                               In the

United States Court of Appeals
                For the Seventh Circuit

Nos. 10-3787, 10-3990 & 11-1123

IN RE:

    S ENTINEL M ANAGEMENT G ROUP, INC.,
                                                                    Debtor.

A PPEAL OF:

    F REDERICK J. G REDE, not individually
    but as Liquidation Trustee of the
    Sentinel Liquidation Trust.


             Appeals from the United States District Court
         for the Northern District of Illinois, Eastern Division.
               No. 1:08-cv-02582—James B. Zagel, Judge.



    A RGUED S EPTEMBER 8, 2011—D ECIDED A UGUST 9, 2012




  Before M ANION, R OVNER, and T INDER, Circuit Judges.
  T INDER, Circuit Judge. The collapse of investment man-
ager Sentinel Management Group, Inc. in the summer
of 2007 left its customers in a lurch. Instead of main-
taining customer assets in segregated accounts as
required by law, Sentinel had pledged hundreds of mil-
2                           Nos. 10-3787, 10-3990 & 11-1123

lions of dollars in customer assets to secure an overnight
loan at the Bank of New York, now Bank of New York
Mellon. This left the bank in a secured position on Senti-
nel’s $312 million loan but its customers out millions.
After filing for bankruptcy, Sentinel’s liquidation trustee
brought a variety of claims against the bank to dislodge
its secured position. After extensive proceedings, in-
cluding more than two weeks of trial over the course
of more than a month, the district court rejected the
claims. This appeal raises concerns about Sentinel’s
business practices and the degree to which the bank
knew about them, but based on the district court’s
factual findings, we affirm.


                  I. Factual Background
The district court’s comprehensive factual findings fol-
lowing a seventeen-day bench trial, see Grede v. Bank of
New York Mellon, 441 B.R. 864 (N.D. Ill. 2010), serve as the
basis of our discussion, see Fed R. Civ. P. 52(a). These
findings of fact “are entitled to great deference and shall
not be set aside unless they are clearly erroneous.” Gaffney
v. Riverboat Servs. of Ind., Inc., 451 F.3d 424, 447 (7th Cir.
2006). If we are presented with two ways of viewing the
evidence, the district court’s choice “cannot be clearly
erroneous.” Id. at 448 (quoting Carnes Co. v. Stone Creek
Mech., Inc., 412 F.3d 845, 847 (7th Cir. 2005)). Given that
the essential issues in this appeal are whether Sentinel
had actual intent to hinder, delay, or defraud and whether
the bank’s conduct was sufficiently egregious, we take
special note that in assessing witness credibility, a
Nos. 10-3787, 10-3990 & 11-1123                          3

district court’s “credibility determination can virtually
never amount to clear error.” Id. (quoting Carnes, 412
F.3d at 848).
  Before filing for bankruptcy in August 2007, Sentinel
was an investment manager that marketed itself to its
customers as providing a safe place to put their excess
capital, assuring solid short-term returns, but also prom-
ising ready access to the capital. Sentinel’s customers
weren’t typical investors; most of them were futures
commission merchants (FCMs), which operate in the
commodity industry akin to the securities industry’s
broker-dealers. In Sentinel’s hands, FCMs’ client money
could, in compliance with industry regulations gov-
erning such funds, earn a decent return while main-
taining the liquidity FCMs need. “Sentinel has con-
structed a fail-safe system that virtually eliminates risk
from short term investing,” proclaimed Sentinel’s web-
site in 2004. To accept capital from its FCM customers,
Sentinel had to register as a FCM, but it did not solicit
or accept orders for futures contracts. Sentinel received a
“no-action” letter from the Commodity Futures Trading
Commission (CFTC) exempting it from certain require-
ments applicable to FCMs. But Sentinel represented
that it would maintain customer funds in segregated
accounts as the district court found Sentinel was required
under the Commodity Exchange Act, 7 U.S.C. §§ 1 et seq.
Maintaining segregation meant that at all times a cus-
tomer’s accounts held assets equal to the amount
Sentinel owed the customer and treated and dealt with
the assets “as belonging to such customer.” 7 U.S.C.
§ 6d(a)(2) (“Such money, securities, and property shall
4                          Nos. 10-3787, 10-3990 & 11-1123

