Record and brief — Danning v. World Airways, Inc., 102 S. Ct. 1009 (1982) (No. 81-821)

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3 1 = 8 2 1 3 FILED

OCT 19 198)

ALEXANDER L. SIFVAS,

IN THE Wo -

Supreme Court of the United States

Octoser Term 198!

In re HOLmpay AIRLINES Corporation, a California

corporation (formerly known as Holiday Recreation-

al Resources and Holiday Resources Corporation),

Bankrupt.

Curtis B. Danning, Trustee in Bankruptcy of HOLIDAY

AIRLINES CORPORATION, a California corporation

(formerly known as Holiday Recreational Resources

and Holiday Resources Corporation),

Petitioner,

vs.

Woa.p Airways, INC.,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

RICHARD S. BERGER

GenpeL, Raskorr, SHAPIRO & QUITTNER

1801 Century Park East

6th Floor

Los Angeles, California 90067

(213) 277-5400

Attorneys for Petitioner

Curtis B. DANNING, Trustee in

Bankruptcy of Holiday Airlines

Corporation

PANDICK PRESS, WEST COAST, 1945 S. FIGUBROA, LOS ANCELES, CALIFORNIA (213) 247-422)

QUESTIONS PRESENTED

1. If the holder of a consensual lien on an aircraft attempts

to perfect its lien by taking possession of the aircraft and does

not record its lien with the Federal Aviation Administration, is

that lien enforceable against a subsequent bona fide purchaser

without notice of che aircraft?

2. Did Congress, by enacting the recordation provisions of

the Federal Aviation Act, 49 U.S.C. Sections 1403-1406, intend

to preempt the field of recordation of interests in aircraft and

provide a single uniform method of perfecting interests in

aircraft?

STATUTES INVOLVED

STATEMENT OF THE CASE

REASONS FOR GRANTING THE WRIT

ARGUMENT

A Consensual Lien That Has Not Been Filed For Recordation

With The Federal Aviation Administration Is Invalid Against

A Subsequent Bona Fide Purchaser Without Notice................. 7

CONCLUSION 12

. APPENDICES

7 ee

iii

TABLE OF AUTHORITIES

Cases PAGE

Bank v. Jack Adams Aircraft Sales, Inc., 570 F. 2d

me ance 1978) 7,9

Colonial Trust Co. v. Goggin, 230 F. 2d 634 ( 9th Cir. 1955)........ 8

Feldman v. Chase Manhattan Bank, N.A., 368 F. 1327

Sis 1974), rev'd on other grounds, 511 F. 2d (2nd -

6 pase apt cseunehoen teeta mancaithendsesinend

Industrial Nat. Bank of Rhode Isiand v. Rog aR

egg mS «ape 1974) 7

Marsden v. Southern Flight Service, Inc., 227 F. Supp. 411

(M.D.N.C. 1961) Re 10

Northern Illinois Bishop Distributing 284 F.

121 (W.D. Mich. 968) = ee,

State Securities Co. v. Aviation Enterprises, Inc., 355 F. 24355

( 10th Cir. 1966) 7,9

Texas National Bank of Houston SES 8 SS:

399 (ED Ark 1964) s

a ba Unted dcr Gap. 00. Sap. 51 (D. Comm

United States Aviation Underwriters, Inc. v. WTAE Flying Club,

300 F. Supp. 341 (W.D. Pa. 1969) 7

Veterans’ Air Express Co., In re, 76 F. Supp. 684 (D.N_J. 1948) . 7

STATUTES

28 U.S.C. § 1254(1) 2

49 U.S.C. § 1301(20) 2,8

49 U.S.C. § 1403 3, 4, 5,6, 8,9

49 U.S.C. § 1403(a)(1) 3,8

49 U.S.C. § 1403(c) 3, 6,8, 11

49 U.S.C. $§ 1403-1406, 7

Cal. Code Civ. Proc. § 1208.61 6

Cal. Code Civ. Proc. § 1208.62 6

Cal. Comm. Code § 9305

Supreme Court of the United States

Ocrossr Term 1981

In re Houmay AIRLINES CornPoraTION, a California

corporation (formerly known as Holiday Recreation-

al Resources and Holiday Resources Corporation),

Bankrupt.

Curtis B. Danning, Trustee in Bankruptcy of HoLipay

AIRLINES CORPORATION, a California corporation

(formerly known as Holiday Recreational Resources

and Holiday Resources Corporation ),

Petitioner,

vs.

Worn Airways, INc.,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS —

FOR THE NINTH CIRCUIT

Curtis B. Danning, Trustee in Bankruptcy of Holiday

Airlines Corporation, hereby petitions the Court for a writ of

certiorari to issue to the United States Court of Appeals for the

Ninth Circuit to review its judgment entered on June 8, 1981.

OPINIONS BELOW

The Memorandum Opinion of the Bankruptcy Judge filed

on June 10, 1977, was not officially reported, but was unoffi-

cially reported in 13 C.B.C. 361 (1977). A copy of that

Memorandum Opinion is attached as Appendix A.

The Memorandum of Decision of the United States Dis-

trict Court for the Central District of California filed on October

2, 1978 and entered on October 3, 1978 is unreported. A copy

of that Memorandum of Decision is attached as Appendix B.

The Opinion of the United States Court of Appeals for the

Ninth Circuit, filed on June 8, 1981, is reported at 647 F. 2d 977

(9th Cir. 1981). A copy of that Opinion is attached as

Appendix C.

The Order of the United Staves Court of Appeals for the

Ninth Circuit denying a petition for rehearing, filed on July 21,

1981, is umreported. A copy of that Order is attached as

Appendix D.

The following statutory provisions are involved in this case:

49 U.S.C. Section 1301(20)

“As used in this chapter, unless the context otherwise

requires—

. > .

(20) ‘Conveyance’ means a bill of sale, contract of condi-

tional sale, mortgage, assignment of mortgage, or other

instrument affecting title to, or interest in, property.”

49 U.S.C. Section 1403(a)(1)

“The Secretary of Transportation shall establish and main-

tain 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.”

49 U.S.C. Section 1403(c)

“No conveyance or instrument the recording of which is

provided for by subsection (a) of this section shall be valid

. unless such conveyance or other instrument is filed for

recordation in the office of the Secretary of Transportation

STATEMENT OF THE CASE

Holiday Airlines Corporation (“Holiday”) operated a

Electra aircraft identified as “aircraft 971” and “aircraft 974.”

Aircraft 971 was owned by Petroleum Investment Services,

Inc. (“Petroleum”) and was leased by Petroleum to Holiday.

The lease agreement required that Holiday at its own expense

maintain the aircraft in good order and repair and perform such

maintenance as necessary to comply with FAA Air Worthiness

directives. The lease agreement further specificaliy provided:

“THIRTEENTH—LESSEE shail have no right to consent

to, allow, or permit any liens or encumbrances on said

AIRCRAFT.”

Aircraft 971 also was subject to a security interest in favor of

Central Bank and Trust Company (“the Bank”). That security

interest had been duly recorded with the Federal Aviation

Administration pursuant to Section 503 of the Federal Aviation

Act, 49 U.S.C. § 1403.

Aircraft 974 was owned by Holiday free and clear of liens.

World Airways, Inc. (“World”) was an approved aircraft

repair station in the business of performing aircraft service and

maintenance. On October 7, 1974, Holiday and World entered

into a Maintenance, Overhaul and Repair Agreement for the

purpose of providing for the service of Holiday's aircraft. That

agreement provided:

“[ World] shall have a lien upon customer’s aircraft and

components for the value of all services furnished, in-

storage incurred by [World] by reason cf customer’s

failure to accept delivery of aircraft or other flight equip-

ment.”

On December 7, 1974, Holiday delivered aircraft 971 to

World for servicing. The Aircraft remained in World’s posses-

sion until January 24, 1975. During that period of time World

supplied services that had a reasonable value of $70,165.05.

World did not give written notice to Petroleum or the Bank

prior to supplying these services, nor was written consent of

either sought or obtained in connection with these services.

World never attempted to record its claim of lien on aircraft

971 with the Federal Aviation Administration pursuant to 49

US.C. § 1403.

On January 24, 1975, all of Holiday’s aircraft, including

both 971 and 974, were in Worid’s possession for servicing. To

meet its schedule commitments, Holiday needed to obtain the

release of at least some of its aircraft, but World would release

none unless payment for services with respect to any aircraft

released was made or adequate security to assure such payment

was made. To solve this problem, it was agreed that World

would surrender possession of aircraft 971 and Holiday would

execute and deliver to World a chattel mortgage on aircraft 974

to secure the $70,165.05 owed with respect to aircraft 971. This

was accomplished on January 24, 1975. However, possession

of aircraft 971 was surrendered several hours before the chattel

re ne, and delivered. This

chattel mortgage was recorded pursuant to 49 U.S.C. § 1403 on

January 28, 1975.

Aircraft 974 was sold immediately thereafter and Worid

received payment on January 31, 1975, of the $70,165.05 due

for servicing aircraft 971. The end for the purposes of this case

came shortly thereafter. On February 13, 1975, Holiday filed a

petition for an arrangement under Chapter XI of the Bank-

ruptcy Act and subsequently was adjudicated bankrupt.

On July 16, 1975, petitioner commenced an action against

World in the bankruptcy court. In that action petitioner

contended that World had no valid perfected lien on aircraft

971 with the consequence that the chattel mortgage on aircraft

974 was given and the resulting payment was made in dis-

charge of an antecedent debt. Specifically, petitioner urged that

World’s failure to record its lien on aircraft 971 pursuant to 49

U.S.C. § 1403 left it unperfected; that in any event Worid’s lien

was invalid, except to the extent of $250.00, under Cal.Code

Civ. Proc. § 1208.62 because no notice was given to cither

Petroleum or the Bank by Wor'd before it commenced to

+ service aircraft 971 and no written consent to do the work was

obtained from either; that a consensual lien on an aircraft

cannot be perfected by possession pursuant to Cal. Comm.

Code § 9305; and that even if a consensual lien on an aircraft

could be perfected by possession of the aircraft, the lien was

extinguished because World surrendered possession of aircraft

971 to Holiday prior to the execution and delivery of the chattel

mortgage on aircraft 974.

At trial, following petitioner’s presentation of its case,

World moved for judgment arguing that it had a valid posses-

sory lien on aircraft 971 and that the subsequent execution and

delivery of the chattel moztgage on aircraft 974 constituted a

substitution of collateral, and not the transfer of property on

account of an antecedent debt. The Bankruptcy Court agreed,

granted Worid’s motion, and on July 8, 1977 entered judgment

for World.

Petitioner appealed to the United States District Court for

the Central District of California. In a Memorandum of

Decision entered on October 3, 1978, that “ourt found that

because the “consensual” lien purportedly created by the

Repair Agreement was merely an embodiment of the statutory

lien created by Cal. Code Civ. Proc. § 1208.61, and because

World had failed to comply with the notice requirement: ~*

Cal. Code Civ. Proc. § 1208.62, Worid’s lien on aircraft 971 was

limited to $250.00 and any payment in excess of that sum was a

voidable preference. Alternatively, the district court held that

to the extent World had an independent consensual lien on

aircraft 971, that lien was invalid pursuant to 49 U.S.C.

§ 1403(c), inasmuch as it had not been recorded with the

Federal Aviation Administration. The decision of the Bank-

ruptcy Court thus was reversed.

World appealed to the United States Court of Appeals for

the Ninth Circuit. In an Opinion filed on June 8, 1981, the

Court of Appeals held that World had a valid consensual lien

for the full amount of its debt, that the consensual lien was

perfected by possession pursuant to Cal. Comm. Code § 9305,

that Congress did not intend to and had not preempted the field

of recordation of interests in aircraft by enacting Section 503 of

the Federal Aviation Act, 49 U.S.C. § 1403, and that Worid’s

lien was not invalid for failure to be recorded pursuant to 49

U.S.C. § 1403. A petition for rehearing was denied on July 21,

1981.

REASONS FOR GRANTING THE WRIT ~~

The decision of the Court of Appeals that Congress has not

preempted the field of recordation of interests in aircraft and

that a consensual lien on an aircraft may be perfected against a

subsequent bona fide purchaser without notice in the absence of

recordation of the lien with the Federal Aviation Adminis-

tration is im direct conflict with decisions of other Courts of

Appeals [ Bank of Lexington v. Jack Adams Aircraft Sales, Inc.,

570 F.2d 1220 (Sth Cir. 1978); State Securities Co. v. Aviation

Enterprises, Inc. 355 F.2d 225 (10th Cir. 1966) ], is in direct

conflict with decisions of district courts in circuits where the

Court of Appeals has not faced the question [ Haynes v. General

Electric Credit Corp. 432 F.Supp. 763 (W.D. Va. 1977);

Industrial Nat. Bank of Rhode Isiand v. Butler Aviation Inter-

national, Inc., 370 F.Supp. 1012 (E.D.N.Y. 1974); United

States Aviation Underwriters, Inc. v. WTAE Flying Club, 300

F.Supp. 341 (W.D. Pa. 1969); Northern Illinois Corp. v. Bishop

Distributing Co., 284 F.Supp. 121 (WD. Mich. 1968); Texas

National Bank of Houston v. Aufderheide, 235 F Supp. 599

(E.D. Ark. 1964); United States v. United Aircraft Corp., 80

F.Supp. 52 (D. Conn. 1948); In re Veterans’ Air Express Co.,

76 F.Supp. 684 (D.N_J. 1948)]}, and is in direct conflict with

It is clear that the consensual lien created by Holiday in

favor of World is a “conveyance” as that term is defined in 49

US.C. § 1301(2):

“As used in this chapter, unless the context otherwise

requires—

e >= >

(2) ‘Conveyance’ means a bill of sale, contract of condi-

tional sale mortgage, assignment of mortgage, or other

instrument affecting title to, or interest in, property.”

