Bankruptcy/fraud
Given the paucity of the banks assets, the creditor bank had sufficient inquiry notice of the fact that funds on deposit were being used for collateral and therefore cannot assert a secured claim against the Trustee's characterization of the transaction as pre-petition avoidable transfer.
As only the lien on the funds is retained, no impermissible double recovery by the Trustee, and no claim under the Code for assets transferred in good faith.
To trigger equitable subordination, the creditor must have known of the fraud, which is a higher bar than inquiry notice -- remand.
http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2016/D01-08/C:15-1039:J:Posner:aut:T:fnOp:N:1684393:S:0
Since 2011. An occasional commonplacing of the U.S. Circuit Courts of Appeal.
Neither an authoritative statement of the law nor legal advice. Quick work.