Shacket v. Roger Smith Aircraft Sales, Inc., 78C4284.

• Citation: 651 F. Supp. 675
• Decision Date: 13 January 1987
• Docket Number: No. 78C4284.,78C4284.
• Parties: Maurice SHACKET and Sylvia Shacket, Plaintiffs, v. ROGER SMITH AIRCRAFT SALES, INC., et al., Defendants. PHILKO AVIATION, INC., Counterplaintiff, v. Maurice SHACKET and Sylvia Shacket, Counterdefendants. Maurice SHACKET and Sylvia Shacket, Third Party Plaintiffs, v. CLARK AVIATION, INC., et al., Third Party Defendants.
• Court: U.S. District Court — Northern District of Illinois

651 F. Supp. 675

Maurice SHACKET and Sylvia Shacket, Plaintiffs, v. ROGER SMITH AIRCRAFT SALES, INC., et al., Defendants.

PHILKO AVIATION, INC., Counterplaintiff, v. Maurice SHACKET and Sylvia Shacket, Counterdefendants.

Maurice SHACKET and Sylvia Shacket, Third Party Plaintiffs, v. CLARK AVIATION, INC., et al., Third Party Defendants.

No. 78C4284.

United States District Court, N.D. Illinois, E.D.

November 20, 1986.

Memorandum Opinion and Order December 29, 1986.

On Motion to Dismiss January 13, 1987.

COPYRIGHT MATERIAL OMITTED

James C. Murray, Jr., James E. Hanlon, Jr., Katten, Muchin, Zavis, Pearl, Greenberger & Galler, Chicago, Ill., for plaintiffs.

Leslie R. Bishop, Donald B. Garvey, Michael E. Kerpan, Jr., Bishop & Crawford, Ltd., Oak Brook, Ill., for defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

SHADUR, District Judge.

This action was brought by Maurice and Sylvia Shacket (Maurice is referred to individually as "Shacket," and they are referred to collectively as "Shackets") for a declaratory judgment that they have title to a 1978 Piper Navajo registered as N78MS (the "Aircraft"). Philko Aviation, Inc. ("Philko") counterclaims on a conversion theory,¹ asserting lawful ownership of the Aircraft. This action, on remand from the Supreme Court, 462 U.S. 406, 103 S.Ct. 2476, 76 L.Ed.2d 678 (1983), poses some if not all of the following issues:

1. whether Philko had statutory "actual notice," within the meaning of Federal Aviation Act § 503(c) (49 U.S.C. § 1403(c)), of the fraudulent scheme of Roger Smith ("Smith") and Roger Smith Aircraft Sales ("Smith Aircraft") to obtain money by dealing with more than one party with respect to the Aircraft;

2. for that purpose, whether statutory "actual notice" can be imputed to Philko by virtue of the relationship between it on the one hand and Smith and Smith Aircraft on the other;

3. whether the instruments purporting to convey the Aircraft to Philko were valid under Illinois law;

4. whether those instruments conveyed valid title to Philko when it had no intention of taking possession and ownership of the Aircraft;

5. whether Philko's interest is valid over Shackets' interest when, at the time Philko recorded its interest, it had knowledge of Shackets' interest; and

6. whether Shackets exercised reasonable diligence to record their interest in the Aircraft.

This Court has conducted a nine-day bench trial (the "Trial"), during which it had the opportunity to hear live testimony and review exhibits, stipulations of fact and designations of deposition transcripts. In accordance with Fed.R.Civ.P. ("Rule") 52(a), this Court finds the facts specially as set forth in the following Findings of Fact ("Findings") and states the following Conclusions of Law ("Conclusions"). To the extent, if any, the Findings as stated reflect legal Conclusions, they shall be deemed Conclusions; to the extent, if any, the Conclusions as stated reflect factual findings, they shall be deemed Findings.

Findings of Fact

1. Shackets are citizens of Michigan residing in Southfield, Michigan. Shacket has been a pilot for many years and has owned a variety of private aircraft since 1955, for the most part together with one of his employees, Joseph Henry Charbonneau ("Charbonneau"). Charbonneau always took responsibility for handling all paperwork, including title documents, relating to ownership of the aircraft he owned jointly with Shacket.

2. Philko is a Delaware corporation with its principal place of business within the Northern District of Illinois. At all relevant times it has been duly licensed to transact business in the State of Illinois.

3. From a date prior to April 1977 through December 1, 1977 Smith Aircraft was an Illinois corporation. Beginning approximately April 28, 1977 Smith Aircraft had its principal (indeed its sole) place of business at the Aurora Municipal Airport in Sugar Grove, Illinois (the "Airport"). On or about December 1, 1977 Smith Aircraft was involuntarily dissolved by the Illinois Secretary of State. Thereafter Smith continued to carry on Smith Aircraft's activities at the same location in the same corporate name despite such dissolution.

