Petition — Bank of Hendersonville v. Red Baron Flying Club, Inc.

eaten,

Supreme Court, U, 1)

FILED !

! OCT $0 1978

L_MieHAEL napax JR., CLERK

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1978

s B8-720

BANK OF HENDERSONVILLE,

Petitioner,

v.

RED BARON FLYING CLUB, INC.,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF TENNESSEE

W. HAROLD BIGHAM

Third Floor, Home

Federal Building

Post Office Box 2757

Nashville, Tennessee 37219

OFC l:

siescanssons Counsel for Petitioner

GULLETT, STEELE, SANFORD

& ROBINSON

Third Floor, Home Federal Building

Nashville, Tennessee 37219

October 27, 1978

Washington, O.C. + THIEL PRESS + (202) 638-4521

ee ee ee Pe eT A

(2)

TABLE OF CONTENTS Page _

EIST OR EE Oe OR ED 2

Ae re a 2

eens PRRDENTED. ... . .. 2 ek ce eens 2

STATUTORY PROVISIONS INVOLVED............-. 2

ee 3

REASONS FOR GRANTING THE WRIT.............. 6

i Sigal shel Mans 3s ke seagaay 9

APPENDIX:

— Statutory Provisions:

— Federal Aviation Act, 49 U.S.C. §§1401-1406.... la

— Tennessee Code Annotated §47-9-307.......... 8a

— Opinions and Judgments Below:

— Judgment of the Supreme Court of Tennessee

Denying Petition for Writ of Certiorari to the

Court of Appeals of Tennessee .............. 9a

— Judgment of the Court of Appeals of Ten-

nessee, Middle Section at Nashville............ 10a

— Opinion of the Court of Appeals of Tennessee,

BGiadie Section at Naswile 2... wc ccccccecas lla

— Memorandum Opinion of Scott Camp, Chan-

cellor Chancery Court for Putnam County,

ee 33a

TABLE OF AUTHORITIES

’ Cases:

Dowell v. Beech Acceptance Corp., Inc., 3 Cal.3d 544,

91 Cal. Rptr. 1, 476 P.2d 401 (1970), cert. denied,

oo BE SS Sore eee eT eee eee 6, 7

Idabel National Bank v. Tucker, 544 P.2d 1287 (Okl.

ET EEE ST CETL CTE ES CPC TEE ee 6

Sanders v. M.D. Aircraft Sales, Inc., 575 F.2d 1086

ES en 6

(ii

Statutes: _Page

Federal:

2B U.S.C. SLITS). cc ccccvcccvccevcccevresess 2

49 U.S.C. $$1401-1406 .. 0... cc rere ccvees 2, 3, 5, 6,9

State:

TC.A. SO7B-SO7. ccc cccccccvccccccercccvees 2, 4

TH Ae SOTBI1GG occ rev evesecccescccecsees 8

Miscellaneous:

Sigman, The Wild Blue Yonder: Interests in Aircraft

under our Federal System, 46 So. Cal. L. Rev.

ee Ee) ere er er ok ee ee ee 7

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1978

No.

BANK OF HENDERSONVILLE .

Petitioner,

U.

RED BARON FLYING CLUuB, INC.,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF TENNESSEE

The petitioner, Bank of Hendersonville, respectfully

prays that a Writ of Certiorari issue to review the judg-

ment of the Supreme Court of Tennessee entered in this

proceeding on July 31, 1978, denying the Petition of

the Bank of Hendersonville for a Writ of Certiorari to

‘review the opinion and judgment of the Court of Appeals

of Tennessee, Middle Section, entered on December 2,

1977.

2

OPINION BELOW

The opinion of the Court of Appeals of Tennessee,

Middle Section at Nashville, not yet reported, and the

Memorandum Opinion of the Chancellor of the Chancery

Court of Putnam County, Tennessee, appear in the

Appendix hereto, as does the judgment of tiie Supreme

Court of Tennessee denying the Petition for a Writ

of Certiorari. No other opinion was rendered by the

Supreme Court of Tennessee.

JURISDICTION

The judgment of the Supreme Court of Tennessee was

entered on July 31, 1978, and this Petition for Certiorari

was filed within ninety (90) days of that date. This

Court’s jurisdiction is invoked under 28 U.S.C. § 1257(3).

QUESTION PRESENTED

Did the Congress in enacting the provisions of the

Federal Aviation Act, 49 U.S.C. §§ 1401 et seg., which

provide that, from the time of filing for recordation of

any conveyance which affects the title to, or any interest

in, any civil aircraft of the United States, such con-

veyance or interest shall be valid as to all persons, intend

to protect a person who lends money to a dealer in

aircraft on the security of the dealer’s inventory, despite

a state law rule purporting to protect purchasers in the

ordinary course of business from prior perfected security

interests, where the sale is effected without accounting

for the proceeds to the dealer’s financer?

STATUTORY PROVISIONS INVOLVED

The apposite provisions of the Federal Aviation Act,

49 U.S.C. §§ 1401-1406, are reproduced in the Appen-

dix, as is Section 9-307 of the Uniform Commercial

Code, T.C.A. § 47-9-307.

3

STATEMENT OF THE CASE

The petitioner here is a bank which was, in part,

financing a corporation, Mid-South Aviation, Inc., a

dealer in aircraft which bought and sold airplanes at

retail. The Bank of Hendersonville loaned money to

Mid-South Aviation, Inc., on the security of the airplane

here involved, and this note was secured by a security

interest created by a validly executed security agreement,

correctly identifying the aircraft and recorded as required

by 49 U.S.C. § 1403. The note and security agreement

were dated June 11, 1974, and the security agreement

was filed for record with the FAA Aircraft Registry in

Oklahoma City, Oklahoma, on June 25, 1974.

The aircraft in issue was purchased by the Red Baron

Flying Club, Inc., on August 2, 1974, and on August 5,

1974, the Red Baron Flying Club forwarded its bill of

sale to the Federal Aviation Administration in Oklahoma

City for recordation. Inquiry by telephone or by mail

would have apprised the respondent, Red Baron Flying

Club, Inc., of the existence and filing of the notice of the

security interest owned by the Bank of Hendersonville.

Mid-South Aviation, Inc., was subsequently adjudi-

cated a bankrupt in the United States District Court for

the Middle District of Tennessee, and, upon learning

that the airplane, which was the subject of its security

interest, had been sold to Red Baron, the Bank of

‘Hendersonville made demand upon the Flying Club, in

the alternative, for the return of the aircraft or the

payment of $13,761.75, the balance then due and unpaid

on the promissory note. The respondent, Red Baron

Flying Club, Inc., through its counsel, refused to pay the

balance due on the note of Mid-South Aviation, Inc., or

to return the aircraft, and, in fact, made demand upon

the Bank of Hendersonville that it take the necessary

4

steps to release the security interest of record with the

Federal Aviation Administration in Oklahoma City.

The petitioner, Bank of Hendersonville, took the

position that the recording provisions of the Federal

Aviation Act preempted conflicting state rules, and that

its security interest, of record at the Federal Aviation

Administration Aeronautical Center, was a first lien

upon the aircraft, and that the Red Baron Flying Club

purchased the airplane subject to this security interest.

PARAGRAPH “SECOND” of the petitioner’s Complaint

in the Chancery Court for Putnam County, Tennessee,

claimed the protection of the federal statute in the

following language:

SECOND: On June 25, 1975, the security

agreement, described herein as “Exhibit A’’, was

caused by plaintiff to be filed for record with the

Department of Transportation, Federal Aviation

Administration Aeronautical Center, Oklahoma

City, Oklahoma. Said conveyance was recorded at

that Center on July 1, 1974, as Conveyance No.

