A federal appeals court in Illinois held that Bank of New York Mellon Corporation and Bank of New York (collectively, “BNYM”) were on “inquiry notice” that Sentinel Management Group, Inc. improperly used customer funds as collateral for a loan prior to the firm’s collapse in August 2007. (Sentinel was an investment management firm registered with the Commodity Futures Trading Commission as a futures commission merchant that claimed it specialized in short-term cash management for hedge funds, individuals, financial institutions and other FCMs. The firm filed for bankruptcy after it unlawfully commingled US $460 million of client securities into its house account, and used client collateral to obtain a US $321 million line of credit from BNYM.) The court noted that, at the time of the loan, at least one senior officer of BNYM questioned how Sentinel, which he mistakenly believed had only US $20 million of capital (in fact it had capital of less than US $3 million), could have sufficient collateral to secure a US $300 million loan. According to the manager, “I have to assume most of this collateral is for somebody’s else’s benefit.” The court said this and other facts in evidence before the lower court demonstrated that BNYM should not have reasonably accepted the collateral without further inquiry. As a result, the appeals court reversed the decision of the lower court, which held in December 2014 that BNYM’s acceptance of the collateral was in good faith and awarded the bank a priority status in Sentinel’s bankruptcy proceeding. The appeals court dropped BNYM’s status to that of a general creditor. Sentinel’s bankruptcy trustee also had argued that BNYM’s conduct should cause its claims to be subordinated to the claims of all creditors as an additional penalty However, the appeals court rejected this position.