Centerre Bank, N.A. v. New Holland Div. of Sperry Corp.
| Decision Date | 30 November 1987 |
| Docket Number | Nos. 86-1893,86-1894,s. 86-1893 |
| Citation | 832 F.2d 1415 |
| Parties | 4 UCC Rep.Serv.2d 1008 CENTERRE BANK, N.A., Plaintiff-Appellee, Cross-Appellant, v. NEW HOLLAND DIVISION OF SPERRY CORPORATION, Defendant-Appellant, Cross- Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Douglas B. King, Wooden, McLaughlin & Sterner, Indianapolis, Ind., for defendant-appellant, cross-appellee.
R.C. Richmond, III, Ancel, Miroff & Frank, P.C., Indianapolis, Ind., for plaintiff-appellee, cross-appellant.
Before WOOD, RIPPLE, Circuit Judges, and ESCHBACH, Senior Circuit Judge.
In this diversity case, New Holland Division of Sperry Corporation (Sperry) appeals the decision of the district court holding it liable for conversion under article 9 of Indiana's version of the Uniform Commercial Code (U.C.C. or Code). Centerre Bank, N.A. (Centerre) cross-appeals the district court's calculation of its damages resulting from the conversion. For the reasons set forth below, we affirm the judgment of the district court regarding Sperry's liability for conversion. However, we reverse the district court's judgment concerning the amount of damages and remand for further proceedings.
The Martinsville Equipment Company (MEC) financed the inventory it purchased from Sperry under a floor plan arrangement. Sperry and MEC were parties to a Dealer Security Agreement and a Retail Financing Agreement, both dated June 2, 1977. See Plaintiff's Exs. 2 & 3. The agreements between the companies provided that Sperry would sell New Holland farm equipment to MEC on credit and, in return, MEC would grant Sperry a security interest in the inventory and proceeds. Sperry had the option of purchasing time payment contracts received by MEC upon the sale of New Holland inventory. On June 22 and June 29, 1977, Sperry filed financing statements covering inventory MEC acquired from Sperry. The financing statements did not include proceeds of MEC's inventory. See Plaintiff's Exs. 16 & 17.
Pursuant to these agreements, MEC acquired as inventory a New Holland T.R. 70 combine, a New Holland fifteen-foot grain head, and a New Holland 962 six-row, thirty-inch corn head with rear weights (New Holland equipment). On September 1, 1978, Centerre purchased the New Holland equipment from MEC for $69,800. On September 19, 1978, Centerre issued a check for $69,800 to MEC as payment in full for the equipment.
MEC failed to notify Sperry of the sale of the equipment to Centerre or to remit payment for the equipment to Sperry. Further, from September 1, 1978 to January 25, 1979, the equipment appeared each month as unsold inventory held by MEC on Sperry's "Statement of Floor Plan Account." Sperry was advised that the equipment was located at various farms for demonstration purposes.
On the same day that it purchased the New Holland equipment, Centerre leased the equipment to John Ream. Mr. Ream and his wife, Gayle Ream (the Reams), were the sole shareholders and directors of MEC and Mr. Ream was the president of MEC. Under the terms of the lease, the Reams agreed to make semi-annual payments to Centerre in the amount of $9,183.54 for five years and to insure and pay all taxes on the equipment. The Reams were entitled to purchase the equipment at the end of the lease term for $6,980. The Reams were authorized to use the equipment solely for their personal farming operation at their home in Morgan County, Indiana and were prohibited from assigning or transferring the equipment or any interest therein without Centerre's written consent. On September 22, 1978, Centerre filed a financing statement for the New Holland equipment and proceeds in the Morgan County recorder's office.
In either December 1978 or January 1979, Mr. Ream transferred the New Holland equipment from his farm to MEC's premises. This transfer occurred without Centerre's knowledge or consent in violation of the lease agreement. On January 25, 1979, MEC sold the equipment to Phillip N. Teeters for $69,800 without Centerre's knowledge or consent. MEC, however, notified Sperry of the sale to Mr. Teeters.
As payment for the equipment, Mr. Teeters traded in three pieces of Massey-Ferguson farm equipment and executed a retail installment contract with MEC for $30,000, the balance of the purchase price. Also on January 25, MEC assigned the contract to Sperry and, in return, Sperry deducted $29,698 from MEC's account. On September 5, 1979, Mr. Teeters paid Sperry $30,000 pursuant to the installment contract and Mr. Teeters' account was then posted as paid in full. Sperry repossessed the Massey-Ferguson equipment from MEC's premises on April 24, 1980. On August 21, 1980, Sperry sold the Massey-Ferguson equipment to the Rodgers Implement Company (Rodgers). At that time, Sperry was still not aware that MEC had previously sold the New Holland equipment to Centerre. On September 25, 1980, Centerre demanded that Sperry return the Massey-Ferguson equipment and the installment contract. Sperry refused Centerre's demand and Centerre subsequently filed this suit in district court.