be separately accounted for and shall not be com-
mingled with the funds of such commission merchant or
be used to margin or guarantee the trades or contracts,
or to secure or extend the credit, of any customer or
person other than the one for whom the same are
held . . . .”). Maintaining segregation serves as com-
modity customers’ primary legal protection against
wrongdoing or insolvency by FCMs and their depositories
as contrasted to depositors’ Federal Deposit Insurance
Corporation protection, see 12 U.S.C. §§ 1811 et seq.,
or securities investors’ Securities Investor Protection
Corporation protection, see 15 U.S.C. §§ 78aaa, et seq.
Sentinel also served other investors such as hedge funds
and commodity pools and starting as early as 2005, main-
tained a house account for its own trading activity
to benefit Sentinel insiders. In 2006, Sentinel represented
that non-FCM entities made up about one-third of its
customer base. By 2007, Sentinel held about $1.5 billion
in customer assets but maintained only $3 million or
less in net capital.
  Sentinel pooled customer assets in various portfolios
depending on whether the customer assets were CFTC-
regulated assets of FCMs or unregulated funds such as
hedge funds or FCMs’ proprietary funds. But Sentinel
handled “its and its customers’ assets as a single, undif-
ferentiated pool of cash and securities.” Grede, 441 B.R. at
874. When customers wanted their capital back, Sentinel
could sell securities or borrow the money. Sentinel’s
borrowing practices, and in particular an overnight loan
it maintained with the Bank of New York, is this
appeal’s focal point. This arrangement allowed Sentinel
Nos. 10-3787, 10-3990 & 11-1123                          5

to borrow large amounts of cash while pledging cus-
tomers’ securities as collateral.
  Sentinel’s relationship with the bank began in 1997 in
the institutional custody division but within months
moved to the clearing division (technically dubbed
broker dealer services) because Sentinel actively traded
securities and frequently financed transaction settle-
ments. Under the old arrangement, for each segregated
account, Sentinel had a cash account for customer
deposits and withdrawals. Assets couldn’t leave seg-
regation without a corresponding transfer from a cash
account. But the risks of overdrafts prompted a switch
to an environment where securities would be bought
and sold from clearing accounts lienable by the bank. In
an email, one bank official said in reference to Sentinel’s
original arrangement that “THIS ACCOUNT IS AN
ACCIDENT WAITING TO HAPPEN. . . . I AM NOTIFY-
ING YOU THAT I NO LONGER FEEL COMFORTABLE
CLEARING THESE TRANSACTIONS AND REQUEST
AN IMMEDIATE RESPONSE FROM YOU. THANK
YOU.” TTX 18.1 (emphasis in original).
  Under the new arrangement, Sentinel maintained three
types of accounts at the bank. Clearing accounts al-
lowed Sentinel to buy or sell securities, including gov-
ernment, corporate, and foreign securities and securities
traded with physical certificates. The bank maintained
the right to place a lien on the assets in clearing ac-
counts. Second, Sentinel maintained an overnight
loan account in conjunction with its secured line of
credit. To borrow on the line of credit, Sentinel would
6                         Nos. 10-3787, 10-3990 & 11-1123

call bank officials to confirm whether it had sufficient
assets in lienable accounts to serve as collateral. A
senior bank executive had to approve requests that put
the line of credit above a predetermined “guidance
line.” Third, Sentinel maintained segregated accounts
that held assets that could not be subject to any bank
lien. These included accounts (corresponding with the
lienable clearing accounts) for government, corporate,
and foreign securities but no corresponding segregated
account for physical securities. To receive FCM funds
in the segregated accounts, the bank countersigned
letters acknowledging that the funds belonged to the
customers and that the accounts would “not be sub-
ject to your lien or offset for, and on account of, any
indebtedness now or hereafter owing us to you . . . .” The
agreement between Sentinel and the bank provided
that the “Bank will not have, and will not assert, any
claim or lien against Securities held in a Segregated
Account nor will Bank grant any third party . . . any
interest in such Securities.”
  Sentinel could independently transfer assets between
accounts by issuing electronic desegregation instruc-
tions without significant bank knowledge or involve-
ment. This system allowed for hundreds of thousands
of trades worth trillions of dollars every day at the
bank. Sentinel maintained responsibility for keeping
assets at appropriate levels of segregation. The bank’s
main concern was ensuring Sentinel had sufficient col-
lateral in the lienable accounts to keep its overnight
loan secured. In fact, at no point does it appear that the
bank was under-secured. If Sentinel sought to extend
Nos. 10-3787, 10-3990 & 11-1123                          7

