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Shacket v. Philko Aviation Inc.

decided: March 2, 1988.

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



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

Posner, Coffee, and Easterbrook, Circuit Judges.

Author: Posner

POSNER, Circuit Judge.

This case, now in its tenth year, involves a dispute over title to an airplane. The plaintiffs are Mr. and Mrs. Shacket; the defendant is Philko Aviation, Inc.; and the basis of federal jurisdiction is diversity of citizenship. Through a complex series of transactions unnecessary to describe, Philko, which is owned by an experienced and successful businessman named Edward McArdle, became the lessor of facilities used by an aircraft dealer named Roger Smith. In November 1977 Smith agreed to sell the Shackets a Piper airplane for $290,000 (we round off all dollar figures to the nearest $1,000), payable by a trade-in of the Shackets' old plane plus $126,000 in cash. The Shackets put down a deposit of $20,000. As Smith was not a Piper dealer, he arranged to buy the plane from Clark Aviation, Inc., which was, for $239,000. On April 20, Clark delivered the plane together with a bill of sale to Smith, who in turn delivered it to the Shackets in exchange for the balance of the purchase price, the trade-in having already been delivered to Smith. Smith told the Shackets that, as was customary, he, as dealer, would take care of registering their title with the FAA pursuant to 49 U.S.C. § 1403.

And now the melodrama: the next day, April 21, Smith went to McArdle and told him that he had contracted to sell a 1978 Piper Navajo -- in fact, the very plane he had just delivered to the Shackets (of course he did not tell McArdle this) -- to a firm called Frueger Aviation for $290,000, and that he needed $152,000 to complete payment to Clark Aviation, from which he had bought the plane. Smith showed McArdle a phony purchase order from Frueger, plus either the original or a copy of the bill of sale to him from Clark. McArdle agreed to have Philko advance the money. In exchange, Smith not only agreed to repay the money to Philko out of the proceeds of the sale, and in addition to use those proceeds to repay $60,000 that he owed one of McArdle's other companies; he also gave Philko a bill of sale for the aircraft. It was understood, however, that Philko would not take possession. The plane would be sold to Krueger, and Smith would pocket the difference between the purchase price and the $212,000 ($52,000 $60,000) destined for the McArdle companies. Smith, who still owed Clark $147,000 of the purchase price of the plane, now paid this off.

Late in May, Smith 'fessed up to McArdle. Philko promptly (May 26) filed with the FAA the bill of sale that it had received from Smith as part of the supposed Frueger deal; on June 13 the FAA recorded Philko as owner of the plane, Smith never having filed the Shackets' title papers with the FAA. Although Mr. Shacket had called Smith repeatedly about the matter, Smith had fobbed him off with stories about the FAA's backlog. Shacket smelled a rat when early in June he tried to call Smith again and fold that Smith's phone had been disconnected. Although Shacket immediately mailed the FAA the temporary registration form that Smith had given him when he bought the plane, it was too late; by the time the form arrived, the FAA's records showed Philko as the owner. The FAA told Shacket that he would have to have a bill of sale from Philko before it would record his title -- which of course Philko would not give him.

The Shackets then brought this suit, asking for a declaratory judgment that they, not Philko, owned the plane. Philko counterclaimed, seeking damages for conversion. (The Shackets were in possession of the plane, as they still are.) The case presented a classic dispute between two persons each with defective title to the same piece of property -- the Shackets' title being defective because not recorded, Philko's being defective because acquired from one (Smith) who had no title, though, as we are about to see, in the world of commercial law one who has no title may be able to convey good title to another. The district court held that, as between the rival claimants, the Shackets should prevail. 497 F. Supp. 1262 (N.D. Ill. 1980). This court affirmed. 681 F.2d 506 (7th Cir. 1982). Taking a narrow view of the registration system created by the Federal Aviation Act, we held that the validity of the Shackets' title depended on state law and that under Illinois law the Shackets had good title notwithstanding their failure to record it. We further held that even if their title might be vulnerable in a contest with a bona fide purchaser (which Philko could be even though Smith lacked title when he gave it the bill of sale -- the whole purpose of the bona fide purchaser doctrine is to enable a person to obtain good title from one who lacks good title), Philko was not a bona fide purchaser because it had never taken possession of the plane.

The Supreme Court, disagreeing with our view that "If an unrecorded transfer of an aircraft is valid under state law, it has validity as against innocent third parties," reversed, but remanded for further proceedings because "if Philko had actual notice of the transfer to the Shackets or if, under state law, Philko failed to acquire or perfect the interest that it purports to assert for reasons wholly unrelated to the sale to the Shackets, Philko would not have an enforceable interest, and the Shackets would [be entitled to] retain possession of the aircraft." 462 U.S. 406, 414, 103 S. Ct. 2476, 76 L. Ed. 2d 678 (1983) (footnote omitted). The further proceedings took the form of a bench trial, at the conclusion of which the district court reinstated the declaratory judgment for the Shackets. 651 F. Supp. 675 (N.D. Ill. 1986).