Petitioner notes that 49 U.S.C. § 1403(a)( 1), in creating a

system for the recordation of interests in aircraft, provides:

“The Secretary of Transportation shall establish and main-

tain 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.”

Finally, 49 U.S.C. § 1403(c) clearly and specifically states:

“No conveyance or instrument the recording of which is

provided for by subsection (a) of this section shall be valid

. unless such conveyance or other instrument is filed for

recordation inthe office ofthe Secretary of Transporation

sc itieahiicnle dich: wenitibasis teaken sii than

Congress intended that no instrument affecting title to aircraft

would be valid against an innocent third party unless and until

it is filed for recordation with the Federal Aviation Adminis-

tration in Oklahoma City, Oklahoma.

Petitioner does not contend that 49 U.S.C. § 1403 pre-

empts all aspects of state law relating to liens on aircraft. State

law still determines the validity of liens and their relative

priority. Thus, cases such as Colonial Trust Co. v. Goggin, 220

F.2d 634 (9th Cir. 1955) and State Securities Co. v. Aviation

Enterprises, Inc., 355 F.2d 225 (10th Cir. 1966), remain good

law. The area that is preempted by 49 U.S.C. § 1403 is the

manner in which consensual liens on aircraft are to be per-

fected. As the Tenth Circuit stated in State Securities Co. v.

Aviation Enterprises, Inc., supra:

“By providing a federal system for registration of con-

veyances and liens affecting the title to aircraft, Congress

has preempted that field and state recording statutes are

not applicable to such title instruments. However, ques-

tions of the validity of such title documents, actual notice,

good faith purchaser status, and the like, must be resolved

under state law.” [355 F.2d at 229; foomotes omitted. ]

The identical conclusion was reached by the Fifth Circuit

in Bank of Lexington v. Jack Adams Aircraft Sales, Inc., 570

F.2d 1220, 1224 (Sth Cir. 1978):

“The Federal Aviation Act created a framework for a

nationwide system to record certain interests in aircraft and

major aircraft components . . . . To the extent that state law

conflicts with any part of the Act, it is preempted under the

power of Congress to regulate interstate commerce ... .

There is no question that Congress has preempted the field

insofar as registration and recording of title instruments

affecting commercial aircraft is concerned.” [Emphasis

added. |

that, absent actual notice, recordation of an instrument affect-

ing title to aircraft with the Federal Aviation Administration is

the exclusive manner of perfecting the claim asserted in this

instrument. Contrary to the decision in this case, a consensual

lien on an aircraft cannot be perfected merely by taking posses-

sion of the aircraft.

Most relevant is Feldman v. Chase Manha‘tan Bank, N.A.,

368 F.Supp. 1327, 1331, (S.D.N.Y. 1974), rev'd on other

grounds, 511 F.2d 468 (2nd Cir. 1975):

“Because it represents federal action in this area, section

in Chattel Paper, 78 Yale L.J. 935, and then gave the following

example:

“For instance, U.C.C, § 9—305 provides for the perfection

of a security interest in ‘chattel paper’ by the secured party

at 1331 2.9)

That open and notorious possession of an aircraft is not

sufficient to perfect a claim to the aircraft without recordation

with the Federal Aviation Administration is further exemplified

by Marsden v. Southern Flight Service, Inc., 227 F.Supp. 411,

416-417 (M.D.N.C. 1961). There, the purchaser of an aircraft

took possession of the aircraft and painted its name on it in 1%

foot high letters, but did not record its title with the Federal

A-l

Bankrupt. in Bankruptcy

NO. 75-€2237(LTL) (RO)

Houmay Amines Corporation, a California MEMORANDUM OPINION

This is 2 preference action brought by the Trustee in

Bankruptcy of HOLIDAY AIRLINES COMPANY (here-

inafter “HOLIDAY™). The factual background of the dispute

is as follows.

A-2

1. HOLIDAY operated a scheduled commercial airline

between Los Angeles and Lake Tahoe. It utilized three aircraft,

identified herein as 971, 972, and 974.

2. HOLIDAY leased 971 from PETROLEUM IN-

VESTMENT SERVICES, INC., a Colorado corporation (here-

inafter “PETROLEUM”). PETROLEUM'’s interest in the

aircraft was subject to a security interest in favor of CENTRAL

BANK AND TRUST COMPANY OF DENVER, COLORA-

DO (hereinafter “BANK”).

3. WORLD AIRWAYS, INC., (hereinafter “WORLD”)

was engaged in the business of repairing and servicing com-

mercial aircraft.

4. On October 7, 1974, WORLD and HOLIDAY entered

into an agreement for the maintenance and servicing of

HOLIDAY’s aircraft. The agreement granted WORLD a lien

upon aircraft in its possession to secure amounts due from

HOLIDAY for services performed on such aircraft.'

S$. On December 7, 1974, HOLIDAY delivered 971 to

WORLD for servicing and maintenance. Thereafter, and prior

to January 24, 1975, WORLD supplied services and mainte-

nance to 971 of the reasonable value of $70,165.05. 971

remained continuously in WORLD's possession from Decem-

ber 7, 1974, to January 24, 1975.

6. WORLD did not give written notice to PETROLEUM

or BANK prior to supplying services and maintenance to 971,

por was written consent of PETROLEUM or BANK sought or

obtained in connection with the services or maintenance ren-

dered by WORLD. WORLD never recorded a lien on 971

with the FAA under the Federal Aviation Act.?

7. By January 24, 1975, all three of HOLIDAY’ aircraft

were in WORLD's possession for repair and maintenance. In

order to meet its schedule commitments, HOLIDAY required

' See: Maintenance, Overhaul and Repair Agreement of October 7,

1974, Endorsement No. 2, paragraph (7).

® See: Federal Aviation Act of 1958, 49 U.S.C. 1301, et seq. (1970).

A-3

the release of one or more of these aircraft. WORLD refused to

release any of the aircraft unless the amount due for services

and maimeosace on the relonsed aircraft was paid or adequate

collateral given to secure payment.

8. Accordingly, on January 24, 1975, HOLIDAY and

WORLD entered into a transaction whereby (a) WORLD

released its lien on 971 and delivered 971 to HOLIDAY; and

(b) HOLIDAY executed and delivered to WORLD a chattel

mortgage on 974 to secure payment of the $70,165.05 owed on

971.. This chattel mortgage was filed with the FAA on January

‘28, 1975.

9. Ultimately 974 was sold by HOLIDAY. A portion of

the proceeds of sale was used to pay WORLD the $70,165.05

incurred for services and maintenance on 971.

10. On February 13, 1975, HOLIDAY filed its Chapter XI

proceedings. It was thereafter adjudicated.

The trustee asserts that the execution and delivery of the

chattel mortgage on 974 and the subsequent payment of

$70,165.05 constitute a voidable preference. He argues:

i. WORLD's failure to give notice and obtain consent

of PETROLEUM and BANK limits the amount of

WORLD's artisan’s lien to $250.00. (CCP.

1208.61 and 1208.62.)

ii, WORLD's failure to file its claim of lien with the

FAA eliminates any potential lien by consensual

agreement based upon the servicing agreement of

October 7, 1974.

iii. The release by WORLD of its $250.00 lien on 971

cannot support the creation of a $70,165.05 chattel

mortgage on 974. The chattel mortgage constitutes a

preference, at least to the extent of $69,915.05 (the

difference between $70,165.05 and $250.00).

A-4

In defense of its position WORLD contends:

i. It acquired a valid possessory lien on 971. The lien

is grounded on two independent bases: (a) the

provisions of 1208.61; and (b) the agreement of

October 7, 1974.

iii PETROLEUM and BANK expressly authorized the

services and maintenance of 971. They have never

asserted, and are now estopped to assert, any

$250.00 limits on charges for such service and

maintenance.

iii. WORLD acquired its $70,165.05 security interest in

974 contemporaneously with the relinquishment of

possession and release of its $70,165.05 lien on 971.

iv. The payment of $70,165.05 to a secured creditor

under these circumstances cannot be attacked as a

preference.

It is clear from the contentions of the parties and from the

evidence received at the trial that all of the elements of a

voidable preference have been established except the “antece-

dent debt” element.? However, if WORLD had a valid lien on

971 to secure the $70,165.05 due to it, then the chattel mortgage

transaction effected a contemporaneous substitution of collate-

ral and cannot be characterized as preferential. The terms of

the lease agreement between PETROLEUM and HOLIDAY

and the security agreement in favor of the BANK are pertinent

to this inquiry.

The provisions of the PETROLEUM-HOLIDAY lease

include the following:

i. HOLIDAY obligated itself to pay rent in the sum of

$11,000.00 a month; and these payments were re-

quired to be made regardless of whether the aircraft

was in operational condition or was grounded for

mechanical difficulties, repair, or any other reason.

* Bankruptcy Act § 60a and § 60b, 11 U.S.C. 96a and 96b.

*See: Stipulation re Genuineness of Documents and Admissiblilty

Thereof, March 18, 1977, Attachments 2, 5, 6, 7, and 8.

ii.

A-5

HOLIDAY was required to return the aircraft to

PETROLEUM at the termination of the lease in the

same condition as when delivered, except for reason-

able wear and tear, repair, and replacement of

equipment.

iii. HOLIDAY was required at its own expense to

maintain the aircraft in good order and repair and to

replace at its own cost any and all parts, equipment,

HOLIDAY was required to perform all engine over-

haul, inspection, and maintenance service on the

aircraft necessary in order to comply with FAA Air

Worthiness directives which became effective during

the term of the lease.

In the event of HOLIDAY ’s default of any of the

provisions of the lease, PETROLEUM could termi-

nate the lease on 15 days’ written notice.

The PETROLEUM-BANK security agreement included

the following terms:

ii.

PETROLEUM agreed at its expense to maintain the

collateral in good condition and to replace and

repair all broken, worn out, or damaged parts.

The security agreement was given to secure a prom-

issory note in favor of BANK in the sum of

$500,000.00. This obligation was also secured by

security interests in other collateral, including oil and

gas interests, common stock, and limited partnership

interests of PETROLEUM.

iii. The existence of the lease on 971 in favor of

HOLIDAY was acknowledged, and all rent pay-

ments due thereunder were assigned to BANK.

I— The $250.00 Limitation of 1208.62.

§ 1208.61 and $ 1208.62 of the C.C.P. deal with artisans

of one who is not the mortgagee or the hoider of legal title to

the aircraft. In order to obtain a lien for a sum in excess of

$250.00 the artisan is required to give legal notice to and obtain

written consent from the mortgagee and legal owner prior to

commencement of the work.

The trustee urges that the failure of WORLD to give such

written notices and obtain such written consents in the case at

bar limits the lien, if any, to $250.00. In the trustee’s view, the

5 Federal Aviation Act of 1958, 49 U.S.C. 1301, et. seq. (1970); 14

CF.R. 49.41, et. seq.

A-7

repair facility utilized by the airline was required to engage in a

continuous written dialogue with the BANK and PETRO-

LEUM relative to the maintenance and servicing of the aircraft.

The realities of the situation refute the trustee’s contention.

There is no evidence that the BANK or PETROLEUM corre-

sponded with HOLIDAY at any time with respect to the repair,

maintenance, or condition of the aircraft. Having imposed the

contractual duty on HOLIDAY to provide servicing and

maintenance required in the operation of the commercial

airliner, PETROLEUM and BANK expected HOLIDAY to

make the necessary arrangements therefor. It is clear that

PETROLEUM and BANK neither expected nor required no-

tice each time a repair facility was called upon to service the

aircraft. In view of the plain language of the lease and security

agreements, such correspondence and dialogue would have

served no useful purpose.

The FAA standard of aircraft and engine maintenance

were an underlying premise upon which the continued use and

value of the collateral depended. PETROLEUM and BANK

knew this and sought to protect the value of the collateral

and insure its continued vitality by imposing this burden on

HOLIDAY. In so doing, they must be deemed to have

authorized HOLIDAY to procure the requisite technical serv-

ices and maintenance necessary to maintain FAA standards.

This obviated the needless harassment incident to written

notices from the repair facility each time a propeller hub was

serviced or a hydraulic line was replaced. The trustee’s

contention as to the impact of § 1208.62 must be rejected.*

* Neither PETROLEUM aor BANK have challenged the validity or

extent of WORLD's lien. This distinguishes the case at bar from the facts

presented in Colonial Trust Co. v. Goggin, 230 F.2d 634 (9th Cir. 1955). Nor

is it necessary to determine priorities under California Commercial Code 9310

as between the prior security interest of BANK and WORLD's subsequent

artisan’s lien.

A-8

i—Filing The Lien With FAA.

The failure of WORLD to comply with the filing require-

ments of the Federal Aviation Act is of no consequence in this

proceeding. The provisions of the Federal Aviation Act and the

cases interpreting it have genera:.y held that artisan’s liens are

The trustee seeks to avoid the implications of these author-

ities b, asserting that: (i) WORLD’s lien rights were not

derived from the artisan’s lien provisions of § 1208.61 but are

based upon the consensual lien described in the agreement of

October 7, 1974; and (ii) the perfection of a consensual lien on

aircraft subject to the Federal Aviation Act must be done in the

manner provided by the federal statute; and (iii) the noncom-

pliance of the federal statute results in invalidity of the lien.

