Petition for Writ of Certiorari — Condren v. Aircraft Trading & Services, Inc.

87-3 06 | AUG 20. 4987

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

Mes

——e

WILLIAM CONDREN and INTERNATIONAL AIR LEASES, INC.,

Petitioners,

—against—

AIRCRAFT TRADING AND SERVICES, INC.,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

JEFFREY A. FILLMAN

Box 468

Lakeville, Connecticut 06039

(203) 435-2924

Counsel for Petitioners

August 18, 1987

QUESTIONS PRESENTED

1. Whether the interpretation of the Federal Aviation Act by

the Court below is in conflict with the decision of this Court in

Philko Aviation, Inc. v. Shacket, 462 U.S. 406 (1983).

2. Whether Section 503(c) of the Federal Aviation Act (49

U.S.C. Sec. 1403(c)) bars the chattel mortgagee under an

aircraft or aircraft engine chattel mortgage from retroactively

encumbering marketable title to the aircraft or engine that was

purchased for value by a person who did not have actual

knowledge of the existence of the mortgage at a time when the

mortgage was not recorded in the Federal Aviation Agency.

3. Whether United States Code Section 1406 enables the

holder of a chattel mortgage covering an aircraft engine who

has failed to record in compliance with the Federal Aviation

Act to rely on State law to retroactively encumber marketable

title to the mortgaged engine previously obtained by a pur-

chaser for value without actual or constructive notice of the

mortgage.

TABLE OF CONTENTS

PAGE

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Ee Ey ys ek ee ee dha sce es acess |

ro ae 5 a6 s'n ky ae oa 5 an 0 68 wo 2

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

| St 3

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

1. THE DECISION BELOW CONFLICTS WITH

THE DECISION OF THIS COURT IN

PHILKO AVIATION, INC. v. SHACKET, 462

ae eae 6

2. THE DECISION BELOW JEOPARDIZES THE

INTEGRITY OF THE FEDERAL SYSTEM

FOR CENTRALLY RECORDING INTERESTS

IN AIRCRAFT AND AIRCRAFT ENGINES... 1]

ee is Ga ah MWe Rb ea a ees se 13

TABLE OF AUTHORITIES

Cases: PAGE

Bank of Honolulu y. Davis, 709 P.2d 613 (Intermed.

Es Fs Ss e's a 5 vin en ee ee bc oa eae 10, 11

General Motors Acceptance Corp. v. Raz Delivery,

Inc., 238 App. Div. 277, 264 N.Y.S. 412 (4th Dept.

i) SREP ages area arr eran Tra wae ee eae: 7

South Shore Bank vy. Johnson Hydraulic Mfg. Co., 131

Ill. App. 3d 1024, 477 N.E. 2d 1 (1985) ............ 10

South Shore Bank v. Tony Mat, Inc., 712 F.2d 896 (3d

We Te Ris Dass oe nade tLe 9

Philko Aviation, Inc. v. Shacket, 462 U.S. 406, 411

ONE daein es eaea Lee oo oy eceeo, eros passim

Trimboli v. Kinkel, 226 N.Y. 147, 152, 123 N.Y. 205

a apa ag Ca hie Aen na phy MR x thar rt eRies 7

Other Authorities:

Federal Aviation Act; 49 U.S.C. Sec. 1403(c) ........ io

hn tg Fila PA ee A ia

ee Re ee Ee a eed ee 2

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

No.

oe

WILLIAM CONDREN and INTERNATIONAL AIR LEASES, INC.,

Petitioners,

—against—

AIRCRAFT TRADING AND SERVICES, INC.,

Respondent.

>

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

The petitioners, William Condren and International Air

Leases, Inc. respectfully pray that a writ of certiorari issue to

review the judgment and opinion of the United States Court of

Appeals for the Second Circuit entered in this proceeding on

May 22, 1987.

OPINION BELOW

The opinion of the Court of Appeals, not yet reported,

appears in Appendix A hereto. The opinion of the United

States District Court for the Southern District of New York has

not been officially reported and is reproduced in Appendix B

hereto.

