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Shacket v. Philko Aviation Inc.

decided: June 22, 1982.

MAURICE SHACKET AND SYLVIA SHACKET, PLAINTIFFS-APPELLEES,
v.
PHILKO AVIATION, INC., DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 78 C 4284 -- Milton I. Shadur, Judge

Before Pell, Circuit Judge, Markey, Chief Judge,*fn* and Sprecher, Circuit Judge.*fn**

Author: Markey

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 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.

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.

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.*fn1 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 ...


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