Shacket v. Philko Aviation, Inc.

• Citation: 681 F.2d 506
• Decision Date: 22 June 1982
• Docket Number: No. 81-1249,81-1249
• Parties: 33 UCC Rep.Serv. 1648 Maurice SHACKET and Sylvia Shacket, Plaintiffs-Appellees, v. PHILKO AVIATION, INC., Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 506

681 F.2d 506

33 UCC Rep.Serv. 1648

Maurice SHACKET and Sylvia Shacket, Plaintiffs-Appellees, v. PHILKO AVIATION, INC., Defendant-Appellant.

No. 81-1249.

United States Court of Appeals,

Seventh Circuit.

Argued Jan. 4, 1982.

Decided June 22, 1982.

James C. Murray, Jr., Katten, Muchin, Zavis, Pearl & Galler, Chicago, Ill., for defendant-appellant.

Leslie R. Bishop, Bishop & Crawford, Ltd., Oak Brook, Ill., for plaintiff-appellee.

Before PELL, Circuit Judge, MARKEY, Chief Judge, ^* and SPRECHER, Circuit Judge. ^**

MARKEY, Chief Judge.

Appeal from a judgment of the district court for the Northern District of Illinois declaring title to an aircraft by way of summary judgment granted to Maurice and Sylvia Shacket. We affirm.

Background

In April 1978, Roger Smith Aircraft Sales, Inc. (Smith Aircraft) sold a new, custom-built Piper Navajo aircraft, registration number N78MS, to Maurice and Sylvia Shacket, who took possession at that time. Subsequently, Smith Aircraft purported to sell the same aircraft to Philko Aviation Company (Philko), the "sale" being financed by Sandwich State Bank (Bank), which purported to take a security interest in the aircraft.

The Shackets brought suit for a judgment declaring their right of ownership in the aircraft. The Shackets and Philko filed motions for summary judgment. Judge Shadur granted summary judgment in favor of the Shackets. Philko's motion for reconsideration was denied, but the court modified its prior opinion respecting certain factual matters and terminology.

Background

Maurice Shacket, a private pilot and aircraft owner for many years, and his wife Sylvia, contracted with Smith Aircraft in 1977 to buy the aircraft for $126,000 plus the trade-in of an aircraft valued at $120,000, giving a check for $20,000 as a down payment. Smith Aircraft, engaged in buying and selling used aircraft, contracted to purchase the new aircraft from Clark Aviation, Inc. (Clark), a Piper franchisee. The Shackets were aware of the arrangements between Smith Aircraft and Clark, and were in contact with Kenneth Rittenhouse, Clark's president and principal shareholder, regarding customizing of the aircraft before final delivery. Citing financial problems Clark had with Smith Aircraft, Rittenhouse requested that he be present at the closing and advised the Shackets not to pay Smith Aircraft unless he was there. The Shackets agreed.

Before the closing, Smith Aircraft located a customer for its resale of the trade-in aircraft. The Shackets relinquished possession of that aircraft for delivery to that customer, keeping the title papers as presumed security for the transaction.

At the closing, Mr. Shacket asked Rittenhouse whether it was all right to close the purchase and Rittenhouse said it was, though Rittenhouse had not yet received full payment from Smith Aircraft. The Shackets then endorsed two cashiers' checks, aggregating $106,000, in favor of The present controversy is in part generated by failure of Roger Smith, president of Smith Aircraft, to give the Shackets all the proper bills of sale reflecting the chain of title in the aircraft, and in part by Smith's "sale" of the same aircraft to two different parties. Telling the Shackets that the legal title could not be delivered at closing because of uncompleted clerical work, Smith supplied the buyer's copy of the bill of sale, and photocopies of bills of sale covering prior transfers of the aircraft and said he would "take care of the paperwork." The Shackets understood that to mean Smith would record the bills of sale as part of the "paperwork." No recording of the Shackets' interest was accomplished.

Smith Aircraft. Rittenhouse showed the Shackets the aircraft and handed them various manuals, the certificate of airworthiness, and the keys. The Shackets subsequently returned home in the new aircraft and have retained possession ever since.