4. At all relevant times Smith, an Illinois citizen, was the sole owner and president of Smith Aircraft. Smith has been in the aircraft business for over 20 years. Until April 1977 Smith Aircraft was a fixed base operator ("FBO") at DuPage County Airport. As an FBO, Smith Aircraft leased and sold new and used aircraft, operated a flight school and a charter service and provided aircraft maintenance services.

5. Before April 22, 1977 Harry Weber ("Weber") was the sole owner of Philko Aviation, Inc., an Illinois corporation ("Philko Illinois"). Philko Illinois was then an FBO operating out of the Airport, engaging in all the same kinds of activities then conducted by Smith Aircraft at the DuPage County Airport, as well as in the sale of aviation fuel and lubricants. Philko Illinois conducted its operations at the Airport pursuant to a lease with the City of Aurora.

6. In December 1976 Smith approached Weber as to the potential acquisition of Philko Illinois. They discussed the terms, including the purchase price, of that possible acquisition. Because Smith was not himself financially capable of acquiring Philko Illinois, Smith then approached Illinois citizen Edward McArdle ("McArdle"), president of McArdle Ltd. (McArdle's holding company for ownership of various business subsidiaries), with the idea that McArdle or one of his companies would purchase Philko Illinois and would in turn lease the facilities operated by Philko Illinois to Smith Aircraft. Smith's testimony during the trial clearly disclosed he had not then thought through the economics of the transaction or just how it would function — his mistaken perception was that Smith Aircraft would be able to fund, out of future operations, its financial obligations incurred in acquiring the business.

7. McArdle, an experienced businessman with a wide variety of holdings, calculated the amount of investment he or his company would be required to make to acquire Philko Illinois and the amount of yield he would want to justify that investment. Based on his analysis he told Smith the required monthly rental from Smith Aviation to McArdle or his company would be $4,000 absolutely net (that is, free and clear of any expenses), and he asked if Smith Aircraft could handle that amount of rent. Smith responded Smith Aircraft could: It was already paying about $3,200 per month at DuPage Airport, with fewer spaces for aircraft tiedowns and without having any right to make fuel sales. What Smith (obviously a far less experienced businessman than McArdle) did not realize was that he had failed to take into account the added financial burdens imposed by (a) the lease (a net lease, with the tenant required to bear all the burdens of ownership), (b) the payments on Weber's noncompetition agreement (see Findings 8 and 9) and (c) the need to build up a replacement inventory of parts (see Finding 12) at the same time that Smith Aircraft was required to pay off its account payable for the original parts inventory to McArdle or his company. From the outset Smith Aviation was hopelessly undercapitalized for the needs of the FBO transaction at the Airport. Though McArdle may not have fully realized that when the transaction was consummated, Philko's personnel (who maintained the financial records of Smith Aircraft's operations at the Airport) certainly became aware of that fact long before the transaction involving the Aircraft, and not later than the end of 1977 McArdle himself also became aware of Smith Aircraft's financial difficulties when Smith had to ask McArdle for still further financing (provided by Pheasant Run, another of McArdle's companies).

8. On April 21, 1977 McArdle caused McArdle, Ltd. to organize Philko as a wholly-owned subsidiary. On April 22 Philko contracted to purchase all the common stock of Philko Illinois for $141,600, subject to certain adjustments that brought the total purchase price over $200,000. In part the purchase agreement obligated Philko to assume the obligations of Philko Illinois under the City of Aurora lease at the Airport. Through the agreement and the subsequent dissolution of Philko Illinois (which caused its assets to be transferred to Philko), Philko acquired an inventory of aircraft, aviation fuel, replacement parts and sundry items associated with an FBO operation. Contemporaneously with execution of the purchase agreement, Philko also contracted to pay Weber an additional $50,000, in monthly installments over the course of five years, under a noncompetition agreement.

9. On April 28 Philko and Smith Aircraft entered into a five-year agreement (the "Lease") with a variety of provisions — both usual and unusual in conventional leasing arrangements. In addition to its $4,000 monthly net rental obligation to Philko, Smith Aircraft assumed (a) all Philko's obligations (formerly those of Philko Illinois) under the City of Aurora lease and (b) Philko's payment obligations under the Weber noncompetition agreement. All Philko employees became employees of Smith Aircraft as of April 28. Smith Aircraft was required to and did maintain insurance for the operations, naming Philko as a co-insured. Smith Aircraft further agreed to operate in Philko's name various of the businesses previously conducted by Philko Illinois: the purchase (also in Philko's name) and sale of aviation fuel and lubricants, the sale of new Piper aircraft, the leasing of aircraft, the operation of a charter school and flight school and the rendering of aircraft maintenance services. Indeed the only activity the Lease permitted Smith Aircraft to carry on in its own name was the purchase and sale of used aircraft. Though labeled a lease, the transaction in substantial part rendered Smith Aircraft an agent for Philko. And as later Findings reflect, the manner of actual...