C 117864, all as shown on the notice of recordation

sent to the plaintiff by the Department of Trans-

portation, and a copy of which is attached hereto

marked as “Exhibit B”. The effect of said recorda-

tion, without more, was to afford constructive .

notice to all subsequent purchasers and lienors of

plaintiff’s prior rights.

The respondent, Red Baron Flying Club, Inc., has con-

sistently taken the position in this litigation that it was

a “purchaser in the ordinary course of business’? within

the meaning of state law, the Uniform Commercial Code,

Tennessee Code Annotated § 47-9-307, and that, as such,

it took the aircraft free of any pre-existing security

interests, whether or not it knew of them, or could

reasonably have learned of them, and furthermore,

5

whether or not sale of the. aircraft was forbidden by the

security agreement of the Bank of Hendersonville, which

was the case.

The Chancery Court of Putnam County, Tennessee,

held that the provisions of the Federal Aviation Act

regarding the recordation of interests in aircraft pre-

empted the “purchaser in ordinary course of business”

doctrine of state law, and that the Red Baron Flying

Club did in fact purchase the aircraft subject to the

prior security interest of the Bank of Hendersonville.

This decision was reversed by the Court of Appeals of

Tennessee, Middle Section, at Nashville, which held, with

one of the three-judge panel dissenting, that there was

no intent on the part of Congress to preempt state law

with regard to such issues as the “purchaser in ordinary

course of business’ doctrine, and that even though the

security interest of the Bank of Hendersonville was

“valid” as to all persons from and after filing for recorda-

tion with the Federal Aviation Administration Aero-

nautical Center, the validity related only to the intrinsic

enforceability of the instrument, and not to its “notice”

effect on third parties. The dissenting judge, as did the

majority, admitted that “the issue is obviously not free

from doubt,” but concluded that Congress intended in

49 U.S.C. § 1403 to set up a rule of priority that controls

the conflicting interest between the aircraft dealer’s

financer or lender and one who purchases from a dealer

‘in aircraft. On July 31, 1978, the Supreme Court of

Tennessee denied the Petition of the Bank of Henderson-

ville for a Writ of Certiorari.

6

REASONS FOR GRANTING THE WRIT

The conflict between state and federal law presented

by this case is a particularly acute and significant one,

and in light of recent judicial developments, it seems to

the petitioner imperative that the matter be reviewed by

this Court. The wholesale aircraft financing industry has

been placed in an untenable position by decisions such as

the one sought to be reviewed here, and the purchasers

of aircraft are similarly positioned upon the horns of a

dilemma, faced with continuing litigation where they

have purchased an aircraft impressed with a lien created

by a prior consensual security agreement between a

lender and the selling dealer.

The precise issue presented by this petition was passed

upon by the Supreme Court of California in Dowell v.

Beech Acceptance Corp., Inc., 3 Cal. 3d 544, 91 Cal.

Rptr. 1, 476 P.2d 401 (1970). There, the Supreme Court

of California in a well-reasoned opinion held that prior

recorded security interests are protected against sub-

sequent buyers who fail to search the Federal Aviation

Administration Aeronautical Center records. The Cali-

fornia court concluded that the Federal Aviation Act,

49 U.S.C. § 1401 et seq., provides a plenary priority

system, with the key being the first to record, and con-

tradictory state priority rules are therefore preempted.

While there have been decisions of other courts which

opted for the application of the state “‘purchaser in the

ordinary course of business’? doctrine, e.g., Sanders v.

M. D. Aircraft sales, Inc., 575 F.2d 1086 (3rd Cir. 1978);

Idabel National Bank v. Tucker, 544 P.2d 1287 (OkI.

App. 1976), the question as to whether state or federal

law controls in this important area remains very much in

doubt, and the industry very much troubled.

7

The present posture of the law is that at least two state

courts of last resort, Tennessee and California, have, on

identical facts, held in favor of state law and federal law,

respectively, in contexts where the clash between the

two rules of law is direct and the decision outcome

determinative. This Court denied a Petition for a Writ of

Certiorari in Dowell v. Beech Acceptance Corp., 404

U.S. 823 (1971), and while it is apparent that other

courts have taken to heart this Court’s admonitions not

to draw conclusions from denial of Petitions for Writs

of Certiorari, in that there have been decisions contrary

to Dowell, the denial of the Petition for a Writ of Certiori

in the instant case would add to the gross confusion

which is typitied both by the legal literature and the

judicial decisions, to say nothing of the industry-wide

problems created by the conflict between state and

federal law.

Since World War II, an expanding economy and mass

production of new technologies have combined to

increase vastly the business and recreational use of both

large and small aircraft. Large sums of money have

been involved in financing the purchase of these highly

expensive chattels, and as the demand for aircraft

increased, more of the industry’s capital needs were met

through secured financing. Due to the considerable value

of modern airplanes, aircraft parts and the economics

of the industry, secured financing arrangements on a

long term basis became necessary. This factor increased

the likelihood of conflicts between secured lenders and

the claims of subsequent lienors, purchasers, accessions

suppliers, and mechanics lienors. See Sigman, The Wild

Blue Yonder: Interests in Aircraft under our Federal

System, 46 So. Cal. L. Rev. 316, 318 (1973).

8

The statutory language of the Federal Aviation Act

leaves little room for doubt that Congress intended to

promote the aircraft industry by protecting and facili-

tating aircraft financing.

State law (the Uniform Commercial Code) itself

reflects an understanding of the very real possibility that

a federal statute, dealing with special types of property,

might have a preemptive effect on the application of state

law. For example, Section 9-104 (T.C.A. § 47-9-104)

states:

This chapter does not apply

(A) To a security interest subject to any statute

of the United States such as the Ship Mortgage Act,

1920, to the extent that such statute governs the

rights of parties to and third parties affected by

transactions in particular types of property. |Em-

phasis added].

Similarly, Comment 1 to T.C.A. § 47-9-104, states

that “where a federal statute regulates the incidents of

security interests in particular types of property, those

security interests are, of course, governed by the federal

statute and excluded from this article.”” The Federal

Aviation Act is admittedly skeletal in nature, but the

Supreme Court of California in Dowell held, and we

believe we can show, plausibly, that the federal act does

establish a complete system of priorities, needing no

interstitial filling by state law. Only this Court can

provide the needed guidance to the court and the indus-

try on this question, and denial of this petition would

immeasurably complicate the problem for all interests

involved.

Finally, the decision below, in our view, is incorrect.

The system of recordation established by Congress in the

9

Federal Aviation Act, while not so detailed as the system

of priorities established by the Uniform Commercial

Code (state law), nevertheless establishes a system of

priorities easy of comprehension, certain of application

and precise in its language. Adherence to its simple

rules would have avoided any loss or difficulty to the

respondent, Red Baron Flying Club, Inc., here. The

statute simply provides in 49 U.S.C. § 1403(d) that

“each conveyance . . . shall from the time of its filing for

recordation be valid as to all persons without further or

other recordation. . ...” [Emphasis added]. That ‘‘valid”

does not refer to the inherent validity of the recorded

instrument itself is shown by the express commitment

of that issue to state law in § 1406. Furthermore, in the

same sentence quoted from above, the word “effective”

is used as being synonymous with “valid,” indicating

very clearly that, as used in the federal act, “valid” refers

to a rule of priority.

