                               In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________


No. 15-1039


IN RE SENTINEL MANAGEMENT GROUP, INC.,
                                                                Debtor.
                     ____________________

FREDERICK J. GREDE, as Liquidation Trustee of the
 Sentinel Liquidation Trust,
                                           Plaintiff-Appellant,
                                 v.

BANK OF NEW YORK MELLON CORP. and BANK OF
 NEW YORK,
                                   Defendants-Appellees.
                     ____________________

         Appeal from the United States District Court for the
           Northern District of Illinois, Eastern Division.
              No. 08 C 2582 — James B. Zagel, Judge.
                     ____________________

  ARGUED NOVEMBER 10, 2015— DECIDED JANUARY 8, 2016
              ____________________

   Before POSNER, EASTERBROOK, and ROVNER, Circuit Judges.
2                                                   No. 15-1039


    POSNER, Circuit Judge. The plaintiff in this case, now in its
eighth year, is the trustee of a bankrupt firm named Sentinel
Management Group, Inc. Sentinel was what is called a cash-
management firm: it invested cash, which had been lent it by
persons or firms, in liquid low-risk securities. It also traded
on its own account, using money borrowed from Bank of
New York Mellon Corp. and Bank of New York (affiliates
usually referred to jointly as BNYM) to finance the trades.
BNYM required that its loans be secured by its borrowers, of
whom Sentinel was one. Not owning enough assets to pro-
vide the required security, however, Sentinel pledged securi-
ties that it had bought for its customers with their money
even though its loans from BNYM were used for trading on
its own account—improperly. Federal law (7 U.S.C.
§§ 6d(a)(2), 6d(b)), as well as the contracts between Sentinel
and its customers, required the securities to be held in segre-
gated accounts, that is, accounts separated from Sentinel’s
own assets. Sentinel was forbidden to pledge the assets in
the segregated accounts to BNYM as security for BNYM’s
loans to it.
    In August 2007, with the securities markets becoming
shaky (the following year, the year of the financial crash,
segments of these markets would be even shakier), Sentinel
experienced trading losses that prevented it from both main-
taining its collateral with BNYM and meeting the demands
of its customers for redemption of the securities that Sentinel
had bought with their assets. Sentinel used its line of credit
with BNYM to meet those demands. By June 2007 its loan
balance with BNYM was $573 million; two months later it
halted redemptions to its customers and declared bankrupt-
cy, owing BNYM $312 million. A BNYM executive notified
Sentinel that because of its inability to repay the bank’s loan
No. 15-1039                                                  3


the bank planned to liquidate the collateral that Sentinel had
pledged to secure the loan. The bankruptcy trustee (Grede,
the plaintiff in our case) believed that the liquidation would
deny Sentinel’s customers more than $500 million in re-
demptions. He refused to classify the bank as a senior se-
cured creditor with respect to the $312 million that the bank-
rupt Sentinel owed it. He considered the transfers of cus-
tomer assets to accounts that Sentinel could (and did) use to
collateralize its loans from BNYM to be fraudulent transfers,
unlawful under 11 U.S.C. § 548(a)(1)(A).
    The bank would have been in the clear had it accepted
the pledge of the assets “in good faith,” 11 U.S.C. § 548(c),
but it would not have been acting in good faith had it had
what’s called “inquiry notice.” In re Sentinel Management
Group, Inc., 728 F.3d 660, 668 n. 2 (7th Cir. 2013). The term
signifies awareness of suspicious facts that would have led a
reasonable firm, acting diligently, to investigate further and
by doing so discover wrongdoing. In re M & L Business Ma-
chine Co., 84 F.3d 1330, 1335–38 (10th Cir. 1996); In re Sher-
man, 67 F.3d 1348, 1355 (8th Cir. 1995); In re Agricultural Re-
search & Technology Group, Inc., 916 F.2d 528, 535–36 (9th Cir.
1990). The trustee believed that officials of BNYM had been
aware of suspicious facts that should have led them to inves-
tigate, and that an investigation would have revealed that
the bank could not in good faith accept assets of Sentinel’s
customers as security for the bank’s loans to Sentinel.
   The district judge conducted a seventeen-day bench trial
that convinced him that Sentinel was in the clear—that it had
not been shown to have intended to defraud its customers,
in violation of 11 U.S.C. § 548(a)(1)(A), when it transferred
their segregated funds into clearing accounts, where they
4                                                  No. 15-1039


