Platte Valley Bank v. Tetra Fin. Grp., LLC

• Decision Date: 26 June 2012
• Docket Number: No. 11–1445.,11–1445.
• Parties: PLATTE VALLEY BANK, a Nebraska State Bank, Appellant, v. TETRA FINANCIAL GROUP, LLC, a Utah Limited Liability Company; Republic Bank, Inc., a Utah Corporation, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

682 F.3d 1078

PLATTE VALLEY BANK, a Nebraska State Bank, Appellant,

v.TETRA FINANCIAL GROUP, LLC, a Utah Limited Liability Company; Republic Bank, Inc., a Utah Corporation, Appellees.

No. 11–1445.

United States Court of Appeals,

Eighth Circuit.

Submitted: Jan. 11, 2012.

Filed: June 26, 2012.

John A. Selzer, argued, Howard P. Olsen, Jr., on the brief, Scottsbluff, NE, for Appellant.

Richard F. Ensor, argued, Salt Lake City, UT, Tim W. Thompson, on the brief, North Platte, NE, for Appellees.

Before RILEY, Chief Judge, MELLOY and SHEPHERD, Circuit Judges.

RILEY, Chief Judge.

Platte Valley Bank (PVB), a Nebraska banking corporation, claimed a perfected security interest in certain equipment owned by Heggem Construction, Inc. (Heggem), a Wyoming corporation with its principal place of business in Scotts Bluff County, Nebraska. In late 2008, Heggem sold the equipment in a sale and leaseback transaction to Tetra Financial Group, LLC (Tetra), a Utah limited liability company whose members are all domiciliaries of Utah. Tetra later transferred the equipment to Republic Bank, Inc. (Republic, and with Tetra, appellees), a Utah corporation. PVB sued appellees, claiming appellees converted the equipment and the collateral proceeds of the sale. The district court ¹ denied PVB's motion for summary judgment and granted appellees summary judgment, finding the undisputed facts in the record did not support PVB's conversion claims. PVB appeals, and we affirm.

I. BACKGROUND

Heggem, a longtime customer of PVB, owed the bank more than $1,000,000. To secure the payment of that debt, Heggem executed a commercial security agreement on March 13, 2002, granting PVB a security interest in all of Heggem's “Property,” as described in the security agreement, including “Instruments,” “Equipment,” and “Deposit Accounts,” as well as “all proceeds.” The agreement defined equipment to include “machinery” and “vehicles,” as well as many other types of equipment, parts, and tools.

On May 6, 2002, PVB filed a financing statement in the office of the Secretary of State for the State of Wyoming to perfect its security interest. On April 18, 2007, PVB filed a continuation statement to keep the financing statement effective.

In late 2007, Heggem and Tetra began discussing the possibility of Tetra providing Heggem lease financing. Tetra and Heggem agreed to structure the transaction as a sale and leaseback agreement under which Heggem would sell some of its construction equipment to Tetra and lease it back for continued use in its construction business. To alleviate Tetra's concerns about the added risk of the longer lease term and lower payments Heggem sought, Heggem suggested placing the purchase funds in a certificate of deposit (CD) as security for the transaction. The suggested structure would allow Heggem to increase its bonding capacity by moving “booked assets to an operating lease and onto a CD.”

Tetra later advised Heggem the security deposit would be placed in a ban control account—held in Heggem's name with Heggem bearing the interest—rather than a CD. Tetra explained the revised structure would allow Tetra to perfect its interest and better protect itself in the event of Heggem's default. As the transaction moved forward, Tetra asked Heggem for credit references. Heggem identified PVB as a creditor, and PVB advised Tetra that Heggem was in good standing on its financial obligations to PVB.

In October 2008, Tetra sent Heggem a draft of the transaction documents, including a subordination agreement for PVB to execute that would have subordinated PVB's security interest in the equipment to Tetra's interest. The parties disagree as to whether PVB was aware of the subordination agreement and was asked to execute it, but agree PVB never signed the agreement.

In late December 2008, Heggem and Tetra executed a Sale and Leaseback Agreement (SLA) dated and effective October 2, 2008, under which Tetra purchased twenty-two pieces of equipment subject to PVB's security interest and then leased the equipment back to Heggem.²The SLA provided for a purchase price of $565,430 (holdback amount), which Tetra would hold back to be “used as a security deposit pursuant to [the] Security Agreement” between Heggem and Tetra until Heggem satisfied its lease obligations. The holdback amount was to be held “in an interest bearing account at Republic Bank” for the duration of the base lease term. The SLA did not provide further details about the account.

