Bank of Hendersonville v. Red Baron Flying Club

• Decision Date: 02 December 1977
• Citation: Bank of Hendersonville v. Red Baron Flying Club, 25 UCCRep.Serv. 1159, 571 S.W.2d 152 (Tenn. App. 1977)
• Parties: BANK OF HENDERSONVILLE, Plaintiff-Appellee, v. RED BARON FLYING CLUB, INC., Defendant-Appellant. 571 S.W.2d 152, 25 UCC Rep.Serv. 1159
• Court: Tennessee Court of Appeals

Page 152

571 S.W.2d 152

BANK OF HENDERSONVILLE, Plaintiff-Appellee, v. RED BARON FLYING CLUB, INC., Defendant-Appellant.

571 S.W.2d 152, 25 UCC Rep.Serv. 1159

Court of Appeals of Tennessee, Middle Section.

Dec. 2, 1977 Certiorari Denied by Supreme Court July 31, 1978.

W. Harold Bigham, Nashville, for plaintiff-appellee.

Ernest Williams, III, Memphis, for defendant-appellant.

OPINION

With the concurrence of participating judges, the original opinion has been abridged for publication.

TODD, Judge.

The defendant, Red Baron Flying Club, Inc., has appealed from the Chancellor's decree sustaining the lien claim (security interest) of the plaintiff, Bank of Hendersonville, in respect to an aircraft purchased by appellant from Mid-South Aviation, Inc.

The facts are uncontroverted. Mid-South, an aircraft dealer, sold to Red Baron the subject aircraft out of its (Mid-South's) stock of several aircraft. The plane was paid for by cashier's check. At the time, the appellee bank held a security interest upon a number of Mid-South's aircraft, including the subject plane. The bank's security interest was at all pertinent times duly recorded with the F.A.A. Aircraft Registry. Mid-South failed to satisfy the security interest and this suit was filed to enforce same in respect to the subject plane.

The sole question is one of law: whether a security interest upon an airplane held as part of a dealer inventory duly recorded as required by federal law, is superior to the rights of a purchaser for value from the dealer without actual notice of the security interest.

T.C.A. § 47-9-307 provides "47-9-307. Protection of buyers of goods. A buyer in ordinary course of business (subsection (9) of § 47-1-201) other than a person buying farm products from a person engaged in farming operations takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence. (Acts 1963, ch. 81, § 1 (9-307); 1965, ch. 362, § 1.)"

T.C.A. § 47-9-104 provides in part:

"47-9-104. Transactions excluded from chapter. This chapter does not apply

(a) to a security interest subject to any statute of the United States such as the Ship Mortgage Act, 1920, to the extent that such statute governs the rights of parties to and third parties affected by transactions in particular types of property; or . . ."

"Comments to Official Text" under said statute include the following:

"Purposes :

To exclude certain security transactions from this Article (Chapter).

1. Where a federal statute regulates the incidents of security interests in particular types of property, those security interests are of course governed by the federal statute and excluded from this Article (Chapter). The Ship Mortgage Act, 1920, is an example of such a federal act. Legislation covering aircraft financing has been proposed to the Congress, and, if enacted, would displace this Article (Chapter) in that field. The present provisions of the Civil Aeronautics Act (49 U.S.C. § 523) call for registration of title to and liens upon aircraft with the Civil Aeronautics Administrator and such registration is recognized as equivalent to filing under this Article (Chapter) (Section 9-302(3) ); but to the extent that the Civil Aeronautics Act does not regulate the rights of parties to and third parties affected by such transactions, security interests in aircraft remain subject to this Article (Chapter), pending passage of federal legislation."

Title 49 §§ 1403, 1406, of the U.S. Code provides:

"S 1403. Recordation of aircraft ownership

Establishment of recording system

(a) The Secretary of Transportation shall establish and maintain a system for the recording of each and all of the following:

(1) Any conveyance which affects the title to, or any interest in, any civil aircraft of the United States; . . .

Effect of recording

(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, . . .

§ 1406. Law governing validity of certain instruments

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, irrespective of the location or the place of delivery of the property which is the subject of such instrument. Where the place of intended delivery of such instrument is specified therein, it shall constitute presumptive evidence that such instrument was delivered at the place so specified."

Appellant insists that the federal statute just quoted does not aptly preempt and remove airplanes from the provisions of the state statute which favor a purchaser in ordinary course of business over the holder of a mortgage on inventory.

