Caterpillar Financial Services Corporation v. Peoples National Bank, N.A.

Filing 120

ORDER: This action was tried by District Judge G. Patrick Murphy without a jury. Plaintiff Caterpillar Financial Services Corporation carried its burden of proof on its claim for conversion. Defendant, Peoples National Bank, is liable to Caterpillar for conversion in the amount of $2,398,313.86, with pre-judgment interest at a rate of 1.93%, to be computed from February 25, 2010. Plaintiff Caterpillar failed to prove Peoples National Bank intentionally interfered with Caterpillars contract. The Bank is not liable to Caterpillar for tortious interference with contract. Signed by Judge G. Patrick Murphy on 6/28/2012. (mab)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS

CATERPILLAR FINANCIAL SERVICES )
CORPORATION
)
)
Plaintiff,
)
)
vs.
)
)
PEOPLES NATIONAL BANK, N.A.
)
)
Defendant.
)

CIVIL NO. 10-298-GPM

MEMORANDUM AND ORDER
MURPHY, District Judge:
Plaintiff, Caterpillar Financial Services Corporation (“Caterpillar”), claims that Peoples
National Bank (“The Bank”) converted its property and interfered with its contract with S Coal
Company (“S Coal”).1 Caterpillar and The Bank made secured loans to S Coal in 2006. The Bank

1

The Court notes it has reviewed the issue of federal subject matter jurisdiction. See
Foster v. Hill, 497 F.3d 695, 696-97 (7th Cir. 2007) (“It is the responsibility of a court to make
an independent evaluation of whether subject matter jurisdiction exists in every case.”). The
Court is satisfied of its jurisdiction pursuant to 28 U.S.C § 1332(a). Caterpillar is a Delaware
Corporation with its principal place of business in Nashville, Tennessee. A corporation, for
diversity purposes, is a citizen of both the state where it is incorporated and the state where it
maintains its principal place of business. See 28 U.S.C. § 1332(c)(1); Metropolitan Life Ins. Co.
v. Estates of Cammon, 929 F.2d 1220, 1223 (7th Cir. 1991). Caterpillar is therefore a citizen of
Delaware and Tennessee. The Bank is a national association with its principal place of business
and corporate office in Illinois. The state listed in The Bank’s organizational certificate is
Illinois. Pursuant to 28 U.S.C. § 1348, the Bank is a citizen of Illinois. Although Caterpillar
withdrew its claims against S Coal prior to trial, S Coal’s presence did not complicate the
Court’s diversity jurisdiction. S Coal was an Illinois corporation with its former principal place
of business in Illinois. Under Illinois law, a dissolved corporation can sue and be sued in its own
name. 805 ILCS 5/12.30. Since Illinois allows S Coal to sue and be sued in its own name, S
Coal’s citizenship, for diversity purposes, is the state where it was incorporated and the state
where it maintained its principal place of business. See Wild v. Subscription Plus, Inc., 292 F.3d
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made additional loans to S Coal in 2008 and 2009. When S Coal went under in late 2009, both
lenders attempted to exercise their rights as secured creditors. The Bank obtained possession of and
sold the disputed collateral.
I. FACTS
In the summer of 2006, S Coal needed additional financing to purchase equipment and bring
current some delinquent accounts payable. The Bank loaned S Coal $6,900,000.00 and Caterpillar
loaned S Coal $6,800,000.00. As structured, both lenders took security interests in separate pools
of collateral. The pool of collateral Caterpillar took a security interest in is the collateral in dispute
here. The disputed collateral is approximately 35 pieces of mining equipment. At the time of this
refinancing, S Coal was already indebted to Peabody Energy Corporation (“Peabody”).
Caterpillar took a security interest in its pool of collateral through a series of agreements and
by using a special purpose entity. In an escrow agreement dated July 14, 2006, S Coal transferred
title to the collateral to PEC Equipment Company LLC (“PECEC”). PECEC is an affiliate of
Peabody and held title to the collateral, subject to Caterpillar’s security interest.
PECEC is important here because under the terms of the escrow agreement, PECEC
functioned as the special purpose entity. Special purpose entities are designed to protect a lender’s
collateral in the event of a debtor’s default or bankruptcy. Here, PECEC protected both Caterpillar
and Peabody if S Coal ever encountered financial difficulty. In the event S Coal defaulted, Peabody
could buy out Caterpillar’s position in the collateral and continue S Coal’s mining operation. If S

