In the

United States Court of Appeals
              For the Seventh Circuit

No. 12-2854

C ATERPILLAR F INANCIAL S ERVICES C ORPORATION,

                                            Plaintiff-Appellee,
                              v.

P EOPLES N ATIONAL B ANK, N.A.,
                                         Defendant-Appellant.


             Appeal from the United States District Court
                  for the Southern District of Illinois.
      No. 3:10-cv-00298-GPM-DGW—G. Patrick Murphy, Judge.


     A RGUED JANUARY 23, 2013—D ECIDED M ARCH 4, 2013




  Before P OSNER and W ILLIAMS, Circuit Judges, and
N ORGLE, District Judge.Œ
  P OSNER, Circuit Judge. This diversity suit governed
by Illinois law pits the financing arm of Caterpillar, the
well-known manufacturer of tractors and a variety of
other industrial equipment (and much else besides),


Œ
   Hon. Charles R. Norgle of the Northern District of Illinois,
sitting by designation.
2                                               No. 12-2854

against Peoples National Bank, which operates in
southern Illinois and eastern Missouri. Caterpillar
accuses the bank of having converted the proceeds of
sales of collateral to which Caterpillar had a secured
claim superior to the bank’s secured claim. After a
bench trial the district judge granted judgment for
Caterpillar and awarded it damages of $2.4 million plus
prejudgment interest of a shade less than 2 percent
per annum. The bank’s appeal presents a variety of
issues of secured-transactions law.
  In 2006 a coal-mining company in southern Illinois
named S Coal borrowed some $7 million from Caterpillar
secured by the coal company’s mining equipment.
The company was also indebted to Peabody Energy
Corporation, for an earlier loan, and at Peabody’s request
S Coal transferred title to the same equipment, subject
to Caterpillar’s security interest in it, to an affiliate of
Peabody. The affiliate was a “special purpose” entity. Its
raison d’être was by holding the title to the equipment
to try to keep the equipment from being seized by
creditors (other than Peabody) of S Coal, which was
known to be in a parlous financial state.
  Two years later, in 2008, Peoples National Bank lent
S Coal $1.8 million secured by the same mining equip-
ment that secured Caterpillar’s loan. (So the same equip-
ment was now collateral for loans from Peabody, Cater-
pillar, and the bank.) The bank filed a financing statement
covering this collateral. In its pre-loan investigation
the bank discovered an earlier, recorded financing state-
ment which said that S Coal had given Peabody a
No. 12-2854                                               3

security interest in all of the coal company’s assets. The
bank wanted its security interest to have priority over
Peabody’s. It therefore negotiated an agreement with
Peabody subordinating the latter’s claim to the bank’s
claim. But the bank did not obtain a copy of a security
agreement between S Coal and Peabody for Peabody’s
loan to S Coal—and a security interest is not enforceable
unless “the debtor has authenticated a security agree-
ment that provides a description of the collateral.” UCC
§ 9-203(b)(3)(A).
  S Coal defaulted on its various loans, and the bank and
Caterpillar found themselves fighting over the same
pool of assets—S Coal’s mining equipment—that secured
their loans. The bank managed to obtain possession of
the assets and told Caterpillar it would try to sell them
for $2.5 million. Caterpillar did not object. But it
reserved the right to sue the bank unless the bank
handed over the proceeds of the sale to Caterpillar; for
Caterpillar claimed that its security interest was senior
to the bank’s. The bank sold S Coal’s equipment for
$2.5 million but kept back $1.4 million to cover what the
coal company owed it. It sent a check for the remaining
$1.1 million to Caterpillar. Caterpillar neither cashed
the check nor returned it to the bank.
  When two or more secured creditors claim conflicting
security interests in the same collateral, the creditor
who filed his financing statement earlier normally has
the senior claim. UCC § 9-322(a)(1). (Illinois law gov-
erns because S Coal, the debtor, is located there, see UCC
§ 9-301(1), but the relevant provisions of the Illinois com-
4                                              No. 12-2854

