Caterpillar Financial Services Corp. v. Peoples National Bank, N.A., 710 F.3d 691

Background

This diversity case under Illinois law pits Caterpillar Financial Services against Peoples National Bank over competing security interests in S Coal's mining equipment.
S Coal borrowed about $7 million from Caterpillar in 2006 secured by the equipment; ownership was temporarily transferred to a Peabody affiliate via a special purpose entity to shield assets from other creditors.
In 2008 the bank loaned $1.8 million secured by the same equipment and filed a financing statement; Peabody subordinated its prior security interest but no Peabody security agreement with S Coal was produced.
S Coal defaulted, the bank took possession of the equipment, sold it for $2.5 million, kept $1.4 million, and sent Caterpillar $1.1 million, which Caterpillar did not cash.
Caterpillar argued its 2006 purchase-money security interest had priority, while the bank asserted Peabody’s senior interest via subordination; a key dispute was whether Caterpillar could rely on a composite-document theory to substitute for a missing security agreement.
The district court awarded Caterpillar $2.4 million in damages plus prejudgment interest; the bank appeals on priority and related theories.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Did Caterpillar have priority over the bank in the collateral?	Caterpillar relied on the 2006 PMSI and lack of assignment from Peabody’s prior security to preserve priority.	Bank contends Peabody’s senior interest, via subordination, gives it priority over Caterpillar.	Caterpillar priority over bank.
Does subordination between Peabody and the bank affect Caterpillar’s priority?	Subordination does not defeat Caterpillar’s PMSI priority because the later arrangement does not involve Caterpillar.	Subordination could shift priority among the secured creditors, potentially elevating the bank over Caterpillar.	Subordination did not disturb Caterpillar’s priority; Caterpillar remained ahead.
Is the bank entitled to priority through Peabody’s security interest absent a security agreement between S Coal and Peabody?	Even without a Peabody-Pet S Coal security agreement, Peabody’s superior interest should prevail via subordination and related instruments.	Without an authenticated security agreement describing collateral, Peabody’s interest cannot be enforceable or subordinated properly.	Bank failed to prove enforceable Peabody security interest; Caterpillar prevailed.
Can the composite-document theory substitute for an absent security agreement?	Financing statement plus subordination agreement can satisfy 9-203(b) when there is a missing security agreement.	Composite-doc theory is not applicable here because the descriptions and documents do not clearly describe the collateral to the required standard.	Composite-document theory rejected; no valid substitute for a missing security agreement.
Were damages and prejudgment interest proper in Caterpillar’s favor?	Bank’s disposition of proceeds harmed Caterpillar; prejudgment interest should accrue from sale date.	No specific challenges beyond priority; interest calculation contested only as damages question.	Damages and prejudgment interest affirmed.

Key Cases Cited

In re Numeric Corp., 485 F.2d 1328 (1st Cir. 1973) (composite-document theory; two-documents satisfy 9-203(b))
Turk v. Wright ℰ Babcock, Ltd., 528 N.E.2d 993 (Ill. App. 1988) (Illinois application of composite-document theory)
Helms v. Certified Packaging Corp., 551 F.3d 675 (7th Cir. 2008) (Illinois law; composite-document doctrine acknowledged)
In re Bollinger Corp., 614 F.2d 924 (3d Cir. 1980) (subordination and priority considerations in secured transactions)
In re Pubs, Inc., 618 F.2d 432 (7th Cir. 1980) (estoppel and authority to create security interests)
Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333 (7th Cir. 1988) (priority and remedies in secured transactions)
PPM Finance, Inc. v. Norandal USA, Inc., 392 F.3d 889 (7th Cir. 2004) (prejudgment interest and money damages principles)
Santa's Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d 339 (7th Cir. 2010) (prejudgment interest under Illinois law)
Residential Marketing Group, Inc. v. Granite Investment Group, 933 F.2d 546 (7th Cir. 1991) (deposit and interest on deposited funds guidance)