became collateral for the bank’s loans to Sentinel. He there-
fore dismissed the trustee’s claim against the bank. A panel
of this court reversed, however, holding that Sentinel had
made fraudulent transfers and instructing the district judge
to decide on remand whether BNYM had been on inquiry
notice in its dealings with Sentinel. In re Sentinel Management
Group, Inc., supra, 728 F.3d at 666–68.
    But on remand the judge neither conducted an eviden-
tiary hearing nor made additional findings. Instead he is-
sued what he called a “supplemental opinion” intended
merely to “clarify” his “prior opinion and findings of fact.”
He “incorporate[d] by reference [his] earlier opinion on the
merits and the Seventh Circuit’s opinion” that had reversed
the earlier decision, without explaining how he could incor-
porate both an opinion that had been reversed and the opin-
ion reversing it.
   The supplemental opinion reveals a misunderstanding of
the concept of inquiry notice. The opinion suggests that the
bank, as long as it did not believe that Sentinel had pledged
customers’ assets to secure its loans without the customers’
permission, was entitled to accept that security for its loans
without any investigation. That’s incorrect, because inquiry
notice is not knowledge of fraud or other wrongdoing but
merely knowledge that would lead a reasonable, law-
abiding person to inquire further—would make him in other
words suspicious enough to conduct a diligent search for
possible dirt. See In re Sentinel Management Group, Inc., supra,
728 F.3d at 668 n. 2; In re M & L Business Machine Co., Inc.,
supra, 84 F.3d at 1338.
   That the bank had information that should have created
the requisite suspicion is illustrated by a note of Mark Rog-
No. 15-1039                                                    5


ers, the bank’s Managing Director of Financial Institutions
Credit, to other employees of the bank who like him worked
on the Sentinel account. Rogers was responding to a mes-
sage, from one of those other employees, that had listed Sen-
tinel’s collateral. The list puzzled Rogers. He responded:
“How can they [i.e., Sentinel] have so much collateral? With
less than $20MM [i.e., 20 million dollars] in capital I have to
assume most of this collateral is for somebody else’s benefit.
Do we really have rights on the whole $300MM?” (Actually
the “$20MM in capital” to which Rogers referred was incor-
rect; the correct figure was between $2 and $3 million.) The
“somebody else” is an obvious reference to Sentinel’s cus-
tomers, owners of the accounts held by Sentinel; it was their
money that was being used—improperly—to secure the
bank’s loans to Sentinel. Rogers’ puzzlement was enough,
given his position in the bank, to place the bank on inquiry
notice and thus require it to conduct an investigation of
what Sentinel was using to secure a $300 million debt when
it had capital of no more than $3 million.
   He received a nonresponsive answer to the question in
his note: “We have a clearing agreement [with Sentinel]
which gives us a full lien on the box position outlined be-
low.” There was no further inquiry.
    The district judge said that “Rogers did not claim he
knew or believed that all the collateral was for somebody
else’s benefit.” True, but he was suspicious, and that was
enough to place him on notice of a possible fraud and so re-
quire that he or others at the bank investigate. In fact it was
more than enough. Notice that because of the recipient’s ob-
tuseness fails to trigger suspicion is nevertheless sufficient to
create inquiry notice because all that is required to trigger it
6                                                 No. 15-1039