mercial code are identical to those of the Uniform Com-
mercial Code, so we won’t bother to cite the Illinois
code.) Caterpillar’s financing statement dates to 2006,
two years before the bank filed its own financing state-
ment covering the same equipment. The bank’s claim
of priority over Caterpillar derives from its dealings
with Peabody, for remember that S Coal’s indebtedness
to Peabody preceded Caterpillar’s 2006 loan. The bank
argues that in connection with that indebtedness
Peabody had obtained a security interest in all of S Coal’s
assets, that the security interest had been perfected by
a financing statement signed in 2005, and therefore
that Peabody had priority over Caterpillar’s security
interest in the same equipment. The bank further and
critically argues that Peabody transferred its secured
interest in the equipment (a secured interest senior to
Caterpillar’s) to the bank in 2008 by agreeing to subordi-
nate the loans it had made to S Coal to the bank’s
loans, enabling the bank to step into Peabody’s shoes
and obtain priority over Caterpillar.
  Had it not been for the subordination agreement, Pea-
body’s claim to a security interest in S Coal’s assets
would have had first priority by virtue of the 2005 fi-
nancing statement, Caterpillar second priority by virtue
of its 2006 financing statement, and the bank third
priority by virtue of its 2008 financing statement.
Courts disagree on how a subordination agreement
affects priorities if the agreement does not say. Some
cases, opting for what is called “complete subordina-
tion,” drop the subordinating creditor to the bottom of
the priority ladder. See, e.g., AmSouth Bank, N.A. v. J & D
No. 12-2854                                                5

Financial Corp., 

(Ala. 1996) (per curiam).
That would make the order of priority in this case Cater-
pillar, bank, Peabody. But that would benefit a nonparty
to the subordination agreement (Caterpillar)—and why
would the parties to the subordination agreement, who
did not include Caterpillar, want to do that?
   The majority approach to subordination agreements,
which goes by the name “partial subordination,” simply
swaps the priorities of the parties to the subordination
agreement—a swap that would make the order in this
case the bank, Caterpillar, Peabody—thus leaving non-
parties unaffected by it. See, e.g., In re Batterton, No. 00-
80181, 

(Bankr. C.D. Ill. Apr. 5, 2001)
(Illinois law); Duraflex Sales & Service Corp. v. W.H.E.
Mechanical Contractors, 

, 935 (2d Cir. 1997);
ITT Diversified Credit Corp. v. First City Capital Corp., 

, 804 (Tex. 1987); 2 Grant Gilmore, Security
Interests in Personal Property § 39.1, pp. 1020-21 (1965);
George A. Nation III, “Circuitry of Liens Arising from
Subordination Agreements: Comforting Unanimity No
More,” 83 B.U. L. Rev. 591, 597-603 (2003); 1 Barkley
Clark & Barbara Clark, The Law of Secured Transactions
Under the Uniform Commercial Code ¶ 3.10[2], p. 3-76 (3d
ed. 2012). The bank would prefer “partial subordina-
tion” because that would put it ahead of Caterpillar,
and we can’t think why Peabody would have insisted
on complete subordination, had it been consulted on the
matter. It wanted the bank’s loan to go through, as that
would bolster S Coal, which was Peabody’s debtor. And
in either case—whether subordination was partial or
complete—Peabody would be in last place.
6                                               No. 12-2854