the line of credit beyond the value of the assets held in
the lienable accounts, the bank made sure Sentinel
moved enough collateral into the lienable accounts.
Sentinel used cash from the overnight loan for customer
redemptions or failed trades and provided collateral
in the form of the customers’ redeemed securities.
When customers redeemed investments, Sentinel could
provide cash, via the loan, without waiting for the securi-
ties to sell. This arrangement did not violate segrega-
tion requirements. When a customer cashed out, the
amount needed in segregation dropped by the amount
lent by the bank via the line of credit. The line of credit
was in turn secured by assets moved out of customers’
segregated accounts and into clearing accounts.
  But in 2001, and increasingly in 2004, Sentinel started
using the loan to fund its own proprietary repurchase
arrangements with counterparties such as FIMAT USA
and Cantor Fitzgerald & Co. Sentinel would finance
most of a security’s purchase price by transferring own-
ership of the security to a counterparty who would
lend Sentinel an amount of cash equal to a percent of
the asset’s market value. Sentinel used the overnight
loan to cover the difference (known as a “haircut”) between
the security’s cost and the repo loan. Sentinel had to
buy the security back at some point for the amount
loaned plus interest. By 2007, Sentinel held more than
$2 billion in securities through repo arrangements. Mean-
while, Sentinel’s guidance line for the bank loan
grew from $30 million pre-May 2004, to $55 million
in May 2004, to $95 million in December 2004, to
$175 million in June 2005, to $300 million in Septem-
8                          Nos. 10-3787, 10-3990 & 11-1123

ber 2006. The average loan balance from June 1, 2007, to
August 13, 2007, was $369 million. The line topped out
at $573 million at one point while all along customer
assets served as collateral. In 2004, Sentinel faced a segre-
gation shortfall of about $150 million, and by July 2007,
that figure reached nearly $1 billion.
  During the summer of 2007, the cloud of a liquidity
and credit crunch settled in. Repurchase lenders became
nervous. The type of securities Sentinel held became a
focus of the market as counterparties stopped accepting
securities previously used as collateral. They wanted
cash. But the crunch prevented selling the securities.
Cash was tough to get. As Sentinel turned increasingly
to its line of credit for cash, the bank’s thirst for the
highest-rated, most-liquid securities to secure the loan
intensified.
  On June 1, a counterparty returned $100 million
in physical securities; the bank loan jumped from
$259.7 million the day before to $353 million. To meet
the bank’s demands for collateral, Sentinel moved about
$88 million in government securities from segregated
accounts to the lienable account. There was no way to
maintain segregation levels via the returned physical
securities because Sentinel didn’t keep segregated
accounts for physical securities. Sentinel’s segregation
deficit grew to $644 million. On June 13, a managing
director at the bank emailed various bank officials
involved with the Sentinel account, asking how Sentinel
had “so much collateral? With less than $20MM in
capital I have to assume most of this collateral is for
Nos. 10-3787, 10-3990 & 11-1123                            9

somebody else’s benefit. Do we really have rights on
the whole $300MM??” 1 After speaking to several
bank officers, a client executive responded, “We have a
clearing agreement which gives us a full lien on the box
position outlined below.” The client executive testified
that this was a well-advised and carefully worded state-
ment but both the managing director and the client exe-
cutive knew Sentinel had an agreement that gave the
bank a lien on any securities in clearing accounts. Grede,
441 B.R. at 889-90. Then on June 26, a counterparty re-
turned $166 million in physical securities. The bank loan
balance grew to $497.5 million. For collateral, Sentinel
moved $66.6 million in government securities out of
segregated accounts and into the lienable account. But
that wasn’t enough for the bank, so Sentinel pledged
$165 million in physical securities. The segregation defi-
ciency grew to $667 million. On June 27, Sentinel’s loan
balanced peaked at $573 million. Two days later, the
bank told Sentinel it would no longer accept physical
securities as collateral. That day, Sentinel transferred
$166 million in corporate securities from segregated
accounts to the lienable account. Sentinel’s under-segrega-
tion problem grew to $813 million.
  A similar transaction occurred on July 17, with a
counterparty returning about $150 million in corporate