526, 528-29(7th Cir. 2002); Colon v. SmithKline Beecham Corp., No. 09-cv-1073-GPM, 2010
WL 46523, 2010 U.S. Dist. LEXIS 544, at *17 (S.D. Ill. Jan. 5, 2010). S Coal, therefore, is a
citizen of Illinois. Finally, the amount in controversy, exclusive of interest and costs, must
exceed $75,000.00. See 28 U.S.C. § 1332(a)(1). Here, there is no dispute the amount in
controversy exceeds $75,000.00. The Court is satisfied of its subject matter jurisdiction.
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Coal filed for bankruptcy, creditors could not assert an interest in the collateral because S Coal did
not hold title to the collateral.
Next, on July 27, 2006, Caterpillar and S Coal executed a collateral control agreement, a
promissory note, and a security agreement for the loan. The collateral control agreement gave S
Coal possession of the collateral and the right to use the collateral at S Coal’s mining operation. A
commercial security guarantee from Peabody accompanied the security agreement and promissory
note. By this guarantee, Peabody agreed to pay as much as 30% of the promissory note if S Coal
defaulted.
Caterpillar followed up by filling two financing statements in August 2006: one in Delaware
against PECEC and the other in Illinois against S Coal.
The Bank’s loan package with S Coal was backed by a security interest in coal reserves and
nine pieces of equipment not implicated by this lawsuit. Peabody also gave The Bank a commercial
security guarantee, promising to pay a portion of the note if S Coal defaulted.
In September 2008, S Coal obtained an additional loan from The Bank. The Bank gave S
Coal a promissary note that included a cross collateralization clause and a commercial security
agreement. In preparing for this loan, The Bank found a September 12, 2005 recorded financing
statement that recited a security agreement by S Coal in favor of Peabody. The 2005 financing
statement purported to cover all of S Coal’s assets. The Bank then bargained for and obtained a
subordination agreement from Peabody that was finalized July 29, 2008. The Bank then filed its own
financing statement with the Illinois Secretary of State on August 27, 2008.
At this point both The Bank and Caterpillar had blundered. Caterpillar had inadvertently
failed to obtain a surrender of Peabody’s superior security interest as part of its 2006 loan. And, The

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Bank had failed to obtain the security agreement recited in Peabody’s 2005 financing statement.
In late 2009, S Coal defaulted on its obligations to both Caterpillar and The Bank. After this
default, Caterpillar scrambled and belatedly obtained the documentation it thought it obtained from
Peabody in 2006. The Bank apparently never obtained the security agreement referenced in
Peabody’s 2005 financing statement. This security agreement is central to The Bank’s argument that
it had a superior interest in the disputed collateral. Apparently, though, is the correct qualifier
because the security agreement was not introduced into evidence or produced during the discovery
process. It is difficult to imagine, with the benefit of hindsight, the security agreement was not in
The Bank’s loan file if it was material to The Bank’s 2008 loan package.
After S Coal defaulted, Peabody made good on its guarantees to both Caterpillar and The
Bank. In all, Peabody paid Caterpillar $966,000.00 and The Bank $1,800,000.00.
The Bank obtained possession of the disputed collateral and notified Caterpillar it intended
to sell the collateral for $2,500,000.00. Caterpillar did not object to the sale but reserved the right
to later seek damages against The Bank. On May 12, 2010, Eagle River Coal purchased the
collateral for $2,500,000.00 at a private sale. The evidence is that this was a good price for the
collateral.
The Bank retained $5,300.00 for the expense of conducting the sale and sent a check for
“surplus” funds to Peabody. Peabody refused the check and instructed The Bank to send these funds
to Caterpillar. The Bank then issued a check to Caterpillar in the amount of $1,097,887.16. On the
memo line of the check, The Bank inserted the language “satisfaction of subordinate security
interest.” Caterpillar, not wanting to concede a subordinate interest in the disputed collateral, never
indorsed the check. The Bank kept $1,396,812.84 from the sale and applied this money to an

