Gary Aircraft Corp., Matter of

• Decision Date: 28 July 1982
• Docket Number: No. 81-1378,81-1378
• Citation: 681 F.2d 365
• Parties: 34 UCC Rep.Serv. 722 In the Matter of GARY AIRCRAFT CORPORATION, Debtor. GARY AIRCRAFT CORPORATION, Plaintiff-Appellee, v. GENERAL DYNAMICS CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 365

681 F.2d 365

34 UCC Rep.Serv. 722

In the Matter of GARY AIRCRAFT CORPORATION, Debtor GARY AIRCRAFT CORPORATION, Plaintiff-Appellee, v. GENERAL DYNAMICS CORPORATION, Defendant-Appellant.

No. 81-1378.

United States Court of Appeals, Fifth Circuit.

July 28, 1982.

Gilbert Lang Mathews, San Antonio, Tex., for defendant-appellant.

John H. Bennett, Jr., Fulbright & Jaworski, Cecil Jay Olmstead, Houston, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Western District of Texas.

Before WISDOM, POLITZ and TATE, Circuit Judges.

WISDOM, Circuit Judge:

I.

This dispute over the ownership of one airplane and of the proceeds of the sale of another requires us to determine the reach of the Federal Aviation Act and its impact on state law. We also explore the protection accorded buyers against secured creditors by state law.

In December 1971, Gary Aircraft Corporation ("Gary"), the plaintiff-appellee, entered into a letter of understanding stating its intention to purchase four airplanes from Frederick B. Ayer & Associates, Inc. ("Ayer"), a dealer in aircraft. Two of these airplanes are the subject of the controversy here. Gary did not complete the purchase, but Arthur Stewart, its president, carried out the transaction in his individual capacity, purchasing the first plane in controversy here, N8222H, on December 22, 1971 for $5,000, and the second, N8221H, on January 4, 1972, also for $5,000. On the date of each sale, the airplane purchased was subject to a security interest held by General Dynamics Corporation ("General Dynamics"), the defendant-appellant. General Dynamics held its interest under a security agreement executed by Ayer on February 20, 1969. Under that agreement, Ayer was authorized to sell the collateral, unless it was in default on its obligations to General Dynamics. In case of default, Ayer could not sell without the written consent of General Dynamics. General Dynamics recorded its security agreement with the Federal Aviation Administration on March 3, 1969. On the dates of the sales to Stewart, Ayer was in default. ¹

Crawford, the vice-president of Gary, requested a title search from the Aircraft Owners and Pilots Association on January 4, 1972. The AOPA reported the results on January 5, 1972. On August 3, 1972, approximately seven months after the sale, Stewart recorded his bill of sale with the FAA. Over the next four years, Crawford communicated periodically with Ayer, requesting that Ayer take action to secure the release of General Dynamics's security interest.

In March 1974, Stewart sold one of the group of four planes to Gary for $13,275. He transferred the two planes at issue here to Gary on November 7, 1975, apparently without consideration. Gary executed a mortgage on the aircraft in favor of the Victoria Bank and Trust Company, the third party defendant. The Victoria Bank recorded its interest with the FAA. On May 28, 1976, General Dynamics informed Gary that it had learned that the aircraft were registered in Gary's name and that General Dynamics was asserting a security interest in the property.

On October 28, 1976, Gary initiated Chapter XI proceedings under the Bankruptcy Act. It brought this action in the bankruptcy court, seeking to sell Airplane N8222H free and clear of liens. Upon the agreement of all interested parties, the court permitted the sale of the airplane, and the proceeds were deposited with the court. The second airplane remains in the possession of Gary.

The bankruptcy court, affirmed by the district court, held that Gary was entitled to the proceeds of the sale of Airplane N8222H and to the possession of Airplane N8221H, free of any interest asserted by General Dynamics. General Dynamics appeals, presenting three theories. First, it contends that the Federal Aviation Act grants it priority because it recorded its security interest with the Federal Aviation Administration before Stewart purchased the aircraft. Second, even if the FAA does not govern the priority question but instead remits it to Texas law, which protects a buyer in the ordinary course of business against the perfected security interest of his seller's creditor, General Dynamics argues that Stewart could not take free of its interest because, according to General Dynamics, Stewart could not qualify as a buyer in the ordinary course of business. Finally, General Dynamics contends that, even if Stewart did qualify as a buyer in the ordinary course, he could not transfer his status to Gary, and Gary did not qualify in its own right so, in Gary's hands, the aircraft are subject to the interest of General Dynamics. Concluding that the FAA does not govern priorities in interests in aircraft, that Stewart, as a buyer in the ordinary course of business, took free of General Dynamics's interest, and that Gary takes the title of its transferor, we affirm.

II.

General Dynamics's first theory presents this court, for the first time, with the question to what extent the provisions of the Federal Aviation Act, 49 U.S.C. §§ 1301-1542, preempt state regulation of interests in aircraft. The Civil Aeronautics Act of 1938, and its successor, the Federal Aviation Act of 1958, both create a single national recording system for interests in aircraft. Section 503 of the FAA, 49 U.S.C. § 1403, establishes the recording system and provides,

(c) No conveyance or instrument the recording of which is provided for by subsection (a) of this section shall be valid in respect of such aircraft ... against any person other than the person by whom the conveyance or other instrument is made or given, his heir or devisee, or any person having actual notice thereof, until such conveyance or other instrument is filed for recordation....