CONCLUSION

For these reasons, a Writ of Certiorari should issue to

review the judgment of the Supreme Court of Tennessee.

Respectfully submitted,

W. HAROLD BIGHAM

Third Floor, Home

Federal Building

Of Counsel: Post Office Box 2757

; Nashville, Tennessee 37219

GULLETT, STEELE, SANFORD C ie al

& ROBINSON ounsel for Petitioner

Third Floor, Home Federal Building

Nashville, Tennessee 37219

October 27, 1978

la

APPENDIX

The pertinent provisions of the Federal Aviation Act,

49 U.S.C. §§ 1401-1406 (Vol. 10, Page 12054 of the

United States Code, 1970 ed.) provide as follows:

§ 1401. Registration of aircraft nationality

Necessity; aircraft of national-defense forces;

transfer of ownership

(a) It shall be unlawful for any person to operate or

navigate any aircraft eligible for registration if such air-

craft is not registered by its owner as provided in this

section, or (except as provided in section 1508 of this

title) to operate or navigate within the United States any

aircraft not eligible for registration: Provided, That air-

craft of the national-defense forces of the United States

may be operated and navigated without being so regis-

tered if such aircraft are identified, by the agency having

jurisdiction over them, in a manner satisfactory to the

Secretary of Transportation. The Secretary of Transpor-

tation may, by regulation, permit the operation and

navigation of aircraft without registration by the owner

for such reasonable periods after transfer of ownership

thereof as the Secretary may prescribe.

Eligibility for registration

(b) An aircraft shall be eligible for registration if, but

‘only if—

(1) It is owned by a citizen of the United States

and it is not registered under the laws of any foreign

country; or

(2) It is an aircraft of the Federal Government, or

of a State, Territory, or possession of the United

States, or the District of Columbia, or of a political

subdivision thereof.

2a

Issuance of certificate

(c) Upon request of the owner of any aircraft eligible

for registration, such aircraft shall be registered by the

Secretary of Transportation and the Secretary shall issue

to the owner thereof a certificate of registration.

Applications

(d) Applications for such certificates shall be in such

form, be filed in such manner, and contain such informa-

tion as the Secretary of Transportation may require.

Suspension or revocation

(ec) Any such certificate may be suspended or revoked

by the Secretary of Transportation for any cause which

renders the aircraft ineligible for registration.

Effect of registration

(f) Such certificate shall be conclusive evidence of

nationality for international purposes, but not in any

proceeding under the laws of the United States. Registra-

tion shall not be evidence of ownership of aircraft in any

proceeding in which such ownership by a particular

person is, or may be, in issue.

§ 1402. Registration of engines, propellers, and appli-

ances

The Secretary of Transportation may establish reason-

able rules and regulations for registration and identifi-

cation of aircraft engines, propellers, and appliances, in

the interest of safety, and no aircraft engine, propeller,

or appliance shall be used in violation of any such rule or

regulation.

3a

§ 1403. Recordation of aircraft ownership

Establishment of recording system

(a) The Secretary of Transportation shall establish

and maintain a system for the recording of each and all

of the following:

(1) Any conveyance which affects the title to, or

any interest in, any civil aircraft of the United States;

(2) Any lease, and any mortgage, equipment trust,

contract of conditional sale, or other instrument

executed for security purposes, which lease or other

instrument affects the title to, or any interest in, any

specifically identified aircraft engine or engines of

seven hundred and fifty or more rated takeoff horse-

power for each such engine or the equivalent of such

horsepower, or any specifically identified aircraft

propeller capable of absorbing seven hundred and fifty

or more rated takeoff shaft horsepower, and also any

assignment or amendment thereof or supplement

thereto;

(3) Any lease, and any mortgage, equipment trust,

contract of conditional sale, or other instrument

executed for security purposes, which lease or other

instrument affects the title to, or any interest in, any

aircraft engines, propellers, or appliances maintained

by or on behalf of an air carrier certificated under

section 1424(b) of this title for installation or use in

aircraft, aircraft engines, or propellers, or any spare

parts maintained by or on behalf of such an air carrier,

which instrument need only describe generally by

types the engines, propellers, appliances, and spare

parts covered thereby and designate the location or

locations thereof; and also any assignment or amend-

ment thereof or supplement thereto.

4a

Recording of releases, cancellations,

discharges or satisfactions

(b) The Secretary of Transportation shall also record

under the system provided for in subsection (a) of this

section any release, cancellation, discharge, or satisfaction

relating to any conveyance or other instrument recorded

under said system.

Validity of conveyances or other instruments; filing

(c) No conveyance or instrument the recording of

which is provided for by subsection (a) of this section

shall be valid in respect of such aircraft, aircraft engine

or engines, propellers, appliances, or spare parts against

any person other than the person by whom the convey-

ance or other instrument is made or given, his heir or

devisee, or any person having actual notice thereof, until

such conveyance or other instrument is filed for recorda-

tion in the office of the Secretary of Transportation:

Provided, That previous recording of any conveyance or

instrument with the Administrator of the Civil Aero-

nautics Administration under the provisions of the Civil

Aeronautics Act of 1938 shall have the same force and

effect as though recorded as provided herein; and con-

veyances, the recording of which is provided for by

subsection (a)(1) of this section made on or before Aug-

ust 21, 1938 and instruments, the recording of which is

provided for by subsections (a)(2) and (a)(3) of this sec-

tion made on or before June 19, 1948, shall not be sub-

ject to the provisions of this subsection.

Effect of recording

(d) Each conveyance or other instrument recorded by

means of or under the system provided for in subsection

(a) or (b) of this section shall from the time of its filing

for recordation be valid as to all persons without further

or other recordation, except that an instrument recorded

5a

pursuant to subsection (a)(3) of this section shall be

effective only with respect to those of such items which

may from time to time be situated at the designated

location or locations and only while so situated: Pro-

vided, That an instrument recorded under subsection

(a)(2) of this section shall not be affected as to the

engine or engines, or propeller or propellers, specifically

identified therein, by any instrument theretofore or

thereafter recorded pursuant to subsection (a)(3) of this

section.

Form of conveyances or other instruments

(ec) Except as the Secretary of Transportation may by

regulation prescribe, no conveyance or other instrument

shall be recorded unless it shall have been acknowledged

before a notary public or other officer authorized by the

law of the United States, or of a State, territory, or

possession thereof, or the District of Columbia, to take

acknowledgment of deeds.

Index of conveyances and other instruments

(f) The Secretary of Transportation shall keep a

record of the time and date of the filing of conveyances

and other instruments with him and of the time and date

of recordation thereof. He shall record conveyances and

other instruments filed with him in the order of their

reception, in files to be kept for that purpose, and

indexed according to—

(1) the identifying description of the aircraft, air-

craft engine, or propeller, or in the case of an instru-

ment referred to in subsection (a)(3) of this section,

the location or locations specified therein, and

(2) the names of the parties to the conveyance or

other instrument.

6a

Regulations

(g) The Secretary of Transportation is authorized to

provide by regulation for the endorsement upon certifi-

cates of registration, or aircraft certificates, of infor-

mation with respect to the ownership of the aircraft for

which each certificate is issued, the recording of dis-

charges and satisfactions of recorded instruments, and

other transactions affecting title to or interest in aircraft,

aircraft engines, propellers, appliances, or parts, and for

such other records, proceedings, and details as may be

necessary to facilitate the determination of the rights of

parties dealing with civil aircraft of the United States,

aircraft engines, propellers, appliances, or parts.

