Feldman v. Chase Manhattan Bank, NA, 73 Civ. 1205.

• Decision Date: 08 January 1974
• Docket Number: No. 73 Civ. 1205.,73 Civ. 1205.
• Citation: 368 F. Supp. 1327
• Parties: George FELDMAN, as Trustee in Bankruptcy of Leasing Consultants Incorporated, Bankrupt, Plaintiff, v. CHASE MANHATTAN BANK, N.A., Defendant.
• Court: U.S. District Court — Southern District of New York

368 F. Supp. 1327

George FELDMAN, as Trustee in Bankruptcy of Leasing Consultants Incorporated, Bankrupt, Plaintiff, v. CHASE MANHATTAN BANK, N.A., Defendant.

No. 73 Civ. 1205.

United States District Court, S. D. New York.

January 8, 1974.

COPYRIGHT MATERIAL OMITTED

Hahn, Hessen, Margolis & Ryan, New York City (Daniel A. Zimmerman, New York City, of counsel), for plaintiff.

Milbank, Tweed, Hadley & McCloy, New York City (Andrew J. Connick, Barry G. Radick, New York City, of counsel), for defendant.

BAUMAN, District Judge.

This is an action by a trustee in bankruptcy brought under § 70 of the Bankruptcy Act, 11 U.S.C. § 110, to invalidate the assignment of an aircraft lease made by the lessor bankrupt to defendant bank and to have defendant's interests in it declared subordinate to those of plaintiff trustee.

Plaintiff moves for summary judgment pursuant to Rule 56 of the Federal Rules and defendant cross moves for summary judgment and counterclaims for the proceeds from the trustee's sale of collateral.

I.

The following facts are undisputed. On August 18, 1970 Leasing Consultants, Incorporated (hereinafter "LCI"), a New York corporation, filed a petition for an arrangement under Chapter XI of the Bankruptcy Act in the United States District Court for the Eastern District of New York and was adjudicated a bankrupt some two months later on October 16, 1970.

During an earlier period of relative financial salubrity, LCI purchased a Cessna 411 airplane from Sunny South Aircraft Service, Inc., which it leased to Devcon International¹ for a sixty month term at a monthly rental of $2,430.40. The Devcon lease was not filed with the Federal Aviation Agency Aircraft Registry in Oklahoma City.

In July, 1967, LCI borrowed $140,963.20 from Chase Manhattan Bank (hereinafter "Chase"). To secure its loan Chase took a "chattel mortgage and security agreement", dated July 12, in the airplane; a written assignment from LCI of the Devcon lease dated July 11; and physical possession of the lease. Chase then recorded the chattel mortgage with the FAA Registry on July 19, but did not record either the Devcon lease or its assignment.

In August and September of 1971 Devcon's monthly rental payments to Chase were not promptly made and subsequently Devcon informed the trustee that it possessed a purchase option on the airplane which it then offered to exercise. The trustee, finding no such purchase option in the lease or in the bankrupt's files, rejected the offer.

By January 1, 1972, Devcon had become delinquent in its rental payments, whereupon Chase seized the airplane with the intention of selling it at public auction. One day before the sale, on March 20, 1972, Devcon commenced action against Chase in the United States District Court for the Southern District of Florida to restrain the sale and reform the lease agreement to include a purchase option at a price of $10.²

There ensued a number of conferences among attorneys for Chase, Devcon and the trustee, after which, in January, 1973 Chase and Devcon executed a stipulation of discontinuance of the Florida action pursuant to which Chase assigned all of its interest in the mortgage to Devcon, and Devcon paid Chase $18,000, in full satisfaction of the remaining rentals due. Three months later, in April, the trustee sold the airplane to Devcon for $20,000.

What is at issue here is the $53,460³ Devcon paid to Chase under the assigned lease after LCI filed its petition in bankruptcy on August 18, 1970, including the $18,000 paid in January, 1973. The trustee contends that Chase's failure to file LCI's assignment of the lease with the FAA registry left Chase without a perfected security interest in the lease payments making its interest subordinate to his rights and invalid as against him. Chase contends that its security interest in the lease was perfected by taking physical possession of it and by filing the chattel mortgage with the FAA and that recording the assignment was not a condition for perfection. Chase further contends that the trustee sold the airplane without adequate notice to Chase and for less than its fair market value and counterclaims for $55,000.

II.

What remains for my determination is the legal question as to whether, by taking possession of the lease and filing the chattel mortgage with the FAA, Chase perfected its security interest or whether, under the law, more was required.