In support of this analysis, the trustee argues:

l. The Federal Aviation Act has preempted and

superseded state laws with respect to the perfection of liens

on federal aircraft. As a consequence, liens on aircraft

within the Act must be filed of record as provided by the

Act.

2. While an artisan’s lien is created by state law, its

recognition and validity may depend upon other and

completely disparate considerations; in the case at

bar compliance with a preemptive federal perfection

statute. To the extent that local policy embodied in

7 Federal Aviation Act § 1403(¢) provides that no instrument shail be

recorded unless it shall have been acknowledged before a notary public or

other appropriate officer described in the statute; Sigman, The Wild Blue

Yonder; Interests in Aircraft Under Our Federal System, 46 S.Cal. L_Rev. 316

(1973) at 322 2.27; Continental Radio Company, Inc. v. Continental Bank &

Trust Ca. 369 S.W.2d 359 (Tex. Civ. App. 1963); Southern Jersey Airways,

Inc. v. National Bank of Secaucus, 261 A.2d 399 (NJ. 1970); Industrial

National Bank v. Butler Aviation International, Inc. 370 F.Supp. 1012

(E.D.N.Y. 1974).

*See (7) supra.

A-9

the creation of the lien conflicts with applicable

perfection requirements of the FAA, the latter must

control. In the case at bar, the artisan’s lien cannot

survive the artisan’s failure to comply with the

central recording requirements of the federal statute.

No doubt the trustee is correct in his assertion that the

preemptive impact of the federal recording statute supersedes

state law with respect to matters dealing with perfection of liens

on federal aircraft. However, no conflict between federal and

local policy is presented here.

The artisan’s lien of § 1208.61 is not within the mandatory

recording provisions of the Federal Act. It presents no issue of

competing policy considerations between local and federal law.

The lien provisions in the agreement of October 7, 1974, are

irrelevant to the issues in this case. No reason appears to

deprive the artisan of his lien merely because it is referred to in

trustee cites no case or other authority to support the proposi-

tion that contractual recognition of the special rights of the

artisan should be held to disenfranchise him of his lien rights. '®

® | Gilmore, Security Interest in Personal Property § 13.5 at 424 (1965);

Industrial National Bank of Rhode Island v. Butler Aviation International,

Inc. 370 F.Supp. 1012 n.4 (E.D.N.Y. 1974); J.C. Equipment, Inc. v. Sky

Aviation, Inc. 498 S.W.2d 73 (Mo.App. 1973); Southern Jersey Airways, Inc.

v. National Bank of Secaucus, 108 NJ. Super. 369, 261 A. 2d 399 ( App. Div.

1970); Dowell v. Beech Acceptance Corporation, Inc. 3 Calid 544, 91

Cal Rper. 1 (1971); Northern Iilineis Corporation v. Bishop Distributing

Company, 284 F.Supp. 121 (WD. Mich. 1968); International Atlas Services,

Inc. v. Twentieth Century Aircraft Company, 251 Cal App. 2d 434, 59

Cal. Rptr. 495 (1967); Continental Radio Company, Inc. v. Continental Bank

and Trust Company, 369 S.W.2d 359 (Tex. Civ. App. 1963); Blalock v. Brown,

78 Ga.App. 537, 51 S.E.2d 610 (1949); United States v. United Aircraft

Corporation, 80 F.Supp. 52 (D.C_D. Conn 1948); In re Veterans’ Air Express

Company, Inc. 76 F.Supp. 684 (D.C. NJ. 1946).

broader or different construction in derogation of the nghts created in favor of

the artisan under state law. (Cf. Chicago Board of Trade v. Johnson, 264 US.

1, 924.)

A-10

I— The Exchange of Collateral.

The transaction on January 24, 1975, accomplished a

substitution of the collateral subject to WORLD’s lien. The

mere substitution of collateral does not create a preference ipso

facto. Whether or not a preference results depends upon

whether or not the transaction resulted in a depletion of the

bankrupt’s estate.'' In the case at bar, WORLD held a valid

artisan’s lien on 971 to secure an indebtedness to it of

$70,165.05. It released that lien in exchange for the chattel

mortgage lien on 974. No depletion resulted to the estate. The

transaction was not a preference.

This Memorandum Opinion shail constitute Findings of

Fact and Conclusions of Law as provided in R.752(a). Coun-

sel for WORLD is directed to prepare and lodge an order

Dated: June 10, 1977.

/s/ Robert L. Ordin

Rosert L. Orpin, Bankruptcy Judge

1? 3 Collier on Bankruptcy 14th Ed. § 6020 and cases therein cited.

B-I

OCT 3 1978 OCT 2 1978

CLERK. US. DISTRICT COURT CLERK. U.S. DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA CENTRAL DISTRICT OF CALIFORNIA

BY DEPUTY BY DEPUTY

Curtis B. Danwine, Trustee in Bankruptcy of

Houmpay Amioves Corporation, a California

corporation (formerly known as Holiday Recre- MEMORANDUM

ational Resources and Holiday Resources Cor- OF DECISION

poration ),

Defendant- Appellee.

This is an appeal from a Memorandum Opinion filed June

10, 1977 and a Judgment entered July 8, 1977 by the Bank-

ruptcy Jucge in bankruptcy proceedings involving Holiday

Airlines Corporation (Holiday). The specific proceeding in-

volving here is one brought by appellant Curtis B. Danning,

Holiday’s Trustee in Bankruptcy (Trustee), to recover an

alleged preference given defendant-appellee World Airways,

B-2

Inc. (World). At the trial of the action, the Bankruptcy Judge

granted World's motion to dismiss at the of the

Trustee's case because of Trustee's failure to prove one of the

elements necessary to show a preference that there was an

antecedent debt.

The underlying facts are not in dispute. Holiday was an air

entered into a maintenance agreement. On December 7, 1974

Holiday delivered to World a Lockheed Electra aircraft No.

N-971-HA (971) for servicing. 971, under lease to Holiday,

was owned by Petroleum Investment Services, Inc. ( Petroleum

Services) subject to a security interest in favor of Central Bank

and Trust Co. (Central Bank). World supplied services on 971

valued at $70,165.05.

On January 24, 1975 World released 971 to Holiday. To

secure the debt owing to World, Holiday shortly thereafter

executed a mortgage in favor of World on another plane, No.

974-HA (974) which was wholly owned by Holiday and at the

time was in World's possession for repair and maintenance.

974 soon thereafter was sold by Holiday with World receiving

payment on January 31, 1975 from the proceeds of such sale for

the work done on 971. The mortgage was then released. The

mortgage was recorded on February 8, 1975. On February 13,

i975 Holiday filed under Chapter XI and was subsequently

adjudicated bankrupt.

Jurisdiction here is found in |1 U.S.C. § 67(c).

Under California Code of Civil Procedure § 1208.61, a

repairer has a lien dependent on possession for repairs made on

an aircraft. Under California Code of Civil Procedure

§ 1208.62, that lien is in some circumstances limited to $250.00.

Appellant Trustee contends on appeal that the Bankruptcy

Court made an error of law by holding that World had a valid

lien on 971 to secure the $70,165.05 debt since World had not

complied with the above sections of the California Code of

B-3

Civil Procedure. Specifically the Trustee argues that when the

Bankruptcy Court held that Petroleum Services and Central

Bank had waived notice and consent requirements as to the

lien, it overlooked provisions of the lease from Petroleum

Services and the mortgage of Central Bank saying that no liens

Alternatively, Trustee contends that if the lien was con-

sensual it was never perfected since it was never recorded with

the Federal Aviation Administration as required by 49 U.S.C.

§ 1403(c), at least as to third parties without notice.

Finally, the Trustee argues that even if the lien was valid

under the California Code of Civi’ Procedure it was never-

thus received a payment on an antecedent debt when it received

the payment from Holiday.

Bankruptcy Rule 741 makes Federal Rule of Civil Proce-

dure 41 applicable to adversary proceedings in bankruptcy.

FRCP 41(b) allows a court as trier of the facts to render

Bankruptcy Court is not required to view the evidence in a light

most favorable to Trustee to see if a prima facie case was made

out, but rather can render judgment if it is convinced from the

record as it stood at the close of Trustee's case that the evidence

preponderated against Trustee. See Ellis v. Carter 328 F.2d

$73, 577 (9th Cir. 1964).

Appeal from such a judgment is covered by Bankruptcy

Rule 810, which states:

B-4

“Upon an appeal the district court may affirm modify,

or reverse a referee's judgment or order or remand with

the referee to judge of the credibility of the witnesses.”

A preference is defined in 11 U.S.C. § 96 (§ 60 of the

Bankruptcy Act) as follows:

“(a)(1) A preference is a transfer, as defined in this

title, of any of the property of a debtor to or for the benefit

of a creditor for or on account of an antecedent debt, made

transfer will be to enable such creditor to obtain a greater

percentage of his debt than some other creditor of the

same class.”

(2) For the purposes of subdivisions (a) and (b) of

this section, a transfer of property other than real property

shall be deemed to have been made or suffered at the time

when it became so far perfected that no subsequent lien

upon such property obtainable b'; legal or equitable pro-

ceedings on a simple contract cou!“ vecome superior to the

rights of the transferee ... If any transfer of real property

is not so perfected against a bona fide purchase, or if any

transfer of other property is not so perfected against such

liens by legal or equitable proceedings prior to the filing of

a petition initiating a proceeding under this title, it shall be

deemed to have been made immediately before the filing

of the petition.”

Here the Bankruptcy Judge found that no antecedent debt

existed. Instead he found that a valid lien existed when the

payment by Holiday to World was made and that the transfer

of property in satisfaction of that statutory lien was not a

preference. See 11 U.S.C. § 107(b); Greenblatt v. Utley (9th

B-5

Cir. 1956) 240 F.2d 243; 3 Collier on Bankruptcy II,

$§ 60.12, 60.22 and 60.47.

The primary question on appeal is whether a valid lien in

be affirmed because its findings that no antecedent debt existed

Judge finds something that isn’t there. See Colonial Trust Co. v.

Goggin 230 F.2d 634 (9th Cir. 1955). While the Bankruptcy

leum Services and Central Bank. Jn re Ahiswede 516 F.2d 784,

787 (9th Cir. 1975), cert. den. 423 U.S. 913. The statutory lien

Although there may be a question as to whether a provi-

sion in the contract between Holiday and World created a

consensual lien, the Bankruptcy Judge ultimately assumed in

his Memorandum Opinion that this was merely an embodiment

of the statutory lien. A consensual lien merely embodying a

statutory lien is no better than the underlying statutory lien

which we have found here to be invalid.

B-6

In any event, even if a consensual lien was intended by the

parties, such lien was never recorded and thus is

invalid under 49 U.S.C. § 1403(c) as to third parties without

notice. In terms of preference analysis, such lien was therefore

perfected only when the petition in bankruptcy was filed [see

tl U.S.C. § 96(a)(2)] amd the granting of the lien was a

transfer on account of an antecedent debt. The payment made

before the lien was perfected was also a transfer on account of

an antecedent debt.

The decision of the Bankruptcy Judge in granting the

motion to dismiss of World at the conclusion of the Trustee's

case is reversed. The matter is remanded to the Bankruptcy

Court for further proceedings consistent herewith.

DATED: September 28, 1978

/s/ Lawrence T. Lydick

LAWRENCE T. LyDICK

United States Distnict Judge

Argued and Submitted Dec. 3, 1980

Decided June 8, 1981

Appeal from the United States District Court for the

Central District of California.

Before GIBSON*, SNEED and POOLE, Circuit Judges.

SNEED, Circuit Judge:

This is a bankruptcy case in which the issue is whether

World Airways, Inc. a creditor of the bankrupt Holiday

Airlines Corporation, Inc., received a preference recoverable by

“Honorable Floyd R. Gibson, Senior United States Circuit Judge for the

Eighth Circuit, sitting by designation.

N-971-HA (971), which was under lease to Holiday, from

the proceeds derived from the sale of another aircraft, No.

N-974-HA (974), which was owned by Holiday. If the receipt

by World of this payment were merely the proceeds from the

liquidation of its previously perfected security interest, which

Lit

C-3

“[ World] shall have a lien upon customer’s aircraft and

components for the value of all services furnished, in-

storage incurred by [World] by reason of customer’s

failure to accept delivery of aircraft or other flight equip-

ment.” Endorsement No. 2, paragraph (7).

On December 7, 1974, Holiday delivered aircraft 971 to Worid

for servicing and maintenance and World supplied services and

maintenance which had a reasonable value of $70,165.05.

Aircraft 971 remained continuously in World's possession from

the date of its delivery to January 24, 1975. World did not give

written notice to Petroleum or the Denver bank prior to

supplying these services, nor was written consent of cither

sought or obtained in connection with these services. World

never attempted to record its lien on aircraft 971 with the

Federal Aviation Administration pursuant to 49 U.S.C. § 1403.

