[ by Melanie Gretchen ] Bank of New York Mellon defeated  Chicago cash management firm Sentinel Management Group Inc. in court once and for all, after a U.S. Appeals court ruled last week that BNY Mellon is entitled to a $312 million lien on the bankrupt firm's holdings.  After the firm filed for bankruptcy in 2007, liquidation trustee Frederick Grede sued the New York-based lender, alleging that the bank's employees knew the firm was improperly using investor assets as credit-line collateral and sought to disallow or subordinate its lien. Unfortunately for Mr. Grede, the Chicago-based appeals court agreed with the original ruling by U.S. District Judge James Zagel, who in 2010 rejected Mr. Grede’s claim that the bank’s actions enabled Sentinel to deceive its clients and an earlier dismissal of the trustee’s bid to invalidate the lien as illegal.

"Perhaps the bank should have known that Sentinel violated segregation requirements, but as the district court found, ‘such a lack of care does not rise to the level of egregious misconduct necessary for equitable subordination.’" -- U.S. Circuit Judge John D. Tinder, writing for the panel.

All told, Mr. Grede faces more than $1.2 billion in claims which has been filed against the firm’s assets, he said.

"Given all of the things that are going on in the industry, it doesn’t bode well for the protection of customer funds." -- Mr. Grede, of the appellate court ruling.

The case: In re Sentinel Management Group Inc., 10-3787, 10-3990 and 11-1123, U.S. Circuit Court of Appeals for the Seventh Circuit (Chicago). For further details, go to [Reuters, 8/9/12].