1
  The official was actually referencing Sentinel’s $2 million
in capital, even though he seemed to think Sentinel had ten
times that amount. He was closer in referring to the bank’s
$300 million in collateral, which at that point apparently
reached $302 million.
10                          Nos. 10-3787, 10-3990 & 11-1123

securities. Sentinel transferred $84 million in corporate
securities from a segregated account to a lienable ac-
count. The bank loan settled at $496.9 million and Senti-
nel’s segregation shortfall grew to $935 million. At
the month’s end, Sentinel briefly sent capital in the
other direction. On July 30, Sentinel moved $248 million
in corporate securities back into segregation from a
lienable account and on July 31, $263 million in govern-
ment securities back into segregation from a lienable
account. Yet that same day, Sentinel moved $289 million
in corporate securities from a segregated account to a
lienable account. Sentinel’s loan settled at $356 million
and its segregation deficit at $700 million.
  Sentinel couldn’t hang on and told customers on
August 13 that it was halting redemptions because of
problems in the credit markets. After Sentinel told the
bank about this decision the next day, the bank cut its
remote access to its systems, sent its officials to Sentinel’s
offices, demanded full repayment of the loan, and threat-
ened to liquidate the collateral. Sentinel filed for bank-
ruptcy on August 17, owing the bank $312,247,000.
  Plaintiff Frederick J. Grede was appointed Chapter 11
Trustee for Sentinel’s estate and subsequent to the
Chapter 11 plan’s confirmation, the trustee of the
Sentinel Liquidation Trust. The bank filed a $312 million
claim as the only secured creditor. Grede filed an ad-
versary proceeding against the bank alleging that
Sentinel fraudulently used customer assets to finance
the loan to cover its house trading activity and that
the bank knew about it and acted inequitably and unlaw-
Nos. 10-3787, 10-3990 & 11-1123                           11

fully. Grede brought claims of fraudulent transfer
under the bankruptcy code and state law, 11 U.S.C.
§§ 544(b)(1), 548(a)(1)(A); 740 ILCS 160/5(a)(1), and prefer-
ential transfer, 11 U.S.C. § 547(b), all to avoid the bank’s
lien, see 11 U.S.C. § 550(a). Grede also brought claims of
equitable subordination of the bank’s claim, 11 U.S.C.
§ 510(c), and invalidation of the bank’s lien, 11 U.S.C.
§ 506(d), among others. The district court dismissed the
lien invalidation count on the pleadings, Grede v. Bank of
New York, No. 08 C 2582, 2009 WL 188460, at *8 (N.D.
Ill. Jan. 27, 2009), and the bank moved for summary
judgment on the other claims. The court reserved ruling
on the bank’s motion and held a bench trial that lasted
seventeen days. After hearing from more than a dozen
witnesses, listening to audio recordings between bank
and Sentinel officials, and reviewing hundreds of
exhibits, the district court ruled in the bank’s favor on
the remaining counts. The court found that Grede
“failed to prove that Sentinel made the Transfers with
the actual intent to hinder, delay or defraud its credi-
tors.” Grede, 441 B.R. at 881. The court rejected the equita-
ble subordination claim because the bank’s conduct
was not “egregious or conscience shocking” but was
at worst negligent. Id. at 901. The court also re-
jected the preference claim because the bank was
over-collateralized on the transfer dates. Id. at 886.


                       II. Analysis
  The crux of this appeal is whether the district court
clearly erred in finding that Grede failed to prove (1) that
12                           Nos. 10-3787, 10-3990 & 11-1123

Sentinel acted with actual intent to hinder, delay, or
defraud and (2) that the bank engaged in inequitable
conduct. We must also determine whether Sentinel’s
contracts with the bank violated the law and thus allow
for the bank lien’s invalidation.


A. Fraudulent Transfer
  11 U.S.C. § 548(a)(1)(A) allows the avoidance of any
transfer of an interest in the debtor’s property if the
debtor made the transfer “with actual intent to hinder,
delay, or defraud” another creditor. Grede claims that
the transfers of customer assets out of segregation and
into the lienable accounts in June and July 2007 con-
stituted fraudulent transfers under 11 U .S.C.
§§ 548(a)(1)(A) & 544(b), and should thus be avoided.
  Grede’s burden at trial was to prove that Sentinel made
the transfers with a specific intent of preventing its credi-
tors from reaching their assets. To prove actual fraudu-
lent intent, as opposed to constructive fraud, see 11 U.S.C.
§ 548(a)(1)(B), Grede had to show that “the main or
only purpose of the transfer was to prevent a lawful
creditor from collecting a debt.” King v. Ionization Int’l, Inc.,
825 F.2d 1180, 1186 (7th Cir. 1987); see also In re Jeffrey
Bigelow Design Grp., 956 F.2d 479, 484 (4th Cir. 1992)
(noting that “actual fraudulent intent requires a sub-
jective evaluation of the debtor’s motive”); 5 Collier on
Bankruptcy ¶ 548.04[1][a] (16th ed. 2012) (trustee must
show “intent to interfere with creditors’ normal col-
lection processes or with other affiliated creditor rights
for personal or malign ends”). Given the lack of direct
Nos. 10-3787, 10-3990 & 11-1123                         13

