Holiday Airlines Corp., In re

• Decision Date: 28 May 1980
• Docket Number: No. 77-2400,77-2400
• Parties: In re HOLIDAY AIRLINES CORPORATION, a California Corporation (formerly doing business as Holiday Recreational Resources and Holiday Resources Corp.), Bankrupt. Curtis B. DANNING, as Trustee in Bankruptcy of Holiday Airlines Corporation, Appellant, v. PACIFIC PROPELLER, INC., a Washington Corporation, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 731

620 F.2d 731

6 Bankr.Ct.Dec. 450

In re HOLIDAY AIRLINES CORPORATION, a California Corporation

(formerly doing business as Holiday Recreational

Resources and Holiday Resources Corp.),

Bankrupt. Curtis B. DANNING, as Trustee in Bankruptcy of

Holiday Airlines Corporation, Appellant, v. PACIFIC PROPELLER, INC., a Washington Corporation, Appellee.

No. 77-2400.

United States Court of Appeals, Ninth Circuit.

May 28, 1980.

Rehearing Denied June 24, 1980.

Richard S. Berger, Los Angeles, Cal., for appellant.

Robert J. Adolph, Short, Cressman & Cable, Seattle, Wash., for appellee.

Appeal from the United States District Court for the Central District of California.

Before CHAMBERS, and ELY, Circuit Judges, and COPPLE ^*, District Judge.

CHAMBERS, Circuit Judge:

In January 1975, appellee Pacific Propeller, Inc. (a Washington corporation operating in Washington) shipped to California a propeller assembly that it had overhauled for Holiday Airlines (a California corporation operating in California). Simultaneously, it billed Holiday $21,259.58 for the work that had been done and, relying on the Washington artisans' lien statute (RCW 60.08.010), ¹ filed a "Notice of Claim of Lien Aircraft" with the Federal Aviation Administration at its central recording office at Oklahoma City.

A month later Holiday commenced Chapter XI proceedings in the Central District of California and it was thereafter adjudicated bankrupt. The trustee brought an action to determine the validity of several liens. Pacific Propeller counterclaimed asserting the validity of its lien against the aircraft in which the propeller had been reinstalled. ²

The bankruptcy judge and the district judge both concluded (though they got there by different routes) that the lien attached in Washington, that Washington's non-possessory lien law applied, and that the lien was valid under Washington law and the notice properly recorded so as to entitle it to priority under the Federal Aviation Act. The trustee argues that the aircraft was present in California at the time the bankruptcy proceedings were commenced and that the applicable lien law is that of the forum State, i. e. California. As the pertinent California statute (California Code of Civil Procedure, § 1208.61) conditions the lien on retained possession, the Trustee takes the position that the lien is invalid.

The lien was filed under terms of the Federal Aviation Act. The pertinent provisions of 49 U.S.C. § 1403(a) state:

"(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;

(2) Any lease, and any mortgage, equipment trust, contract of conditional sale, or other instrument executed for security purposes, which lease or other instrument affects the title to, or any interest in (certain engines and propellers); and

(3) Any lease, and any mortgage, equipment trust, contract of conditional sale, or other instrument executed for security purposes, which lease or other instrument affects the title to, or any interest in, any aircraft engines, propellers, or appliances maintained by or on behalf of an air carrier . . . ."

The provisions of the Federal Aviation Act preempt State law insofar as they relate to the priority of liens. State Securities Co. v. Aviation Enterprises, Inc., 355 F.2d 225 (10th Cir. 1966); Pope v. National Aero Finance Co., Inc., 236 Cal.App.2d 722, 46 Cal.Rptr. 233 (1965). But matters touching on the validity of liens are determined by underlying State law. See 49 U.S.C. 1406; State Securities Co. v. Aviation Enterprises, Inc., supra; Texas National Bank of Houston v. Aufderheide, 235 F.Supp. 599 (E.D.Ark.1964); Aircraft Investment Corp. v. Pezzani & Reid Equipment Co., 205 F.Supp. 80 (E.D.Mich.1962). We thus begin with an acknowledgment that State lien law applies. The issue is which State's lien law? And to determine of that issue, we must first decide what choice of law rationale is to be employed.

