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Caterpillar Financial Services Corporation v. Peoples National Bank

June 28, 2012

CATERPILLAR FINANCIAL SERVICES CORPORATION PLAINTIFF,
v.
PEOPLES NATIONAL BANK, N.A. DEFENDANT.



The opinion of the court was delivered by: Murphy, District Judge:

#1748

MEMORANDUM AND ORDER

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").*fn1 Caterpillar and The Bank made secured loans to S Coal in 2006. The Bank 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 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 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 ...


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