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Seventh Circuit Voids Lien-Securing Rescue Loan

By Michael L. Cook
April 01, 2016

A “bank [making a secured rescue loan] had information that should have created the requisite suspicion ' to conduct a diligent search for possible dirt” ' i.e., whether the debtor had the right to pledge $312 million of customer securities, held the U.S. Court of Appeals for the Seventh Circuit on Jan. 8, 2016. In re Sentinel Management Group, Inc., 2016 WL 98601, at *2 (7th Cir. Jan. 8, 2016) ["Sentinel V "].

The Seventh Circuit reversed the district court, voided the defendant bank's lien as a fraudulent transfer, and rejected the bank's good-faith defense. Based on the district court's detailed findings of inquiry notice, the Seventh Circuit stressed that “the bank had lent approximately $300 million to a company that had capital equal to roughly 1/150th of that amount” at a time when the debtor was mysteriously “able to secure the entire loan.” Id. at *3. Because the “obvious” source of the collateral “was the [debtor's] customer accounts,” and because “the bank had ' documents [showing] on even a casual perusal ' that [the debtor] lacked authority to pledge” the assets, the bank “was on inquiry notice that the assets ' had been fraudulently” pledged to it. Id. at *6.

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