  Caterpillar was not consulted about whether subor-
dination of Peabody to the bank would be partial or
complete. It didn’t have to be. Under complete subordina-
tion, it would benefit; the priority of its security
interest would rise from second to first. Under partial
subordination, no matter how large the bank’s loan Cater-
pillar’s security interest would be unaffected. The “par-
tial” in “partial subordination” denotes the fact that
the parties to a subordination agreement swap places in
the priority ladder only to the extent of the smaller of
the swapping parties’ loans. If, for example, Peabody
had been owed $1 million by S Coal, the subordination
agreement would have given the bank first priority
only with respect to the first $1 million of the bank’s
$1.8 million loan. The order of priority would then
be bank ($1 million), Caterpillar ($7 million), bank
($.8 million), Peabody ($1 million). The amount subordi-
nated is limited to the amount that the creditor
having priority over the nonparty was owed before he
swapped places with a junior creditor. In the real as dis-
tinct from the hypothetical case, S Coal owed Peabody at
least $4 million, which was much more than the bank’s
loan, and so the bank was able to move into first place
for its entire loan without hurting Caterpillar.
  But this conclusion reckons without Caterpillar’s argu-
ment that the security interest it acquired in S Coal’s
equipment in 2006 was a purchase money security
interest: “an obligation . . . incurred as all or part of the
price of the collateral or for value given to enable the
debtor to acquire rights in or the use of the collateral if
the value is in fact so used.” UCC § 9-103(a)(2). Such
No. 12-2854                                              7

a security interest enjoys priority even over earlier
security interests in the same property, UCC § 9-324(a);
4 James J. White & Robert S. Summers, Uniform Commercial
Code § 33-4, pp. 330-40 (6th ed. 2010), such as Peabody’s,
and therefore over the priority of the bank as Peabody’s
successor. A purchase money security interest does not
encumber existing property of the debtor, but new prop-
erty. New property increases the debtor’s assets and
so reduces rather than increases the risk that the
debtor will default on its earlier debts. In re Howard,

, 857 (7th Cir. 2010). So the earlier creditors
are not harmed by the latecomer’s obtaining priority
over them in the new property.
  The argument fails in this case because the equipment
of S Coal that Caterpillar financed in 2006 was not
newly purchased equipment. S Coal had obtained it by
leases that entitled the coal company to purchase the
equipment for a nominal sum after completing specified
payments. Thus the “lessors,” though nominally owners,
were actually lenders. Caterpillar’s loan enabled S Coal
to complete the payments and thus obtain title. The
loan just replaced the financial lease. The UCC treats the
two types of financing as equivalents. UCC § 1-203(b)(4);
cf. Public Hospital of Town of Salem v. Shalala, 

, 178 (7th Cir. 1996).
  It’s true that before the refinancing of the lessors’
loans by Caterpillar, the lessors had a purchase money
security interest because the leases had enabled S Coal
to acquire the equipment; “a purchase-money security
interest does not lose its status as such, even if. . .the
purchase-money obligation has been . . . refinanced.” UCC
8                                               No. 12-2854

§ 9-103(f)(3). But the lessors did not refinance their
loans. A new lender—Caterpillar—came along and re-
placed the lessors, and in such a situation the new
lender can preserve his predecessor’s priority only by
obtaining an assignment of the predecessor’s security
interest. Lewiston State Bank v. Greenline Equipment, L.L.C.,

, 955 (Utah App. 2006); see also UCC § 9-310(c);
In re Trejos, 

, 215-16 (9th Cir. B.A.P. 2007).
Otherwise other creditors might not realize that the
new lender had preserved his predecessor’s prior-
ity—that another creditor had stepped into that
previous creditor’s shoes. Without an assignment the
previous creditor’s loan would appear to have been
repaid and his security interest therefore extinguished.
Caterpillar didn’t obtain an assignment of the lessors’
purchase money security interest, so it didn’t inherit as
it were the priority of that security interest.
   Another losing argument by Caterpillar relates to
the special purpose entity that Peabody formed to hold
title to its collateral, that is, to S Coal’s assets. Cater-
pillar argues that the bank could not have obtained a
security interest in those assets because they no
longer belonged to S Coal but instead to the special pur-
pose entity. But the location of title is not determina-
tive of the power to create a security interest. Title
to S Coal’s assets was, as we said, transferred to
Peabody’s special purpose entity only in order to shield
the assets from creditors of S Coal, other than Peabody
itself. The transfer of title was temporary, until S Coal
repaid Peabody. And the assets themselves, as distinct
from title to them, were not transferred: S Coal needed
No. 12-2854                                                  9