On January 24, 1975 all of Holiday’s aircraft, including

both 971 and 974, were in World's possession for servicing. To

meet its schedule commitments Holiday needed to obtain the

release of at least some of its aircraft but World would release

none unless payment for services was made or adequate

security to assure such payment was made. To solve this

problem it was agreed that World would surrender possession

of aircraft 971 and Holiday would execute and deliver to Worid

a chattel mortgage on aircraft 974 to secure the $70,165.05

owed with respect to aircraft 971. This was accomplished in

January 24, 1975. However, possession of aircraft 971 was

surrendered several hours before the chattel mortgage on

aircraft 974 was executed and delivered. This chattel mortgage

was recorded pursuant to 49 U.S.C. § 1403 on January 238,

1975.

Aircraft 974 was sold immediately thereafter and World

received payment on January 31, 1975 of the $70,165.05 due

for servicing aircraft 971. The end for the purposes of this case

came shortly thereafter. On February 13, 1975 Holiday filed

under Chap. XI and subsequently was adjudicated bankrupt.

C-4

To support his contention that the payment to World of

$70,165.05 was a preference the Trustee contends that World

had no valid perfected lien on aircraft 971 with the consequence

that the chattel mortgage on aircraft 974 and the resulting

payment were in discharge of an antecedent debt. World

disputes this vigorously. It argues that a valid perfected lien on

aircraft 971 existed from the time it serviced the aircraft. The

lien’s validity, World asserts, rests on either Cal.Civ.Pro.Code

$ 1208.61 and § 1208.62 or Cal.Com.Code § 9305. The Trustee

responds by contending ( | ) that a failure to record Worid’s lien

pursuant to 49 U.S.C. § 1403 left it unperfected, (2) that in any

event Worild’s lien was invalid, except to the extent of $250,

under Cal.Civ.Pro.Code § 1208.62, because no notice was given

to either Petroleum or the Denver bank prior to commencing to

service aircraft 971 and no written consent to do the work was

obtained from either, (3) that no consensual lien perfected by

possession pursuant to Cal.Com.Code § 9305 exists, and (4)

that should one exist it was surrendered prior to the execution

of the chattel mortgage on aircraft 974 and the payment of

$70,165.05 by Holiday.

Inasmuch as we hold that a valid consensual lien perfected

by possession did exist and that the gap of a few hours between

the surrender of possession of aircraft 971 and the execution of

the chattel mortgage on aircraft 974 is without legal significance

for the purpose of this case, tire exists no reason for us to

address the questions raised by the trustee concerning a lien

asserted pursuant to Cal.Civ.Pro.Code §1208.62. We also hold

that World’s consensual lien perfected by possession is not

invalid for failure to be recorded pursuant to 49 U.S.C. § 1403.

THE EFFECT OF FAILURE TO RECORD PURSUANT TO

49 U.S.C. § 1403

The Trustee is correct when he contends that a preference

exists if recordation by World under 49 U.S.C. § 1403 is

necessary to perfect its lien on aircraft 971. Section 1403(c)

C-5

provides some support for the position that such recordation is

necessary. It states that “no conveyance or instrument,” able to

be recorded under the act, “shall be valid in respect of such

aircraft . . . against any person,” other than the parties to the

conveyance or instrument,” until such conveyance or other

instrument is filed .

Section 1403 does aot preempt local law to the full exsent

that this extract might suggest. The court observed in Colonial

Trust Co. v. Goggin, 230 F.2d 634, 637 (9th Cir. 1955), that,

notwithstanding the federal recordation system, “where an

article of personal property of whatever character is in posses-

sion of one who has expended work and labor thereon at the

request of the person lawfully in possession, the domestic law of

the place of possession governs as to the extent and character of

the lien.” A similar view has been expressed in State Securities

Company v. Aviation Enterprises, Inc., 355 F.2d 225, 229 ( 10th

Cir. 1966). Several decisions upholding the rights of a

purchaser in the ordinary course of business under state law as

against holders of floor plan financing liens recorded under

federal law employ the same approach. See Sanders v. Aircraft

Sales Inc., S75 F.2d 1086 (3d Cir. 1978); Haynes v. General

Electric Credit Corporation, 582 F.2d 869 (4th Cir. 1978).

Both Sanders and Haynes declined to read section 1406 so as to

preempt provisions of the relevant state’s version of the Uni-

form Commercial Code which were designed to protect pur-

chasers in the ordinary course of business. The Supreme Court

of California has reached the opposite conclusion. See Dowell

v. Beech Acceptance Corp., Inc., 3 Cal.3d 544, 91 Cal. Rptr. 1,

476 P.2d 401 (1970). The financing agency prevailed over the

buyer in the ordinary course of business because of the

preemptive effect accorded section 1406 by the California court.

Despite the reference of 49 U.S.C. § 1406 to state law as

determining the validity of liens recorded under section 1403,

we are not bound by state court decisions on the preemptive

effect of federal law.' Sheli Oil Co. v. Younger, 587 F.2d 34,

* We, of course, express no opinion on the effect of state decisions on

preemption in diversity cases.

C-6

36-37 (9th Cir. 1978)(California Supreme Court decision

interpreting the preemptive scope of the Sherman Act not

controlling in a case construing a similar state statute and its

preemption by the Sherman Act); Clifton v. Cox, 549 F.2d 722,

730 (9th Cir. 1977)( state courts have no power to bind the

_ federal courts with their rulings concerning the extent of federal

power); see Flournoy v. Wiener, 321 U.S. 253, 270-72, 64 S.Ct.

$48, 556-57, 88 L.Ed. 708 (1944)(Frankfurter, J., dis-

senting )(construction of federal law necessary to decision

under state law gives rise to a federal question ); Standard Oil of

California v. Johnson, 316 U.S. 481, 62 S.Ct. 1168, 86 L.Ed.

1611 (1942); Smith v. Kansas City Title & Trust Co., 255 U.S.

180, 41 S.Ct. 243, 65 L.Ed. 577 (1921). We hold that the

failure of World to record its consensual lien on aircraft 971

while in its possession under the circumstances of this case does

not make perfection of its lien impossible as a matter of federal

law. This holding is limited to consensual liens perfected by

require recording under 49 U.S.C. § 1406.

WORLD’S CONSENSUAL LIEN PERFECTED BY

POSSESSION

The question remaining is whether, absent any preemptive

effect of sections 1403 and 1406, a consensual lienholder who

has not recorded his lien and is in possession of an airplane has

an interest under California law that is superior to any lien that

is “obtainable by legal or equitable proceedings” on a simple

contract. Section 60(a)(2) Bankruptcy Act, 11 U.S.C. § 96

(1976). A demonstration is now necessary that, under Califor-

nia law, World held a consensual lien on aircraft 971 perfected

by possession. The Maintenance, Overhaul and Repair Agree-

ment set out above clearly indicates that a lien for services,

repairs, and any storage was intended. Both the bankruptcy

judge and the district court treated this provision as but a

C-7

reference to the statutory lien provided by Cal.Civ.Pro.Code

§ 1208.61 and § 1208.62. Therefore, both were compelled to

determine whether Worid’s statutory lien had been perfected

beyond the minimal amount of $250. As to this they differed,

the bankruptcy judge holding that it had and the district court

that it had not.

We hold that it was clearly erroneous to disregard the plain

language of the Agreement between Holiday and World and to

treat the lien provision as surplusage in effect. Without tarrying

to determine whether this treatment of the lien provision by

both the bankruptcy judge and the district court was a finding

of fact, a conclusion of law, or a mixed question of law and fact,

we have a sufficiently firm conviction that it is wrong to require

The framework within which a consensual lien, such as

World asserts, functions under California law is provided by

Article 9 of California’s version of the Uniform Commercial

Code. Section 9102(1)(a), Cal.Comm.Code, provides that

“Division 9” applies “To any transaction (regardless of form)

interest attaches. . . ..” Cal.Comm.Code, § 9105(1)(f), which

clearly embraces aircraft 971. More specifically, the aircraft fell

_ within the definition of “equipment” set forth in

Cal.Comm.Code § 9109 because it was goods “used or bought

C-8

collateral.” This is, of course, precisely what World did with

respect to aircraft 971. This perfection commences when

“possession is taken without relation back and continues only so

long as possession is retained. . .” [bid. A perfected security

interest is not subordinate to a subsequent lien creditor. See

Cal.Comm.Code § 9301( 1)(b).

Without question World is entitled to its agreed upon

“security interest” which it perfected by taking possession of the

“goods.” Nor does the existence of the statutory lien for

repairs on aircraft provided by Cal.Civ.Pro. Code § 120.61 and

§ 1208.62 preclude the operation of “Division 9” of the com-

mercial Code. While it is true that “Division 9” does not

preempt section 1208.61 and 1208.62 liens, see

Cal.Comm.Code § 9104(c), it is also true that there exists no

indication these statutory liens are intended to preclude the

application to aircraft of those provisions of “Division 9” not in

conflict thereto.

Thus, we hold that World possessed a consensual lien w

secure its services and maintenance with respect to aircraft 97/1

perfected by possession and recognized by California law.?

It has not been suggested by the parties that this holding

would impinge in any way upon the interests of either Petro-

leum Investment Services, Inc. or Central Bank and Trust Co.

Had such a suggestion been made it might have been necessary

to consider the effect of Holiday’s undertaking in its agreement

with Petroleum to maintain the aircraft in good order and

repair. However, under the circumstances of this case no such

examination is necessary.

THE “GAP” PROBLEM

Inasmuch as Worid’s lien on aircraft 971 lost its perfected

status on January 24, 1975 when possession of this aircraft was

surrendered to Holiday several hours before the chattel mort-

gage on aircraft 974 was executed, it is possible to argue that

2We decline w believe that the California Supreme Court would

interpret its holding in Dowell v. Beech Acceptance Corp., supra, as decision

based on state law so as to reverse this resuit.

c-9

execution of the mortgage and payment of $70,165.05 to World

was in discharge of an antecedent debt and did cause a

diminution of Holiday’s estate. It would be pointed out that,

rather than a mere substitution of security occurring, the proper

characterization is that the chattel mortgage replaced perfected

; ioush lered

The replacement characterization exalts form over sub-

stance. A similar analysis, also employed to claim that the

creation of a security interest amounted to a preference, has

been rejected when, to secure a current advance, the instrument

cuted several days after the date of the advance. Dean v. Davis,

242 U.S. 438, 37 S.Ct. 130, 61 L.Ed. 419 (1917). Substantial

comtemporaneity appears to be all that is required. Jd at 443,

37 S.Ct. at 131. The proper characterization, therefore, is that

the events of January 24, 1975 constituted a substitution of one

security for another. This did not amount to a preference where

no diminution of the debtor’s estate occurred. See 4 Collier on

Bankruptcy, § 547.22 (1980). None such occurred here.? We

hold that the so-called “gap” on January 24, 1975 generated no

preference. ;

3 The determination of whether such an exchange constitutes a prefer-

ence turns on whether it results in a diminution of the bankrupt’s estate, not

on whether or not the creditor’s security was enhanced. 4 Collier on

Bankruptcy 1 547.22 (1980). Prior two the exchange, Holiday's estate

contained (1) its ownership interest in aircraft 974 and (2) its leasehold

imserest in aircraft 971 encumbered by a lien for $70,165.05. After the

exchange, Holiday’s estate contained (a) its ownership interest in aircraft 974

encumbered by a chattel mortgage for $70,165.05 and (b) its leasehold

interest in aircraft 971. If the sum of the latter two values is greater than or

equal to the sum of the two former values, there was no preference. Put

another way, if value (b) was less than $70,165.05, there was a preference.

See in re Star Spring Bed Co., 265 F. 133 (3d Cir. 1920). No finding appears

to have been made below concerning the value of Holiday’s leasehold in

aircraft 971. However, because of the bankruptcy court's finding that there

was no preference and the failure of either the parnes or the district court to

raise the issue of the value of Holiday's leaschoid, we assume that its value

was greater than $70,165.05.

C-10

ay pp ae gape US. 30, 34 S.Ct. 20,

$8 L.Ed 115 (1913), does not require a different holding.

Torts Goad cites tn auaea oF

security interest followed the advance because at the time of the

- tween Petroleum and Holiday did provide that Holiday was

required at its own expense to maintain the aircraft. Holiday

remained liable for the cost of repairs. The lessee had an

C-11

POOLE, Circuit Judge, dissenting.

I respectfully dissent. In my view, under the provisions of

California law relied upon by the majority, Holiday Airlines,

Inc. ( Holiday) lacked the power to consent to the creation of a

security interest in an aircraft which it did not own. Therefore,

the consensual lien which Holiday attempted to grant to World

Airways, Inc. (World) never attached to aircraft 971; World

perfected by possession only that which it was granted, to wit,

an unattached, ineffective lien. As World had no valid,

perfected lien in 971, the security interest which it acquired

through substitution in aircraft 974 was preferential within the

meaning of § 60 of the Bankruptcy Act, 11 U.S.C. § 96 (1976),

and the judgment of the district court should be affirmed.

In part ITI the majority concludes that the repair agreement

between Holiday, lessee of 971, and World, the repairman,

created a consensual lien under California law which World

perfected when it took 971 into its possession. See

Cal.Comm.Code $§ 9204, 9305; Maj. op., at 981. This provision

of the repair contract, set out at page 978 of the majority

opinion, is not the only part of the record before us relevant to

determining the validity of World's alleged consensual lien.

Holidey was the lessee of 971. Its possessory rights stemmed

from a lease agreement with Petroleum Investment Services,

Inc. (Petroleum ), the owner, which provides that Holiday had

no power to permit any lien or encumbrance to arise on 971.'

