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June 26, 1984


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


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
  record ...

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