is information that would cause a reasonable person to be
suspicious enough to investigate.
    The district judge acknowledged that the bank had in its
possession documents that would show, on even a casual
perusal, that Sentinel lacked authority to pledge all the as-
sets that it pledged to the bank to secure the bank’s loans to
it. But he said that the bank wasn’t required to conduct an
investigation because there were no “grounds to believe that
[the] bank should have known of the misconduct of its bor-
rower.” BNYM had Sentinel’s assurances that it “was al-
lowed to use client[s’] segregated funds as collateral,” and
on the basis of those assurances the judge concluded that
“any inquiry BNYM might have made would likely have
been fruitless, as BNYM believed, even to its own detriment,
the lies” told by Sentinel’s CEO. But Rogers had a reason to
disbelieve Sentinel’s assurances, and an investigation would
have discovered their falsity.
    The district judge noted that Rogers “came closer to an
affirmative statement when he ‘assumed’ that most of the
collateral was for somebody else’s benefit, but this too was
not an assertion of belief or knowledge.” But the assumption
was at least a suspicion, based on evidence, and it should
have prompted an investigation.
    The judge went on to say that “assuming arguendo that
Rogers knew, rather than guessed, that some portion of the
collateral was posted for the benefit of insiders, he did not
assume that all of it came from the accounts of Sentinel’s cli-
ents.” But if some of it did, and Rogers knew it, he knew
there was fraud. Again the judge missed the point when he
said that the bank “neither knew nor turned a blind eye to
the improper actions of Sentinel.” Knowing or turning a
No. 15-1039                                                      7


blind eye (refusing to look because of what you fear to see)
would have made the bank guilty of fraud, but was not re-
quired to establish inquiry notice. And while the judge may
have been correct when he said that “mere negligence—or
ineptitude—is insufficient to establish inequitable conduct,”
it would suffice for inquiry notice.
    He said there was no evidence that anyone agreed with
Rogers that there was something fishy about the security for
the bank’s loan to Sentinel. We don’t believe it. The bank
had lent approximately $300 million to a company that had
capital equal to roughly 1/150th of that amount. Yet the com-
pany had been able to secure the entire loan. Where could
that security have come from? The obvious place was the
company’s customer accounts. The bank’s failure to follow
this obvious lead was a failure to act on inquiry notice.
   Recall that the district judge in the opinion under review
incorporated his earlier opinion—the one this court had re-
versed—and by incorporating it adopted the findings in it.
Those findings actually prove inquiry notice. We quote a few
passages from the opinion, Grede v. Bank of New York Mellon,
441 B.R. 864 (N.D. Ill. 2010):
   “[T]he evidence at trial revealed the Bank’s knowledge
   that Sentinel insiders were using at least some of the loan
   proceeds for their own purposes.” Id. at 883.
   “BNYM had Sentinel’s audited financial statements … .
   [T]he 2005 financial statements showed customer securities
   ‘segregated and held in trust’ to be approximately $1.14
   billion, but that approximately $156 million of this total
   was pledged as collateral for a $280 million short-term
   bank loan. [Terence] Law [a BNYM client executive] and
   [Joseph] Ciacciarelli [who oversaw BNYM’s relationship
8                                                       No. 15-1039


    with Sentinel], both of whom reviewed these monthly
    statements [and were recipients of Rogers’ note], admitted
    that securities pledged as collateral could not simultane-
    ously be held in segregation. Moreover … the difference
    between the amount of assets listed as ‘funds segregated
    or in separate accounts …’ and Sentinel’s total assets was
    never more than approximately $15 million. Therefore, in
    order for Sentinel to pledge collateral in excess of that dif-
    ference, it would have to use assets that had been held in
    segregation and then removed from segregation to allow
    them to be pledged.” Id. at 889 (footnote omitted).
    “Rogers’ [note] is certainly evidence that he had a suspi-
    cion that the securities were not Sentinel’s to pledge and he
    shared this suspicion with Law,” who of course did noth-
    ing. Id. at 890.
    “The team [Rogers et al.] knew that same-day liquidity
    was part of Sentinel’s agreement with its customers, which
    also suggests that Sentinel may not have had the right to
    pledge customer assets.” Id. (That’s an understatement;
    had Sentinel pledged customer assets to secure its loan
    from the bank, how could it transfer those assets to the
    customers in a day?)
    “It is clear to me that before June 13, 2009, certain BNYM
    employees had suspicions that Sentinel may not have
    rights to the collateral” for the bank’s loan. Id. (What more
    need be said?) “Members of the Sentinel team also had ac-
    cess to forms … which, with relatively cursory review, re-
    vealed that Sentinel was violating its segregation [of cus-
    tomer assets] requirements.” Id.
    “I have little doubt that BNYM should have looked further
    into whether Sentinel had the right to pledge the securities.
    BNYM employees were careless in protecting their own in-
    terests.” Id. at 891.
No. 15-1039                                                        9