(d) Each conveyance or other instrument recorded by means of or under the system provided for in subsection (a) or (b) of this section shall from the time of its filing for recordation be valid as to all persons without further or other recordation. ²

In 1964, Congress added section 506, 49 U.S.C. § 1406, providing,

The validity of any instrument the recording of which is provided for by section 1403 of this title shall be governed by the laws of the State, District of Columbia, or territory or possession of the United States in which such instrument is delivered....

Without question, section 506 reserves some areas of regulation for the states by assigning questions of "validity" to state law. At the same time, Congress has provided the exclusive means of recordation and has preempted state laws providing filing systems for interests in aircraft. See, e.g., Bank of Lexington v. Jack Adams Aircraft Sales, Inc., 5 Cir. 1978, 570 F.2d 1220 (dictum); Scott, Liens in Aircraft: Priorities, 25 J.Air L. & Com. 193, 200 (1958).

Whether Congress intended to preempt a broader field of state law by federalizing also the assignment of priorities to various interests in aircraft is not as clear. The courts have split on that question. Compare e.g., Sun Bank v. Snell (In re Cone), Bkrtcy.M.D.Fla.1981, 11 B.R. 925 (FAA preempts state priorities law); Dowell v. Beech Acceptance Corp., 1970, 3 Cal.3d 544, 476 P.2d 401, 91 Cal.Rptr. 1 (in banc) (same), cert. denied, 1971, 404 U.S. 823, 92 S.Ct. 45, 30 L.Ed.2d 50; and O'Neill v. Barnett Bank, Fla.App.1978, 360 So.2d 150 (same) with, e.g., Danning v. World Airways, Inc. (In re Holiday Airlines), 9 Cir.1981, 647 F.2d 977 (FAA does not preempt state priorities law), cert. denied, 1982, --- U.S. ----, 102 S.Ct. 1009, 71 L.Ed.2d 299; Sanders v. M.D. Aircraft Sales, Inc., 3 Cir.1978, 575 F.2d 1086 (same); Bitzer-Croft Motors v. Pioneer Bank & Trust Co., 1980, 82 Ill.App.3d 1, 37 Ill.Dec. 247, 401 N.E.2d 1340 (same); and Southern Jersey Airways, Inc. v. National Bank, 1970, 108 N.J.Super 369, 261 A.2d 399 (same). After considering the language of the FAA and the CAA as well as their legislative history, we conclude that the FAA does not displace state law assignment of priorities to interests in aircraft. That conclusion is in accord with the weight of recent authority, see cases cited above; CIM International v. United States, 9 Cir.1980, 641 F.2d 671, 675 n.6; Danning v. Pacific Propeller, Inc. (In re Holiday Airlines Corp.), 9 Cir.1980, 620 F.2d 731, cert. denied, 449 U.S. 900, 101 S.Ct. 269, 66 L.Ed.2d 130; Haynes v. General Electric Credit Corp., W.D.Va.1977, 432 F.Supp. 763; Industrial National Bank v. Butler Aviation International, Inc., E.D.N.Y.1974, 370 F.Supp. 1012, 1016-17; Cessna Finance Corp. v. Skyways Enterprises, Inc., Ky.1979, 580 S.W.2d 491. ³ A majority of the commentators agree. See 1 G. Gilmore, Security Interests in Personal Property § 13.5 (1965); J. White & R. Summers, Uniform Commercial Code § 25-16 at 1077 (2d ed. 1980); Sigman, The Wild Blue Yonder: Interests in Aircraft Under Our Federal System, 46 S.Cal.L.Rev. 316 (1973); Note, Taking the Lender for a Ride: Section 1403 of the Federal Aviation Act and the Buyer in the Ordinary Course of Business, 36 Wash. & Lee L.Rev. 205 (1979); Note, Federal Protection of Security Interests in Carriers' Mobile Equipment, 71 Harv.L.Rev. 1516, 1530-31 (1958).

Although Congress has acted in the general field of aircraft interests, the supremacy clause, U.S.Const. art. VI, requires us to invalidate ⁴ state law only if it conflicts with a federal statute, if it would frustrate a federal scheme, or if the totality of the circumstances shows that Congress sought to occupy the field. The intent of Congress is determinative. ⁵ Malone v. White Motor Corp., 1978, 435 U.S. 497, 504, 98 S.Ct. 1185, 1189, 55 L.Ed.2d 443, 450. The courts do not favor the preemption of state law, however, and, in the absence of strong reasons to believe that Congress intended to displace it, state law governs. Chicago and Northwestern Transportation Co. v. Kalo Brick & Tile Co., 1981, 450 U.S. 311, 315-316, 101 S.Ct. 1124, 1129, 67 L.Ed.2d 258, 264-65.

Before examining the statute itse...