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unspecified delinquent loan with S Coal.
Caterpillar abandoned all but two claims before trial. Caterpillar’s conversion claim is based
on its perfected security interest in the disputed collateral. The tortious interference with contract
claim is premised on the escrow agreement and special purpose entity. Neither the escrow agreement
nor the special purpose entity were ever placed of record by any public filing. It is also important
to note The Bank was not a party to either the escrow agreement or special purpose entity.
Caterpillar claims The Bank converted its collateral when The Bank: (1) told Caterpillar any
attempt to take possession of its collateral would constitute a breach of peace; (2) asserted title to
the collateral free and clear of Caterpillar’s security interest; and (3) sold the collateral at a private
sale and applied the proceeds to an unspecified delinquent loan. The Bank’s defense to the
conversion claim is that The Bank acquired a superior interest in the disputed collateral through the
2008 security agreement with S Coal and through the subordination agreement from Peabody.
Caterpillar claims The Bank committed tortious interference with contract when The Bank
tried to obtain a superior security interest in the disputed collateral from S Coal. According to
Caterpillar, The Bank had constructive notice of the escrow agreement and special purpose entity
through Caterpillar’s 2006 financing statement. However, The Bank says it never had notice of the
escrow agreement or special purpose entity. The Bank always thought S coal had title to the
collateral. After all, S Coal depreciated the collateral on its tax returns, and the tax returns were a
basis for making the loan in 2008.

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II. ANALYSIS
A. Conversion
The tort of conversion is premised on the wrongful deprivation of property to the detriment
of the owner or person entitled to possession. See Cruthis v. Firstar Bank, N.A. 822 N.E. 2d 454,
462 (5th Dist. 2004). Here, no one disputes that after S Coal’s refinancing in 2006, Caterpillar was
a secured creditor with an interest in the disputed collateral. The Bank claims, however, it acquired
a superior interest in the disputed collateral in 2008. If The Bank’s argument is true, then
Caterpillar’s claim for conversion fails.
First, The Court must determine what interest, if any, The Bank had in the disputed
collateral. The Illinois Commercial Code is clear on what it takes to transfer a security interest in
collateral:
A security interest is enforceable against the debtor and third parties with respect to
the collateral only if (1)value has been given; (2) the debtor has rights in the
collateral or the power to transfer rights in the collateral to a secured party; and (3)
one of the following conditions is met: (A) the debtor has authenticated a security
agreement that provides a description of the collateral . . . .
810 ILCS 5/9-203(b).
In 2008, The Bank gave value to S Coal through the additional loan. The question then
becomes: what interest did S Coal transfer in return to The Bank? Although S Coal passed title to
the collateral to PECEC in 2006, that does not mean S Coal did not retain some interest in the
collateral. S Coal, arguably, transferred whatever interest it had in the collateral in 2008 to The
Bank. If the special purpose entity worked as intended, it would supplant Article 9 of the Uniform
Commercial Code. This Court is skeptical of such a result.

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The Bank’s real problem is (3)(A): “the debtor has authenticated a security agreement that
provides a description of the collateral.” The Bank produced the 2005 financing statement between
Peabody and S Coal, but never came up with the 2005 security agreement recited in the financing
statement. The financing statement is not enough. Absent the security agreement signed by the
debtor (S Coal), it is impossible to determine what interest, if any, Peabody passed to The Bank
through the subordination agreement. The subordination agreement is the lynchpin of The Bank’s
claimed superior position in the disputed collateral. Therefore, The Bank does not have a superior
interest in the disputed collateral. See Helms v. Certified Packaging Corp., 551 F.3d 675, 680 (7th
Cir. 2008)(“A prudent potential creditor would have requested a copy of the security agreement .
. . [because] [t]he security agreement is the document which creates the security interest.”)
Next, the Court must examine whether Caterpillar carried its burden of proof on the
conversion claim. An “action for conversion is a proper remedy for a secured party to bring against
a third party when its collateral has been disposed of by the debtor.” Id. at 678 (quoting Taylor
Rental Corp. v. J.I. Case Co., 749 F.2d 1526, 1529 (11th Cir. 1985)).
To prove the tort of conversion, a plaintiff must establish that (1) he has a right to the
property; (2) he has an absolute and unconditional right to the immediate possession
of the property; (3) he made a demand for possession; and (4) the defendant
wrongfully and without authorization assumed control, dominion, or ownership over
the property.
Cirrincione v. Johnson, 703 N.E. 2d 67, 70 (1998).
Caterpillar had a security interest in the collateral. “After default, a secured party (1) may
take possession of the collateral; and (2) without removal, may render equipment unusable and
dispose of the collateral on a debtor’s premises . . . .” 810 ILCS 5/9-609(1)-(2). Since Caterpillar’s
interest in the collateral was superior to any interest The Bank arguably had in the collateral, S