proof of actual fraudulent intent, Grede could have tried
to prove fraudulent intent indirectly through what
have become known as “badges of fraud.” See Frierdich v.
Mottaz, 294 F.3d 864, 870 (7th Cir. 2002) (listing eight
badges); 740 ILCS 160/5(b) (listing eleven). But the
district court found that Grede only presented evidence
of “at most” a single badge—Sentinel’s insolvency at the
time of the transfers. Grede, 441 B.R. at 881-82. Grede’s
point about the badges not being the be-all and end-all
of proving fraudulent intent with circumstantial evi-
dence is well founded, Brandon v. Anesthesia & Pain
Mgmt. Assocs., 419 F.3d 594, 599-600 (7th Cir. 2005) (dub-
bing “badges of fraud” an unfortunate legal cliché
that “can exercise a mesmerizing force on lawyers and
judges”), but that does not mean his evidence was
enough to prove that Sentinel transferred customer
assets out of segregation with actual intent to hinder,
delay, or defraud, see In re Model Imperial, Inc., 250 B.R.
776, 792 (Bankr. S.D. Fla. 2000) (confluence of factors
mandated conclusive presumption of fraudulent intent).
  Grede maintains that the district court erred as a
matter of law because the transfers violated federal law
requiring Sentinel to maintain segregation. See Scholes
v. Lehmann, 56 F.3d 750, 759 (7th Cir. 1995) (even strong
circumstantial evidence may not be sufficient to declare
that as a matter of law there was fraud in fact). Grede
argues that by moving the securities out of segregation
and into lienable accounts to repay Sentinel’s repo
counterparties, Sentinel acted with “actual intent to
hinder, delay, or defraud” its customers. For support,
Grede points to cases like In re Bell & Beckwith as estab-
14                         Nos. 10-3787, 10-3990 & 11-1123

lishing that the transferring of a third party’s assets
for unauthorized purposes supplies the necessary intent
to hinder, delay, or defraud. 64 B.R. 620, 629 (Bankr.
N.D. Ohio 1986).
  That Sentinel failed to keep client funds properly segre-
gated 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 at-
tempts “to choose among” creditors as contrasted with
Nos. 10-3787, 10-3990 & 11-1123                         15

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.’ ”).
  As the district court found, Sentinel made the transfers
to pay off one set of creditors in an attempt to save the
enterprise from sinking. Grede, 441 B.R. at 884. A debtor’s
“genuine belief that” he could repay all his debts if only
he could “weather a financial storm” won’t “clothe him
with a privilege to build up obstructions” against his
creditors, Shapiro v. Wilgus, 287 U.S. 348, 354 (1932), but
that does not mean that actions taken to survive a
financial storm require a legal finding that the debtor
intended to hinder, delay, or defraud, see Boston Trading
Grp., 835 F.2d at 1511 (basic function of fraudulent con-
veyance law is “to see that an insolvent debtor’s
limited funds are used to pay some worthy creditor” as
opposed to “determining which creditor is the more
worthy”). That Sentinel used client funds as collateral
to finance proprietary trading is quite troubling, but the
trouble has less to do with any actual intent by Sentinel
to “hinder, delay, or defraud” in making those sum-
mer 2007 transfers than with Sentinel’s ability to
effectively intermingle house and client investments via
collateral securing a bank loan that served ambiguous
purposes. Cf. Dean, 242 U.S. at 444 (“Making a mortgage
16                         Nos. 10-3787, 10-3990 & 11-1123