   “The facts demonstrate that by the middle of June, at least
   one BNYM employee [Rogers] was suspicious, and others
   should have known that Sentinel was violating segregation
   requirements. In light of such notice, it is difficult to see
   how reliance on Sentinel’s representations and warranties
   contained in the clearing agreement is objectively appro-
   priate.” Id. at 892.
    Enough! As we said, the district judge found inquiry no-
tice—over and over again—without realizing it. But in fair-
ness to the judge, the first panel’s opinion may have been
unduly deferential in remanding this issue rather than re-
versing outright. The panel had noted correctly that “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’ an-
other creditor,” and that “Grede claims that the transfers of
customer assets out of segregation and into the lienable ac-
counts (which Sentinel used as collateral for its overnight
loans from Bank of New York) in June and July 2007 consti-
tuted fraudulent transfers under 11 U.S.C. §§ 548(a)(1)(A) &
544(b), and should thus be avoided.” In re Sentinel Manage-
ment Group, Inc., supra, 728 F.3d at 666–67. But even though
the panel agreed with Grede that Sentinel had made fraudu-
lent transfers, it remarked in a footnote that “the district
court needs to clarify on remand what exactly the Bank
knew before Sentinel’s collapse. But based on the record cur-
rently before us, we suspect that the Bank will have a very
difficult time proving that it was not on inquiry notice of
Sentinel’s possible insolvency.” Id. at 668 n. 2. The district
judge had, as we’ve seen, found fact after fact showing that
the bank had indeed been on inquiry notice. There was no
need to remand for further findings on that issue.
10                                                 No. 15-1039


    The second issue, to which we now turn, presented by
the trustee’s appeal is whether the bank’s conduct was suffi-
ciently egregious to justify application of the doctrine of eq-
uitable subordination, which allows a bankruptcy court to
reduce the priority of a claim in bankruptcy. Id. at 669–72; 11
U.S.C. § 510(c)(1). Even though the bank’s secured claim
goes down the drain because it was on inquiry notice of Sen-
tinel’s fraud, it still has an unsecured claim in bankruptcy—a
claim for the money it lost when Sentinel failed to repay the
bank’s loan to it of $312 million. The question is whether its
claim is to be subordinated to other claims, which would
normally be subordinate to its claim. The first panel’s opin-
ion wrestled inconclusively with the question of how serious
the bank’s misconduct had to be to justify reducing the pri-
ority of the bank’s bankruptcy claim. It reversed the district
judge’s rejection of the trustee’s argument for equitable sub-
ordination and remanded the case for the district judge to
clarify his factual findings regarding the extent of the bank’s
knowledge of wrongdoing. On remand the district judge
adhered to his original position.
    The statute authorizing equitable subordination does not
indicate what conduct justifies that Draconian remedy, but
there is general agreement in the case law that the defend-
ant’s conduct must be not only “inequitable” but seriously
so (“egregious,” “tantamount to fraud,” and “willful” are
the most common terms employed) and must harm other
creditors. See, e.g., Carhart v. Carhart-Halaska Int’l, LLC, 788
F.3d 687, 692 (7th Cir. 2015); In re Kreisler, 546 F.3d 863, 866
(7th Cir. 2008); In re Granite Partners, L.P., 210 B.R. 508, 515
(Bankr. S.D.N.Y. 1997). Other creditors (that is, creditors oth-
er than the bank) were harmed by the bank’s accepting the
accounts of Sentinel’s customers as security for its loan.
No. 15-1039                                                    11


