Bank of New York Mellon Wins Appeal on $312 Million Lien

Bank of New York Mellon Corp. won a U.S. Appeals Court ruling affirming it’s entitled to a $312 million lien on the holdings of the bankrupt suburban Chicago cash management firm Sentinel Management Group Inc.

After Sentinel filed for bankruptcy in 2007, liquidation trustee Frederick Grede sued the New York-based lender claiming its employees knew the firm was improperly using investor assets as credit-line collateral and sought to disallow or subordinate its lien.

The Chicago-based appeals court today unanimously affirmed U.S. District Judge James B. Zagel’s 2010 post-trial ruling rejecting Grede’s claim that the bank’s actions enabled Sentinel to deceive its clients and an earlier dismissal of the trustee’s bid to invalidate the lien as illegal.

“Perhaps the bank should have known that Sentinel violated segregation requirements,” U.S. Circuit Judge John D. Tinder wrote for the panel, “but as the district court found, ‘such a lack of care does not rise to the level of egregious misconduct necessary for equitable subordination.’”

Grede, in a phone interview today, said he was disappointed by the court’s decision and that he and his attorneys were evaluating their options. More than $1.2 billion in claims have been filed against the firm’s assets, he said.

“Given all of the things that are going on in the industry, it doesn’t bode well for the protection of customer funds,” he said of the appellate court ruling.

“We are pleased the appeals court has affirmed the district court’s ruling in our favor,” Kevin Heine, a spokesman for the bank, said in an e-mailed statement.

Sentinel was based in Northbrook, Illinois.

The case is In re Sentinel Management Group Inc., 10-3787, 10-3990 and 11-1123, U.S. Circuit Court of Appeals for the Seventh Circuit (Chicago).

To contact the reporter on this story: Andrew Harris in Chicago at aharris16@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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