In connection with the SLA, Heggem and Tetra also executed a Bill of Sale, Master Lease Agreement (lease), and Lease Schedule No. 1 (lease schedule). Under the terms of the lease, Heggem leased the equipment from Tetra for 60 months with a base monthly rental payment of $11,591.32. The lease schedule stated 100% of the $565,430 total lease cost for the equipment was “to be held in an instrument acceptable to [Tetra] at Republic Bank.” Heggem granted Tetra a security interest in the $565,430 security deposit and all Heggem's assets. In the lease schedule, Tetra expressly acknowledged its security interest in Heggem's assets was “junior in priority” to PVB's security interest in those assets.

The sale and leaseback transaction documents did not otherwise recognize PVB's security interest in Heggem's equipment. The SLA and the bill of sale indicated Heggem was transferring good title to the equipment “free and clear of all liens, charges, encumbrances, security interests and rights of others, and that [Heggem] has full right, power and lawful authority to sell said property.” (Bill of Sale). Under the terms of the lease, Heggem retained physical possession of the equipment.

After completing the sale and leaseback, Tetra and Republic entered into a Sale and Assignment Agreement (SAA) dated as of December 31, 2008, under which Tetra sold the Heggem equipment to Republic and assigned the lease in exchange for $555,899. At the end of the lease, if Republic had received all of the rental payments due, all of Republic's right, title, and interest in the Heggem equipment would automatically transfer back to Tetra for no additional consideration. Like the sale and leaseback documents, the SAA did not mention PVB's security interest in the equipment. Tetra represented it held “a first lien and priority security interest in the [Heggem equipment]” and purportedly transferred the equipment “free and clear of all liens, charges, encumbrances and other agreements other than the [l]ease and any applicable software license.”

The SAA contemplated Republic paying Tetra the $555,899 purchase price in cash on the closing date of January 2, 2009. Instead, at closing, Republic transferred $555,899 of its own funds into a new account titled “Republic Bank BAN CONTROL ACCOUNT Heggem Construction, Inc.” (holdback account). Tetra transferred $9,531 into the holdback account, bringing the balance to $565,430. Although Heggem's taxpayer identification number was assigned to the account, Heggem did not sign any of the documents to open the account and did not have the right or ability to withdraw funds from it. The holdback account was in the control and possession of Republic at all times.

Just three months after executing the sale and leaseback transaction, Heggem failed to make the required lease payment for March 2009. Heggem was unable to cure its default. On June 10, 2009, Republic applied the funds in the holdback account to Heggem's lease obligations, “thereby netting out the asset and liability of the [l]ease on Republic Bank's books to zero.” ³

Heggem also fell behind on its payments to PVB. By June 2009, PVB and Heggem began discussing the possibility of selling some of Heggem's assets to provide cash to bring PVB's loan current.

On June 29, 2009, an attorney for PVB sent appellees a letter claiming a security interest in the Heggem equipment and the proceeds being held in the holdback account at Republic. Receiving no response, PVB sent a second letter on September 1, 2009, requesting appellees pay PVB the holdback amount. On October 13, 2009, Tetra's counsel responded by letter, denying PVB or Heggem had any interest in the $565,430 security deposit.

In January 2010, PVB filed suit against appellees in state court in Nebraska, alleging conversion. After filing suit, PVB, with Heggem's cooperation, repossessed and sold the equipment pursuant to PVB's rights as a secured party under Revised Article 9 of the Uniform Commercial Code (U.C.C.) to pay down Heggem's debt to PVB. Neither Tetra nor Republic interfered with PVB's repossession and sale of the equipment. PVB applied the sale proceeds from the untitled equipment to Heggem's outstanding obligations and is holding the sale proceeds from the titled equipment in escrow pending resolution of this litigation.

On February 10, 2010, appellees removed this case to the federal district court pursuant to 28 U.S.C. §§ 1332(a)(1), 1441(a), and 1446, asserting diversity jurisdiction. On May 13, 2010, PVB filed an amended complaint in the district court, alleging appellees converted the equipment and the collateral proceeds acquired upon the equipment's sale. After discovery, PVB and appellees filed cross motions for summary judgment. The district court granted appellees' motion for summary judgment and denied PVB's motion, finding (1) any interference with PVB's rights in the equipment was not serious or important enough to constitute conversion, and (2) appellees had a superior interest in the alleged collateral proceeds. PVB appeals.

II. DISCUSSIONA. Standard of Review

We review the district court's resolution of cross motions for “summary judgment de novo, viewing the record in the light most favorable to the nonmoving party and drawing all reasonable inferences in that party's favor.” Chambers v. Pennycook, 641 F.3d 898, 904 (8th Cir.2011). Summary judgment is proper “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to...