Holiday's status as a lessee and this explicit prohibition on

encumbrance of 971 undermine the majority theory that under

California law a consensual lien arose by virtue of the repair

agreement.

In order to establish a consensual lien against one who is

not a party to the agreement creating the disputed security

interest, the interest must attach to the collateral and be

‘ The lease between Petroleum and Holiday reads:

THIRTEENTH—LESSEE shall have no right to consent to, allow, or

permit any liens or encumbrances on said AIRCRAFT.

c-12

4TH Ret

Hail

ely

does it purport to

& Storage Co. 17 Wash.App.

2 The majority does not dispute, nor

2 See generally Anzivino, When Does a Debtor Have Rights in the

Collateral Under Article 9 of the Uniform Commercial Code, 61 Marq. L-Rev.

23, 29-31 (1977).

not encumber his lessor’s property.

C-13

alter this rule. Holiday's status as a lessee thus gives it no more

than a lawful right to possession of 971, not the power to

employ the aircraft as security.®

Notwithstanding its lessee status, Holiday could create a

lien in 971 if Petroleum had authorized Holiday to enter into a

consensual lien agreement. Under California law,

{a] debtor who does not own collateral may nonetheless

use the collateral for security, thereby obtaining rights in

the collateral, when authorized to do so by the actual

owner of the collateral.

K. N. C. Wholesale, Inc. v. AWMCO, Inc., 56 Cal.App.3d 315,

31819, 128 Cal. Rptr. 345, 348 ( 1976); accord, Matter of Pubs,

Inc. of Champaign, 618 F.2d 432, 436 (7th Cir. 1980) (under

Article 9, a lessee may have rights in collateral and encumber a

lessor’s chattel when lessor has expressly or implicitly author-

ized creation of the security interest ).

On this record, it is impossible to find that Petroleum gave

Holiday the power to encumber 971. The lease agreement

liday and World nor has it taken any action which suggests its

acquiescence in the creation of a lien by its lessee. When the

right to pledge a chattel as security has been withheld by the

owner, it is unreasonable to give effect to an attempt by a lessee

to create such an interest.

The majority attempts to define away the difficulties

presented to its analysis by the “rights in collateral” require-

ment of Cal.Comm.Code § 9204. At page 981, the opinion

3 It may be that a lessee has sufficient rights in a chattel to pledge it as

collateral when the lease is designed to be a security interest or financing

device rather than a traditional leasehold. Sec Anzivino, spre. There is 20

C-14

indicates that there is no suggestion in this case that the rights of

Petroleum or the mortgagor of 971, Central Bank & Trust Co.,

secured party’s acquisition of a security interest in property of

the debtor is that the debtor have ‘rights in the.collateral.’”

Anthony v. Community Loan & Investment Corp., 559 F.2d

1363, 1368, reh’y. denied, 564 F.2d 416 (Sth Cir. 1977).

ee ee eareene oman

of a valid security interest in 971 turns on whether

In his concurring opinion, Judge Gibson suggests that the

necessary “rights in collateral” arise by virtue of the Petroleum-

Holiday lease provision whereby Holiday must maintain 971 at

its own expense and in accord with federal aviation standards.

Judge Gibson would read this provision to mean “[t}he lessee

(1) the implication must arise from the language used or it

must be indispensable to effectuate the intention of the

parties; (2) it must appear from the language used that it

was so clearly within the contemplation of the parties that

they deemed it unnecessary to express it; (3) implied

covenants can only be justified on the grounds of legal

necessity; (4) a promise can be implied only where it can

C-15

be rightfully assumed that it would have been made if

attention had been called to it; (5) there can be no implied

covenant where the subject is completely covered by the

contract.

See, e.g., Stockton Dry Goods Co. v. Girsh, 36 Cal.2d 677, 681,

227 P.2d 1 (1951); Cal.Civ.Code § 1648.

Applying these standards, it is certainly not indispensable

a as has been done in Cal.Civ.Pro.Code $8 1208.61,

D-1

Before: GIBSON*, SNEED and POOLE, Circuit Judges

Judges Gibson and Sneed have voted to deny and Judge

Poole has voted to grant Appellee’s petition for rehearing. The

petition for rehearing is denied.

“Honorable Floyd R. Gibson, Senior United States Circuit Judge for the

Eighth Circuit, sitting by designation.

- uomsodd¢

Office-Supreme Court, U.S,

FILED

NOV 24 1981

No. 26-821 ALEXANUER L. STEVAS,

IN THE

Supreme Court of the United States

October Term 1981

In re Howiway Aimiines Corporation, a California

corporation (formerly known as Holiday Recreation-

al Resources and Holiday Resources Corporation ),

Bankrupt.

Curtis B. DANNING, Trustee in Bankruptcy of HoLipay

AiRmLINES Corporation, a California corporation

(formerly known as Holiday Recreational Resources

and Holiday Resources Corporction ),

vs.

Worn Aimways, INC.

Respondent.

BRIEF IN OPPOSITION TO PETITION FOR

A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Irving Sulmeyer

Sulmeyer, Kupetz, Baumann & Rothman

a professional corporation

615 South Flower Street—Suite 600

Los Angeles, California 90017

(213) 626-2311

Attorneys for Respondent,

World Airways, Inc.

PANDICK PRESS. WEST COAST. 1945 S. FIGUEROA LOS ANGELES. CALIFORNIA (215) 747-4321

QUESTION PRESENTED

Whether an entity which performs services on an aircraft

and obtains a lien for the value of its services may perfect its

lien by possession of the collateral as well as by recordation of

the lien pursuant to the provisions of the Federal Aviation Act?

TABLE OF CONTENTS

STATUTES INVOLVED 2

SUMMARY OF ARGUMENT .. 2

ARGUMENT 2

I. THE NINTH CIRCUIT HELD THAT AN ENTITY

WHICH PERFORMS SERVICES ON AN AIR-

CRAFT AND OBTAINS A LIEN FOR THE VALUE

OF ITS SERVICES MAY PERFECT ITS LIEN BY

PURSUANT TO THE PROVISIONS OF THE FED-

ERAL AVIATION ACT -

Il. THERE IS NO CONFLICT AMONG THE FEDER-

AL COURTS OF APPEALS « 6

Ill. THERE IS NO CONFLICT BETWEEN THE NINTH

CIRCUIT AND THE DISTRICT COURTS ................. 10

IV. THE NINTH CIRCUIT'S DECISION FULFILLS

THE INTENT OF CONGRESS 13

CONCLUSION 14

APPENDIX A-!

‘TABLE OF AUTHORITIES

CASES PaGE

ee oe

1220 ( Sth Cir. 1978) 7,8, 9

Colonial Trust Co. v. Goggin, 230 F.2d 634 ( 9th Cir. 1955) .5,8, 9

Feldman v. Chase Manhattan Bank, N.A., 368 F.Supp. 1327

(S.D.N.Y. 1974) 11, 12

Feldman v. Chase Manhattan Bank N.A., 511 F.2d 468 (2nd

Cir. 1975) 12

Feldman v. First National City Bank, 368 F.Supp. 1333

(S.D.N.Y. 1974) ll

Haynes v. General Electric Credit Corp., 432 F Supp. 763 ( W.D.

Va. 1977) 8,14

Haynes v. General Electric Credit Corp., 582 F.2d 869 ( 4th Cir.

1978) » 9

Holiday Airlines Corp., in re 647 F.2d 977 ( 9th Cir. 1981)

passim

Industrial National Bank of R.1. v. Butler Aviation International,

Inc., 370 F Supp. 1012 (E.D.N.Y. 1974) 10, 13, 14

Marsden v. Southern Flight Service, Inc.. 227 F.Supp. 411

(M.D.N.C. 1961) 10, 12

Northern Illinois Corp. v. Bishop Distributing Co., 284 F Supp.

121 (W.D. Mich. 1968) 10

Sanders v. M.D. Aircraft Sales Inc., 57S F.2d 1086 (3rd Cir.

_ 1978) 5, 9

State Securities Co. v. Aviation Enterprises, Inc., 355 F.2d 225

( 10th Cir. 1966) 5, 6

Texas National Bank of Houston v. Aufderheide, 235 F Supp.

599 (E.D. Ark. 1964) 12, 14

United States Aviation Underwriters, Inc. v. WTAE Flying Club,

300 F.Supp. 341 (W.D. Pa. 1969) 12

United States v. United Aircraft Corp., 80 F Supp. 52 (D.Conn.

1948) 13

Veterans’ Air Express Co., In re 76 F.Supp. 684 (D.4. 1948) ... 12

State STATUTES

Cal. Comm. Code § 9301(1)(b)

Fepera STATUTES

11 U.S.C. § 96

49 USC. § 1403(c)

49 US.C. § 1406

OTHER AUTHORITIES

Rule 17 of the Supreme Court Rules

No. 80-821

IN THE

Supreme Court of the United States

October Term 1981

In re Houmwway Arruines Corporation, a California

corporation (formerly known as Holiday Recreation-

al Resources and Holiday Resources Corporation ),

Bankrupt.

Curtis B. DANNING, Trustee in Bankruptcy of HOLIDAY

AmRLINES CorPoRATION, a California corporation

(formerly known as Holiday Recreational Resources

and Holiday Resources Corporation ),

Wor_p AIRWAYS, INC.

Respondent.

BRIEF IN OPPOSITION TO PETITION FOR

A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Irving Sulmeyer, counsel for World Airways, Inc.,

insted Renta prtoaniaaiteahstes Reisttee Geonilien

to Curtis B. Danning’s Petition For A Writ Of Certiorari To The

United States Court Of Appeals For The Ninth Circuit.

STATUTES INVOLVED

The following statutory provisions are involved in this case:

49 U.S.C. § 1403(c)

“No conveyance or instrument the recording of which is

provided for by subsection (a) of this section shall be valid

actual notice thereof. . . unless such conveyance or other

instrument is filed for recordation in the office of the

Secretary of Transportation . . ..”

49 U.S.C. § 1406

“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 place of delivery

of the property which is the subject of such instrument.”

SUMMARY OF ARGUMENT

In order to convince this Court to issue a writ of certiorari,

mindupvon sacdiahttagh dteaias « ton tae on ales of tn

well as by recordation of the lien pursuant to the provisions of

the Federal Aviation Act. Petitioner's version of the Ninth

Circuit's holding is “that Congress has not premepted [ sic} the

field of recordation of interests in aircraft and that a consensual

lien on an aircraft may be perfected against a subsequent bona

fide purchaser without notice in the absence of recordation of

As the following Argument will demonstrate, the cases

cited as establishing conflicting decisions do not in fact conflict

courts, has sensibly and correctly construed the federal statute

involved in a manner which accounts for the interest of the

federal government in air travel and the interest of the states in

day-to-day commercial activity.

ARGUMENT

THE NINTH CIRCUIT HELD THAT AN ENTITY WHICH

PERFORMS SERVICES ON AN AIRCRAFT AND OB-

TAINS A LIEN FOR THE VALUE OF ITS SERVICES MAY

PERFECT ITS LIEN BY POSSESSION OF THE

COLLATERAL AS WELL AS BY RECORDATION OF

THE LIEN PURSUANT TO THE PROVISIONS OF THE

FEDERAL AVIATION ACT.

The Ninth Circuit in the instant case decided that under

California law World obtained both a statutory and a con-

sensual lien. Jn re Holiday Airlines Corp., 647 F.2d 977, 981

(9th Cir. 1981) (hereinafter cited to Appendix pagination ).

Petitioner has not presented this part of the Court's decision as

a “Question Presented” in his Petition For A Writ Of Certiorari.

The Court ‘held that World's lien was, under California

law, perfected by possession of the collateral (the airplane).

Id. at A-6-8. The Ninth Circuit inquired whether World had

“an interest under California law that is superior to any lien

that is ‘obtainable by legal or equitable proceedings’ on a

simple contract. Section 60(a)(2) Bankruptcy Act, 11 U.S.C.

§ 96 (1976).” Jd. at A-6. The Ninth Circuit concluded that

World's “perfected security interest is not subordinate to a

subsequent lien creditor. See Cal. Comm. Code § 9301-

(1)(b).” Jd at A-8.

The first “Question Presented” of Petitioner implies, and

Petitioner's “Reasons For Granting The Writ" expressly main-

tains, that the Ninth Circuit considered the rights of a lien

holder versus the rights of a bona fide purchaser. Petition at i

and 9. The Ninth Circuit simply did not address this issue.

Rather, as the above quotes indicate, the Court considered the

rights of a lien holder versus the rights of a Trustee in

Bankruptcy, who as to personal property has the rights of a

rights of a bona fide purchaser are not relevani to the Ninth

Circuit's decision except to the extent that the reasoning which

is used to limit the preemptive effect of the recordation provi-

sions of the Federal Aviation Act as to bona fide purchasers is

by analogy supportive of the Ninth Circuit’s reasoning used to

limit the preemptive effect of the recordation provisions of the

Federal Aviation Act as to perfection by possession.

