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September 22, 1980


The opinion of the court was delivered by: Shadur, District Judge.


This action involves a dispute over the ownership of a Piper Navajo airplane sold twice by defendants Roger Smith ("Smith") and Roger Smith Aircraft Sales, Inc. ("Smith Aircraft").*fn1 Plaintiffs Maurice and Sylvia Shacket ("Shackets"*fn2) are in possession of the plane and have asked this Court in Count I for a declaratory judgment that they own the plane free of any claims of defendants. Defendant Philko Aviation Company ("Philko") has counterclaimed asserting its ownership of the plane. Defendant Bank has claimed a lien if the plane is owned by Philko. Shackets have also alleged in Complaint Count II that Philko aided Smiths in seeking to defraud Shackets of their interest in the plane and that all defendants have engaged in fraudulent conversion. Counterclaims have been filed by Philko and Bank.

Shackets and Philko have filed cross-motions for summary judgment on Count I, and Philko and defendant Edward McArdle ("McArdle"), its president and principal shareholder (through a holding company), have moved for summary judgment on Count II. For the reasons stated in this memorandum opinion and order, Shackets' motion for summary judgment as to Count I is granted (and Philko's is denied), and the Philko-McArdle motion for summary judgment as to Count II is also granted.


1. The First Sale.

Shacket, a private pilot and owner of aircraft for many years, contracted with Smith Aircraft in 1977 to buy a custom-built Piper Navajo plane for $126,000 plus the trade-in of a plane currently owned by Shacket, the wholesale value of which was $120,000. Shacket paid $20,000 down on the purchase price upon signing the contract with Smith Aircraft. Smith Aircraft in turn contracted to acquire the plane from Clark Aviation, Inc. ("Clark," the Piper franchisee for the area), an arrangement of which Shacket was aware. Before the closing of Shacket's purchase of the plane, Smith located a customer for his resale of the trade-in aircraft, and Shacket turned over possession of the trade-in aircraft for delivery to Smith's customer. After completion of the necessary work on the Piper Navajo to meet Shacket's specifications, the closing was set for April 18, 1978.

As of the closing date Smith Aircraft had not been able to pay Clark for the plane to be sold to Shacket,*fn3 but that did not prevent the closing from taking place on April 19. Closing involved a meeting at an airport attended by Shacket, Smith and Clark's president and principal shareholder, Kenneth Rittenhouse ("Rittenhouse"). Rittenhouse had previously told Shacket of financial problems Clark had encountered with Smith Aircraft (the delivery of one, or perhaps two, NSF checks). As a special request Rittenhouse had told Shacket that he wanted to be present at the closing and that Shacket should not pay Smith Aircraft for the plane unless Rittenhouse were there.

At the closing Shacket asked Rittenhouse whether it was all right to close the purchase of the plane and Rittenhouse said it was. Shacket then endorsed two cashiers' checks aggregating $106,000 in favor of Smith Aircraft. Rittenhouse and Smith showed Shacket the plane, turned over to Shacket various manuals and the certificate of airworthiness and handed the keys to Shacket. Shacket flew the plane to Detroit and has had possession ever since.

Essentially the problem in this case has been generated by Smith's failure at the closing to give Shacket all the proper bills of sale reflecting the chain of title to the plane. Smith did give Shacket the buyer's copy of the bill of sale from Smith Aircraft to Shacket, together with photocopies of the bills of sale covering prior transfers of the plane, and told Shacket that Smith would "take care of the paperwork." Shacket understood that to include an undertaking by Smith to record the bills of sale as part of the "paperwork."

There is a central registration system for aircraft conveyances under the Federal Aviation Act (the "Act"). Such registration requires the original bill or bills of sale covering the chain of title. After the closing Shacket made several attempts to get the prior bills of sale from Smith but was unsuccessful. Thus Shacket was unable to register his purchase with the Federal Aviation Administration (the "FAA").

2. The Second Sale.

Before the events described in the prior section, McArdle had been pressuring Smith to repay the remaining balance of $60,000 on Philko's $80,000 loan made to Smith Aircraft in December 1977. On April 18, 1978, the same day that Shacket arrived in Aurora for his closing the following day, Smith came to McArdle and represented that he had contracted with Clark to purchase a plane (which was in fact the same plane about to be paid for by and delivered to Shacket) for resale to a third party, Krueger Aviation. Smith claimed to have tried to borrow $152,000 from Bank on the plane but to have been refused because that would have exceeded his line of credit with Bank.

After McArdle and Bank had examined the original prior bills of sale that Smith exhibited, McArdle agreed that Philko would take title to the plane from Smith Aircraft, enabling it to obtain the same $152,000 loan from Bank to be secured by that title, and then to complete Smith Aircraft's previously committed sale to Krueger Aviation. All the proceeds of the Krueger sale would be credited to Smith Aircraft (with $152,000 of those proceeds being contemporaneously repaid to Bank, $60,000 being applied in payment of the prior Philko loan to Smith Aircraft, and the balance belonging to Smith Aircraft).

On April 22, 1978, just two days after the Shacket transaction, Philko executed its note for $152,000 to Bank, which in turn issued its cashier's check for that amount to Clark. Bank showed the remitter on the cashier's check as "Roger Smith Aircraft Sales, Inc. (Philko Aviation, Inc.)." On April 24, 1978 Smith Aircraft executed a bill of sale to Philko (the same date appears on all of Bank's security documents other than the Philko note to Bank, which was dated April 22).

At that point Bank had all of the original bills of sale establishing the paper chain of title in its possession (a series of bills of sale running from Piper Aviation to North States Aviation [the Piper distributor for the area] to Clark to Smith Aviation to Philko). All those documents were then transmitted by Bank to the Federal Aviation Administration for recording. Bank delayed that transmittal for a period of time. Its reason for delay was that where another sale of an aircraft is expected to be made, the administrative delay in recording earlier bills of sale can cause problems in implementing the subsequent sale. In any case, the present situation is that Shacket has the physical possession of, while Philko has the FAA registered title to, the plane.*fn4

3. Prior Relationships Among the Defenfants.

McArdle, the owner of a large number of corporations through his holding company McArdle, Ltd., first met Smith in 1976 or 1977 when McArdle was contemplating the purchase of corporate aircraft. In about April 1977 Smith, who wanted to acquire a new base of operations, learned about the availability for sale of the corporation that was lessee of the Aurora Airport from the City of Aurora. Because he didn't have funds to make the deal himself but regarded it as a good buy, Smith approached McArdle as a possible financial backer. Smith proposed that McArdle purchase the operation and lease it to Smith Aircraft on terms that would make it a good investment.

McArdle investigated Smith Aircraft's financial viability (including having an audit performed). He found that Smith Aircraft did a large volume of business but lacked operating capital and needed added credit to carry on its purchases of planes. Having satisfied himself on that score, McArdle caused one of his own corporations to purchase the Airport lessee (which became Philko by corporate merger) and caused Philko contemporaneously to sublease the Airport to Smith Aircraft for a five year term.

Smith Aircraft became more than a sublessee of Philko as a result of the April 1977 transaction, although the document the parties executed was termed a "Lease Agreement." In its sublessee capacity, Smith Aircraft agreed to make all the rental payments to the City of Aurora, and to perform all other obligations imposed on Philko as lessee, under the leases from the City; that much of course represented a conventional lessor-lessee relationship. But the parties also contracted for ...

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