There was a hitch in The Bank of New York Mellon Corporation’s BK bankruptcy dispute over a $312 million loan given to investment management firm Sentinel Management Group Inc. after a federal appeals court stated that the bank should have had a hunch about the latter inappropriately using investor funds as collateral.
According to the 7th U.S. Circuit Court of Appeals in Chicago, which reversed the lower court’s ruling in the bank’s favor, BNY Mellon should be treated as an unsecured Sentinel creditor instead of a secured one as it was somewhat suspicious of Sentinel’s actions.
The judgment of the district court was affirmed in part and reversed in part, and the case remanded for further proceedings consistent with this decision.
A three-judge Seventh Circuit panel said that the district judge got the wrong impression of the inquiry notice, which signifies awareness of suspicious facts that would have led a reasonable firm, acting diligently, to investigate further and by doing so discover wrongdoing.
In this context, an email written by BNY Mellon employee Mark Rogers was taken into account as adequate evidence. According to the appellate court, Rogers’ confusion was enough, given his position in the bank, to place the bank on an inquiry notice and thus require it to conduct an investigation of what Sentinel was using to secure a $300 million debt when it had capital of no more than $3 million.
“The district judge said that ‘Rogers did not claim he knew or believed that all the collateral was for somebody else’s benefit,’” the 13-page opinion states. “True, but he was suspicious, and that was enough to place him on notice of a possible fraud and so require that he or others at the bank investigate.”
Moreover, the trustee’s argument that the bank's claim should be pushed in the back of other claims was dismissed by the panel, which said the trustee did not demonstrate that the bank “believed there was a high chance of fraud and acted deliberately to avoid confirming its suspicion.”
However, the panel agreed with the district judge that the trustee has not satisfied that high standard.
Sentinel filed for bankruptcy in 2007 and its former CEO Eric Bloom was later charged with a $665 million fraud leading to a 14-year prison term. Though the trustee’s claim against the bank was rejected in 2010, the case was later revived in 2013.
"The trustee is extremely pleased," trustee Frederick Grede's lawyer Catherine Steege, who co-chairs Jenner & Block's bankruptcy litigation practice, said in an email to Reuters. "The ruling paves the way for the trustee to make a very substantial distribution to Sentinel's customers harmed by Sentinel's fraud, which the Court of Appeals determined the Bank of New York should have investigated."
Currently, BNY Mellon carries a Zacks Rank #3 (Hold). Some better-ranked banks include Bank of Hawaii Corporation BOH, BBCN Bancorp, Inc. BBCN and Heritage Commerce Corp. HTBK. All these stocks hold a Zacks Rank #2 (Buy).
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