The Ninth Circuit did address the question of the effect of

World's failure to record its lien. Holiday at A-4-6. Petitioner

maintains that the Ninth Circuit held “that Congress has not

premepted [sic] the field of recordation of interests in air-

craft.” Petition at 9. The Ninth Circuit issued no such

ere

The Ninth Circuit carefully considered the extent to which

§ 1403 preempts local law. Holiday at A-4-6. In fact, the Ninth

Circuit expressly noted that perfection of nonpossessory con- |

sensual liens will require recording under the provisions of the

Federal Aviation Act. Jd. at A-6. The Ninth Circuit issued the

narrow holding that an entity which performs services on an

aircraft and obtains a lien on an aircraft may perfect its lien by

possession as well as by recordation under federal law. Id. at

A-6. The Ninth Circuit noted that similar views had been

expressed in Colonial Trust Co. v. Goggin, 230 F.2d 634 (9th

Cir. 1955); and in State Securities Co. v. Aviation Enterprises,

Inc., 355 F.2d 225 (10th Cir. 1966). The Ninth Circuit also

noted that decisions such as Sanders v. M. D. Aircraft Sales

Inc., 575 F.2d 1086 (3rd Cir. 1978) and Haynes v. General

Electric Credit Corp. 582 F.2d 869 (4th Cir. 1978) upholding

the rights of bona fide purchasers employed “the same

approach” as to the preemptive effect of the Federal Aviation

Act. Holiday at A-5.

Once the holding of the Ninth Circuit is correctly stated,

the cases cited by Petitioner as establishing a conflict are seen to

be irrelevant to, distinguishable from, or strongly supportive of

the Ninth Circuit's decision. The balance of this Argument will

simply discuss the cases cited by Petitioner and demonstrate

that they do not conflict with the decision of the Ninth Circuit.

The Argument ends with a brief discussion of Petitioner's

contention that the decision of the Ninth Circuit, if left stand-

ing. “will cause chaos in the aircraft financing industry and will

render meaningless the recordation provisions of the Federa!

Aviation Act.” Petition at 10.

THERE IS NO CONFLICT AMONG THE FEDERAL

COURTS OF APPEALS.

Petitioner cites several cases to establish that there is a

conflict between the Ninth Circuit and other Federal Courts of

Appeals. However, an examination of these cases shows that

no such conflict exists. To the contrary, the decisons of the

other circuits strongly support the instant decision of the Ninth

Cireui

Petitioner cites the Tenth Circuit's decision in State Secu-

rities Co. v. Aviation Enterprises, Inc., 355 F.2d 225 (10th Cir.

1966) for the proposition that “[t}he area that is preempted by

49 U.S.C. § 1403 is the manner in which consensual liens are to

be perfected.” [Emphasis in original.} Petition at 12. Peti-

tioner excerpts the following quote to support this proposition:

“By providing a federal system for registration of con-

veyances and liens effecting the title to aircraft, Congress

has preempted that field and state recording statutes are

not applicable to such title instruments. However, ques-

tions of validity of such documents, actual notice, good

faith purchaser status, and the like, must be resolved under

state law.” Petition at 12; Sta ° at 229.

As the above quote shows, the Tenth Circuit in State

concluded that the Federal Aviation Act pre.mpts state law

recording statues. The Tenth Circuit expressly states that

questions of validity of documents, notice, good faith purchaser

status, and the like, are still resolved under the applicable state

law. Not surprisingly, the Ninth Circuit in the instant case cited

State as a case which supported the Ninth Circuit's reasoning

that § 1403 does not preempt state law to the full extent that an

initial, cursory reading of § 1403 might first suggest. Holiday at

A-5.

Petitioner ducks the issue of the relationship of § 1403 and

§ 1406, and thereby distorts cases dealing with the preemptive

effect of § 1403. Section 1403 requires that recordation be

performed at a federal office. Section 1406 provides that the

validity of an instrument to be recorded shall be governed by

state law. These two statutes leave gaps: for instance, if a valid

lien interest (state law determination) is properly recorded

( federal law determination ) what law determines the effect of a

sale of the collateral to a bona fide purchaser on the lien

holder’s interest in the collateral. As the quote from State

shows, the Tenth Circuit applies state law to determine the

status and rights of a bona fide purchaser. Similarly, the Ninth

Circuit in the instant case looked to state law to determine the

status and rights of a person who performs services, maintains

possession of collateral, and obtains a statutory or consensual

len.

Petitioner maintains that the Fifth Circuit in Bank of

Lexington v. Jack Adams Aircraft Sales, Inc., 570 F.2d 1220

(Sth Cir. 1978) reached the conclusion that § 1403 preempts

the “manner in which consensual liens on aircraft are to be

perfected.” Petition at 12, 13. Petitioner excerpts the following

quote to support his analysis:

“The Federal Aviation Act created a framework for a

nationwide system to record certain interests in aircraft and

major aircraft components . . . to the extent that state law

conflicts with any part of the Act, it is preempted under the

power of Congress to regulate interstate commerce . . .

there is no question that Congress has preempted the field

insofar as registration and recording of title instruments

affecting commercial aircraft is concerned.” (Emphasis

added by Petitioner). Petitioner at 13; Lexington at 1224.

As the above quote shows, the Fifth Circuit maintains that

§ 1403 only preempts the field of registration and recording. a

principal with which the Ninth Ciruit agrees. In Lexington, the

Fifth Circuit used state law to determine the legal effect of an

assignment of a security interest. The Fifth Circuit stated that

“the Act preempts only that portion of state law which conflicts

with its provisions . . . because no provision of the Federal

Aviation Act addresses our question of the viability of the

assignment of a security interest, state law will provide our rule

of decision.” Jd. at 1225.

Petitioner admits that Colonial Trust v. Goggin, 230 F.2d

634 ( 9th Cir. 1955) remains “good law.” Petition at 12. Yet,

in Colonial, the Ninth Circuit noted that:

“[W]here an article of personal property of whatever

character is in possession of one who has expended work

and labor thereon at the request of a person lawfully in

possession, the domestic law of the place of possession

governs as to the extent and character of the lien.”

[Emphasis added.] Jd. at 637.

Petitioner cites the decision in the District Court case of

Haynes v. General Electric Credit Corp., 432 F. Supp. 763

(W.D. Va. 1977) as conflicting with the Ninth Circuit's deci-

sion in the instant case. Petition at 9. To the contrary, the

District Court held that the recordation provisions of the

Federal Aviation Act did not preempt state law which would

otherwise govern the status and rights of bona fide purchasers.

Jd. at 765. The Court held that “Congress did not intend by

adoption of the cited recordation provision [Section 1403] to

displace state law that would otherwise govern priority disputes

of lien and title interest in aircraft.” Jd. at 765. The Court also

held that:

“[ F jederal law governs the relative rights of third parties

and other claimants to the aircraft only to the extent that

these rights are dependent on the fact or time of recordation.

Questions such as the validity of title documents, good

faith purchaser status and the like, must be resolved under

state law.” [Emphasis added.} Jd. at 767.

In Haynes v. General Electric Credit Corp., 582 F.2d 869

(4th Cir. 1978), the Fourth Circuit affirmed the decision of the

District Court. The Fourth Circuit expressly stated that it

affirmed the holding that:

“Section 1403, which provides for a system of recordation

of conveyances affecting title to or security interests in civil

aircraft of the United States, does not preempt the rule of

the Uniform Commercial Code that a ‘buyer in the ordi-

aary course of business’ takes chattels free of a security

interest created by his seller. Congress did not intend . . . to

create affirmative priority of federally recorded interest as

against competing rights declared by state law. | Emphasis

added.] Jd. at 870.

. the Third Circuit in Sanders v. M.D. Aircraft

Sales Inc., 575 F.2d 1086 ( 3rd Cir. 1978) held that a bona fide

purchaser takes free of federally recorded liens. The Third

Circuit rejected the argument that the predecessor statute to

§ 1403 “displaced state law.” Jd. at 1088.

As Colonial demonstrates, the Ninth Circuit's position for

over 25 years has been that the recordation provisions of the

Federal Aviation Act do not totally preempt state law. As

Sanders, Haynes, and Lexington demonstrate, this construction

of the recordation provisions is consistent with the construction

given the recordation provisions by the Third, Fourth, and Fifth

Circuit Courts of Appeals. Petitioner has cited these cases as

establishing a conflict amongst Federal Courts of Appeals, but

there is in fact no conflict.

Hil.

THERE IS NO CONFLICT BETWEEN THE NINTH

CIRCUIT AND THE DISTRICT COURTS.

Rule 17 of the Supreme Court Rules does not mention a

conflict between a Federal Court of Appeals and a Federal

District Court as a situation in which the Supreme Court will

issue a writ of certiorari. Because such a conflict may play a

minimai role in this Court’s decision-making process, Respond-

ent will proceed in this Argument to demonstrate that the

District Court cases cited by Petitioner do not establish a

conflict.

In Industrial National Bank of RI. v. Butler Aviation

International, Inc., 370 F.Supp. 1012 (E.D.N.Y. 1974), a New

York District Court held that a bailee’s possessory lien on an

aircraft for storage charges was superior to a federally recorded

lien on the aircraft. Jd. at 1017. The Court held that Congress

had not “decreed total federal preemption in this area.” Jd. at

1017. The Court noted that decisions which speak of federal

preemption, when carefully read, are actually “far more con-

cerned with resolving the question of whether Congress has the

power to totally preempt the field of aircraft title and lien

recordation [rather] than the extent to which Congress has in

fact exercised the power by the statute in question.” [ Emphasis

in original.} Jd. at 1017. Amazingly, Petitioner cites this case

as conflicting with the instant case. Petition at 9. Similarly, in

’ Northern Illinois Corp. v. Bishop Distributing Co., 284 F Supp.

121 (W.D. Mich. 1968), a Michigan District Court held that

§ 1403 did not preempt state law which provided that a buyer

in the ordinary course of business defeated the rights of a

recorded-lien holder.

The North Carolina District Court’s decision in Marsden v.

Southern Flight Service, Inc., 227 F.Supp. 411 (M.D.N.C.

1961), so heavily relied on by Petitioner, is distinguishable

from the instant case. In that case, a purchaser of an aircraft

sought to defeat the rights of a recorded chattel mortgagee of

the aircraft. Jd. at 412-15. The purchaser was not concerned

with the preemptive effect of the federal recordation provisions

over otherwise applicable state law. Rather, the purchaser

argued that the “actual notice” exception to the Federal

Aviation Act’s recordation provisions was satisfied by the

purchaser’s possession of the aircraft. Jd at 415-16. The

District Court did not accept this construction of the “actual

notice” exception. Jd. at 416. The District Court did not

consider the preemptive effect of the recordation provisions on

competing rights created by state law.

Feldman v. Chase Manhattan Bank, N.A., 368 F.Supp.

1327 (S.D.N.Y. 1974), also heavily relied on by Petitioner, is

likewise distinguishable from the instant case. In that case, a

bank recorded its chattel mortgage interest but not the bank’s

lease and assignment of rents interests. In holding the latter

interests invalid, the, District Court relied on the fact that

persons concerned with the status of the aircraft would be

misled by the incomplete filings and conclude that the debtor

retained a possessory interest in the aircraft. Jd. at 1332.

The District Court decided that “Section 1403 should be

broadly construed . . . when the failure to record might be

misleading to creditors.” Jd. at 1332.

In the instant case, World has not misled creditors by filing

documents which do not fully reflect World’s interest. It is

worth noting that in the companion case to Feldman v. Chase,

the New York District Court in Feldman v. First National City

Bank, 368 F.Supp. 1333 (S.D.N.Y. 1974) applied state law to

decide the issue of the period of limitations applicable to § 1403

litigation. Jd. at 1339. The District Court noted that:

“The preemption of otherwise applicable state law by

§ 1403 of the Federal Aviation Act. . . is considerably less

than total. I has been established that such preemption

goes only to the validity of purported security interests and

does not determine the issue of priority of security interests

. . . Mor validate security interests which are void under

federal law.” Jd. at 1338.

Not only is Feldman v. Chase distinguishable from the

instamt case, the significance of that decision is even further

eroded by the decision of the Second Circuit in Feldman v.

Chase Manhattan Bank N.A., 511 F.2d 468, 470 (2nd Cir.

1975). In that decision, the Second Circuit reversed the District

Court, holding that in the circumstances presented in that case,

the Trustee was equitably estopped from asserting claims based

on the federal statute. The Second Circuit ignored the substan-

tive analysis of the District Court and simply stated that:

“whatever may be the merits of the Trustee’s argument

that this interest was unperfected, we find convincing

reasons for holding that [the Trustee] should be barred

from challenging it by reason of equitable estoppel consid-

erations.”

That Petitioner relies on the two District Court cases of

Marsden and Feldman demonstrates the weakness of his posi-

tion. As has been shown, the Circuit Courts of Appeal agree

with the Ninth Circuit, as do most of the District Court cases

cited by Petitioner. Marsden and Feldman are distinguishable.

The remaining District Court cases cited by Petitioner as

conflicting actually support the decision of the Ninth Circuit.

Texas National Bank of Houston v. Aufderheide, 235 F.Supp.

599 (E.D. Ark. 1964) held that a buyer in the ordinary course

of business takes free of a federally recorded lien. United

States Aviation Underwriters, Inc. v. WTAE Flying Club, 300

F.Supp. 341, 348 (W.D. Pa. 1969) held that a bona fide

purchaser of goods takes free of liens of third parties in the

goods, “notwithstanding that [such] lien was perfected by

filing with the Federal Aviation Agency.”

In In re Veterans’ Air Express Co., 76 F Supp. 684 (D.N_J.

