Grede v. Bank of New York Mellon, 441 B.R. 864

Sentinel executed a Chapter 11 plan and established the Sentinel Liquidation Trust, appointing Grede as Trustee and later as Liquidation Trustee; Sentinel used Bank of New York Mellon (BNYM) as custodian for segregated customer funds and collateral for a large overnight loan program; multiple transfers of securities between Seg 1/Seg III accounts and lienable collateral accounts occurred in June–July 2007 to secure/repay loans; Sentinel’s customers’ assets were reportedly segregated under CEA/NAF rules, but collateral was pledged and used for loan collateral; Sentinel’s liquidity crisis culminated in bankruptcy on August 17, 2007; Trustee alleges fraudulent transfers, preferential transfers, and seeks equitable subordination of BNYM’s lien; the Bank seeks a declaratory judgment that its security interest is valid and first-priority; the court bifurcated trial and ruled on summary judgment before a bench trial proceeding.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Fraudulent transfers under §548/UFTA	Trustee asserts transfers were to hinder/defraud creditors.	BNYM contends transfers drained no asset pool and were for collateral value; no intent shown.	Counts I-II fail; no clear intent to defraud proven; transfers did not drain assets and compensation was adequate.
Preferential transfers under §547	Trustee argues transfers improved BNYM’s position as undersecured or improperly prioritized.	BNYM was oversecured; transfers were contemporaneous with new value and not preferential.	Count III fails; no avoidable preferential transfer.
Equitable subordination of BNYM’s claims	Trustee seeks subordination due to alleged misappropriation and segregation violations by BNYM.	BNYM asserts no egregious conduct and no fiduciary duty breach; acts were arm’s-length and not conscience-shocking.	Count IV fails; Bank’s conduct not sufficiently inequitable to warrant subordination.
Bank’s knowledge of Sentinel’s fraud	BNYM knew or should have known of segregation breaches and misuse of customer assets.	Bank relied on representations/W&As and did not have duty to police every transaction; acted in good faith.	Bank’s conduct not enough to subordinate; knowledge not proven to level required for equitable subordination.

In re Mobile Steel Co., 563 F.2d 692 (5th Cir. 1977) (equitable subordination standards and elements of inequitable conduct)
Kham & Nate's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351 (7th Cir. 1990) (non-fiduciary inequitable conduct requires more than mere contract enforcement; some moral turpitude allowed)
United States v. Noland, 517 U.S. 535 (1996) (knowledge standard for equitable subordination; Supreme Court guidance on creditor misconduct)
In re 604 Columbus Ave. Realty Trust, 968 F.2d 1332 (1st Cir. 1992) (equitable subordination considerations and lender conduct)
In re Decker, 295 F. Supp. 501 (W.D. Va. 1969) (historical context for fraudulent transfer doctrines)