The district judge, following the general rule in diversity of citizenship cases (Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed.2d 1477 (1941)) looked to the forum State's choice of law rules in order to determine which State lien law should be applied. He concluded that under California's "governmental interest" approach, as defined in Bernhard v. Harrah's Club, 16 Cal.3d 313, 128 Cal.Rptr. 215, 546 P.2d 719 (1976) and Reich v. Purcell, 67 Cal.2d 551, 63 Cal.Rptr. 31, 432 P.2d 727 (1967), Washington's and not California's interest would be more impaired if its lien law were not applied. He then concluded that the lien was valid under Washington's non-possessory lien statute.

The bankruptcy judge had looked to the Restatement (Second) of Conflicts for its choice of law rule as to chattel liens. Section 251 of that Restatement focuses the inquiry on which State's law bears the more "significant relationship to the parties, the chattel and the security interest." ³ Applying this test, he also concluded that Washington lien law should be employed. In applying the Restatement's test, rather than the conflicts law of California, the bankruptcy judge had the blessing of several commentators, including Collier, who urges that bankruptcy courts should not be required to use the conflicts rule in diversity of citizenship cases but "should be free to exercise for itself the choice of applicable state law." 4B Collier, on Bankruptcy (14th Ed. 1976), P 70.49 at 605-606.

We agree with the bankruptcy judge that the rule in diversity of citizenship cases, i. e. of mechanical application of the conflicts law of the forum State, should not be required in bankruptcy proceedings, at least in Federal Aviation Act cases. The Bankruptcy Act is silent as to the appropriate choice of law when two States have competing interests. Aircraft and their appurtenances, which are subject to the Act, are mobile by nature. It is their very mobility that led to the enactment of the federal recording provisions, so that creditors and others would have one central location to refer to when they wished to search titles and other ownership interests. Otherwise, it would be necessary to search what might well be a multitude of State and County recording offices to find the information. The place where such mobile aircraft property happens to be at the time bankruptcy is commenced, should not be seen as controlling when choice of law issues are presented.

The Act itself addresses the choice of law problem in an amendment, enacted in 1964. Section 1406 of Title 49 states:

"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."

Sanders v. M. D. Aircraft Sales, Inc., 575 F.2d 1086 (3d Cir. 1978), considers choice of law issues in the context of a consensual finance company loan. The Third Circuit refers to the legislative history of Section 1406, and its recognition that the Federal Aviation Act as adopted in 1958 had "left unresolved serious choice of law questions with respect to liens on chattels so mobile as aircraft." 575 F.2d at 1088. It then quotes from the legislative history of Section 1406 as contained in Senate Report 1060, 88th Cong., 2nd Sess., reprinted in U.S.Code Cong. & Admin.News, pp. 2319-2320 (1964):

"The rule would apply to all instruments subject to the recording provisions of § 503 of the Federal Aviation Act. Included would be various instruments executed for security purposes such as conveyances, leases, mortgages, equipment trusts, conditional sales contracts, etc. Assignments, amendments, and supplements to such instruments would similarly be covered. To determine the validity of such an instrument, one need only to look to the substantive law of the particular State in which the instrument was delivered."

In determining that the law of the State where the "instrument was delivered" is to apply, the Congress specifically rejected two alternative suggestions, i. e. that the jurisdiction where the property is located, or where the parties reside, be considered the jurisdiction whose law will be applied to resolve the conflicts question. In the view of the Senate Report, both alternatives would have resulted in "needless complexities and difficulties". More particularly, if the jurisdiction where the property was located were chosen, "it would be necessary to know the exact location of every aircraft at the precise moment the refinancing instrument was executed." Sanders views Section 1406 as a preemption by federal law and concludes that accordingly Congress "has sensibly federalized choice of law, thereby freeing aircraft financing from the forum shopping which the rule of Klaxon Co. v. Stentor Electric Mfg. Co. . . . might otherwise produce." 575 F.2d at 1088.

In the words of the Senate Report, the adoption of Section 1406 "establishes a uniform Federal rule governing the validity of instruments affecting title to or interests in aircraft and related equipment"...