to secure an advance with which the insolvent debtor
intends to pay a pre-existing debt does not necessarily
imply an intent to hinder, delay, or defraud creditors.”).
Such an arrangement raises questions of sound financial
policy and good business practices, but even if suspect
legally, but see infra Part II.C, Sentinel’s transfers within
the account structure at the bank doesn’t alone require
a finding that Sentinel intended to hinder, delay, or
defraud its customers.
  Grede asks that we establish and apply a modified
version of the “Ponzi Presumption,” which some courts
have used in cases where the debtor knows at the time
of the transfer, based on the structure of their scheme,
that the scheme would collapse. In re World Vision Entm’t,
Inc., 275 B.R. 641, 656 (Bankr. M.D. Fla. 2002) (payments
made to further a Ponzi scheme are “made with the
actual intent to hinder, delay, or defraud creditors”
because Ponzi schemes are “by definition fraudulent” and
“any acts taken in furtherance of the Ponzi scheme, such
as paying brokers commissions, are also fraudulent”);
In re Indep. Clearing House Co., 77 B.R. 843, 860 (D. Utah
1987) (because Ponzi scheme operator “must know all
along, from the very nature of his activities, that investors
at the end of the line will lose their money” and
“[k]nowledge to a substantial certainty constitutes intent
in the eyes of the law,” knowing “that future investors
will not be paid is sufficient to establish his actual intent
to defraud them”). Courts infer intent when a debtor
participates in a Ponzi scheme. In re C.F. Foods, L.P., 280
B.R. 103, 110 (Bankr. E.D. Pa. 2002) (inferring intent
when a debtor participated in Ponzi scheme); In re
Nos. 10-3787, 10-3990 & 11-1123                        17

Randy, 189 B.R. 425, 438-39 (Bankr. N.D. Ill. 1995) (Ponzi
operator “necessarily knew all along that most investors,
certainly the latest among them, would lose their money
if they invested in his scheme”). Grede doesn’t suggest
Sentinel ran a Ponzi scheme but asks us to apply a
fraud presumption on the basis that Sentinel must
have somehow known that the summer 2007 transfers
would prevent its investors from getting their money
back. See In re Bayou Grp., LLC, 439 B.R. 284, 306-07
(S.D.N.Y. 2010) (even in the absence of a Ponzi scheme,
prima facie case of actual fraudulent conveyance estab-
lished by guilty pleas, expert report, and multiple
badges of fraud including fraudulently inflated reports).
  Yet the district court found that Grede failed to prove
that Sentinel knew at the time of the transfers that its
scheme would ultimately collapse. Grede’s position
would extend the Ponzi Presumption to any case where
a debtor somehow acted wrongly in a manner that
harmed one set of creditors. Grede cites no authority
for such a proposition and because he doesn’t show
where the district court clearly erred in finding that he
failed to prove that Sentinel officials necessarily knew,
or should have known, that their scheme would
eventually collapse, Grede, 441 B.R. at 882, we won’t
consider whether the Ponzi Presumption may extend
beyond cases involving its namesake.


B. Equitable Subordination
 Courts will subordinate a claim under 11 U.S.C. § 510(c)
when the claimant engaged in inequitable conduct
18                           Nos. 10-3787, 10-3990 & 11-1123

that injured other creditors or conferred an unfair ad-
vantage on the claimant, but not when subordination
is inconsistent with the Bankruptcy Code. See In re
Kreisler, 546 F.3d 863, 866 (7th Cir. 2008) (quoting United
States v. Noland, 517 U.S. 535, 538-39 (1996)). “Equitable
subordination allows the bankruptcy court to reprioritize
a claim if it determines that the claimant is guilty of
misconduct that injures other creditors or confers an
unfair advantage on the claimant.” Id. (citing In re
Lifschultz Fast Freight, 132 F.3d 399, 343 (7th Cir. 1997)). Our
only issue is whether the bank engaged in sufficiently
inequitable conduct.
  Equitable subordination typically involves insiders of
closely-held corporations. Lifschultz, 132 F.3d at 343. The
corporate insiders, often shareholders, want to convert
their low priority claims (equity) into higher priority
claims (secured debt). There’s nothing inherently wrong
with this, but it muddies relationships and creates op-
portunities for self-dealing. See id. at 343-44. Courts must
tread carefully because wrongfully disregarding a bona
fide transaction causes two problems: the upsetting of
a claimant’s legitimate expectations and the spawning
of legal uncertainty that courts will refuse to honor other-
wise binding agreements “on amorphous grounds of
equity,” increasing everyone’s credit costs. Id. at 347.
“Equitable subordination means that a court has chosen
to disregard an otherwise legally valid transaction.” Id.
Courts also apply equitable subordination quite care-
fully because the question “whether a party has acted
opportunistically,” is quite subjective. Id. at 349 (quoting
David A. Skeel, Jr., Markets, Courts, and the Brave New
Nos. 10-3787, 10-3990 & 11-1123                              19