them, and continued to use them, to operate its coal-
mining business; the special purpose entity was for-
bidden to use, transfer, or encumber them unless S Coal
defaulted. And neither the creation of the special purpose
entity nor the transfer to it of title to S Coal’s assets
was disclosed publicly. “ ‘[W]here the true owner of the
property allows another to appear as the owner of or
to have full power to dispose of the property, so [that] a
third party is led into dealing with the apparent owner,
the true owner will be estopped from asserting that the
apparent owner did not have the title,” and therefore
the apparent owner will be treated as having “rights in
the collateral,” thus enabling him to create security inter-
ests in it. In re Pubs, Inc., 

, 439 (7th Cir. 1980)
(Illinois law); see also Midwest Decks, Inc. v. Butler & Baretz
Acquisitions, Inc., 

, 516 (Ill. App. 1995); In re
Standard Foundry Products, Inc., 

, 479 (Bankr.
N.D. Ill. 1997).
  So far we have seen Caterpillar’s arguments for
priority over the bank falling like ninepins. But the
bank’s argument for priority encounters a greater
obstacle—in fact an insurmountable one.
  If Peabody had a security agreement with S Coal, it
hasn’t surfaced in this litigation. Peabody did not
produce any such agreement in response to the bank’s
subpoena, and the bank dropped the matter; for
example it made no effort to obtain a copy from S Coal.
It is of course possible, and in fact very likely, that
Peabody had such an agreement with S Coal; its
financing statement says so. But remember that a
10                                               No. 12-2854

security interest is not enforceable unless “the debtor
has authenticated a security agreement that provides a
description of the collateral.” UCC § 9-203(b)(3)(A).
The bank can’t prove that S Coal, the debtor, did that for
Peabody. And even if there was a security agreement,
we can’t assume that the collateral it described, if it did
describe collateral, included the specific equipment that
the bank took possession of in 2009 to satisfy its loan.
  The bank invokes a “composite document theory”
as authority for substituting for the missing security
agreement two other documents: the financing statement
that recites the existence of such an agreement, and
the subordination agreement. The bank derives the com-
posite document theory from In re Numeric Corp., 

, 1331 (1st Cir. 1973), which has been followed
in Illinois and elsewhere. See Turk v. Wright & Babcock,
Ltd., 

, 994-95 (Ill. App. 1988); Helms v.
Certified Packaging Corp., 

, 681-82 (7th Cir.
2008) (Illinois law); In re Bollinger Corp., 

, 927
(3d Cir. 1980). We have no quarrel with the theory, or
with its application in Numeric. A financing statement
contained a description of collateral, and although there
was no separate security agreement a resolution of the
debtor’s board of directors stated that the debtor was
conveying a security interest in the assets described in
the financing statement. The resolution’s authenticity
was not in question and the court held that the
two documents—the financing statement and the resolu-
tion—between them satisfied the two purposes of sec-
tion 9-203(b): to provide an exact description of the col-
lateral and “to serve as a Statute of Frauds, preventing
No. 12-2854                                            11

the enforcement of claims based on wholly oral repre-

.
   The composite proposed by Peoples National Bank
comports with neither purpose. The financing statement
subjects “all equipment” of S Coal to the security agree-
ment but leaves unclear whether the description in the
missing security agreement was as general, or whether
instead it itemized equipment in which Peabody was
acquiring a security interest. There was only one descrip-
tion in Numeric—the one in the financing statement. If
there were two descriptions in the present case, the one
in the missing security agreement is controlling. For
as we have twice pointed out, a security interest is en-
forceable only if the debtor has authenticated a
security agreement that provides a description of the
collateral. The financing statement does not create
the security interest. It only places other creditors on
notice of it. If Peabody’s financing statement lists any
equipment not specified in the security agreement, Pea-
body had no security interest in that equipment that
it could subordinate to the bank’s security interest, thus
enlarging the bank’s interest.
  As for the Statute of Frauds function of requiring a
written security agreement, also emphasized in Numeric,
nothing in our case corresponds to the directors’ resolu-
tion in that case. Remember that the required signature
(or a directors’ resolution conceded to be an authentic
verification of the company’s execution of an agreement
to vest a creditor with a security interest) is that of
the debtor, in this case S Coal. There is no signature,
12                                             No. 12-2854

