United States District Court, Northern District of Illinois, E.D
June 26, 1984
MAURICE SHACKET AND SYLVIA SHACKET, PLAINTIFFS,
PHILKO AVIATION, INC., DEFENDANT.
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
record their conveyance.
This Court then directed the parties to address, at the
outset, the first of those questions. Its relevance is plain:
Under Section 1403(c), if Philko had "actual notice" of the
Shackets' unrecorded interest, the fact of Shackets'
non-recording would not defeat Shackets' claim vis-a-vis
On that score, this Court had said in originally granting
summary judgment to Philko and McArdle on Count II, 497
F. Supp. at 1271 & n. 13:
Shacket alleges in Complaint Count II that Smith
and McArdle were business partners; that Smith
had some interest in Philko; that Philko and
McArdle were aware that the Shackets owned the
plane when Smith Aircraft executed the bill of
sale to Philko; that Philko aided and abetted
Smith and Smith Aircraft in attempting to defraud
the Shackets; and that Philko and McArdle joined
Smith and Smith Aircraft in the illegal and
fraudulent conversion of the Shackets' property.
Except for the issue of conversion, which is a
matter of law and follows from the matters
already discussed in this opinion, there is no
evidence in support of the allegations in Count
II. Certainly there is no showing of fraud or
a knowing interference
with the Shackets' rights by Philko or McArdle.
Defendants' memorandum in support of the
McArdle-Philko cross-motion for summary judgment
regarding Count II was not responded to by
Shackets. Accordingly the Court finds there is no
genuine issue of any material fact regarding the
subject matter of Count II.
 At the Shacket-Smith Aircraft closing, Rittenhouse told
Shacket that Smith had a partner named Philko. Sometime after
both "sales," McArdle told Shacket there was money owed on the
plane. Neither of those facts creates an issue of fact
supporting the allegations of Count II.
Shackets failed to appeal that decision. That renders the
Count II judgment for Philko and McArdle final, with full res
judicata and collateral estoppel effects. See Bloomer Shippers
Association v. Illinois Central Gulf Railroad Co.,
655 F.2d 772, 777 (7th Cir. 1981).*fn4
Now Philko has moved (purportedly under Fed.R.Civ.P.
("Rule") 56) for a determination of the res judicata or
collateral estoppel effect of this Court's initial judgment in
favor of Philko and McArdle on Count II. Despite the
procedural infirmity of that request,*fn5 this Court will
accept the invitation to decide whether that judgment
collaterally estops Shackets from now arguing Philko had
"actual notice" of Shackets' interest within the meaning of
Three questions must be answered "yes" to apply collateral
estoppel to an issue in a later proceeding, Teamsters Local 282
Pension Trust Fund v. Angelos, 585 F. Supp. 1401, 1402 (N.D.Ill.
1984); see Whitley v. Seibel, 676 F.2d 245, 248, 250 (7th
Cir.), cert. denied, 459 U.S. 942, 103 S.Ct. 254, 74 L.Ed.2d
1. Is the relevant issue in the second suit the
same as an issue in the first?
2. Was that issue actually and necessarily
litigated and determined in the first suit?
3. Did the party against whom estoppel is
asserted have a "full and fair opportunity" to
litigate the issue?
Each of those questions will be dealt with in turn.
1. Identity of Issues
As interpreted by the few courts that have dealt with the
issue head-on, "actual notice" under Section 1403(c) means
(Marsden v. Southern Flight Service, Inc., 227 F. Supp. 411, 416
knowledge of inquiry-provoking facts as well as
express knowledge of the fact in issue.
See South Shore Bank v. H & H Aircraft Sales, Inc.,
16 Mass. App. 472, 452 N.E.2d 276, 280 (1983).*fn6
In Count II Shackets charged Philko and McArdle with:
(1) aiding and abetting Smith and Smith Aircraft
in defrauding Shackets, and
(2) fraudulent conversion of the airplane.
