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Bitzer Croft Motors v. Pioneer Bk. & T. Co.

OPINION FILED MARCH 18, 1980.

BITZER CROFT MOTORS, INC., PLAINTIFF-APPELLANT,

v.

PIONEER BANK & TRUST COMPANY, DEFENDANT AND THIRD-PARTY PLAINTIFF-APPELLEE. — (MICHAEL A. TATALOVICH ET AL., THIRD-PARTY DEFENDANTS.)



APPEAL from the Circuit Court of St. Clair County; the Hon. JOSEPH F. CUNNINGHAM, Judge, presiding.

MR. JUSTICE HARRISON DELIVERED THE OPINION OF THE COURT:

Appellant Bitzer-Croft Motors, Inc., appeals from a judgment of the circuit court of St. Clair County finding that it was not entitled to possession of a certain 1977 Piper Lance aircraft, and appellee Pioneer Bank & Trust Company cross-appeals from a judgment finding that there was no conspiracy on the part of David Croft and others to deprive it of a security interest in the aircraft. Appellant contends that (1) title to and possession of the aircraft should be resolved under the Uniform Commercial Code as adopted in Illinois rather than the Federal Aviation Act as urged by appellee; (2) the trial court erred in finding that Bitzer-Croft was not a good-faith purchaser (buyer in the ordinary course of business) under the provisions of the Uniform Commercial Code; (3) appellee is estopped under the terms of its chattel mortgage from exercising its security interest in the aircraft; and (4) appellee's notice of cross-appeal was not timely filed. We affirm in part, reverse in part, and remand with directions.

On November 18, 1977, plaintiff Bitzer-Croft Motors, Inc., an automobile dealership (hereinafter referred to as Bitzer-Croft), by and through its agent, David Croft, entered into a retail purchase order with Southern Illinois Aviation, Inc. (hereinafter referred to as Southern), to purchase a 1977 Piper Lance airplane for $72,925. Michael Tatalovich, an officer of Southern, negotiated the order with Mr. Croft. To establish chain of title, Tatalovich delivered Bitzer-Croft three bills of sale on November 23, 1977: A purchaser's copy of the bill of sale from Aviation Distributors, Inc., to Ken Paul Aircraft, Inc., an original bill of sale from Ken Paul Aircraft, Inc., to Southern, and the original and purchaser's copy of the bill of sale from Southern to Bitzer-Croft. The document evidencing sale from Ken Paul Aircraft, Inc., to Southern was an undated, partially handwritten bill of sale which Ken Paul testified he prepared when Tatalovich informed him that the original had been lost. These documents, except the original bill of sale from Southern to Bitzer-Croft, were delivered by Croft to the Bank of Belleville prior to December 13, 1977, in order to obtain financing in the sum of $62,000 for the plane and for the bank to perfect its security interest in the plane. That original bill of sale from Southern to Bitzer-Croft apparently was sent on December 15, 1977, by David Croft with an aircraft registration application to the Federal Aviation Administration in order to register the aircraft in the name of Bitzer-Croft, which was done on February 9, 1978.

On December 14, 1977, Croft received a phone call from Tatalovich requesting immediate payment for the plane by Bitzer-Croft since Tatalovich had issued a draft to Ken Paul Aviation, Inc., and needed the payment in order to cover his draft. Tatalovich said the plane would be returned to Ken Paul Aviation, Inc., if Bitzer-Croft did not issue immediate payment. Croft and Earle Bitzer, as officers and agents of Bitzer-Croft, executed a promissory note, security agreement and aircraft chattel mortgage on December 15, 1977, to the Bank of Belleville and received a draft for $62,000 which together with a check for $11,000 drawn on Bitzer-Croft's account was delivered to Southern. Possession of the aircraft was then taken by Bitzer-Croft, although it remained on the premises of Southern at its place of business in Cahokia, Illinois. Southern then refunded, allegedly as a sales commission, $11,000 to Croft and Earle Bitzer in equal shares. There were, then, discrepancies between the original order price, the gross amount paid by Bitzer-Croft, and the net amount retained by Southern. A subsequent handwritten purchase order dated December 15, 1977, was entered between Bitzer-Croft and Southern, by David Croft and Michael Tatalovich respectively, reflecting a purchase price of $62,000.

On the same day Bitzer-Croft and Southern entered their agreement, November 18, 1977, Tatalovich obtained a loan for Southern from defendant Pioneer Bank & Trust Company (hereinafter referred to as Pioneer) in the sum of $61,000 executing a chattel mortgage and pledging the subject 1977 Piper Lance aircraft as security. This was accomplished by Tatalovich's delivery to Pioneer of the first original bill of sale from Ken Paul Aviation, Inc., to Southern, the second original having been delivered to Bitzer-Croft, as well as the original bills of sale from Piper Aircraft Corporation to Aviation Distributors, Inc., and from Aviation Distributors, Inc., to Ken Paul Aviation, Inc. On November 18, an agent of Pioneer called the Insured Aircraft Title Service, Inc., in Oklahoma City, Oklahoma, to check the ownership status of the subject aircraft which at that time was listed as unregistered. The loan was then extended to Southern according to Pioneer installment loan officer Don Garner, as part of Southern's floor plan financed by Pioneer and with knowledge that the aircraft would constitute part of Southern's sales inventory and that it would be or may already have been sold. The chattel mortgage as well as the three aforesaid original bills of sale were filed by Pioneer with the Federal Aviation Administration on November 28, 1977, five days after the bills of sale were transferred from Southern to Bitzer-Croft, and recorded therewith on December 16, 1977.