directors’ resolution, or equivalent indication of S Coal’s
decision to convey a security interest to Peabody—or
rather no contemporaneous indication. The subordina-
tion agreement itself, signed by S Coal, states that
Peabody has a security interest in S Coal’s assets.
But signed as it was three years after Peabody’s loan to
S Coal, it indicates only that S Coal believed that it
had created a security interest at that earlier time.
  So because of the missing security agreement between
S Coal and Peabody, Caterpillar’s security interest in
the equipment was prior to the bank’s, which was deriva-
tive from Peabody’s. And Caterpillar’s security interest,
with its priority, continued into the proceeds when
the bank sold the equipment. UCC §§ 9-315(a)(2),
9-322(b)(1). Caterpillar refused to cash the bank’s check
for a portion of those proceeds, fearing that doing so
would be construed as a waiver of any objection to
the bank’s claim to have a superior security interest. UCC
§ 3-311; IFC Credit Corp. v. Bulk Petroleum Corp., 

, 873 (7th Cir. 2005) (Illinois law), and McMahon Food
Corp. v. Burger Dairy Co., 

, 1312-13 (7th Cir.
1996) (ditto). The fear was well founded because
written on the check was “Satisfaction of subordinate
security interest.”
  So Caterpillar was out $2.4 million of the $2.5 million
sale proceeds (the other $100,000 was for a piece of equip-
ment not covered by Caterpillar’s security interest). The
bank had no right to those proceeds. It converted
them—the counterpart in tort law to theft in the
criminal law. The damages awarded Caterpillar were
No. 12-2854                                               13

therefore proper. They would have been lower had the
$1.1 million check that the bank sent Caterpillar been a
cashier’s check rather than, as it was, a personal check.
Wang v. Marcus Brush Co., 

, 142 (Ill. App.
2005). For a cashier’s check is the equivalent of cash,
whereas a personal check is just a promise of payment.
The bank did not, by writing the check, give Caterpillar
a dime, or give up a dime.
  The award to Caterpillar of prejudgment interest
(from the date on which having sold the equipment the
bank pocketed the proceeds, that being the date on
which the tort was committed) was also proper. Illinois
law authorizes prejudgment interest when the loss for
which the plaintiff is seeking redress is a dollar amount
known or easily calculable. National Union Fire Ins. Co.
v. American Motorists Ins. Co., Nos. 11-2500, 11-2533,

, at *4 (7th Cir. Feb. 13, 2013) (Illinois
law); Santa’s Best Craft, LLC v. St. Paul Fire & Marine
Ins. Co., 

, 355 (7th Cir. 2010) (ditto). If that
condition is satisfied, the debtor can stop the running of
interest by depositing with the court the exact amount
he’ll have to pay if found liable. Residential Marketing
Group, Inc. v. Granite Investment Group, 

, 549
(7th Cir. 1991); Empire Gas Corp. v. American Bakeries
Co., 

, 1342 (7th Cir. 1988). For when a
party deposits money with the court “the clerk shall
deposit that money in an interest bearing account . . . .
When a judgment is entered as to the disposition of
the principal deposited, the court shall also direct disposi-
tion of the interest accrued to the parties as it deems
appropriate.” 735 ILCS 5/2-1011(a). The deposit thus
14                                         No. 12-2854

ensures that the plaintiff will be compensated for the
time value of money should he be found to be owed
that money, so that the judgment will “make [the] de-
prived plaintiff whole.” PPM Finance, Inc. v. Norandal
USA, Inc., 

, 895 (7th Cir. 2004).
                                            A FFIRMED.




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