Previously unrecorded ownership of aircraft

(h) The person applying for the issuance or renewal

of an airworthiness certificate for an aircraft with respect

to which there has been no recordation of ownership as

provided in this section shall present with his application

such information with respect to the ownership of the

aircraft as the Secretary of Transportation shall deem

necessary to show the persons who are holders of prop-

erty interests in such aircraft and the nature and extent

of such interests.

§ 1404. Limitation of security owners’ liability

No person having a security interest in, or security title

to, any civil aircraft, aircraft engine, or propeller under a

contract of conditional sale, equipment trust, chattel

or corporate mortgage, or other instrument of similar

nature, and no lessor of any such aircraft, aircraft engine,

or propeller under a bona fide lease of thirty days or

more, shall be liable by reason of such interest or title,

or by reason of his interest as lessor or owner of the

7a

aircraft, aircraft engine, or propeller so leased, for any

injury to or death of persons, or damage to or loss of

property, on the surface of the earth (whether on land

or water) caused by such aircraft, aircraft engine, or

propeller, or by the ascent, descent, or flight of such

aircraft, aircraft engine, or propeller or by the dropping

or falling of an object therefrom, unless such aircraft,

aircraft engine, or propeller is in the actual possession

or control of such person at the time of such injury,

death, damage, or loss.

§ 1405. Dealers’ aircraft registration certificates

The Secretary of Transportation may, by such reason-

able regulations as he may find to be in the public

interest, provide for the issuance, and for the suspension

or revocation, of dealers’ aircraft registration certificates,

and for their use in connection with aircraft eligible for

registration under this chapter by persons engaged in the

business of manufacturing, distributing, or selling aircraft.

Aircraft owned by holders of dealers’ aircraft registration

certificates shall be deemed registered under this chapter

to the extent that the Secretary of Transportation may,

by regulation, provide. It shall be unlawful for any

person to violate any regulation, or any term, condition,

or limitation contained in any certificate, issued under

this section.

§ 1406. Law governing validity of certain instruments

The validity of any instrument the recording of which

is provided for by section 1403 of this title shall be

governed by the laws of the State, District of Columbia,

or territory or possession of the United States in which

such instrument is delivered, irrespective of the location

or the place of delivery of the property which is the

8a

subject of such instrument. Where the place of intended

delivery of such instrument is specified therein, it shall

constitute presumptive evidence that such instrument

was delivered at the place so specified.

Tennessee Code Annotated, Section 47-9-307 (Vol. 8A,

Cumulative Supplement, Page 48), provides as follows:

47-9-307. Protection of buyers of goods.—A buyer in

ordinary course of business (subsection (9) of § 47-1-201)

other than a person buying farm products from a person

engaged in farming operations takes free of a security

interest created by his seller even though the security

interest is perfected and even though the buyer knows of

its existence.

a

9a

IN THE SUPREME COURT OF TENNESSEE

AT NASHVILLE

BANK OF HENDERSONVILLE,

Petitioner '

ve _ PUTNAM

' EQUITY

RED BARON FLYING CLUB,

INC., et al.,

Respondents

IN RE: PETITION FOR WRIT OF CERTIORARI

OF BANK OF HENDERSONVILLE

Upon consideration of the petition and briefs in

support thereof of the Bank of Hendersonville, the reply

briefs of Red Baron Flying Club, Inc., et al., the amicus

curiae brief of Aircraft Finance Association and General

Aviation Manufacturers Association, the opinions of the

Court of Appeals and the record in the cause,

Finding no error in the Court of Appeals the writ is

denied at the cost of petitioner.

PER CURIAM

Filed: July 31, 1978

10a

COURT OF APPEALS, NASHVILLE

RED BARON FLYING CLUB, INC.,

et al.,

Appellant

_ PUTNAM

VS. ' EQUITY

BANK OF HENDERSONVILLE, : Reversed

Appellee ; and

PF . Dismissed,

This cause coming on to be heard upon a transcript of

the record from the Chancery Court of Putnam County,

assignments of error, reply brief and argument of counsel,

upon consideration whereof the Court is of opinion that

in the decree of the Chancellor there is reversible error.

In accordance with the opinion of the Court filed

herein, it is, therefore, ordered and decreed by this Court

that the decree of the Chancellor be reversed and that the

plaintiff’s suit against Red Baron Flying Club, Inc., is

dismissed.

All costs of the case will be paid by the Bank of

Hendersonville for which execution may issue if neces-

sary. 12/2/77. (Drowota, J., Dissenting)

lla

BANK OF HENDERSONVILLE,

Plaintiff-Appellee,

PUTNAM

EQUITY

VS.

RED BARON FLYING CLUB, INC.,

et al.,

Defendants-Appellants. .

COURT OF APPEALS OF TENNESSEE

MIDDLE SECTION AT NASHVILLE

APPEAL FROM CHANCERY COURT

OF PUTNAM COUNTY, TENNESSEE

THE HONORABLE SCOTT CAMP, CHANCELLOR

Filed: Dec. 2, 1977

W. HAROLD BIGHAM

Vanderbilt University Law School

Nashville, Tennessee 37240

Attorney for Plaintiff-Appellee

ERNEST WILLIAMS, III,

2020 First National Bank Bldg.

Memphis, Tennessee 38103

Attorney for Defendant-Appellant,

Red Baron Flying Club, Inc.

12a

JOHN E. ACUFF

101 S. Jefferson Ave.

Cookeville, Tennessee 38501

Attorney for Defendant,

Citizens Bank

HENRY F. TODD,

Judge

REVERSED AND DISMISSED

OPINION

The defendant, Red Baron Flying Club, Inc., has

appealed from the Chancellor’s decree sustaining the

lien claim (security interest) of the plaintiff, Bank of

Hendersonville, in respect to an aircraft purchased by

appellant from Mid-South Aviation, Inc, On this appeal,

only the respective rights of Red Baron and the bank are

in issue,

The facts are uncontroverted. Mid-South, an aircraft

dealer, sold to Red Baron the subject aircraft out of its

(Mid-South’s) stock of several aircraft. The plane was

paid for by cashier’s check, At the time, the appellee

bank held a security interest upon a number of Mid-

South’s aircraft, including the subject plane. Mid-South

failed to satisfy the security interest and this suit was

filed to enforce same in respect to the subject plane.

The bank’s security interest was at all pertinent times

duly recorded with the F.A.A. Aircraft Registry.

Before the Chancellor, and on appeal to this Court,

the sole question is one of law: whether a security

interest upon an airplane held as part of a dealer inven-

tory duly recorded as required by federal law, is superior

~——-——

13a

to the rights of a purchaser for value from the dealer

without actual notice of the security interest.

T.C.A. § 47-9-307 provides:

“47-9-307. Protection of buyers of goods.—A

buyer in ordinary course of business (subsection (9)

of §47-1-201) other than a person buying farm

products from a person engaged in farming opera-

tions takes free of a security interest created by his

seller even though the security interest is perfected

and even though the buyer knows of its existence;

[Acts 1963, ch. 81, §1 (9-307); 1965, ch. 362,

$1.7”

T.C.A. § 47-9-104 provides in part:

“47-9-104, Transactions excluded from chapter. -

This chapter does not apply

(a) to a security interest subject to any statute of

the United States such as the Ship Mortgage Act,

1920, to the extent that such statute governs the

rights of parties to and third parties affected by

transactions in particular types of property; or...”