1948), the Court analyzed the power of Congress to regulate

interstate commerce. The Court concerned itself with the rights

of the federal government as 2 lien holder and concluded that

“Federal statutes may declare liens in favor of the government

and establish their priority over subsequent purchaser or lienors

irrespective of state recording acts.” Jd. at 690. United States

v. United Aircraft Corp., 80 F Supp. 52, 54 (D.Conn. 1948)

held that a federally recorded instrument did not create a valid

lien due to the instrument's insufficient description.

IV.

THE NINTH CIRCUIT'S DECISION FULFILLS THE IN-

TENT OF CONGRESS.

Petitioner maintains that the Ninth Circuit's decision

would destroy “all certainty in the aircraft financing industry.”

Petition at 16. While this argument addresses the merits of the

Ninth Circuit’s decision and not the issue of conflict of decisions

among the Circuits, a brief response to Petitioner’s contention is

warranted.

The Ninth Circuit’s decision does not defeat the purpose of

the Federal Aviation Act to create a central agency for the

recordation of documents affecting title to aircraft. As recog-

nized by the District Court in Jndustrial National Bank, Con-

gress, aware of the mobility of aircraft, intended to lift the

burdensome requirement of title searches in numerous states.

Id. at 1016. However, Congress did not intend:

“[t]o subject state-created liens of the type here involved

to federal recording requirements . . . Indeed it seems

inconceivable that Congress could have intended to im-

pede the ability of proprietors of essential aviation facilities

to collect their legitimate charges for servicing aircraft,

when the overall congressional purpose was to promote the

development and safety of civil aviation.” Jd. at 1017.

It is impossible to reconcile Petitioner’s dire warnings

about the Ninth Circuit’s decision in the instant case with

Petitioner’s approving citation to cases such as Haynes,

Industrial National Bank, and Texas Nationa! Bank. In those

cases, unrecorded interests (the interests of bona fide pur-

chasers) defeated the imterest of federally recorded documents.

In those cases, as in the instant case, state-created rights were

held not to be preempted by the recordation provisions of the

Federal Aviation Act.

The decision of the Ninth Circuit in the instant case does

not conflict with the decision of other Courts, nor does it

frustrate the intent of Congress.

CONCLUSION

For each of the foregoing reasons, Respondent respectfully

submits that the Petition For Writ Of Certiorari be denied.

Respectfully submitted,

SULMEYER, Kupetz, BAUMANN & ROTHMAN

a professional corporation

By IRVING SULMEYER

Irving Sulmeyer

Attorneys for Respondent

A-1

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In the Mater of:

Houipway Aimines Corporation, a California

corporation ( formerly known as Holiday Recre-

ational Resources and Holiday Resources Cor-

poration ),

Bankrup:.

Cuatis B. DaNnninG, Trustee in Bankruptcy of

Houpay Amines Coaporation, a California Ne. 79.3148

corporation (formerly known as Holiday Recre-

ational Resources and Holiday Resources Cor-

poration ),

Plaintiff -Appeliee.

VS.

Woa.p Almways, INC.,

Defendant - Appellant.

Argued and Submitted Dec. 3, 1980

Decided June 8, 1981

Appeal from the United States District Court for the

Central District of California.

Before GIBSON*, SNEED and POOLE, Circuit Judges.

This is a bankruptcy case in which the issue is whether

World Airways, Inc., a creditor of the bankrupt Holiday

Airlines Corporation, Inc., received a preference recoverable by

“Honorable Floyd R. Gibson. Senior United States Circuit Judge for the

Exghth Circuit, sitting by designation.

A-2

- Holiday’s Trustee in bankruptcy when it received payment for

services and maintenance on a Lockheed-Electra aircraft. No.

N-971-HA (971), which was under lease to Holiday, from

No.

payment from proceeds, to which it had no claim better than

that of a general creditor, to discharge the antecedent debt that

arose from its services and maintenance with respect to aircraft

Qr ctober 7, 1973 Holiday entered into what was desig-

nated « faintenance, Overhaul and Repair Agreement with

A-3

“[{ World] shall have a lien upon customer's aircraft and

components for the value of all services furnished, in-

storage incurred by [World] by reason of customer's

failure to accept delivery of aircraft or other flight equip-

ment.” Endorsement No. 2, paragraph (7).

On December 7, 1974, Holiday delivered aircraft 971 to World

for servicing and maintenance and World supplied services and

maintenance which had a reasonable value of $70,165.05.

Aircraft 971 remained continuously in World's possession from

the date of its delivery to January 24, 1975. World did not give

written notice to Petroleum or the Denver bank prior to

supplying these services, nor was written consent of either

sought or obtained in connection with these services. World

never attempted to record its lien on aircraft 971 with the

Federal Aviatior Administration pursuant to 49 U.S.C. § 1403.

On January 24, 1975 all of Holiday's aircraft, including

both 971 and 974, were in World's possession for servicing. To

meet its schedule commitments Holiday needed to obtain the

release of at least some of its aircraft but World would release

none unless payment for services was made or adequate

security to assure such payment was made. To solve this

problem it was agreed that World would surrender possession

of aircraft 971 and Holiday would execute and deliver to World

a chattel mortgage on aircraft 974 to secure the $70,165.05

owed with respect to aircraft 971. This was accomplished in

January 24, 1975. However, possession of aircraft 971 was

surrendered several hours before the chattel mortgage on

aircraft 974 was executed and delivered. This chattel mortgage

was recorded pursuant to 49 U.S.C. § 1403 on January 28,

1975.

Aircraft 974 was sold immediately thereafter and World

received payment on January 31, 1975 of the $70,165.05 due

for servicing aircraft 971. The end for the purposes of this case

came shortly thereafter. On February 13, 1975 Holiday filed

under Chap. XI and subsequently was adjudicated bankrupt.

A-4

To support his contention that the payment to World of

$70,165.05 was a preference the Trustee contends that World

had no valid perfected lien on aircraft 971 with the consequence

that the chattel mortgage on aircraft 974 and the resulting

payment were in discharge of an antecedent debt. World

disputes this vigorously. It argues that a valid perfected lien on

aircraft 971 existed from the time it serviced the aircraft. The

lien’s validity, World asserts, rests on either Cal.Civ.Pro.Code

§ 1208.61 and § 1208.62 or Cal.Com.Code § 9305. The Trustee

responds by contending ( 1 ) that a failure to record Worid’s lien

pursuant to 49 U.S.C. § 1403 left it unperfected, (2) that in any

event World's lien was invalid, except to the extent of $250,

under Cal.Civ.Pro.Code § 1208.62, because no notice was given

to either Petroleum or the Denver bank prior to commencing to

service aircraft 971 and no written consent to do the work was

obtained from either, (3) that no consensual lien perfected by

possession pursuant to Cal.Com.Code § 9305 exists, and (4)

that should one exist it was surrendered prior to the execution

of the chattel mortgage on aircraft 974 and the payment of

$70,165.05 by Holiday.

Inasmuch as we hold that a valid consensual lien perfected

by possession did exist and that the gap of a few hours between

the surrender of possession of aircraft 971 and the execution of

the chattel mortgage on aircraft 974 is without legal significance

for the purpose of this case, there exists no reason for us to

address the questions raised by the trustee concerning a lien

asserted pursuant to Cal.Civ.Pro.Code $1208.62. We also hold

that World's consensual lien perfected by possession is not

invalid for failure to be recorded pursuant to 49 U.S.C. § 1403.

THE EFFECT OF FAILURE TO RECORD PURSUANT TO

49 U.S.C. § 1403

The Trustee is correct when he contends that a preference

exists if recordation by World under 49 U.S.C. § 1403 is

necessary to perfect ‘:, lien on aircraft 971. Section 1403(c)

A-5

provides some support for the position that such recordation is

necessary. It states that “no conveyance or instrument,” able to

be recorded under the act, “shall be valid in respect of such

aircraft . - against any person,” other than the parties to the

conveyance of instrument,” until such conveyance or other

instrument is filed .

Section 1403 does not preempt local law to the full extent

that this extract might suggest. The court observed in Colonial

Trust Ce. ». Goggin, 230 F.2d 634, 637 (9th Cir. 1955), that,

notwithstanding the federal recordation system, “where an

article of personal property of whatever character is in posses-

sion of one who has expended work and labor thereon at the

request of the person lawfully in possession, the domestic law of

the place of possession governs as to the extent and character of

the lien.” A similar view has been expressed in State Securities

Company v. Aviation Enterprises, Inc., 355 F.2d 225, 229 ( 10th

Cir. 1966). Several decisions upholding the rights of a

purchaser in the ordinary course of business under state law as

against holders of floor plan financing liens recorded under

federal law employ the same approach. See Sanders v. Aircraft

Sales inc., $75 F.2d 1086 (3d Cir. 1978); Haynes v. General

Electric Credit Corporation, 582 F.2d 869 (4th Cir. 1978).

Both Sanders and Haynes declined to read section 1406 so as to

preempt provisions of the relevant state’s version of the Uni-

form Commercial Code which were designed to protect pur-

chasers in the ordinary course of business. The Supreme Court

of California has reached the opposite conclusion. See Dowell

v. Beech Acceptance Corp., Inc., 3 Cal.3d 544, 91 Cal.Rprtr. 1,

476 P.2d 401 (1970). The financing agency prevailed over the

buyer in the ordinary course of business because of the

preemptive effect accorded section 1406 by the California court.

Despite the reference of 49 U.S.C. § 1406 to state law as

determining the validit, of liens recorded under section 1403,

we are not bound by state court decisions on the preemptive

effect of federal law.‘ Shell Oil Co. v. Younger, 587 F.2d 34,

* We, of course, express no opinion on the effect of state decisions on

preempnon in diversity cases.

A-6

36-37 (%h Cir. 1978)(California Supreme Court decision

interpreting the preemptive scope of the Sherman Act not

controlling in a case construing a similar state statute and its

preemption by the Sherman Act): Clifton v. Cax, 549 F.2d 722.

730 (9th Cir. 1977)(state courts have no power to bind the

federal courts with their rulings concerning the extent of federal

power); see Flournay v. Wiener, 321 U.S. 253, 270-72, 64 S.Ct.

$48, 556-57, 88 L.Ed. 708 (1944)(Frankfurter, J., dis-

senting (construction of federal law necessary to decision

under state law gives rise to a federal question ); Standard Oil of

California v. Johnson, 316 U.S. 481, 62 S.Ct. 1168, 86 L.Ed.

1611 (1942); Smith v. Kansas City Title & Trust Co., 255 U.S.

180, 41 S.Ct. 243, 65 L.Ed. 577 (1921). We hold that the

failure of World to record its consensual lien on aircraft 971

while in its possession under the circumstances of this case does

not make perfection of its lien impossible as a matter of federal

law. This holding is limited to consensual liens perfected by

possession. It does not embrace consensual liens when the

lienholder is not in possession. Perfection of such liens will

require recording under 49 U.S.C. § 1406.

WORLD'S CONSENSUAL LIEN PERFECTED BY

POSSESSION

The question remaining is whether, absent any preemptive

effect of sections 1403 and 1406, a consensual lienholder who

‘has not recorded his lien and is in possession of an airplane has

an interest under California law that is superior to any lien that

is “obtainable by legal or equitable proceedings” on a simple

contract. Section 60(a)(2) Bankruptcy Act, 11 U.S.C. § 96

(1976). A demonstration is now necessary that, under Califor-

nia law, World held a consensual lien on aircraft 971 perfected

by possession. The Maintenance, Overhaul and Repair Agree-

ment set out above clearly indicates that a lien for services,

repairs, and any storage was intended. Both the bankruptcy

judge and the district court treated this provision as but a

A-7

reference to the statutory lien provided by Cal.Civ.Pro.Code

§ 1208.61 and § 1208.62. Therefore, both were compelled :o

determine whether World's statutory lien had been perfected

beyond the minimal amount of $250. As to this they differed,

the bankruptcy judge holding that it had and the district court

that it had not.

We hold that it was clearly erroneous to disregard the plain

language of the Agreement between Holiday and World and to

treat the lien provision as surplusage in effect. Without tarrying

to determine whether this treatment of the lien provision by

both the bankruptcy judge and the district court was a finding

of fact, a conclusion of law, or a mixed question of law and fact.

we have a sufficiently firm conviction that it is wrong to require

that we proceed differently. The more natural and normal

reading of the lien provisions in the Agreement is that World

was to have a lien for its services to the full extent that an

explicit agreement to that effect would permit under California

law. This would embrace both the statutory and a consensual

lien. Expressed colloquially, we read the Agreement as provi-

ding World a lien for its services by any, and all, means

available under California law.

The framework within which a consensual lien, such as

World asserts, functions under California law is provided by

Article 9 of California's version of the Uniform Commercial

Code. Section 9102(1)(a), Cal.Comm.Code, provides that

“Division 9” applies “To any transaction (regardless of form )

which is intended to create a security inierest in personal

property, including goods . . .” The term “goods” is defined

to include “all things which are movable at the time the security

interest attaches. . . ..” Cal.Comm.Code, § 9105(1)(f), which

clearly embraces aircraft 971. More specifically, the aircraft fell

within the definition of “equipment” set forth in

Cal.Comm.Code § 9109 because it was goods “used or bought

for use primarily in business. . .” perfection of a “security

interest” in “goods,” under Cal.Comm.Code § 9305, may be

achieved by “the secured party's taking possession of the

collateral.” This is, of course, precisely what World did with

respect to aircraft 971. This perfection commences when

“possession is taken without relation back and continues only so

long as possession is retained. . .” Jbid. A perfected security

interest is not subordinate to a subsequent lien creditor. See

Cal.Comm.Code § 9301(1)(b).

