Opinion ID: 790467
Heading Depth: 3
Heading Rank: 2

Heading: How Equitable Tracing Works in this Case

Text: 36 As indicated, GECC may be able to establish that some of UPB's sweeps occurred outside of the ordinary course of business, enabling it to use equitable tracing principles to establish that the funds UPB received were identifiable proceeds of GECC-financed inventory. Because the district court ruled on how GECC may trace deposited funds to UPB's sweeps, and because the parties have briefed the issue, we address the matter. 37 When funds from multiple sources are deposited to the same account and subsequent payments are made from the account, it becomes difficult, if not impossible, to determine whether the subsequent payments are traceable to the initial deposits. Equity, though, can serve as a means of attributing rights in such a commingled account by tracing the subsequent payments to particular deposits. And, as the district court held, Missouri law recognizes the use of equitable tracing principles to identify a secured party's interest in a commingled deposit account. 38 As an initial matter, we reject GECC's attempt to characterize the use of equitable tracing principles as a way of measuring damages. The measure of damages in a conversion action is generally the fair market value of the property at the time and place of the conversion. Bell, 85 S.W.3d at 54. Equitable tracing, on the other hand, allows a plaintiff to establish that the credit created by the deposit of encumbered funds was used to make a payment or a withdrawal. While tracing is a tool to permit the calculation of damages at the time of conversion, Meyer v. Norwest Bank Iowa, 112 F.3d 946, 951 (8th Cir.1997), it is not a measure of damages. It is the primary means of demonstrating the plaintiff's rights, and therefore the defendant's liability, in cases involving commingled accounts. This case illustrates that premise. Without equitable tracing, GECC cannot make out a claim for conversion because it cannot establish that the funds allegedly converted were identifiable proceeds in which it had a security interest. 39 In its summary-judgment order, the district court held that the lowest intermediate balance rule could be applied to Machinery's parent account. But at the damages trial, it concluded that a pro-rata methodology based on the total deposits, withdrawals, and sweeps over the relevant period was more appropriate because the lowest intermediate balance rule yielded a result of zero. Under its pro-rata rationale, the district court concluded that GECC could recover 37.6% of the total GECC proceeds deposited because UPB swept 37.6% of the total deposits. 40 The parties have cited no Missouri cases utilizing a pro-rata tracing methodology like that employed in this case, and we have found none. 5 Thus, we conclude that the lowest intermediate balance rule is the only tracing method available in this litigation. 41 But the district court erred in concluding that a proper application of the lowest intermediate balance rule yielded a result of zero. Because UPB received the funds at different times over the course of the three months, and GECC's conversion claim is based on UPB's sweeps, the analysis must look to those transactions. Under the lowest intermediate balance rule, it is assumed the traced proceeds are the last funds withdrawn from a contested account. Once the traced proceeds are withdrawn, however, they are treated as lost, even though subsequent deposits are made into the account. Id. at 951 (citation omitted). The district court concluded that because the account was zeroed out by UPB sweeps and other payments, the traced proceeds were therefore gone. That conclusion would be appropriate if GECC's claim were based on the account balance after UPB swept the account. But GECC's claim is based on UPB's sweeps. Thus, Machinery's account balance at the time UPB swept it is the relevant account balance. By the very occurrence of the sweep, we know the balance of the account was not zero at that time. An appropriate application of the lowest intermediate balance rule would therefore focus on attributing the account balance at that time to preceding deposits of GECC proceeds. 42 Of course, a zero balance in the parent account after a deposit of GECC proceeds but before a UPB sweep would mean all of the credit that resulted from the deposit of GECC proceeds had been exhausted and, thus, lost. So the time frame the court must look to ends with a UPB sweep and begins with the immediately preceding zero balance. If GECC proceeds were deposited after the immediately preceding zero balance, they may be traced to UPB's sweep through an ordinary application of the lowest intermediate balance rule. Thus, the funds UPB swept on a given day will be deemed identifiable proceeds of GECC-encumbered deposits to the extent post-deposit withdrawals that precede the sweep didn't reduce the account balance below the amount of those encumbered deposits. 43 A hypothetical explains this proposition. If UPB swept the account on March 16 and received $20,000, then the court should look back to the immediately preceding zero balance. If that event occurred on March 15 (either through a transfer to the operating accounts or a previous UPB sweep), the court begins its application of the lowest intermediate balance rule there. After the preceding zero balance, assume that (1) $10,000 in GECC proceeds were deposited, (2) then $50,000 of other funds were deposited, (3) then $55,000 were transferred to the operating accounts to cover expenses, and (4) then $15,000 of other funds were deposited. The following chart represents the deposits, withdrawals, and account balances during the relevant time frame. 44 ---------------------------------------------- GECC Proceeds Other Account Deposits Deposits Withdrawals Balance ---------------------------------------------- $10,000 $10,000 ---------------------------------------------- $50,000 $60,000 ---------------------------------------------- ($55,000) $ 5,000 ---------------------------------------------- $15,000 $20,000 ---------------------------------------------- 45 On these facts, GECC would be able to trace $5,000 of deposited proceeds in which it had a security interest, through the account, to the funds UPB received. Its other $5,000 interest in the account would be lost because after the $10,000 of GECC proceeds were deposited, the account balance dropped to $5,000 when $55,000 were transferred to the operating accounts. The subsequent deposit of $15,000 did not replenish GECC's interest in the account. 46 We recognize that the facts upon which this analysis must proceed could be difficult to establish. But that problem does not entitle a plaintiff to recover on a conversion claim without establishing what property was converted.