World of Bankruptcy Theory, 1993 Wis. L. Rev. 465, 506).
There are no clear rules for determining whether under-
handed behavior occurred. Id. (“Equitable subordina-
tion relies on courts’ peering behind the veil of formally
unimpeachable legal arrangements to detect the
economic reality beneath.”). Conduct deemed “inequita-
ble” typically falls within three areas: “(1) fraud, illegality,
breach of fiduciary duties; (2) undercapitalization; and
(3) claimant’s use of the debtor as a mere instrumentality
or alter ego.” Id. at 345 (quoting In re Missionary Baptist
Found. of Am., 712 F.2d 206, 212 (5th Cir.1983)). Yet mere
undercapitalization is not enough; there must be some-
thing extra. Id. at 345. See also In re Bowman Hardware &
Elec. Co., 67 F.2d 792, 794 (7th Cir. 1933) (requiring “act
involving moral turpitude or some breach of duty or
some misrepresentation whereby other creditors were
deceived to their damage”).
  Grede’s principal argument is that the district court
erred by applying a subjective-intent standard. Under
Grede’s standard, the bank’s acceptance of customer
assets as collateral for Sentinel’s loan constituted inequita-
ble conduct because the bank knew about Sentinel’s
segregation duty and that Sentinel could not use cus-
tomer assets as collateral. Grede maintains that the
bank’s acceptance of collateral that should have re-
mained in segregation violated the Commodity Ex-
change Act, 7 U.S.C. § 6d(b) (prohibiting depository
institutions from treating customer assets “as belonging
to the depositing futures commission merchant or any
person other than the customers of such futures com-
mission merchant”), and common law duties, see Lerner
20                           Nos. 10-3787, 10-3990 & 11-1123

v. Fleet Bank, N.A., 459 F.3d 273, 287 (2d Cir. 2006) (banks
may be liable under state law for participating in diver-
sions “either by itself acquiring a benefit, or by notice
or knowledge that a diversion is intended or being exe-
cuted” (quoting In re Knox, 477 N.E.2d 448, 451 (N.Y.
1985)). For support of its subjective-intent standard,
Grede cites our adoption of the “magisterial Mobile Steel”
decision in Lifschultz, 132 F.3d at 344 (citing In re Mobile
Steel Co., 563 F.2d 692, 701 (5th Cir. 1977)), but Grede
misreads these cases. Both courts applied the “rea-
sonably prudent men” standard to determine whether
the debtor was reasonably capitalized, not the degree
of egregiousness. See Mobile Steel, 563 F.2d at 702-03;
Lifschultz, 132 F.3d at 351-52.
  Grede fails to show where the district court clearly
erred in finding that the bank did not engage in the
type of misconduct that warrants equitable subordina-
tion. We emphasize that given that the bank was not
an insider, Grede needed evidence of “gross and
egregious conduct” such as fraud, spoliation, or overreach-
ing on the bank’s part. See In re First Alliance Mortg. Co., 471
F.3d 977, 1006 (9th Cir. 2006); see also Kham & Nate’s
Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1356
(7th Cir. 1990) (few cases subordinate “claims of creditors
that dealt at arm’s length”); 4 Collier on Bankruptcy
¶ 510.05[4] (16th ed. 2012) (citing cases). Based on the
evidence presented at trial, including hours of recorded
phone calls involving bank and Sentinel employees, the
district court found that the bank and Sentinel had a
typical ten-year relationship that only came into trouble
in the summer of 2007. Grede, 441 B.R. at 891. Sentinel
Nos. 10-3787, 10-3990 & 11-1123                          21

