## Facts

- Machinery, Inc. rented, sold, and serviced aerial-manlift equipment and maintained its operating accounts at Union Planters Bank, N.A. (UPB), which also provided a revolving line of credit secured by a blanket lien on Machinery’s property and proceeds.
- General Electric Capital Corp. (GECC) financed specific Machinery inventory and held a security interest in that financed inventory and its proceeds.
- GECC and UPB executed a written subordination agreement under which UPB subordinated its interest in GECC-financed inventory and “cash, rents, and proceeds” from that inventory to GECC.
- Machinery deposited commingled receipts (sales, rentals, and service revenue) into a UPB “parent account” without identifying which deposits were proceeds of GECC-financed inventory.
- UPB operated an automatic cash-management system: it covered checks, advanced funds on the line of credit as needed, and “swept” deposits from the parent account to pay down Machinery’s line-of-credit balance.
- After Machinery filed bankruptcy, GECC claimed UPB’s sweeps included proceeds subject to GECC’s priority and constituted conversion.
- The district court granted GECC summary judgment on conversion liability and later, after a bench trial on damages, awarded $62,818 using a method that (i) excluded deposits from 23 customers with mixed-collateral transactions and (ii) applied a 37.6% “sweep percentage” to deposits from the remaining customers.

## Issues

1. Whether UPB was liable for conversion by sweeping commingled funds that included proceeds of GECC-financed inventory, notwithstanding UPB’s claim that the transfers occurred in the ordinary course under the UCC.
2. Whether the damages award was supported by a legally and factually sound tracing methodology where collateral proceeds were commingled with other funds, including whether excluding certain customer deposits and using a sweep-percentage proxy was permissible.

## Decision

- The court affirmed the determination that UPB was liable for conversion because the subordination agreement gave GECC superior rights in proceeds of the financed inventory and UPB applied commingled funds to its own debt despite that agreement.
- The court rejected UPB’s reliance on an “ordinary course” defense on these facts, given UPB’s knowledge of GECC’s priority and UPB’s affirmative sweep practices for its own benefit.
- The court held that damages in a commingled-proceeds dispute must be based on a reasonable, evidence-grounded tracing or allocation approach, and it scrutinized the district court’s method where the proxy used did not correspond to evidence of the proportion of GECC-related proceeds.

## Legal Principles

- A party with superior rights in collateral proceeds may recover in conversion when another creditor knowingly exercises dominion over identifiable proceeds inconsistent with the senior party’s rights.
- Contractual subordination agreements are enforceable according to their terms and can reorder priority between secured creditors as to specified collateral and proceeds.
- An “ordinary course” payment defense does not necessarily protect a secured lender/depository bank that, with knowledge of another creditor’s priority by agreement, affirmatively sweeps commingled funds to satisfy its own loan.
- When proceeds are commingled in a deposit account, damages require a reasonable tracing or allocation method tied to record evidence; a mechanically convenient proxy that is not logically connected to the proven proportion of collateral proceeds is insufficient.

## Conclusion

The Eighth Circuit held that a bank that agreed to subordinate its interest to another secured creditor could be liable in conversion when it swept commingled receipts to reduce its own loan balance, and it emphasized that any damages award must rest on a rational, evidence-based method for tracing or allocating collateral proceeds within a commingled account.


Gen. Elec. Cap. Corp. v. Union Planters Bank, N.A., 409 F.3d 1049 (8th Cir. 2005)