What do the Illinois authorities teach about each of those
theories? Illinois case law recognizes no separate tort of
aiding and abetting fraud. Cenco, Inc. v. Seidman & Seidman,
686 F.2d 449, 452-53 (7th Cir.), cert. denied, 459 U.S. 880,
103 S.Ct. 177, 74 L.Ed.2d 145 (1982). But a person who
knowingly participates in a fraud or who knowingly accepts the
fruits of fraudulent conduct is also guilty of that fraud. Id.;
Callner v. Greenberg, 376 Ill. 212, 218, 33 N.E.2d 437, 440
(1941); Beaver v. Union National Bank and Trust Co., 92 Ill. App.3d 503,
506, 47 Ill.Dec. 223, 225, 414 N.E.2d 1339, 1341
(3d Dist. 1980); Moore v. Pinkert, 28 Ill. App.2d 320, 333,
171 N.E.2d 73, 78 (1st Dist. 1960).
As for the "conversion" branch of Shackets' attack, under
Illinois law intent need not be shown to prove simple
conversion of goods. Douglass v. Wones, 120 Ill. App.3d 36, 41,
76 Ill.Dec. 114, 119, 458 N.E.2d 514, 519 (2d Dist. 1983);
Landfield Finance Co. v. Feinerman, 3 Ill. App.3d 487, 490,
279 N.E.2d 30, 33 (1st Dist. 1972); Associates Discount Corp. v.
Walker, 39 Ill. App.2d 148, 153, 188 N.E.2d 54, 56 (2d Dist.
1963). Conversion involves merely a defendant's exercise of
control over the goods in a manner inconsistent with the
plaintiff's right of possession. Jenson v. Chicago & Western
Indiana Railroad Co., 94 Ill. App.3d 915, 932, 50 Ill.Dec. 470,
484, 419 N.E.2d 578, 593 (1st Dist. 1981). But Shackets did not
allege "simple" conversion. Instead they charged fraudulent
conversion, which by definition requires the same showing of
intent to defraud — and necessarily the same knowledge that the
defrauded party had an interest in the property — as a claim of
Thus Philko's and McArdle's actual knowledge of Shackets'
interest was an element Shackets had to prove in order to
recover on Count II. But such actual knowledge is merely a
sufficient, and not a necessary, element of "actual notice"
under Section 1403(c) — all actual knowledge is "actual
notice," but not all "actual notice" involves actual knowledge.
If this Court were to hold Shackets collaterally estopped by
its prior resolution of Count II, that holding would foreclose
relitigation of Philko's claimed actual knowledge, but not of
its claimed "actual notice" based on less than outright
2. "Actually and Necessarily Litigated and Determined"
Shackets also attack the second element of collateral
estoppel analysis. They say that even if this Court did decide
Philko had no actual knowledge of Shackets' interest in the
airplane, that determination was not necessary to the decision
in favor of Philko on Count II. According to their analysis:
1. As to "aiding and abetting" fraud, this
Court could have ruled for Philko and McArdle by
(a) Smith and Smith Aircraft did not defraud
(b) Philko and McArdle did not know of the
2. As to the fraudulent conversion, this Court
could have ruled for Philko and McArdle if:
(a) no conversion had taken place or
(b) Philko and McArdle did not know of the
As for the first ground of Shackets' Count II claim, this
Court made no specific finding as to Smith's and Smith
Aircraft's fraud (although the whole recital of their conduct
is instinct with fraud). It did however specifically find
Philko and McArdle did not engage in fraud. As for the second
ground, this Court found conversion had taken place but there
had been no "knowing
interference" with Shackets' rights by Philko and McArdle.
At least then as to the second (fraudulent conversion)
claim, and on any fair reading of the first (aiding and
abetting fraud) as well, the Philko-McArdle lack of knowledge
was the linchpin in granting judgment in their favor on Count
II. It follows that the absence of Philko's and McArdle's
actual knowledge of Shackets' interest in the aircraft was
necessarily determined in granting judgment for them on Count
3. Full and Fair Opportunity to Litigate
As to the third and last component of the collateral
estoppel analysis, Shackets argue they did not have a full and
fair opportunity to litigate the issue of "actual notice"
because it was not briefed the first time around. But that is
not the relevant question. For the reasons already discussed,
collateral estoppel can extend only to the issue of Philko's
and McArdle's actual knowledge (not "actual notice" in the
statutory sense). As to that issue, they plainly had the
requisite "full and fair opportunity." When Philko and McArdle
moved for summary judgment on Count II, their lack of knowledge
of Shackets' interest in the airplane was clearly placed in
issue (see the McArdle-Philko memorandum in support of their
summary judgment motion on Count II). Shackets chose not to
respond. They must bear the burden of that choice. Keene Corp.
v. International Fidelity Insurance Co., 736 F.2d 388 (7th Cir.
1984), adopting this Court's opinion denying Fidelity's motion
for reconsideration, 561 F. Supp. at 665-66.