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Coal’s default gave Caterpillar an absolute and unconditional right to immediate possession of the
disputed collateral.
Caterpillar made several demands for possession of the collateral. The first demand came
when Caterpillar’s corporate counsel attempted to negotiate directly with The Bank through the
exchange of e-mails. When Caterpillar requested access to the collateral, The Bank insouciantly
replied that any attempt to take possession of the collateral would constitute a breach of the peace.
The evidence clearly establishes The Bank wrongfully exerted dominion and control over
the collateral. To establish wrongful dominion or control, it is not necessary to show “malice,
culpability or conscious wrongdoing.” Landfield Finance Co. v. Feinerman, 279 N.E.2d 30, 33 (1st
Dist. 1972). “All that is required is the exercise of control by the defendant over the chattel in a
manner inconsistent with the plaintiff’s right of possession.” Id.
The Bank obtained possession of and exercised control over the collateral after S Coal
defaulted. The Bank never had Caterpillar’s consent to obtain possession of the collateral. If this
were not enough, The Bank then obtained a bill of sale from S Coal and asserted free and clear title
to the collateral as if Caterpillar’s interest did not exist.
After the sale of collateral, The Bank exercised exclusive control over the proceeds. In
general, proceeds are “whatever is acquired upon the sale . . . of collateral.” 810 ILCS 5/9102(64)(A). “A security interest in proceeds is a perfected security interest if the security interest
in the original collateral was perfected.” 810 ILCS 5/9-315(c). Caterpillar had a perfected secured
interest in the collateral. Therefore, Caterpillar’s perfected security interest continued in the
proceeds. A “perfected security interest in the proceeds” will become unperfected unless “the
proceeds are identifiable cash proceeds.” 810 ILCS 5/9-315(d)(2). Here, the proceeds are

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identifiable cash proceeds. Accordingly, Caterpillar continues to have a perfected security interest
in the proceeds.
S Coal’s default gave Caterpillar an absolute and unconditional right to immediate
possession of its collateral. The Bank, however, obtained possession of the collateral and exerted
dominion and control over the collateral and its proceeds. Caterpillar carried its burden of proof
on its claim for conversion.
B. Tortious Interference with Contract
In Illinois, the elements of a cause of action for “tortious interference with contract are: ‘[1]
a valid contract, [2] defendant’s knowledge of the existence of the contract, [3] defendant’s
intentional and malicious inducement of the breach of the contract, [4] breach of contract caused by
defendant’s wrongful conduct, and [5] resultant damages to the plaintiff.’” George A. Fuller Co.,
Div. of Northrop Corp. v. Chicago College of Osteopathic Medicine, 719 F.2d 1326, 1330 (7th Cir.
1983) (quoting Swager v. Couri, 376 N.E.2d 456, 459 (3d Dist. 1978) aff’d, 395 N.E.2d 921 (1979)).
The escrow agreement and special purpose entity constitute a valid contract. But Caterpillar
must also show The Bank knew “of the existence of the contract or that [The Bank] knew of facts
from which a contract could reasonably have been inferred . . . .” Wheel Masters, Inc., v. Jiffy Metal
Prod. Co., 955 F. 2d 1126, 1130 (7th Cir. 1992). Although “the actor’s conduct is in fact the cause
of another’s failure to perform a contract, the actor does not induce or otherwise intentionally cause
that failure if he has no knowledge of the contract.” Restatement (Second) of Torts § 766, comment
i.
Here, there is no evidence The Bank had knowledge of the escrow agreement and special
purpose entity. The Bank was not a party to either the escrow agreement or the special purpose