Through Smith, Edward McArdle learned of an aircraft operation (Philko) for sale at the Aurora Municipal Airport. McArdle purchased Philko, becoming its president and principal stockholder, and leasing its operations to Smith Aircraft. Under the lease arrangement, Smith Aircraft would continue existing operations under Philko's name, accounting to Philko for all expenses and receipts. ¹ Smith Aircraft was permitted to use Philko's buildings for Smith Aircraft's used aircraft sales and charter business. McArdle extended his personal credit and the credit of his companies to assist Smith Aircraft, guaranteeing $100,000 of its $500,000 line of credit and loaning it $80,000. When Smith approached McArdle concerning the Piper aircraft in question, Smith Aircraft owed Philko $60,000 on the loan.

Two days after closing with Shackets, Smith told McArdle he needed $152,000 to complete purchase of the same aircraft he had already sold and delivered to the Shackets, telling him the aircraft was to be sold to Krueger Aviation Inc., a California corporation (Krueger). Smith said the Bank would not advance funds to complete the transaction because an advance would exceed his line of credit and showed McArdle a copy of a purported purchase order signed by Krueger. Smith told McArdle the sale would enable him to erase the $60,000 debt to Philko.

After McArdle and the Bank examined the original prior bills of sale exhibited by Smith, and checked the title against Federal Aviation Administration (FAA) records, McArdle agreed that Philko would take title to the plane from Smith Aircraft. All the proceeds of the Krueger sale would be credited to Smith Aircraft ($152,000 being repaid to the Bank, $60,000 being applied to payment of the Philko loan, and the balance going to Smith Aircraft). The Bank subsequently recorded with the FAA the bill of sale to Philko and the Bank loan agreement, though Philko never received physical possession of the Piper aircraft.

Issues

1. Did the district court err in concluding that state law governs validity of the transfers of the aircraft?

2. Did the district court err in concluding that under state law the Shackets obtained title to the aircraft as a result of their purchase from Smith Aircraft?

3. Did the trial court err in concluding that under state law Philko did not obtain title to the aircraft?

4. Were there genuine issues of material fact sufficient to preclude grant of summary judgment to the Shackets?

OPINION

1. Effect of the Shackets' Failure to Record

Under the Federal Aviation Act of 1958 (Act), 49 U.S.C. § 1301 et seq., Congress established a system for national registration of conveyances and encumbrances affecting aircraft. Registration entails filing an application for registration with the FAA in Oklahoma City, disclosing prescribed information about the owner, evidence of ownership, and a filing fee. Upon acceptance of the application, the interest is recorded and a certificate of registration issued. Section 1403 of the Act recites the broad range of conveyances included within the scope of the recording system and further provides at section (c):

§ 1403(c) No conveyance or instrument, the recording of which is provided for by (§ 1403(a) ) shall be valid in respect of such aircraft, aircraft engine or engines, propellers, appliances, or spare parts 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 in the office of the Administrator.

Philko argues that § 1403(c) preempts state law and invalidates any conveyance of an aircraft without recordation. Any federal preemption however is limited by the terms of 49 U.S.C. §§ 1401(f) and 1406. The former provides that the FAA issued certificate of registration shall not be evidence of ownership in any proceeding where ownership is in issue. Congress indicated a further deference to state law in 1964 when it enacted § 1406.

§ 1406 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 ....

The extent to which the Act effects priorities between claimants under successive transactions involving the same aircraft must therefore be limited. In Sanders v. M. D. Aircraft Sales, Inc., 575 F.2d 1086 (3rd Cir. 1978), the court noted:

(T)here has been preemption by federal law only to the limited extent that Congress has sensibly federalized choice of law, thereby freeing aircraft financing from the forum shopping which the rule of Klaxon Co. v. Stentor Elec. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941), might otherwise produce.

Id. at 1088; also quoted in Bitzer-Croft Motors, Inc. v. Pioneer Bank & Trust Co., 82 Ill.App.3d 1, 37 Ill.Dec. 247, 401 N.E.2d 1340, 1345 (1980).

Since the enactment of § 1406, numerous courts have adopted the view that the Act is subject to UCC principles of good faith purchaser status, actual notice, and the rights of a buyer in the ordinary course, as Judge Shadur determined the Shackets to be. ² Thus, though the manner of recordation and choice of law question are resolved under the Act, the underlying validity and effect of an instrument are subject to applicable state law. We therefore conclude that the Act does not preempt all state laws governing priorities among security interests, and that the interests of the parties in the aircraft in this case must be determined by reference to state law.

2. The Shackets' Interest Under State Law

The state law applicable to the sale of goods in Illinois is the Uniform Commercial Code (UCC). ³ UCC § 1-201(9) defines a buyer in the ordinary course of business.

(9) "Buyer in ordinary course of business" means a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third par...