In sum, all three prerequisites to application of collateral
estoppel have been satisfied — but only as to the question of
actual knowledge, not statutory "actual notice." Shackets are
collaterally estopped from now contending Philko had actual
knowledge of Shackets' interest in the airplane.
Philko's Summary Judgment Motion
But that is not the end of the inquiry. Philko has moved for
summary judgment on the non-collaterally-estopped facet of
"actual notice": Did Philko have knowledge of
inquiry-provoking facts that, if investigated, would have put
it on notice of Shackets' interest?
Shackets assert the existence of several facts they say were
"inquiry-provoking" in that sense:
1. Smith Aircraft did not have possession of
2. Philko, through McArdle, knew of Smith
Aircraft's precarious financial position.
3. Smith had the original bills of sale. That
included one from Clark to Smith Aircraft,
allegedly inconsistent with Smith's statement he
still needed money to complete the purchase from
4. Andrews, a Bank representative, knew Smith
had sold airplanes out of trust in 1974-75 in a
transaction where he had not financed with Cessna
Financing. That knowledge is assertedly
chargeable to Philko because Andrews was acting
as Philko's agent in this transaction.
Each of those matters bears a brief separate look:
1. Several cases have held non-possession by
the seller is not itself enough to provoke
inquiry. Marsden, 227 F. Supp. at 416-17; South
Shore Bank, 16 Mass. App. 472, 452 N.E.2d at 280;
Smith v. Eastern Airmotive Corp., 99 N.J. Super. 340,
240 A.2d 17, 20 (Ch.Div. 1968). See Lochhead
v. G.A.C. Finance Corp. of Camelback, 6 Ariz. App. 539,
434 P.2d 655, 658 (1967).
2. Although McArdle did know of Smith
Aircraft's financial situation in general, that
too is not of itself sufficient to provoke
inquiry into whether someone else has an interest
in a particular asset. See Michelin Tires (Canada)
Ltd. v. First National Bank of Boston,
666 F.2d 673, 681-83 (1st Cir. 1981).
3. Smith's possession of the original bills of
sale is not necessarily suspicious in the face of
Smith's representation he was acting as Clark's
agent in the transaction. After all, Smith also
said (consistently with that representation) the
check for the balance of the purchase price had
to be made out to Clark.
4. Finally Shackets have adduced no evidence
Andrews was acting as an agent for Philko beyond
his having given the check to Smith and having
later sent the bills of sale to the FAA. McArdle
himself examined the bills of sale, talked to
Bank and decided to enter into the transaction.
Any knowledge Andrews may have had about Smith's
prior financial dealings cannot be imputed to
Philko, for there is no showing of a scope of
agency vested in Andrews that would trigger such
attribution. Peoria & Eastern Railway Co. v.
Kenworthy, 7 Ill. App.3d 350, 353-54,
287 N.E.2d 543, 546 (4th Dist. 1972). Moreover, information
even a recognized agent has relating to events
before the start of the agency relationship is not
automatically imputed to the principal. Greer v.
Carter Oil Co., 373 Ill. 168, 172, 25 N.E.2d 805,
807-08 (1940). There is nothing to create even a
reasonable inference Philko either knew or might be
deemed to know about Smith's transactions several
years earlier (and even were it otherwise, it would
require a real conceptual stretch of that knowledge
to impose a duty on Philko to inquire into whether
someone else had an interest in the current
But all this overview demonstrates is that the trier of fact
could reasonably find (or even most likely find) for Philko on
the inquiry-provoking aspect of "actual notice." What Philko
has asked for is summary judgment on that issue, and the test
there is a wholly different one: Must the trier of fact, with
all reasonable inferences drawn in Shackets' favor, find for
Philko? Korf v. Ball State University, 726 F.2d 1222
, 1226 (7th
Cir. 1984). On that score the fourth "fact" advanced by
Shackets may be ignored entirely for the reasons already
discussed, but it cannot be said the other three — in tandem —
could not reasonably lead a factfinder to the different
conclusion that Philko should have inquired further.
Shackets are collaterally estopped from contending Philko
had actual knowledge of Shackets' interest in the aircraft.
This Court cannot however find, as a matter of law, Philko had
no "actual notice" of that interest within the meaning of
Section 1403(c). That issue, together with the remaining two
questions identified by our Court of Appeals (and any others
the parties properly identify as open on remand), remain for