The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
Maurice and Sylvia Shacket ("Shackets") originally sued
Roger Smith ("Smith"), Roger Smith Aircraft Sales, Inc.
("Smith Aircraft"), Philko Aviation, Inc. ("Philko"), its
president Edward J. McArdle ("McArdle") and Sandwich State
Bank ("Bank") for declaratory relief (Count I) and fraud
(Count II). This Court's September 22, 1980 memorandum opinion
and order (497 F. Supp. 1262) granted Shacket's motion for
summary judgment on Count I and the Philko-McArdle motion for
summary judgment on Count II. On Philko's appeal as to Count
I, our Court of Appeals affirmed this Court's decision
(681 F.2d 506), only to be reversed by the Supreme Court
(462 U.S. 406, 103 S.Ct. 2476, 76 L.Ed.2d 678). Shackets did not appeal
from the Count II judgment in favor of Philko and McArdle. Now
the case is before this Court on remand from 727 F.2d 1113.
On April 19, 1978 Smith Aircraft sold a new Piper Navajo
airplane to Shackets, who paid the price in full and took
possession. Smith gave Shackets photocopies of the bills of
sale reflecting the plane's chain of title and told them he
would take care of the paperwork. Shackets understood that to
mean Smith would record the original bills of sale with the
Federal Aviation Administration ("FAA").
For some time before the Smith-Shacket transaction McArdle
had been pressing Smith for repayment of a December 1977
Philko loan to Smith Aircraft ($60,000 of the original $80,000
was still unpaid). Just one day before making the deal with
Shackets, Smith came to McArdle and said he had contracted to
buy an airplane (actually the same one involved in the Shacket
transaction) from Clark Aviation ("Clark") for resale to
Krueger Aviation ("Krueger"). Smith represented Bank had
refused to lend him $152,000 needed to complete the purchase,
because that loan would put Smith over his credit limit.
After both McArdle and Bank had examined the original bills
of sale evidencing the airplane's chain of title, McArdle
decided Philko would borrow the necessary funds from Bank and
in turn lend the money to Smith Aircraft to finance the
purchase, with Philko taking title as security. McArdle and
Smith agreed all proceeds of the airplane's sale to Krueger
would be credited to Smith Aircraft (they would be applied
first to pay off Philko's note to Bank and then to pay Smith
Aircraft's pre-existing note to Philko, with any remaining
funds to go to Smith Aircraft).
Smith told Andrews, Bank's representative, he was acting as
a broker for Clark in the transaction and the check must be
made out to Clark. On April 22 Philko executed a note for
$152,000 to Bank, which in turn issued its cashier's check for
that amount to Clark.
On April 24 Smith gave Bank the final bill of sale from
Smith Aircraft as seller to Philko as buyer, and Bank gave
Smith the check made out to Clark. After some lapse of time
Bank sent all the original bills of sale (representing an
unbroken paper chain of title) to the FAA. That gave Philko
FAA-registered title to the airplane. Smith did not go through
with the Krueger transaction (if indeed there ever was one).
Case History and Present Posture
In awarding Shackets summary judgment on Count I, this Court
decided (497 F. Supp. at 1264-71):
1. Federal Aviation Act of 1958 (the "Act"),
49 U.S.C. § 1301-1542,*fn2 did not preempt state law
in determining the validity of the transfer between
Smith Aircraft and Shackets and in resolving
priorities among conflicting interests.
2. Under the Illinois Uniform Commercial Code,
Ill.Rev.Stat. ch. 26, §§ 1-101 et seq., Shackets as
bona fide purchasers had priority over Philko's
later-recorded security interest.
In its reversal of the Court of Appeals' affirmance of this
Court's decision, the Supreme Court held:
1. Under Section 1403(c)*fn3 every transfer of
title to an airplane must be evidenced by an
instrument, and every such instrument must be
recorded before it can affect the rights of
innocent third parties who had recorded their
titles with the FAA. To the extent of any
conflict with that federal law, state law is
preempted. 103 S.Ct. at 2478-79.
2. State law determines priorities between two
recorded interests, but each interest must be
recorded before it can get whatever priority
state law gives it. Id. at 2480.
3. As between the parties the sale to Shackets
was valid and binding. If Philko either (a) had
actual notice of Shackets' interest or (b) failed
to acquire or perfect its interest under state
law for reasons wholly unrelated to the sale to
Shackets, Shackets are entitled to retain
possession of the airplane. Id. at 2481.
4. Despite those principles, the Act does not
require a party to do the impossible. If Shackets
failed to record their interest through no fault
of their own, their interest might still be valid
under the Act. Id. at 2481.
After the Supreme Court's remand of the case to the Court of
Appeals, that Court's mandate instructed this Court to
consider at least the following issues:
(1) Whether the district court had so considered
and dismissed count II (involving notice) as to
justify a holding of waiver or res judicata
because there was no cross appeal.
(2) Whether Philko's conveyance instruments were
valid under Illinois law.
(3) Whether the Shackets exercised diligence to