Could that acceptance be thought tantamount to fraud, thus
justifying the remedy of equitable subordination? That
would require that the bank believed there was a high prob-
ability of fraud and acted deliberately to avoid confirming
its suspicion. E.g., Global-Tech Appliances, Inc. v. SEB S.A., 131
S. Ct. 2060, 2070–71 (2011). But we agree with the district
judge that the trustee has not satisfied that high standard. To
suspect potential wrongdoing yet not bother to seek confir-
mation of one’s suspicion is negligent, and negligence has
not been thought an adequate basis for imposing equitable
subordination. See, e.g., In re Franklin Bank Corp., 526 B.R.
527, 534 (D. Del. 2014). For it is not “purposeful avoidance of
the truth.” Harte-Hanks Communications, Inc. v. Connaughton,
491 U.S. 657, 692 (1989) (emphasis added); see also Bullock v.
Bankchampaign, N.A., 133 S. Ct. 1754, 1759–60 (2013); United
States v. Macias, 786 F.3d 1060, 1061–64 (7th Cir. 2015). Rog-
ers had suspicions that he should have followed up, as we
said earlier. But he may have thought he’d done so when he
communicated his suspicions to colleagues at the bank, and
if so then at worst he was negligent.
    The trustee argues that refusing to decree equitable sub-
ordination “would permit BNYM to lien securities it knew
Sentinel was improperly pledging from segregation.” The
key word is “knew,” and BNYM has not been proved to
have known that Sentinel was securing the bank’s loans with
customers’ money without their consent. The trustee also
argues that “a duty of inquiry arises when a bank has notice
of facts ‘sufficient to cause a reasonably prudent person to
suspect that trust funds are being misappropriated.’” True,
but that’s the inquiry-notice argument for forbidding the
bank to retain its secured creditor status when it should have
12                                                    No. 15-1039


investigated Sentinel’s fraudulent use of its customer ac-
counts to secure the bank’s loan to it; it is not proof of fraud.
    We close by noting briefly two more defenses to losing its
status as a secured creditor that the bank presses on us. Sec-
tion 550(b)(1) of the Bankruptcy Code creates a defense
against the trustee’s recovering property from a firm that re-
ceived a transfer otherwise avoidable under other sections of
the Code but that gave value for the transfer in good faith.
That provision has no application to this case. The transfer
was the bank’s acquisition of a lien, consisting of the cus-
tomers’ assets pledged by Sentinel to the bank, in violation
of section 548. The trustee is not seeking recovery of those
assets. See In re Burns, 322 F.3d 421, 427–28 (6th Cir. 2003).
    Section 550(d), the basis of the bank’s second defense,
limits a trustee in bankruptcy to a single satisfaction of a
debt owed the bankrupt estate. The district judge thought
that granting the trustee the requested relief would result in
“a windfall recovery of the millions loaned to Sentinel by
BNYM plus the entire collateral that secured these loans,”
because the trustee would have both the value of the loans
that remained and the collateral (the customers’ assets that
Sentinel pledged to the bank). No. The bank is still owed
Sentinel’s debt to it. It has just lost its security interest. This
does not give the trustee a double recovery. See In re Sky-
walkers, Inc., 49 F.3d 546, 549 (9th Cir. 1995). The bank re-
mains a creditor in the bankruptcy proceeding, but is an un-
secured creditor because it was on inquiry notice that the as-
sets that Sentinel had used to secure the bank’s loans had
been fraudulently conveyed to the bank.
No. 15-1039                                               13


   The judgment of the district court is affirmed in part and
reversed in part, and the case remanded for further proceed-
ings consistent with this decision.