Without question World is entitled to its agreed upon

“security interest” which it perfected by taking possession of the

“goods.” Nor does the existence of the statutory lien for

repairs on aircraft provided by Cal.Civ.Pro. Code § 120.61 and

§ 1208.62 preclude the operation of “Division 9” of the com-

mercial Code. While it is true that “Division 9” does not

preempt section 1208.61 and 1208.62 liens. see

Cal.Comm.Code § 9104(c), it is also true that there exists no

indication these statutory liens are intended to preclude the

application to aircraft of those provisions of “Division 9” not in

conflict thereto.

Thus, we hold that World possessed a consensual lien to

secure its services and maintenance with respect to aircraft 971

perfected by possession and recognized by California law.?

It has not been suggested by the parties that this holding

would impinge in any way upon the interests of either Petro-

leum Investment Services, Inc. or Central Bank and Trust Co.

Had such a suggestion been made it might have been necessary

to consider the effect of Holiday’s undertaking in its agreement

with Petroleum to maintain the aircraft in good order and

repair. However, under the circumstances of this case no such

examination is necessary.

THE “GAP” PROBLEM

Inasmuch as World's lien on aircraft 971 lost its perfected

status on January 24, 1975 when possession of this aircraft was

surrendered to Holiday several hours before the chattel mort-

gage on aircraft 974 was executed, it is possible to argue that

2 We decline w believe that the California Supreme Court would

interpret its holding in Dowell v. Beech Acceptance Corp. supra, as decision

based on state law so as to reverse this result.

A-9

execution of the mortgage and payment of $70,165.05 to World

was in discharge of an antecedent debt and did cause a

diminution of Holiday’s estate. It would be pointed out that.

rather than a mere substitution of security occurring. the proper

characterization is that the chattel mortgage replaced perfected

security previously surrendered.

The replacement characterization exalts form over sub-

stance. A similar analysis, also employed to claim that the

creation of a security interest amounted to a preference, has

been rejected when, to secure a current advance, the instrument

creating the previously agreed upon security interest was exe-

cuted several days after the date of the advance. Dean v. Davis,

242 U.S. 438, 37 S.Ct. 130, 61 L.Ed. 419 (1917). Substantial

contemporaneity appears to be all that is required. Jd at 443,

37 S.Ct. at 131. The proper characterization, therefore, is that

the events of January 24, 1975 constituted 3 substitution of oae

security for another. This did not amount to a preference where

no diminution of the debtor’s estate occurred. See 4 Collier on

Bankruptcy, § 547.22 (1980). None such occurred here.? We

hold that the so-called “gap” on January 24, 1975 generated no

preference.

3 The determination of whether such an exchange constitutes a prefer-

ence turns on whether it results in 2 diminution of the bankrupt’s estate. not

on whether or not the creditor's security was enhanced. 4 Collier on

Bankruptcy 7 547.22 (1980). Prior two the exchange, Holiday's estate

contained (1) its ownership interest in aircraft 974 and (2) its leasehold

-interest in aircraft 971 encumbered by a lien for $70,165.05. After the

exchange. Holiday's estate contained (a) its ownership interest in aircraft 974

encumbered by a chattel mortgage for $70,165.05 and (b) its leasehold

interest in aircraft 971. If the sum of the latter two values is greater than or

equal to the sum of the two former values, there was no preference. Put

another way, if value (b) was less than $70,165.05, there was a preference.

See in re Star Spring Bed Co., 265 F. 133 (3d Cir. 1920). No finding appears

to have been made below concerning the value of Holiday's leasehold in

aircraft 971. However, because of the bankruptcy court's finding that there

was no preference and the failure of either the parties or the district court to

raise the issue of the value of Holiday's leasehold, we assume that its value

was greater than $70,165.05.

A-10

National City Bank v. Hotchkiss, 231 U.S. 50, 34 S.Ct. 20,

58 L.Ed 115 (1913), does not require a different holding.

There the Court found a preference when creation of the

security interest followed the advance because at the time of the

advance no security was considered necessary. The rapid

deterioration of the debtor activated the desire to obtain

security. Nothing of this sort occurred here. A substitution of

security was contemplated from the beginning. Dean v. Davis,

supra, not National City Bank v. Hotchkiss, supra, governs this

case.

Finally, we note that, because World’s chattel mortgage

was recorded pursuant to 49 U.S.C. § 1403, the payment to

World of $70,165.05 was not be discharge an unperfected lien

and was, hence, not a preference.

Reversed and Remanded.

GIBSON, Senior Circuit Judge, concurring.

I concur in Judge Sneed’s opinion. My rationale for

finding a valid consensual lien is that Holiday had sufficient

“rights in the collateral,” Cal.Comm.Code § 9204, to enter into

a security agreement with World Airways for the limited

purpose of obtaining services and maintenance on the aircraft.

While a leasehold may not be a sufficient interest upon which to

ordinarily allow the lessee to base a security interest, as outlined

in Judge Poole’s dissenting opinion, the lease agreement be-

tween Petroleum and Holiday did provide that Holiday was

required at its own expense to maintain the aircraft. Holiday

remained liable for the cost of repairs. The lessee had an

obviously beneficial to both the lessor and the lessee. Third

party creditors’ rights and security interests might also

impaired if the aircraft were allowed to fall into a state

ti ~<

A-1l

I respectfully dissent. In my view, under the provisions of

California lew selied upon by the majority, Holiday Aisi

Inc. ( Holiday) lacked the power to consent to the creation of a

security interest in an aircraft which it did not own. Therefore,

the consensual lien which Holiday attempted to grant to World

Airways, Inc. (World) never attached to aircraft 971; World

perfected by possession only that which it was granted, to wit,

an unattached, ineffective lien. As World had no valid,

perfected lien in 971, the security interest which it acquired

through substitution in aircraft 974 was preferential within the

meaning of § 60 of the Bankruptcy Act, 1! U.S.C. § 96 (1976),

and the judgment of the district court should be affirmed.

In part III the majority concludes that the repair agreement

between Holiday, lessee of 971, and World, the repairman,

created a consensual lien under California law which World

perfected when it tock 971 into its possession. See

Cal.Comm.Code §§ 9204, 9305; Maj. op., at 981. This provision

of the repair contract, set out at page 978 of the majority

opinion, is not the only part of the record before us relevant to

determining the validity. of World's alleged consensual lien.

Holiday was the lessee of 971. Its possessory rights stemmed

ee re ee ee

Inc. ( Petroleum ), the owner, which provides that Holiday had

no power to permit any lien or encumbrance to arise on 971."

Holiday’s status as a lessee and this explicit prohibition on

encumbrance of 971 undermine the majority theory that under

California law a consensual lien arose by virtue of the repair

agreement.

In order to establish a consensual lien against one who is

not a party to the agreement creating the disputed security

interest, the interest must attach to the collateral and be

* The lease between Petroleum and Holiday reads:

THIRTEENTH—LESSEE shall have no right to consent to, allow, cr

permit any liens or encumbrance« on said AIRCRAFT

A-12

perfected. There is no doubt that whatever interest World

obtained became perfected under California law when it took

possession of 971. Cal.Comm.Code § 9305. However, World

could perfect only that interest which had attached to 971 and

which Holiday had the power to cause to attach. If Holiday

lacked the power to impress a lien on 971, then no interest ever

attached in the aircraft and World could have perfected by

possession only an ineffective, unattached interest. This is our

case.

Mere recitation of the security interest in the repair con-

tract is insufficient to establish that the interest attached to 971.

See Chartered Bank of London v. Chrysler Corp., 115 Cal.

App.3d 755, 760, 171 Cal. Rptr. 748, 750 (1981). Rather in

order for a security interest to attach in a chattel, there must be

“an agreement . . . that it attach and value is given and the

debtor has rights in the collaterai.” Cal.Comm.Code § 9204.

The majority’s analysis of § 9204 is faulty because World

cannot demonstrate on this record that Holiday possessed

sufficient “rights in the collateral,” 971, to encumber it by

consensual agreement. See Chartered Bank, supra (party

asserting validity of a security interest will be required to show

that debtor had “rights in the collateral” sufficient to create the

interest ).

Certainly an owner may encumber his property and sub-

ject it to a consensual security interest. Holiday, however, is not

an owner, but a lessee. Under Article 9, a lessee may generally

not encumber his lessor’s property. See, e.g.. Disch v. Raven

Transfer & Storage Co., 17 Wash.App. 73, 561 P.2d 1097

(1977).2 The majority does not dispute, nor does it purport to

? See generally Anzivino, When Does « Debtor Have Rights in the

Collateral Under Article 9 of the Uniform Commercial Code, 61 Marq. L_Rev.

23, 29-31 (1977).

A-13

alter this rule. Holiday’s status as a lessee thus gives it no more

than a lawful right to possession of 971, not the power to

employ the aircraft as security.*

Notwithstanding its lessee status, Holiday could create a

lien in 971 if Petroleum had authorized Holiday to enter into a

consensual lien agreement. Under California law,

[a] debtor who does not own collateral may nonetheless

use the collateral for security, thereby obtaining rights in

the collateral, when authorized to do so by the actual

owner of the collateral.

K. N. C. Wholesale, Inc. v. AWMCO, Inc., 56 Cal.App.3d 315,

31819, 128 Cal.Rptr. 345, 348 (1976); accord, Matter of Pubs,

Inc. of Champaign, 618 F.2d 432, 436 (7th Cir. 1980) (under

Article 9, a lessee may have rights in collateral and encumber a

lessor’s chattel when lessor has expressly or implicitly author-

ized creation of the security interest).

On this record, it is impossible to find that Petroleum gave

Holiday the power to encumber 971. The lease agreement

expressly withdraws such power from Holiday. Petroleum

never approved the repair agreement executed between Ho-

liday and World nor has it taken any action which suggests its

acquiescence in the creation of a lien by its lessee. When the

right to pledge a chattel as security has been withheld by the

owner, it is unreasonable to give effect to an attempt by a lessee

to create such an interest.

The majority attempts to define away the difficulties

presented to its analysis by the “rights in collateral” require-

ment of Cal.Comm.Code § 9204. At page 981, the opinion

3 It may be that a lessee has sufficient rights in a chattel to pledge it as

collateral when the lease is designed to be a security interest or financing

device rather than a traditional leasehold. See Anzivino, supra. There is no

need to consider this possibility in this case because the parties clearly

indicated that Holiday acquired no title or security interest in 971 by virtwe of

the lease. Similarly, nothing in any provision of the lease suggests that

anything other than a traditional leasehold was created.

A-14

indicates that there is no suggestion in this case that the rights of

Petroleum or the mortgagor of 971, Central Bank & Trust Co.,

are in any way impinged by the majority's holding and that if

there were such a prospect a different case would be presented.

This dubious observation overlooks that “[f]undamental to a

secured party’s acquisition of a security interest in property of

the debtor is that the debtor have ‘rights in the collateral.’ ”

Anthony v. Community Loan & Investment Corp., 559 F.2d

1363, 1368, reh’g. denied, 564 F.2d 416 (Sth Cir. 1977).

Under Cal.Comm.Code § 9204, it is elementary that the

existence of a valid security interest in 971 turns on whether

Holiday had “rights in the collateral” which enabled it tw

pledge the aircraft. One cannot dispense with this requirement

simply because the owner is not challenging the validity of the

security interest a lessee attempted to create.

In his concurring opinion, Judge Gibson suggests that the

necessary “rights in collateral” arise by virtue of the Petroleum-

Holiday lease provision whereby Holiday must maintain 97! at

its own expense and in accord with federal aviation standards.

Judge Gibson would read this provision to mean “[t]}he lessee

had an implied right . . . to place the aircraft in the possession of

a third party which could give rise to a mechanic's lien.”

Concurring Opinion. I cannot agree that the law of California

permits us to imply this new covenant into the Petroleum-

Holiday agreement.

Implied covenants are disfavored and the California Su-

preme Court has identified five factors which should be present

before a covenant will be implied:

(1) the implication must arise from the language used or it

must be indispensable to effectuate the intention of the

parties; (2) it must appear from the language used that it

was so Clearly within the contemplation of the parties that

they deemed it unnecessary to express it; (3) implied

covenants can only be justified on the grounds of legal

necessity; (4) a promise can be implied only where it can

A-15

be rightfully assumed that it would have been made if

attention had been called to it: (5) there can be no implied

covenant where the subject is completely covered by the

contract.

See, e.g.. Stockton Dry Goods Co. v. Girsh, 36 Cal.2d 677, 681,

227 P.2d 1 (1951); Cal.Civ.Code § 1648.

Applying these standards, it is certainly not indispensable

to a lessee’s obligation to repair an airplane that the lessee have

power to encumber the aircraft. The record here belies the

prospect that the parties so clearly contemplated Holiday's

power to encumber 971 for repairs that they thought it unneces-

sary to include such a provision in the lease. If it is legally

necessary or sound policy to vindicate an aircraft repairman’s

lien, then it is for California’s legislature to provide such

protection, as has been done in Cal.Civ.Pro.Code §§ 1208.61,

.62. The presence of this statutory aircraft repairman’s licn

makes it legally unnecessary to imply such a lien to a clear,

consensual agreement. Finally. 1 doubt that we have the power

under California law to imply a contract term which is contrary

As the majority erroneously concludes that World acquired

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