Section 503 of the Federal Aviation Act, 49 U.S.C. § 1403,⁴ establishes a nation wide recording system for security interests in airplanes. Any conveyance for which recording is required by Section 1403(a)(1) as "affecting the title to, or any interest in, any civil aircraft," is invalid except as against those persons with actual notice if it is not recorded. See 49 U.S.C. § 1403(c). Its purpose, as stated in Marsden v. Southern Flight Service, Inc., 227 F.Supp. 411, 415 (M.D.N.C.1961), is "to protect persons who have dealt on the faith of recorded title . . . and as to whom it would be a fraud to give effect to unrecorded titles to their detriment." See also International Atlas Services, Inc. v. Twentieth Century Aircraft Co., 251 Cal.App.2d 434, 438, 59 Cal.Rptr. 495, 497 (1967). Like the Federal Ship Mortgage Act,⁵ the FAA recording system represents an attempt by Congress to give fair notice of security interests in highly mobile collateral to interested parties through one readily accessible, national filing system.

Because it represents federal action in this area, section 1403 preempts, albeit not completely, those provisions of the Uniform Commercial Code which might otherwise apply as is implicitly recognized by Section 9—104 of the U.C. C.⁶ and explicitly acknowledged in the Official Comment to that section.⁷ Validation under the FAA recording system is in every respect equivalent to perfection of a security interest under the U. C.C.,⁸ although, unlike the U.C.C., the FAA system provides only one way in which security interests in aircraft can be perfected. It does not envisage the variety of methods permitted for differing types of collateral.⁹ So, the validity of Chase's security interest in the Devcon lease against the trustee must be determined solely under the FAA recording system.

This, in turn, depends upon whether the assignment is a "conveyance which affects the title to, or any interest in, any civil aircraft" for which Section 1403(a)(1) requires recordation, or, even if so, whether the trustee had the actual notice of the assignment contemplated by Section 1403(c).

Unfortunately, the regulations promulgated by the Federal Aviation Agency pursuant to Section 1403 do not resolve the first question. Although 14 C.F.R. § 49.31(a) specifically requires the recording of "a bill of sale, contract of conditional sale, assignment of an interest under a contract of conditional sale, mortgage, assignment of mortgage, lease, equipment trust, notice of tax lien or of other lien" as instruments affecting title to or an interest in an aircraft, it makes no reference to the assignment of an interest under a lease.

It would seem incontrovertible that the statutory language "conveyance which affects . . . any interest in" an airplane should encompass an assignment of a lease. Clearly the present possessory right and the entitlement to rentals conferred by a lease agreement are property "interests" as the term has been generally understood;¹⁰ less than "title" perhaps, but "interests" nonetheless.¹¹ It then follows that assigning a lease "affects" the lessor's interest by transferring its primary incident, the right to receive rentals.

Therefore, Section 1403(a)(1) in my view requires that an assignment be recorded with the FAA in order to perfect a security interest in the lease. Chase apparently regarded the lease as falling within the designation "chattel paper" set forth by U.C.C. 9-105(1)(b), and thus attempted to perfect its security interest by taking possession of the lease, as permitted by U.C.C. § 9-305. But, as we have seen, the FAA recording system preempts the U.C.C. perfection requirements as to interests in aircraft and Chase's attempted U.C.C.— perfection was futile.

The conclusion seems inevitable that Section 1403 should be construed broadly to embrace all conveyances of interests in airplanes when the failure to record them might be misleading to creditors and other innocent third parties. See Marsden v. Southern Flight Service, Inc., supra, 227 F.Supp. at 415. Here, Chase filed only the chattel mortgage and not the lease or its assignment. This meagre filing does not give notice that the airplane was leased—a conveyance for which filing is specifically required by 14 C.F.R. § 49.31(a)—or that the lease payments were to be made to Chase and not to LCI. A potential creditor of LCI, or even a subsequent purchaser of the airplane, consulting the FAA files, might be misled into the wholly justifiable conclusion that LCI owned a valuable possessory interest in an airplane and, a fortiori, was entitled to the rental payments (which may well have exceeded the payments due under the mortgage) should such possessory interest be leased out. The perfection of security interests under Section 1403 is not too burdensome to expect of anyone seeking its protection. See Smith v. Eastern Airmotive Corp., 99 N.J.Super. 340, 240 A.2d 17 (1968).

Insofar as the trustee in bankruptcy succeeds to the rights of creditors who could, by the date of bankruptcy, have completed all necessary processes to perfect a lien in the bankrupt's property by reason of Section 70c of the Bankruptcy Act, 11 U.S.C. § 110(c), and since the notice given by Chase would have been inadequate as to them, I find that the filing of the chattel mortgage was inadequate to confer the actual notice of the assignment contemplated by 49 U.S.C. § 1403(c) upon the trustee.

Therefore, I hold that Chase's failure to file either the Devcon-LCI lease or its assignment to Chase left its security...