## Facts

- Van Diest Supply Co. supplied agricultural products to Hennings Feed and Crop Care under a 1983 agreement granting Van Diest a purchase money security interest (PMSI) in inventory Van Diest supplied and the proceeds of that inventory.
- Hennings bought inventory from multiple suppliers and did not segregate, track, or know on any given day how much inventory it held from any particular supplier.
- In 1998, Shelby County State Bank financed Hennings through a draw note arrangement under which Shelby advanced funds in exchange for Hennings’s accounts receivable and then collected those receivables.
- Shelby collected over $2 million in receivable payments during the relevant period.
- Hennings later entered financial distress, filed for bankruptcy, and did not pay Van Diest for certain inventory.
- Van Diest sued Shelby for conversion, alleging Shelby received and retained proceeds subject to Van Diest’s PMSI.
- The district court granted summary judgment to Shelby on the ground that Van Diest failed to produce evidence identifying the specific proceeds in which it claimed a security interest.

## Issues

1. Whether a PMSI holder in inventory and proceeds can maintain a conversion claim against a competing creditor absent evidence identifying or tracing the proceeds of its collateral within commingled accounts receivable.
2. Whether the summary judgment record contained sufficient evidence for a reasonable factfinder to determine that receivables collected by Shelby were proceeds of Van Diest-supplied inventory.

## Decision

- The Seventh Circuit affirmed summary judgment for Shelby.
- The court held that Van Diest did not present sufficient evidence to identify the proceeds of its inventory allegedly converted by Shelby.
- Because Hennings commingled inventory and did not track sales or receivables by supplier, Van Diest could not show what portion of the receivables collected by Shelby, if any, constituted proceeds of Van Diest’s collateral.
- The inability to identify the specific property at issue defeated an essential element of conversion, so the claim could not proceed to trial.

## Legal Principles

- A conversion plaintiff must show a right to immediate possession of specific, identifiable property; when the claimed property is “proceeds,” the plaintiff must identify or trace those proceeds.
- A perfected security interest in inventory and proceeds does not, by itself, establish conversion against another creditor without proof that the defendant received identifiable collateral or identifiable proceeds subject to the plaintiff’s interest.
- When proceeds are commingled and the debtor’s records do not permit allocation by source, the secured creditor bears the burden of producing a workable method to identify or trace proceeds; failure to do so warrants summary judgment.
- Where a PMSI is limited to the creditor’s own supplied inventory (not all of the debtor’s inventory), proof tying receivables to sales of that inventory is required to establish conversion.

## Conclusion

The court upheld summary judgment for the bank because the PMSI holder could not identify or trace any receivables collected by the bank as proceeds of the creditor’s own inventory, which is required to prove conversion of proceeds drawn from a commingled pool.


Van Diest Supply Co. v. Shelby Cnty. State Bank, 425 F.3d 437 (7th Cir. 2005)