management Group ("Sentinel") was an investment manager that handled money for futures commission merchants ("FCM"), hedge funds, and others. To facilitate certain transactions and promote liquidity, Sentinel secured an overnight loan ("Loan") from the Bank of New York ("BoNY"). Sentinel was required by the Commodity Futures Trading Comm. ("CFTC") to submit to the Commodities Exchange Act ("Act"), register as an FCM, and to maintain segregated accounts. Overall, Sentinel maintained 3 kinds of accounts: (1) Segregated Accounts: custodial accounts for customers that could not be liened; (2) General Accounts: where transactions were cleared, that could be liened.; and (3) Proprietary Accounts: for proprietary trades, that the bank had agreed not to lien. As the markets became weak in 2007 Sentinel was forced to rely on the Loan in order to provide liquidity to customers seeking to redeem their interests. In turn, BoNY demanded that Sentinel move sufficient cash or funds into the lienable accounts to ensure that it was fully secured at all times. Eventually. the demand by customers for liquidity, as well as the need to cover losses on proprietary trades, forced Sentinel to rely so heavily on its Loan that the short-fall approached $1 Billion and the company sought Chapter 11 protection. To recoup as much as possible for the Estate, Frederick J. Grede, as Trustee on behalf of the Sentinel Liquidation Trust, brought adversary cases against BoNY; claiming the bank's execution on the Debtor's assets constituted a fraudulent transfers, that the sums owed to the bank should be equitably subordinated to customer interests, and that the agreement to refrain from liening certain accounts was prima facie illegal.

Judge(s):

MANION, ROVNER, and TINDER

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