“Comments to Official Text’? under said statute in-

clude the following:

“Purposes:

To exclude certain security transactions from this

Article [Chapter].

1. Where a federal statute regulates the incidents

of security interests in particular types of property,

those security interests are of course governed by

the federal statute and excluded from this Article

[Chapter]. The Ship Mortgage Act, 1920, is an

example of such a federal act. Legislation covering

aircraft financing has been proposed to the Con-

gress, and, if enacted, would displace this Article

[Chapter] in that field. The present provisions of

l4a

the Civil Aeronautics Act (49 U.S.C. § 523) call for

registration of title to and liens upon aircraft with

the Civil Aeronautics Administrator and such regis-

tration is recognized as equivalent to filing under

this Article [Chapter] (Section 9-302(3)); but to

the extent that the Civil Aeronautics Act does not

regulate the rights of parties to and third parties

affected by such transactions, security interests in

aircraft remain subject to this Article [Chapter],

pending passage of federal legislation.”

Appellee refers to the “Comments” just quoted as

being “obsolete,” because it does not take cognizance of

Federal Legislation passed in 1958 and 1959, not cited

by appellee. However, T.C.A. § 47-9-104 was passed in

1963, long after 1958 and 1959, from which it is difficult

to conceive an intelligent “comment” made in ignorance

of 1958 and 1959 law.

The brief of appellee refers to the Federal Aviation Act

generally, but does not cite specific portions thereof,

More detailed citation would have been more in con-

formity with the rules of this Court and would have been

a distinct courtesy, kindness and convenience to this

Court.

Title 49 §§ 1403, 1406, of the U.S. Code provides:

Ҥ 1403. Recordation of aircraft ownership

Establishment of recording system

(a) The Secretary of Transportation shall estab-

lish and maintain a system for the recording of each

and all of the following:

(1) Any conveyance which affects the title

to, or any interest in, any civil aircraft of the United

States; ...

+ * +

l5a

Effect of recording

(d) Each conveyance or other instrument re-

corded by means of or under the system provided

for in subsection (a) or (b) of this section shall from

the time of its filing for recordation be valid as to all

persons without further or other recordation, ...

* ok Ok

§ 1406. Law governing validity of certain instru-

ments

The validity of any instrument the recording of

which is provided for by section 1403 of this title

shall be governed by the laws of the State, District

of Columbia, or territory or possession of the

United States in which such instrument is delivered,

irrespective of the location or the place of delivery

of the property which is the subject of such instru-

ment. Where the place of intended delivery of such

instrument is specified therein, it shall constitute

presumptive evidence that such instrument was

delivered at the place so specified.”

Appellant insists that the federal statute just quoted

does not aptly preempt and remove airplanes from the

provisions of the state statute which favor a purchaser in

ordinary course of business over the holder of a mortgage

on inventory.

Appellee insists that the federal statute does preempt

the subject priority of interests in aircraft and creates

a right in favor of the holder of a security interest in

an aircraft held in stock by a dealer, such right being

superior to that of a purchaser from the dealer in ordi-

nary course of business.

In Texas National Bank of Houston v. Aufderheide,

et al., (U.S.D.C., Ark-1964) , 235 F.Supp. 599, there was

a “floor plan” lien, duly recorded with the F.A.A., but

l6a

the mortgagee was shown to have followed a practice of

allowing the dealer to sell and deliver planes out of stock

in violation of the mortgage instrument. The District

Court held that the mortgagee had, by its conduct,

waived any priority of rights against the purchaser and

said:

“[1] There is no question that the Congress by

the statutory enactments which have been men-

tioned has preempted the field of registration and

recording of title instruments affecting commercial

aircraft, Pacific Financial Corporation v. Central

Bank & Trust Co., 5 Cir., 296 F.2d 68, 71, so that

protection is no longer afforded to a purchaser or

mortgagee of such an aircraft by a recording of his

conveyance or mortgage under a State recording

Statute,

“[2] On the other hand, compliance with section

1403 does not validate a conveyance or other instru-

ment which is lacking in initial or inherent validity

as a contract document between the original parties,

as, for example, a mortgage or conveyance obtained

by fraud or without consideration, or executed by

an incompetent party. Questions of such inherent

or original validity must be determined by reference

to applicable State law. This has been expressly

recognized by the Congress. See in this connection

the Act of June 30, 1964, P.L. 88-346, 78 Stat.

236, which statute, among other things, provides

that the validity of a conveyance or other instru-

ment affecting an aircraft is to be determined

by the law of the place where the instrument is

delivered. In the Court’s estimation the validity

about which Congress was talking in the 1964 Act

is what the Court has referred to as the initial or

inherent validity of the instrument in question.

ee esas

17a

‘[3] While the act of recording a conveyance or

mortgage under the terms of the federal statute or

any other recording statute does not confer inherent

validity upon an instrument otherwise basically

invalid, proper recordation can, and usually does,

have a substantial bearing on the validity of the

instrument as to third persons, and as to the priority

to be accorded to that instrument with respect to

other claims or liens affecting the property involved

whether arising before or after the recordation.

+ * *

II.

[5,6] It does not follow, however, that section

1403 has repealed or abolished the general rule of

chattel mortgage law that when a mortgagee con-

sents to the sale of a mortgaged chattel free of lien

by the mortgagor, the purchaser takes free of the

mortgage lien and his rights are superior to those of

the mortgagee. 15 Am.Jur.2d, Chattel Mortgages,

§§ 150, 151, and 153; 14 C.J.S. Chattel Mortgages

§ 262. And a provision in a chattel mortgage pro-

hibiting a sale of the mortgaged chattel without a

mortgagee’s consent is waived if the mortgagee

knowingly permits the violation of such provision.

15 Am. Jur. 2d, p. 324.”

235 F.Supp., p. 603

In State Securities Company v. Aviation Enterprises,

Inc., et al., (10th USCA, 1966), 355 F.2d 225, the dealer

executed a mortgage on the subject aircraft which was

subsequently sold to a customer who had no knowledge

of the mortgage which was not recorded with the F.A.A.

as required by federal law. The purchaser did not record

his bill of sale with the F.A.A., but the U.S. Court of

Appeals sustained the rights of the purchaser as superior

to those of the mortgagee stating:

18a 19a

“[1,2] By providing a federal system for regis-

tration of conveyances and liens affecting the title

to aircraft, Congress has preempted that field and

state recording statutes are not applicable to such

title instruments. However, questions of the validity

of such title documents, actual notice, good faith

purchaser status, and the like, must be resolved

Northern Illinois Corporation v, Bishop Distributing

Co., et al., USDC Mich. 1968, 284 F.Supp. 121, involved

the same situation and decision as Texas National Bank,

supra, with quotations from the Uniform Commercial

Code (§ 9-307 supra), and the “Comment” to § 9-104,

quoted supra. Also said opinion states:

under state law.

“In Bordman Invest. Co. v. Peoples Bank of

Kansas City, Mo. App., 320 S.W.2d 72, 76-77, the

court held in part as follows:

‘In almost all jurisdictions the recognized rule is

that where a mortgagee of an automobile or other

chattel knows the mortgagor is a dealer, buying to

sell the automobile or other chattel in the regular

course of business, and consents to its sale by the

mortgagor, the purchaser takes free from the mort-

gagee’s lien....