assured the bank that it could use customer securities
as collateral and that its customers knew about Sentinel’s
leveraged trading strategy. Id. The bank could not see
collateral moving to and from segregated accounts
and there was no particular reason for the bank to see
or track each transfer. Id. The bank also lacked any
real motivation to lend millions of dollars simply to
earn extra overnight interest. Id. at 891-92. At worst, bank
officials acted negligently, but not fraudulently. Id. at
894, 898, 901. The district court’s finding that the bank
officials were suspicious, as exemplified by the email
change between bank officials over how Sentinel was
able to pledge $300 million in collateral with only
$2 million in capital, doesn’t require a finding that the
bank’s conduct was sufficiently egregious. Id. at 890-92.
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 the egregious misconduct necessary for equitable
subordination.” Id. at 891. And as detestable as the bank
officials’ testimony may appear, we are not going to
question the district court’s able credibility judgments,
Gaffney, 451 F.3d at 448, particularly where the court
took account of the problematic aspects of the testi-
mony, and explained that while it did not always
believe the bank officials, the discredited testimony did
not lead the court to believe the witnesses were covering
up knowledge of Sentinel’s “pre-collapse mess.” Grede,
441 B.R. at 893-94 (“Lies are sometimes told, as they
were here, not to help the employer in a lawsuit, but
rather to help the employee’s career.”). Instead of
22                        Nos. 10-3787, 10-3990 & 11-1123

finding that their testimony justified a finding of
egregious bank behavior, the district court essentially
found that the bank officials were such artless
liars that they couldn’t have been concealing deliberate
wrongdoing. Instead, the bank officials were simply
trying to cover up their own incompetence. Id. at 893.
And incompetence alone, however problematic, won’t
require the equitable subordination of the bank’s lien.
  Grede seeks to retroactively impose a requirement for
the bank to ensure Sentinel maintained appropriate
segregation levels and argues that its failure to do so
justifies a finding of inequitable conduct. For support,
Grede cites a CFTC letter that prohibits pledging of
customer securities for debts regardless of location.
Even if we accepted the letter as authoritative, the
bank’s failure to somehow ensure segregation compli-
ance would not support the required level of egregious
behavior. Grede doesn’t explain how the bank was
suppose to access Sentinel’s moment-by-moment seg-
regation calculations, its segregated accounts at other
banks, or even how to evaluate the fluctuating market
value of the segregated assets. The bank would also
have to know how much was on deposit from
Sentinel’s FMC customers as opposed to its non-FCM
customers such as hedge funds. Even the CFTC in its
amicus brief acknowledges that there is an absence of
direct authority for its position that the district court
misinterpreted 7 U.S.C. § 6d(b) in finding that the bank
did not violate legal duties. See Br. of CFTC as Amici
Curiae Supporting Appellant at 13-14 n.12. A violation
of an issue of first impression, even if the CFTC is
Nos. 10-3787, 10-3990 & 11-1123                            23

correct, does not supply the required degree of egregious
conduct needed for equitable subordination.


C. Voiding the Contract
  The district court dismissed under Rule 12(b)(6) the
claim that Sentinel’s contracts with the bank were in-
herently illegal. See 11 U.S.C. § 506(d) (voiding liens
securing disallowed claims). We review de novo. Tamayo
v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008).
   The district court correctly dismissed this claim
because although the agreements may have created a
structure for abuse, the agreements were not the cause
of Sentinel’s under-segregation. A contract may be found
unenforceable in situations where the conduct required
in the contract violates the law, see U.S. Nursing Corp. v.
Saint Joseph Med. Ctr., 39 F.3d 790, 792 (7th Cir. 1994)
(Illinois law), but Grede fails to point to any provision
in the contract that required Sentinel or the bank to do
anything even remotely illegal, see N. Ind. Pub. Serv. Co. v.
Carbon Cnty. Coal Co., 799 F.2d 265, 273 (7th Cir. 1986)
(illegality defense does not apply when a party merely
“commits unlawful acts to carry out his part of the bar-
gain”). The contract’s provision requiring Sentinel
to release all third party claims when the funds were
desegregated was not inherently unlawful because segre-
gated funds could be deposited elsewhere “in the
normal course of business” to settle trades. 7 U.S.C.
§ 6d(a)(2); see also 17 C.F.R. § 1.23 (stating that § 6d(a)(2)
does not prohibit entities withdrawing segregated
24                          Nos. 10-3787, 10-3990 & 11-1123

funds “to the extent of its actual interest”); 17 C.F.R. § 1.29
(FCMs may receive and retain funds “as its own any
increment or interest resulting” from investments). Even
if the contract’s terms enabled illegal activity, the pro-
vision did not inherently cause segregation violations.
Quite unlike in Cary Oil Co. v. MG Ref. & Mktg., Inc., 230
F. Supp. 2d 439, 452 (S.D.N.Y. 2002), Grede did not
allege that Sentinel and the bank promised “to do some-
thing unlawful.”


                      III. Conclusion
  We A FFIRM the judgments of the district court.




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