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entity. Neither the escrow agreement nor the special purpose entity were ever placed of record by
any public filing. The law simply does not support Caterpillar’s claim that a financing statement,
which recites a security agreement, gives notice to all the world of a related escrow agreement. Nor
can The Bank be expected to infer the existence of an escrow agreement and special purpose entity
from a financing statement that recites a security agreement. Rather, the purpose of a financing
statement is to provide notice to the world “that a creditor has a security interest in the debtor’s
property” and nothing more. Helms, 551 F.3d at 680. Caterpillar did not prove The Bank
intentionally interfered with Caterpillar’s contract with S Coal.
C. Damages
The party seeking to recover bears the burden of proving damages to a “reasonable degree
of certainty.” Telemark Dev. Group v. Mengelt, 313 F. 3d 972, 983 (7th Cir. 2002). “Generally the
measure of damages for conversion of personal property is the market value of the property at the
time and place of conversion plus legal interest.” Jensen v. Chciago & W.I.R. Co., 419 N.E. 2d 578,
593 (1st Dist. 1981). Here, however, a diversion from the general rule is necessary. Caterpillar had
a perfected secured interest in the collateral.

Caterpillar’s security interest never became

unperfected after the sale to Eagle River Coal because“the proceeds are identifiable cash proceeds.”
810 ILCS 5/9-315(d)(2). Caterpillar’s damages are the identifiable cash proceeds it had a perfected
security in after the sale of collateral.
The sale price of the collateral was $2,500,000.00. Caterpillar concedes it had no interest
in one piece of equipment sold to Eagle River Coal; the Modular Prep Plant. The Modular Prep
Plant totaled four percent of the net sales price, which is $101,686.14. Caterpillar’s damages for
conversion do not include the value of the Modular Prep Plant. Accordingly, the damages for

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conversion are $2,398,313.86.
Caterpillar had an absolute and unconditional right to immediate possession of the collateral
upon S Coal’s default. Therefore, pre-judgment interest is appropriate. Pre-judgment interest shall
be awarded at a rate of 1.93%, which is the 2010 average market yield on U.S. Treasury securities
at 5-year constant maturity. The average for 2010 is appropriate because Caterpillar’s first demand
for the collateral came on February 25, 2010. On that date, Caterpillar’s corporate counsel
attempted to directly negotiate with The Bank through the exchange of e-mails. Accordingly, prejudgment interest shall be measured from February 25, 2010.
Caterpillar claims it is entitled to punitive damages. The Court disagrees. “Illinois courts
do not favor punitive damages and insist that plaintiffs must establish . . . extraordinary or
exceptional circumstances clearly showing malice or willfulness.” Europlast, Ltd. v. Oak Switch
Sys., 10 F.3d 1266, 1276 (7th Cir. 1993) (internal quotation omitted). The Illinois Supreme Court
has stated “[b]ecause of their penal nature, punitive damages are not favored in the law, and courts
must be cautious in seeing that they are not improperly or unwisely awarded.” Deal v. Byford, 537
N.E.2d 267, 272 (1989); Kelsay v. Motorola, Inc., 384 N.E.2d 353, 359 (1978)(“It has long been
established in this State that punitive or exemplary damages may be awarded when torts are
committed with fraud, actual malice, deliberate violence or oppression, or when the defendant acts
willfully, or with such gross negligence as to indicate a wanton disregard of the rights of others.”);
Home Sav. & Loan Ass’n of Joliet v. Schneider, 483 N.E.2d 1225, 1228 (1985) (“[D]eceit alone
cannot support a punitive damage award, such damages may be allowed . . . [in] extraordinary or
exceptional circumstances clearly showing malice and willfulness.”).

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Here, Caterpillar has failed to show any evidence The Bank acted with malice or wilfulness.
The Bank made a costly mistake of law thinking it purchased Peabody’s superior interest without
obtaining the underlying security agreement. Caterpillar was similarly negligent when it failed to
obtain Peabody’s interest in 2006. The price for negligence is an award of damages and here there
are no exceptional circumstances such that punitive damages are appropriate.
III CONCLUSION
Caterpillar failed to prove The Bank intentionally interfered with Caterpillar’s contract. The
Bank is not liable to Caterpillar for tortious interference with contract. Caterpillar carried its burden
of proof on its claim for conversion. The Bank is liable to Caterpillar for conversion in the amount
of $2,398,313.86, with pre-judgment interest at a rate of 1.93%, to be computed from February 25,
2010. There are no exceptional circumstances and an award of punitive damages is not appropriate.
An award of attorneys’ fees is also inappropriate in this case. In accordance with Federal Rule of
Procedure 58(a), judgment for this matter is entered on a separate document.
IT IS SO ORDERED.
DATED: June 28, 2012
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G. PATRICK MURPHY
United States District Judge

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