‘In such situations, as between an owner or

mortgagee who entrusts the chattel to another for

purposes other than a complete sale and the one

who buys the chattel from the latter without notice

of the seller’s lack of authority to sell, the courts

have evolved the estoppel theory based on the

maxim that, as between two innocent victims of

fraud, the one who makes possible the fraud on the

other should suffer. It is felt that under such cir-

cumstances a purchaser in good faith of a motor

vehicle from the stock in trade of a recognized

dealer is not bound to investigate the dealer’s title

in anticipation of the unknown claims of a mort-

gagee or seller of such vehicle who should be aware

of the danger of the buying public being misled and

has made the situation possible by permitting the

dealer to have the automobile in his stock in trade,”

355 F.2d, p. 229

“Plaintiff argues that because aircraft are much

more costly than household goods or cars, a buyer

of an aircraft should be required to conduct an air-

craft title search. In this respect, plaintiff contends

that all that would have been required of the de-

fendants would have been for them to check with

the Federal Aviation Agency in Oklahoma City,

Oklahoma.

“[9] We question whether the price of goods

should determine the duties and obligations of the

buying public. Plaintiff was aware that Mich-Air

Mooney, Inc. purchased the aircraft in order to sell

it.

[10-13] Although both plaintiff and defendants

are innocent parties to a very unhappy chain of

events, in determining who should bear the loss we

conclude that buyers in the ordinary course of

business should not be required to act at their peril.

As Chicf Judge Henley said in Texas National Bank

of Houston, supra:

‘Ordinarily, when a person goes into a mer-

chant’s place of business to make a purchase,

whether it be of an automobile, a television set, a

washing machine, or a pound of nails, the purchaser

ought to have the right to assume that the merchant

has a right to sell the commodity in question and

should not be required to make a record search

before purchasing or to see to it that the merchant

obtains a valid release of the item from a bank

floor plan before delivering it to the purchaser and

20a

receiving his money or obligation. The Court sees

no reason why that right should not extend to the

purchaser of an airplane who buys it from a recog-

nized dealer from a regular inventory or display and

in the ordinary course of business. 235 F.Supp.

at 604.”

284 F.Supp., p. 125

United States Aviation Underwriters v. WTAE Flying

Club, et al., U.S.D.C. Penn. 1969, 300 F.Supp., 341, was

an interpleader suit to determine right to proceeds of

insurance policy on an aircraft which was encumbered

with a duly recorded lien at the time it was purchased

from a dealer. The District Court awarded proceeds to

the purchaser on grounds of misconduct of the lienholder

and said:

[8] Steensen was a buyer of the Cessna in the

ordinary course of business. A buyer in the ordinary

course of business is one who in good faith and

without knowledge that the sale to him is in viola-

tion of the ownership rights or the lien of a third

party in the goods, buys in ordinary course from a

person in the business of selling goods of that kind.

Steensen was such a buyer.”

300 F.Supp., p. 348

In Suburban Trust & Sugs. Bank v. Campbell, CCP

Ohio 1969, 10 Ohio Misc. 74, 250 N.E.2d 118, the rights

of a purchaser in ordinary course of business were held

superior to the lien of a chattel mortgage executed by the

dealer after the sale to renew a prior mortgage recorded

before the sale. Although decided on principles of

novation, the opinion also supports the superior rights

of the purchaser of an airplane in ordinary course of

business.

atoms. cme

2la

In Southern Jersey Airways, Inc. v. National Bank of

Secaucus, N.J. App. 1970, 261 A. 399, there was a

contest between the holder of an unrecorded mechanic’s

lien in possession and the holder of a prior mortgage duly

recorded with the F.A.A. <The New Jersey Appellate

Division held in favor of the mechanic and said:

“[5-7] Thorough study of the matter convinces

us that Congress did not intend by adoption of the

cited recordation procedure necessarily to displace

and preempt all state law. otherwise applicable

bearing upon priorities of lien and title interests in

aircraft. Rather was it the intent, in relation to air-

craft, to substitute for the multiplicity of state

registration or recording systems a single preemptive

federal system for registering (1) instruments of

title, comparable to state registration of titles to

motor vehicles, and recording (2) security docu-

ments of the kinds commonly comprehended by

state recording laws concerning written consensual

security interests affecting personal property. The

reason was that the ready mobility of aircraft and

their common use across state lines made it cumber-

some and burdensome for persons having concern

with the title to or incumbrances on aircraft to have

to record or search in all states or localities which

could arguably be claimed to constitute the proper

recording situs in relation to the specific owner or

incumbrancer of a particular aircraft. See Scott,

‘Liens in Aircraft: Priorities,’ 25 J. Air L. & Com.

193, 200, 203 (1958); Case Note, 48 Colum. L.

Rev. 1248 (1948). Thus, failure to federally record

a recordable instrument would entail the specific

consequences declared by § 1403(c), but no other.

Federal recording would validate a title or incum-

brance as against any claim of invalidity based upon

absence of state recording, but would not neces-

22a

sarily create affirmative priority as against com-

peting rights declared by applicable state law.

* * *

‘* |. Professor Gilmore’s authoritative text states:

The several provisions summarized above obvi-

ously amount to « good deal more than a recording

system (like the patent and copyright provisions)

but are still a good deal less than a comprehensive

coverage of security interests in aircraft; they are

much less comprehensive than the Ship Mortgage

Act, which goes into great detail on the formal

requisites and priorities of ship mortgages and

includes sections on foreclosure and on the status

of mortgages on foreign flag ships. There is of

course no plenary federal power over air transpor-

tation comparable to the patent and copyright

powers or even to the extention [sic] of the

‘judicial power of the United States’ to admiralty

and maritime cases. Here Congress acts under the

interstate commerce and the bankruptcy powers—

which have, however, become so extensive that

there is not likely to be any constitutional challenge

to anything Congress has done or may do in the

future. A truly comprehensive security statute for

aircraft—or indeed a statute covering security

interests in transportation equipment of any kind,

by air, rail, road and water—would undoubtedly be

within the power of Congress to enact; there is,

however, little likelihood that such a federal pre-

emption of the field will take place in the near

future. [1 Gilmore, Security Interests in Personal

Property, § 13.5, at 423 (1965).]

“Except for the engine and spare parts liens,

§503 is not in any sense a substantive statute.

Therefore, it is believed, apart from these substan-

tive provisions, the question of formal requisites,

ee a ne mea ee a a

23a

and the operation of the recording system, state law

should apply to determine any question arising in

connection with a security interest in aircraft. The

argument for a federal law solution is even weaker

here than under any of the other federal statutes we

have so far discussed: § 503 is much less compre-

hensive than the Ship Mortgage Act and there is not

the same federal source of power that could be

alleged in favor of a federal solution in the fields of

copyright, patent and admiralty law. The cases

decided under § 503 all seem to assume that state

law is generally applicable and that § 503 is clearly

an ‘interstitial’ statute, which goes as far as it goes

but no further. [Id., at 426-427]

“Striking a similar note is Scott, supra, 25 J. Air

L. & Com., at 202, wherein, after discussing the case

holding the federal act constitutionally applicable

to aircraft used solely in intrastate commerce, the

writer says:

“Meaning of Section 503 [now § 1403]. Ac-

cepting the constitutional validity of the section, we

are then faced with the more important question—

what priority in right is obtained by a security

holder through federal recordation? Clearly it is not

axiomatic that recordation assures priority as to

subsequent lienors, and the statutory language

cannot be construed in such a way as to leave the

matter free from doubt. The statute merely provides

that conveyances or other instruments filed for

recordation shall be valid as to all persons... .