The main issue in that trial was whether Philko had "actual notice" of the sale to the Shackets when it obtained its own bill of sale. Although under the Federal Aviation Act as interpreted by the Supreme Court an unrecorded conveyance of an airplane, such as the sale by Smith to the Shackets, normally is trumped by a recorded interest, there is an exception for the case where the holder of that interest had "actual notice" of the prior unrecorded conveyance. See 49 U.S.C. § 1403(c). Obviously Philko had such notice at the time it mailed its bill of sale to the FAA, but the district court held that the relevant date for notice is the date on which Philko gave value for its interest, rather than the date of recording. See 651 F. Supp. at 691. The statute does not say this, and there are no cases on the question apart from the district judge's opinion, but his conclusion agrees with the usual result in priority contests, see Atlantic Transp. Co. v. Alexander Shipping Co., 261 Mass. 1, 8, 157 N.E. 725, 727 (1927); Life Savings & Loan Ass'n v. Bryant, 125 Ill. App. 3d 1012, 1019, 467 N.E.2d 277, 282-83, 81 Ill. Dec. 577 (1984), and is sensible as an original matter. The purpose of forteiting the unrecorded conveyance is to protect the innocent third party who parts with value in reliance on the absence of recorded evidence of a previous conveyance. He needs that protection from the moment he parts with value; his own delay if any in recording his interest is relevant only if the delay misleads another innocent third party just as he was misled by his predecessor's failure to record.

The issue of notice must be distinguished from that of possession, which figured in our previous decision. While holding that the federal recording system is preemptive, the Supreme Court disclaimed the ridiculous proposition that whoever files a bill of sale first is the true owner unless he has actual notice of a prior sale. The filer must have a property interest, whether an ownership or a security interest, to be entitled to file. 49 U.S.C. § 1403(a); see also id., § 1401(f) (registration with the FAA is not evidence of ownership when ownership is in issue). The interest is created by state law. See 49 U.S.C. § 1406; Aircraft Trading & Services, Inc. v. Braniff, Inc., 819 F.2d 1227, 1231 (2d Cir. 1987). This might seem to imply that if, as we originally held, Philko had no ownership interest under state law because under that law (see UCC § 2-403(1), Ill. Rev. Stat. ch. 26, para. 2-403(1)) a bona fide purchaser must have possession of the good in question, which Philko did not, Philko had no right to file, and actual notice is irrelevant.

There are three problems with this suggestion. First, despite what we said in our previous opinion, section 2-403 does not appear to make possession a prerequisite to being a bona fide purchaser. Lack of possession can be evidence that there was no purchase, and in some circumstances (as we shall note shortly) can be evidence that the purchaser was not acting in good faith; but that is different from an ironclad rule that a purchaser to be bona fide (or perhaps to be a purchaser) must have possession. See Lochhead v. G.A.C. Finance Corp., 6 Ariz. App. 539, 542, 434 P.2d 655, 658 (1968). Any such requirement would be inconsistent with the unquestioned principle that a creditor can be a bona fide purchaser. See UCC § 1-201(32); In re Samuels & Co., 526 F.2d 1238, 1242 (5th Cir. 1976); 1 Anderson on the Uniform Commercial Code § 1-201:169 (3d ed. 1981).

Second, a rule of state law that disqualified the nonpossessory filer might encroach intolerably on the federal scheme, in which event it would of course be preempted. The Supreme Court alluded to this issue in a footnote, see 462 U.S. at 414 n. 8, without resolving it; if, however, the Court had been in confident agreement with our finding that Philko had no valid interest in the plane under state law, presumably it would have affirmed our decision on that alternative ground, rather than reverse. A recording system presupposes a distinction between title and possession. But if, as our previous opinion may have implied, only possessors have title, then it is possession, not (recorded) title, that determines rights, and once again the federal registration scheme is out the window. Some such concern, at any rate, may lie behind footnote 8. The concern may be exaggerated. Systems for recording title to chattels are designed primarily for the benefit of creditors rather than purchasers, see Baird, Notice Filing and the Problem of Ostensible Ownership, 12 J. Legal Stud. 53, 54-59 (1983); Baird & Jackson, Possession and Ownership: An Examination of the Scope of Article 9, 35 Stan. L. Rev. 175, 180-83 (1983); and of course a bona fide creditor with a valid security interest need not, and ordinarily will not, be in possession of the collateral. And, realistically, Philko was a creditor rather than a buyer.

Finally, to make possession a condition of valid title could be thought to undermine the federal statute's requirement of "actual notice" by making lack of possession in effect a suspicious circumstance importing "constructive" notice (i.e., no notice, treated as notice). See Marsden v. Southern Flight Service, Inc., 227 F. Supp. 411, 416-17 (M.D.N. Car. 1961); South Shore Bank v. II & II Aircraft Sales, Inc., 16 Mass. App. 472, 478, 452 N.E.2d 276, 280 (1983). But if possession is merely a requirement under state law of valid title, it is a little hard to see the force of this particular objection.

The question of the significance of Philko's lack of possession need not be answered in order to decide this appeal. We mention it only to make clear that we regard it as an open question. Judge Shadur's finding that Philko had actual notice ...


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