Bankruptcy — fraudulent transfers

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United States Court of Appeals For the Seventh Circuit

Civil

Bankruptcy — fraudulent transfers

Failure to keep funds in segregated accounts is insufficient to show that transfers were fraudulent.

“That Sentinel failed to keep client funds properly segregated is not, on its own, sufficient to rule as a matter of law that Sentinel acted ‘with actual intent to hinder, delay, or defraud’ its customers. In Bell & Beckwith, the defendants admitted the transfers were made with intent to defraud, and the court found that the use of customer funds for personal purposes ‘was an unlawful theft’ based on the transferor’s deposition testimony and criminal conviction. Id. As demonstrated in Bell & Beckwith, proving actual fraud as a matter of law requires more than simply showing that the transfers resulted in an under-segregation of client funds. The use of customer assets as collateral for a loan that served purposes that did not directly benefit the customers does not necessarily mean Sentinel had the requisite actual intent to hinder, delay, or defraud the customers. See B.E.L.T., Inc. v. Wachovia Corp., 403 F.3d 474, 478 (7th Cir. 2005) (finding no state cases where payments to arms’ length third-party creditors were found fraudulent). Sentinel’s preference of one set of creditors (the bank, whose funds paid off the repo counterparties) over another (its customers) is properly reserved for Grede’s preferential transfer claims, cf. Boston Trading Grp. v. Burnazos, 835 F.2d 1504, 1508-09 (1st Cir. 1987) (fraudulent conveyance law exists ‘for very different purposes’ that does not include attempts ‘to choose among’ creditors as contrasted with restitution and preferences), and for reasons not on appeal, the district court rejected Sentinel’s preferential transfer claims, see generally Dean v. Davis, 242 U.S. 438, 444-45 (1917) (knowledge that a transfer is a preference may be sufficient to prove fraud depending on the case’s facts); In re Sharp Int’l Corp., 403 F.3d 43, 56 (2d Cir. 2005) (‘The $12.25 million payment was at most a preference between creditors and did not “hinder, delay, or defraud either present or future creditors.”’).”

Affirmed.

10-3787, 10-3990 & 11-1123 In re Sentinel Management Group, Inc.

Appeals from the United States District Court for the Northern District of Illinois, Zagel, J., Tinder, J.