It does not speak in positive terms of priority, as

does for instance the Ship Mortgage Act of 1920

discussed above.

“Most of the decisions having to do with the

federal act have been careful to delineate its record-

ing provisions as preemptive and exclusive only in

24a

respect of place and requirements of recording and

the effect of failure to record a federally recordable

conveyance or instrument as to subsequent bona

fide purchasers or lienors without notice, Aircraft

Investment Corp. v. Pezzani & Reid Equipment Co.,

205 F.Supp. 80, 82 (E.D. Mich. 1962); American

Aviation v. Aviation Insurance Managers, Inc., 244

Ark. 829, 427 S.W.2d 544, 547 (Sup. Ct. 1968);

Blalock v. Brown, 78 Ga. App. 537, 51 S.E.2d 610,

9 A.L.R.2d 476 (Ct. App. 1949); State Securities

Company v. Aviation Enterprises, Inc., 355 F.2d

225, 229, 22 A.L.R.3d 1263 (10 Cir. 1966);

Marsden v. Southern Flight Service, Inc., 227

F.Supp. 411, 415 (M.D.N.C. 1961); cf. Lochhead

v. G.A.C. Finance Corp. of Camelback, 6 Ariz. App.

539, 434 P.2d 655 (Ct. App. 1968); Curtis v. Carey,

393 S.W.2d 185, 189 (Tex. Ct. Civ. App. 1965).

* * *

“Plaintiff suggests that Congress has preempted

the entire field of conveyancing of interests in

aircraft. This view is erroneous, notwithstanding

In re Veterans’ Air Express Company, 76 F.Supp.

684 (D.N.J. 1948), which contains dicta on which

plaintiff relies. Congress has said only that until

an instrument purporting to convey an interest in

an aircraft is recorded, in accordance with the Act, -

it is void as to third parties without notice. Upon

federal recordation, it is valid without further

recording. [205 F.Supp., at 82]”

261 A.2d, pp. 403, 404, 405

In Dowell v. Beech Acceptance Corp., Calif. 1971, 476

P.2d 401, the California Supreme Court, relying princi-

pally upon decisions of the California Court of Appeals,

determined that a lien upon part of an aircraft dealer’s

stock in trade, duly recorded with F.A.A., was superior

to the claim of a purchaser in ordinary course of business.

eo Ne rt et ee ee ee -

eo es ae

25a

The California Court was of the opinion that the federal

statute did preempt all phases of lien law in respect to

aircraft and thereby created an exception to the pro-

visions of U.C.C. as to purchasers in ordinary course of

business. The same opinion relies upon the annotation in

22 A.L.R.3d 1270. The pertinent portion of said anno-

tation is §12(b), pp. 1292 and 1293 wherein only two

cases are mentioned. One is Dawson v. General Discount

Corp., 82 Ga. App. 29, 60 S.E.2d 653 (1950), which was

not based upon the U.C.C. protection of purchasers

(from a dealer) in ordinary course of business. The

unsuccessful defendant, Dawson, purchased the plane

from an individual who had not satisfied the lien of a

duly recorded conditional sales contract.

The only other case mentioned in ‘said annotation is

Texas Nat. Bk. v. Aufderheide, a 1964 case already dis-

cussed, wherein the rights of the purchaser were upheld.

The Dowell decision also relies upon three U.S. District

Court decisions and two State decisions which involve

superiority of recorded liens over unrecorded mechanics

liens and one State decision involving superiority of prior

recorded chattel mortgage over subsequently recorded

chattel mortgages. None of the out-of-state authorities

relied upon in Dowell involves the rights of a purchaser

in ordinary course of business from a dealer.

Dowell does recognize Northern Ill. Corp. v. Bishop

‘Co, and Texas National Bank v, Aufderheide, supra, but

“simply declines to follow them.”

Dowell ignores State Securities Co. v. Aviation Enter-

prises Inc. (U.S. Court of Appeals), U.S. Aviation Under-

writers v. WTAE Flying Club (U.S. District Court, Mich.),

and Southern Jersey Airways v. National Bank of

Secaucus (New Jersey Appellate Div.), all discussed supra.

26a

Subsequent decisions have been contrary to the

holding of Dowell.

In Carolina Aircraft Corp. v. Commerce Trust Co.

(Fla. App. 1974), 289 So. 2d 37, the lien of a mechanic

in possession was held to be superior to that of a prior

recorded mortgage.

To the same effect is /ndustrial National Bank of

Rhode Island v. Butler Aviation International Inc.,

U.S.D.C. E.D. NY-1974, 370 F.Supp. 1012.

In Idabel National Bank v. Tucker, Okla. App. 1975,

Cert. Den. by Okla. Supr. Ct., the title and right of a

purchaser in ordinary course of business was held to be

superior to that of a bank holding a prior recorded

mortgage from the dealer. After quoting applicable and

persuasive portions of the legislative history of the

U.S.C.A. § 1403, the Oklahoma Court adopts the

language of Texas National Bank v. Aufderheide, supra

as follows:

“Ordinarily, when a person goes into a mer-

chant’s place of business to make a_ purchase,

whether it be of an automobile, a television set,

a washing machine, or a pound of nails, the pur-

chaser ought to have the right to assume that the

merchant has a right to sell the commodity in .

question and should not be required to make a

[second] search before purchasing or to see to it

that the merchant obtains a valid release of the item

from a bank floor plan before delivering it to the

purchaser and receiving his money or obligation.

The Court sees no reason why that right should not

extend to the purchaser of an airplane who buys it

from a recognized dealer from a regular inventory

or display and in the ordinary course of business.”

544 P.2d, p. 1291

27a

From the foregoing, it is evident that the proper dis-

position of the issue is not without doubt.

Appellee relies upon only one authority, Dowell, and

for grounds states that all other authorities are ill con-

sidered and that Dowell is dominant because the U.S.

Supreme Court denied certiorari in that case.

The denial of certiorari by the United States Supreme

Court cannot be ignored, but its action (or inaction) must

be considered in the light of the repeated assertions of

that Court that its denial of certiorari is not proper basis

for unwarranted inferences of what the holding of the

Court might have been had it granted certiorari. It is

also significant that Dowell preserved and extended the

encroachment of federal law in the state field of com-

mercial law, rather than restricting the application of

federal law. State decisions of the former type have been

rarely reviewed by the U.S. Supreme Court, whereas

decisions of the latter type have been more frequently

reviewed,

California appears to stand alone in its insistence that

a customer who buys an airplane out of the stock of a

dealer must carry out a “title search” for recorded “floor

plan” liens.

This Court prefers to follow the rule announced in all

other decisions that the rights of a purchaser from a

dealer in ordinary course of business are superior to the

holder of a lien upon a moving stock of planes in the

hands of a dealer. There are a number of reasons why

this decision is preferable.

1. The Uniform Commercial Code has brought uni-

formity and order to the field of commercial law. To

graft a new class of exceptions upon the existing uniform

28a

law would reverse the wholesome intent and result of

the law.

2. It is not reasonable to assume that Congress in-

tended any such result where not clearly stated.

3. The proliferation of aircraft dealerships and aircraft

purchases would be seriously hampered if the public were

not allowed to trust dealers selling in ordinary course of

business.

4. It is inequitable and unjust to allow a mortgagee

to hold “secret liens” on chattels while authorizing the

chattels to be exhibited for sale by a dealer to the decep-

tion and loss of the purchasing public.

