Cessna Finance Corp. v. Skyways Enterprises, Inc.

• Decision Date: 20 March 1979
• Citation: Cessna Finance Corp. v. Skyways Enterprises, Inc., 580 S.W.2d 491 (Ky. 1979)
• Parties: 26 UCC Rep.Serv. 212 CESSNA FINANCE CORPORATION, Movant, v. SKYWAYS ENTERPRISES, INC. and First Security National Bank and Trust Company, Respondents.
• Court: Supreme Court of Kentucky

Page 491

580 S.W.2d 491

26 UCC Rep.Serv. 212

CESSNA FINANCE CORPORATION, Movant, v. SKYWAYS ENTERPRISES, INC. and First Security National Bank and Trust Company, Respondents.

Supreme Court of Kentucky.

March 20, 1979.

Gardner L. Turner and Stephen L. Barker, Lexington, for movant.

William L. Montague, Stoll, Keenon & Park, Lexington, for respondents.

LUKOWSKY, Justice.

Cessna Finance seeks a reversal of a decision of the Court of Appeals affirming a judgment of the Fayette Circuit Court. The trial court held that Cessna Finance's perfected security interest in a Cessna 414 aircraft could not be enforced against Skyways, a subsequent purchaser of the aircraft in the ordinary course of business from Du Page, a Cessna dealer, and First Security which subsequently acquired a perfected security interest in the aircraft from Skyways. We affirm.

Cessna Finance bank-rolled the sale of a Cessna 414 by Aviation Activities, a Cessna distributor, to Central States, a Cessna dealer, controlled by Brooks. Central States gave Cessna Finance a mortgage supported by a promissory note to secure the loan. The mortgage provided that Central States could not sell the aircraft without the prior consent of Cessna Finance. Cessna Finance recorded its mortgage with the Federal Aviation Administration (F.A.A.) pursuant to 49 U.S.C. Sec. 1403, which provides for the centralized recording of all title and security documents for civil aircraft.

On June 18, 1973 Central States transferred the aircraft without consideration to Du Page, another Cessna dealer controlled by Brooks. ¹ Cessna Finance was not notified of nor did it consent to this transfer. On the same day Du Page sold the aircraft to Skyways, a recently formed aircraft dealership, which failed to make a title search of F.A.A. records and did not have actual knowledge of the Cessna Finance security interest. Skyways recorded its title to the aircraft with the F.A.A. on November 8, 1973, nearly five months after the sale.

In January, 1974 First Security acquired a security interest in the aircraft from Skyways. First Security had no actual knowledge of the Cessna Finance security interest and also failed to make a title search of F.A.A. records. On April 12, 1974, First Security perfected its security interest by filing with the F.A.A. ² First Security was aware of the F.A.A. records facility. ³ Skyways was not.

Cessna Finance did not consent to the sale of the aircraft by Du Page to Skyways. However, Cessna Finance was notified of a proposed sale by Du Page of the Cessna 414 to Skyways on May 23, 1973. ⁴ It was the practice of the parties to treat such a notification as a commitment to sell the aircraft to the named buyer within four (4) months and during this period the loan would run interest free. Cessna Finance also knew that Du Page was selling other aircraft in which it held a security interest without its consent, and without satisfaction of the security interest until after consummation of the sale.

On September 25, 1973, in accord with the Cessna Finance lending policy and three months after Du Page sold the aircraft to Skyways, Central States requested that Cessna Finance rewrite the note it held on the aircraft from Central States. Cessna Finance did so while allegedly unaware of the consummation of the sale of the aircraft to Skyways. The rewritten note was for a forty-eight (48) month period.

In November, 1973, Cessna Finance became aware of the sale of this aircraft out of trust without pay-off of its security interest. Cessna Finance made several searches of the title of the Cessna 414 before discovering on November 27, 1974, that Skyways had been sold the aircraft. Cessna Finance informed Skyways of its security interest and requested that Skyways surrender the aircraft to it, because Central States had defaulted on its note. Skyways refused to comply with the request. Cessna Finance filed suit in April, 1974, to replevy the aircraft. First Security intervened in a timely manner to protect its security interest in the aircraft.

Cessna Finance contends that the Federal Aviation Act, 49 U.S.C. Sec. 1403, preempts all state laws governing priorities among perfected security interests. We do not agree. The purpose of Congress in enacting the Federal Aviation Act was to establish a single national filing system for the recording of documents evidencing title and security interests in civil aircraft and not to legislate priorities among holders of various interests in aircraft. H.R. Rep. No. 2360, 85th Cong., 2d Sess., Reprinted in (1958) U. S. Code & Admin. News, pp. 3741, 3750, 3755; H.R. Rep. No. 9738, 75th Cong., 3d Sess., 405-407 (1938). E. g., Henson, Secured Transactions 22 (1979). Congress did not intend to supercede state laws that would otherwise govern the priorities between perfected security interests. Haynes v. General Elec. Credit Corp., W.D.Va., 432 F.Supp. 763, 765-767 (1977), Affirmed C.A.4th, 582 F.2d 869 (1978) (per curiam); Sanders v. M. D. Aircraft Sales, Inc., C.A.3d, 575 F.2d 1086 (1978); see also Malone v. White Motor Corp., 435 U.S. 497, 98 S.Ct. 1185, 55 L.Ed.2d 443 (1978). ⁵

Kentucky has adopted the Uniform Commercial Code and its provisions govern priorities between conflicting security interests. KRS 355.1-101 355.10-102. The general rule under the Uniform Commercial Code is that a perfected security interest "continues in collateral notwithstanding sale, exchange, or other disposition by the debtor unless his action was authorized by the secured party in the security agreement Or otherwise . . .." KRS 355.9-306(2). However, there are many cases where by operation of statute a purchaser of collateral will take free of a perfected security interest under the "or otherwise" exception in KRS 355.9-306(2) and the secured party's only right will be to proceeds of the sale held by the debtor. U.C.C. Sec. 9-306, comment 3 (1962).

KRS 355.9-307(1) is one of the statutory "or otherwise" exceptions to KRS 355.9-306(2). U.C.C. Sec. 9-306, comment 3 (1962). It provides that a buyer in the ordinary course of business takes free of a security interest created by the seller ⁶ even though the secured party has perfected its interest and the buyer knows of it and even though the disposition was not authorized. U.C.C. Sec. 9-306, comment 3 (1962). A buyer in the ordinary course of business is defined as a "person who in good faith ⁷ and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker." KRS 355.1-201(9). Under these two statutory provisions a buyer will purchase goods free of any security interest created by the seller if he knows that there is a security...