Appellee insists that the federal statute does preempt the subject of priority of interests in aircraft and creates a right in favor of the holder of a security interest in an aircraft held in stock by a dealer superior to that of a purchaser from the dealer in ordinary course of business.

In Texas National Bank of Houston v. Aufderheide et al. (U.S.D.C.Ark. 1964), 235 F.Supp. 599, there was a "floor plan" lien, duly recorded with the F.A.A., but the mortgagee was shown to have followed a practice of allowing the dealer to sell and deliver planes out of stock in violation of the mortgage instrument. The District Court held that the mortgagee had, by its conduct, waived any priority of rights against the purchaser and said:

"(1) There is no question that the Congress by the statutory enactments which have been mentioned has preempted the field of registration and recording of title instruments affecting commercial aircraft, Pacific Financial Corporation v. Central Bank & Trust Co., 5 Cir., 296 F.2d 68, 71, so that protection is no longer afforded to a purchaser or mortgagee of such an aircraft by a recording of his conveyance or mortgage under a State recording statute.

"(2) On the other hand, compliance with section 1403 does not validate a conveyance or other instrument which is lacking in initial or inherent validity as a contract document between the original parties, as, for example, a mortgage or conveyance obtained by fraud or without consideration, or executed by an incompetent party. Questions of such inherent or original validity must be determined by reference to applicable State law. This has been expressly recognized by the Congress. See in this connection the Act of June 30, 1964, P.L. 88-346, 78 Stat. 236, which statute, among other things, provides that the validity of a conveyance or other instrument affecting an aircraft is to be determined by the law of the place where the instrument is delivered. In the Court's estimation the validity about which Congress was talking in the 1964 Act is what the Court has referred to as the initial or inherent validity of the instrument in question.

"(3) While the act of recording a conveyance or mortgage under the terms of the federal statute or any other recording statute does not confer inherent validity upon an instrument otherwise basically invalid, proper recordation can, and usually does, have a substantial bearing on the validity of the instrument as to third persons, and as to the priority to be accorded to that instrument with respect to other claims or liens affecting the property involved whether arising before or after the recordation.

II.

"(5, 6) It does not follow, however, that section 1403 has repealed or abolished the general rule of chattel mortgage law that when a mortgagee consents to the sale of a mortgaged chattel free of lien by the mortgagor, the purchaser takes free of the mortgage lien and his rights are superior to those of the mortgagee. 15 Am.Jur.2d, Chattel Mortgages, §§ 150, 151, and 153; 14 C.J.S. Chattel Mortgages § 262. And a provision in a chattel mortgage prohibiting a sale of the mortgaged chattel without a mortgagee's consent is waived if the mortgagee knowingly permits the violation of such provision. 15 Am.Jur.2d, p. 324." 235 F.Supp., p. 603.

In State Securities Company v. Aviation Enterprises, Inc. et al. (10th CA, 1966), 355 F.2d 225, the dealer executed a mortgage on the subject aircraft which was subsequently sold to a customer who had no knowledge of the mortgage which was Not recorded with the F.A.A. as required by federal law. The purchaser did not record his bill of sale with the F.A.A., but the U.S. Court of Appeals sustained the rights of the purchaser as superior to those of the mortgagee stating:

"(1, 2) By providing a federal system for registration of conveyances and liens affecting the title to aircraft, Congress has preempted that field and state recording statutes are not applicable to such title instruments. However, questions of the validity of such title documents, actual notice, good faith purchaser status, and the like, must be resolved under state law.

"In Bordman Invest. Co. v. Peoples Bank of Kansas City, Mo.App., 320 S.W.2d 72, 76-77, the court held in part as follows:

'In almost all jurisdictions the recognized rule is that where a mortgagee of an automobile or other chattel knows the mortgagor is a dealer, buying to sell the automobile or other chattel in the regular course of business, and consents to its sale by the mortgagor, the purchaser takes free from the mortgagee's lien. . . .

'In such situations, as between an owner or mortgagee who entrusts the chattel to another for purposes other than a complete sale and the one who buys the chattel from the latter without notice of the seller's lack of authority to sell, the courts have evolved the estoppel theory based on the maxim that, as between two innocent victims of fraud, the one who makes possible the fraud on the other should suffer....