5. Lienholders may protect themselves (if they desire)

by impounding the mortgaged planes in locked surround-

ings inconsistent with the free-sale situation of a stock of

merchandise.

For the reasons and under the authority stated, the

decree of the Chancellor is reversed, the plaintiff’s suit

against Red Baron Flying Club, Inc., is dismissed, and all

costs, including costs of this appeal, are taxed against the

plaintiff.

Reversed and Dismissed.

/s/ Henry F. Todd, Judge

SHRIVER, P. J., CONCURS

DROWOTA, J., DISSENTS

Filed: December 2, 1977

29a

BANK OF HENDERSONVILLE,

Plaintiff-Appellee

, PUTNAM

™ EQUITY

RED BARON FLYING CLUB, INC.,

et al.,

Defendants-Appellants

DISSENT

I respectfully dissent from the conclusion reached in

the majority opinion that the purchaser of an aircraft

who qualifies as a “buyer in ordinary course of business”

under T.C.A. § 47-9-307 is protected by that statute

from the claim of one holding a security interest recorded

under 49 U.S.C. § 1403 prior to the sale. While the issue

is obviously not free from doubt and while the force of

many of the policy considerations espoused by the

majority in favor of the U.C.C. rule cannot be gainsaid,

I believe that Congress intended in § 1403 to set up a

rule of priority that controls the instant situation, and

that we should follow Dowell v. Beech Acceptance Corp.,

Inc., 3 Cal. 3d 544, 475 P.2d 401, 91 Cal. Rptr. 1 (1970).

The Court in Dowell furnishes a reasoned explanation

of its conclusion that 49 U.S.C. § 1401 et seq. pre-empt

State priority rules and render the rights of the holder of

a security interest recorded under § 1403 prior to the

sale of an aircraft superior to those of one who buys the

aircraft in the “ordinary course of business” within the

meaning of U.C.C. § 9-307. In addition, a reading of the

federal provisions themselves seems to me to require this

result. Section 1403(a) sets out the types of interests

a |

COTE

30a

recordable under the statute, and its language encom-

passes the security interest involved in the instant case.

Section 1403(c) provides that no instrument recordable

under the statute shall be “valid” except against “the

person by whom the conveyance or other instrument is

made or given, his heir or devisee, or any person having

actual notice thereof” until it is recorded as provided

in the statute. The effect of proper recording is stated

by § 1403 (d) to be as follows:

(d) Each conveyance or other instrument re-

corded by means of or under the system provided

for in subsection (a) or (b) of this section shall from

the time of its filing for recordation be valid as to

all persons without further or other recordation. . . '

[Emphasis added. ]

That “valid” does not refer to the inherent validity of

the recorded instrument itself is shown by the express

commitment of that issue to state law in § 1406. The

most logical explanation of § 1403(d), then, is that

recording an instrument makes it “valid as to all persons”’

in the sense that its holder acquires rights superior to

those acquired by subsequent persons such as purchasers,

The priority conferred by recording under § 1403 is

very similar to that given recorded deeds of real property

under the theory of constructive notice. The similarity

is brought out by a description of the effect of § 1403

recording in the legislative history of the 1964 amend-

ment to § 1401 e¢ seq. It is there stated that, when an

instrument has been properly recorded under the statute,

- - . all persons are deemed to have notice of its

existence and its effect on title to the property

covered thereby. Consequently, to determine

whether there are any encumbrances on the aircraft,

it is only necessary to consult the central file.

a oe ee

3la

1964 U.S. Code Cong. & Adm. News 2320. In my view,

this strengthens the conclusion that the rights of one who

has recorded a security interest under § 1403 are superior

to those of a subsequent purchaser of the encumbered

aircraft.

Much of the policy in favor of protecting one who

purchases in the ordinary course of business is sound, and

has been widely accepted by state courts and by state

legislatures adopting the U.C.C. Nevertheless, 49 U.S.C.

§ 1403 evidences Congress’s intent to reverse this rule in

the case of security interests in aircraft which are record-

able under the statute. Congress has chosen to give

priority to the secured party rather than the buyer in

such cases by applying its own uniform rule, a rule not

subject to change by the legislatures of the several states.

This uniform federal rule simply removes the priority

question from determination under the U.C.C. when

certain aircraft are involved, rather than “grafting excep-

tions” onto the Code as the majority suggest. The

principle of federal supremacy, recognized in T.C.A.

§ 47-9-104, requires that this federal priority rule replace

conflicting state rules of priority with regard to aircraft.

Further, the buyer’s burden of checking the federal

record in such cases is a light one. This is especially so

when it is compared to the steps a secured party would

have to take, such as locking up the aircraft, to protect

himself under the majority’s approach. Far from being

“secret,” any interest recorded under § 1403 is readily

available for anyone to see. F inally, it is again pointed

out that the similar system of “constructive notice” in

real property recording, under which a subsequent

purchaser would not take free of previously recorded

instruments in his chain of title, has worked reasonably

well and is not generally considered to be unfair.

EE EE

a ptt lial

32a

In sum, I find in 49 U.S.C. § 1401 et seg, an intent to

prefer the rights of a secured party such as plaintiff over

those of a buyer in the ordinary course of business such

as defendant in the circumstances of the instant case.

The Dowell Court was correct in saying that

++ [t]he federal policy to foster recordation and to

protect recorded interests is eviscerated by a rule

which relies on state laws to protect the buyer in the

ordinary course of business even though he fails to

undertake a simple title search which would have

readily revealed all encumbrances.

476 P.2d at 406, 91 Cal. Rptr. at 6. We should not

frustrate the federal purpose of encouraging recording of

interests in aircraft and disregard the intent of Congress

by reading state laws of priority such as U.C.C. § 9-307

into the federal scheme.

/s/ Frank F. Drowota, III, Judge.

Filed: December 2, 1977

33a

IN THE CHANCERY COURT FOR

PUTNAM COUNTY, TENNESSEE

“3ANK OF HENDERSONVILLE,

Plainti/f,

CIVIL

versus , ACTION

‘ NO. 1002

MID-SOUTH AVIATION, INC.,

RED BARON FLYING CLUB, INC.,

and CITIZENS BANK OF

COOKEVILLE, TENNESSEE,

Defendants.

MEMORANDUM OPINION

The issue to be determined in this case is that of

whether a party which provides financing for a seller

and lessor of aircraft will prevail over a purchaser of an

aircraft from the borrower’s inventory where no attempt

is made to determine if there is a valid security interest in

the aircraft owned by someone else.

Most excellent briefs have been filed by eminent

counsel on each side of the case. Comprehensive Stipu-

lation of Facts has been filed. This stipulation includes

the pertinent exhibits.

I have read and studied the briefs filed by respective

counse! with a great deal of interest. I am of the opinion

that our Uniform Commercial Code 9-307, TCA,

47-9-307, which purports to protect “purchasers in the

ordinary course of business” does not apply to this

transaction but that to the contrary the provisions of

34a

the Federal Aviation Act, 49 U.S.C., et seq., have pre-

empted the state law and require protection for the

owner of the admittedly validly perfected security

instrument at the time of the sale to the Red Baron

Flying Club, Inc.

It results therefore that the complaint of the Bank

of Hendersonville is sustained. Counsel will prepare a

final decree for my signature in accord with this Memo-

randum Opinion.

Done at Sparta, Tennessee, on this the 22nd day of

December, 1976.

/s) SCOTT CAMP, Chancellor

[Certificate of Service Omitted in Printing]