Bank of New York Mellon Corp. must again face a lawsuit challenging its $312 million lien on the assets of bankrupt Sentinel Management Group Inc., a Chicago-based U.S. appeals court ruled.
Today’s ruling reversed U.S. District Judge James B. Zagel’s 2010 decision to uphold the lien after a 17-day trial. It also completed a reversal for the appellate court which affirmed Zagel’s findings in August 2012, then rescinded that decision without explanation in November.
Sentinel, a failed cash management firm, filed for bankruptcy protection in 2007. Liquidation trustee Frederick Grede later sued BNY to disallow or subordinate its lien, alleging bank employees knew Sentinel was wrongly using investor assets as collateral for the firm’s own credit line.
“Although we normally give great deference to the district court’s factual findings after a full bench trial, we cannot extend the same deference to internally inconsistent factual findings, which are, by definition, clearly erroneous,” U.S. Circuit Judge John D. Tinder wrote for the panel.
Kevin Heine, a spokesman for the New York-based bank, declined to immediately comment on the court’s ruling.
While work remains to be done at the trial court level, the panel said, Grede should be able to avoid the bank’s lien on grounds Sentinel’s transfer of funds from segregated customer accounts into its own clearing accounts demonstrates an intent to hinder, delay or defraud its creditors.
The trio of judges also tasked Zagel with determining what the bank’s employees knew of about Sentinel before its collapse when he revisits the issue of whether to subordinate its claim to those of other creditors,
“Was BNYM’s failure to investigate Sentinel before its collapse merely negligent? Or was it reckless? Or was it deliberately indifferent?” Tinder wrote.
“We are extremely gratified after seeing the 7th circuit’s analysis which adopted our position,” Grede’s attorney, Chris Gair, said by phone. “we are looking forward to pursuing the matter on remand.”
Sentinel was based in Northbook, Illinois.
Prosecutors in Chicago last year obtained a federal grand jury indictment charging former Sentinel President Eric Bloom with fraud. He has pleaded not guilty. The case is scheduled for trial on Feb. 24.
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).