# Petition — Bank of Hendersonville v. Red Baron Flying Club, Inc. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1982%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1979 - **Citation:** 439 U.S. 1089 ## Text 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: “§ 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.