Also in December 1977, after the loan had been extended to Bitzer-Croft, the Bank of Belleville filed the documents in its possession with the Federal Aviation Administration. Betty Evans, a loan officer for the Bank of Belleville, made a phone call to Insured Aircraft Title Service, Inc., which reported that a certain document pertaining to the aircraft had been received by the Federal Aviation Administration but had not as yet been recorded. Ms. Evans requested a written report regarding the plane, but no further document search was performed by the Bank of Belleville. The documents from the Bank of Belleville regarding the plane were received by the Federal Aviation Administration on January 26, 1978, and recorded therewith on February 9, 1978.

Southern subsequently went out of business. Don Garner testified that because Southern had been delinquent in the payment of certain notes a floor plan check was pursued in February 1978. At that time he discovered that the aircraft had been sold by Southern and that Bitzer-Croft and the Bank of Belleville were named insureds on the policy covering the plane. Garner then notified Ms. Evans that Pioneer had an unsatisfied lien on the plane, but the aircraft was repossessed on February 15, 1978, by Pioneer's agents before David Croft and the Bank of Belleville could get a satisfactory explanation from Tatalovich as to the existence of another lien. Prior to the repossession of the plane, Garner had called Insured Aircraft Title Service, Inc., to determine the ownership status of the plane, but he testified that "[e]vidently they were so busy they weren't going to call back until the next day." Rather than waiting for the return call, the plane was repossessed. The day after repossession, a title search by Insured Aviation Title Service, Inc., showed the record owner of the aircraft to be Bitzer-Croft. Mr. Garner agreed that had he resolved the ownership status of the plane on February 15, the Federal Aviation Administration documents would have shown Bitzer-Croft as the owner of the plane.

Bitzer-Croft subsequently filed suit to recover possession of the aircraft, to obtain clear title thereto, and for damages for loss of use of the plane, punitive damages and attorney's fees. Pioneer filed a third-party action charging David Croft with conspiracy in conjunction with officers and agents of Southern to defraud Pioneer of its security interest in the plane. After a bench trial, the trial court found on December 28, 1978, that Bitzer-Croft was not a "good faith" purchaser, that David Croft should have made further inquiry into the chain of title to the plane because of his experience in financing and floor-planning automobiles and aircraft, and that Pioneer had perfected its security interest in the plane and was therefore entitled to its immediate possession. The court, however, found against Pioneer on its action alleging conspiracy.

On January 18, 1979, Bitzer-Croft filed a notice of appeal. On January 26, 1979, Pioneer filed a post-trial motion which was denied on February 9, 1979. Pioneer subsequently filed a notice of cross-appeal on February 20, 1979, with Bitzer-Croft filing no new notice of appeal. This is the posture in which the case is presented to this court.

• 1 We must initially address a question of first impression in Illinois, that being whether the Federal Aviation Act, which establishes a system of recordation of aircraft title, affects the priorities under the Uniform Commercial Code between prior security interests and subsequent buyers. A comprehensive registration system was first created by section 503 of the Civil Aeronautics Act of 1938 (49 U.S.C. § 503 (1938)). This statute was superseded by section 503 of the Federal Aviation Act of 1958 (49 U.S.C. § 1403 (1958)) and was amended in 1964 (Pub. L. No. 88-346, § 2, 78 Stat. 236) and 1966 (Pub. L. No. 89-670, 80 Stat. 931). Section 1403 as amended provided in relevant part:

"(a) The Administrator shall establish and maintain a system for the recording of each and all of the following:

(1) Any conveyance which affects title to, or any interest in, any civil aircraft of the United States;

(2) * * * any mortgage, * * * or other instrument executed for security purposes, * * *;

(c) No conveyance or instrument the recording of which is provided for by subsection (a) of this section shall be valid in respect of such an aircraft * * * 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 * * *.

(d) Each conveyance or other instrument recorded by means of or under the system provided for in subsection (a) or (b) of this section shall from the time of its filing for recordation be valid as to all persons without further or other recordation * * *."

Also, in 1964, section 506 of the Act (49 U.S.C. § 1406 (1964), Pub. L. No. 88-346 § 1(a), 78 Stat. 236), was added as follows:

"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."

Based on these statutes, it can be seen the Congress has preempted the field by enacting this system of aircraft title registration, and that State recording statutes are inapplicable to such instruments. State Securities Co. v. Aviation Enterprises, Inc. (10th Cir. 1966), 355 F.2d 225, 229; Texas National Bank v. Aufderheide (E.D. Ark. 1964), 235 F. Supp. 599, 603.

• 2, 3 However, it is also clear that Congress did not preempt every aspect of the field to the mutual exclusion of State law. Senate Commerce Committee Report No. 1060, which accompanied the bill subsequently enacted as 49 U.S.C. § 1406, stated:

"It establishes a uniform Federal rule governing the validity of instruments affecting title to or interests in aircraft and related equipment. 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 would need only to look to the substantive law of the particular State in which the relevant instrument was delivered." (Emphasis added.) (2

U.S. Code Cong. & Ad. News 2319, 2320.)

It is settled that the underlying validity of such title instruments is resolved under State law. (Aircraft Investment Corp. v. Pezzani & Reid Equipment Co. (E.D. Mich. 1962), 205 F. Supp. 80, 82; Idabell National Bank v. Tucker (Okla. App. 1976), 544 P.2d 1287, 1290; see Annot., 22 A.L.R.3d 1270, 1275 (1968).) Indeed, it has been held that "`state law should apply to determine any question arising in connection with a security interest in ...


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