Van Diest Supply Co. v. Shelby County State Bank

Hennings Feed and Crop Care (Hennings) entered into a security agreement with Van Diest Supply Co. (Van Diest) (plaintiff). In 1983 Hennings purchased inventory from Van Diest for its agricultural-products business and gave Van Diest a purchase-money security interest specifically in the inventory Van Diest sold to Hennings and in the proceeds from the sale of this inventory. Hennings operated by commingling the inventory purchased from different suppliers, which was identical. Hennings did not separate or track the inventory by the company supplying the products, and Hennings never knew how much of its inventory was from any particular supplier. In 1998 Hennings entered into a financing agreement with Shelby County State Bank (the bank) (defendant) and gave the bank a security interest in Hennings’s accounts receivables. Under the agreement, the bank made advances to Hennings, and the bank collected on receivables the bank purchased. Hennings’s customers made payment directly to the bank, or Hennings gave checks directly to the bank for these accounts. In June 1999, Hennings failed to make a payment to Van Diest on a shipment of inventory. After Van Diest demanded payment in full, in August 1999, Hennings filed for bankruptcy. Hennings did not have enough assets to pay both Van Diest and the bank, so Van Diest demanded that the bank turn over money from the receivables the bank had collected in an effort to recoup the proceeds from the sale of inventory Van Diest had supplied to Hennings. The bank refused, and Hennings brought suit, accusing the bank of converting its property. The bank moved for summary judgment. The district court in Illinois ruled that Van Diest did not provide evidence identifying its proceeds. Therefore, Van Diest did not establish that it had a security interest in the proceeds that the bank had collected. Van Diest appealed, arguing above as it did below that it could identify the proceeds attributable to its interest by showing the percentage of inventory sold on the day of each sale that was supplied by Van Diest.