After a bench trial, the district court held that Sperry was liable for conversion of the Massey-Ferguson equipment and the contract. Centerre Bank, N.A. v. New Holland Div. of Sperry Corp., No. 81-967-C, order at 13 (S.D.Ind. Sept. 20, 1985); R.56 at 13 [hereinafter Order of Sept. 20, 1985]. The district court determined that Centerre purchased the New Holland equipment from MEC as a buyer in the ordinary course of business under Ind. Code Sec. 26-1-1-201(9). 1 Therefore, Centerre acquired the equipment free of Sperry's security interest in the equipment. According to the district court, Centerre perfected its security interest in the equipment and proceeds by filing a financing statement. The district court concluded that Centerre's security interest in the equipment and proceeds continued despite Mr. Ream's transfer of the equipment to MEC and MEC's later sale of the equipment to Mr. Teeters in exchange for a retail installment contract and the Massey-Ferguson equipment. It found that all the requirements of Ind. Code Sec. 26-1-9-306(2) 2, which sets forth when a security interest continues in proceeds of collateral, had been satisfied: 1) Mr. Ream's transfer of the New Holland equipment to MEC constituted an unauthorized disposition of collateral, 2) the Massey-Ferguson equipment and the installment contract constituted identifiable proceeds received by the debtor, and 3) MEC was a debtor as defined by Ind. Code Sec. 26-1-9-105(1)(d). 3 The district court accordingly determined that Sperry was liable for conversion because its exercise of dominion and control over the proceeds was inconsistent with and contrary to Centerre's superior interest.
The district court issued a second order on April 30, 1986 determining the amount of damages owed to Centerre. Centerre Bank, N.A. v. New Holland Div. of Sperry Corp., No. 81-967-C, order (S.D.Ind. Apr. 30, 1986); R.64 [hereinafter Order of Apr. 30, 1986]. The court first determined when Sperry had converted the installment contract. It decided that, because Sperry had acquired possession of the contract lawfully, it had not converted the contract until September 25, 1980, the date when it refused Centerre's demand for its return. The court reasoned that:
Sperry lawfully possessed the contract prior to Centerre's demand in that MEC had assigned the contract to Sperry pursuant to the Retail Finance Agreement between MEC and Sperry. Sperry had no knowledge prior to Centerre's demand that the contract was subject to Centerre's superior security interest. Because Sperry came into possession of the contract lawfully, its possession did not constitute conversion until it refused Centerre's demand.
Order of Apr. 30, 1986 at 5-6. The court then addressed when Sperry had converted the Massey-Ferguson equipment and decided that the conversion occurred on August 21, 1980 when it sold the equipment to Rodgers. The court reasoned that, because Sperry gained possession of the equipment lawfully, it did not convert the equipment until it sold the machinery to Rodgers:
Sperry's initial possession of the equipment was lawful because it repossessed the equipment pursuant to the Dealer Security Agreement between MEC and Sperry. The repossession was based on Sperry's valid security interest in the Massey-Ferguson equipment. Because Sperry came into possession of the equipment lawfully, it did not convert the equipment until it sold the Massey-Ferguson equipment to Rodgers Implement.
Id. at 6-7 (citations omitted).
The district court assessed Centerre's damages resulting from the conversion of the contract as $30,000 plus prejudgment interest at the statutory rate of 8% per annum from the date of the conversion to the date of the judgment. The court calculated the amount of prejudgment interest to be $6.58 a day.
The court assessed Centerre's damages resulting from Sperry's conversion of the Massey-Ferguson equipment to be the fair market value of the equipment on August 21, 1980, the date that the conversion occurred. Based upon Rodgers' testimony, the court found that the fair market value of the equipment on August 21 was $10,500. The court further held that Centerre was not entitled to prejudgment interest resulting from Sperry's conversion of the equipment. Quoting Indiana Indus. v. Wedge Prods., 430 N.E.2d 419, 427 (Ind. Ct. App.1982), the court stated that prejudgment interest " 'is proper when the damages are ascertainable in accordance with fixed rules of evidence and accepted standards of valuation at the time the damages accrued.' " Order of Apr. 30, 1986 at 7. Because the district court found that "the fair market value of the equipment was neither clearly ascertainable on the date of conversion nor simply subject to mathematical...
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