JURISDICTION

The judgment of the Court of Appeals for the Second

Circuit was entered on May 22, 1987. This Petition was filed

within 90 days of that date. This Court’s jurisdiction is

invoked under 28 U.S.C. Sec. 1254(1).

STATUTORY PROVISIONS INVOLVED

United States Code, Title 49:

Sec. 1403. Recordation of aircraft ownership.

(a) The Secretary of Transportation shall establish and

maintain a system for the recording of each of the

following:

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

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

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

contract of conditional sale, or other instrument

executed for security purposes, which lease or other

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

specifically identified aircraft engine or engines. . .;

and also any assignment or amendment thereof or

supplement thereto;

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

contract of conditional sale, or other instrument

executed for security purposes, which lease or other

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

aircraft engines, propellers, or appliances maintained

by or on behalf of an air carrier certificated under

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

aircraft . . .; and also any assignment or amend-

ment thereof or supplement thereto.

(c) No conveyance or instrument the recording of

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

shall be valid in respect of such aircraft, aircraft engine or

engines, propellers, appliances, or spare parts against any

person other than the person by whom the conveyance or

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

any person having actual notice thereof, until such con-

veyance or other instrument is filed for recordation in the

office of the Secretary of Transportation: .. .

(d) Each conveyance or other instrument recorded by

means of or under the system provided for in subsection

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

for recordation be valid as to all persons without further

or other recordation. .

Sec. 1406. Law governing validity of certain instruments.

The validity of any instrument the recording of which is

provided for by Section 1403 of this title shall be governed by

the laws of the State, District of Columbia, or territory or

possession of the United States in which such instrument is

delivered, ...

STATEMENT OF THE CASE

In December 1982, Respondent Aircraft Trading and Serv-

ices, Inc. (*ATASCO”), sold a jet aircraft engine (the “En-

gine”) to Northeastern Airiines (“Northeastern”), a United

States commercial airline carrier, for promissory notes secured

by a chattel mortgage (the “Mortgage”) covering the Engine.

Although the Mortgage was required to be recorded under

Section 403(c) of the Federal Aviation Act, ATASCO did not

record it.

On November 28, 1984, Northeastern agreed to sell the

aircraft containing the Engine to Braniff, Inc. (“Braniff”), a

commercial airline carrier. At the time, Braniff did not have

4

actual or constructive notice that the Mortgage existed. Indeed,

prior to completing its purchase, Braniff checked the appropri-

ate records of the Federai Aviation Agency (“FAA”) for prior

claims or liens upon the aircraft or its engines or parts, and

found no record of any encumbrances.

On November 30, 1984, after its purchase was consum-

mated, Braniff duly filed its bill of sale with the FAA.

On December 7, 1984, Braniff sold the aircraft and engines

thereon, including the Engine, to petitioner William Condren

(“Condren”). It is undisputed that Condren checked the FAA

records for prior claims and encumbrances before consummat-

ing his purchase, and he found none. Nor did Condren have

actual knowledge of the existence of the Mortgage. Condren

promptly filed his bill of sale.

In early February 1985, Condren leased the aircraft and

attached engines (including the Engine) to Petitioner Interna-

tional Air Leases, Inc. (“IAL”). In that lease, Condren granted

[AL an option to purchase the aircraft and engines upon

expiration of the lease, and agreed to warrant good title to the

aircraft and engines in the event the option was exercised. At

the time Condren entered into the lease and irrevocably obli-

gated himself to sell the aircraft and engines to IAL, the

Mortgage had not been filed with the FAA, and neither

Condren nor IAL had actual or constructive knowledge of its

existence.

IAL did not file its lease with the FAA. In March 1985,

ATASCO finally filed the Mortgage with the FAA and, in April

1985, ATASCO notified Condren of the existence of the Mort-

gage. In late July or early August 1985, IAL exercised its

irrevocable option to purchase the aircraft and engines, and on

August 5, 1985, IAL filed with the FAA the bill of sale by

which Condren purported to convey to IAL good and market-

able title to the aircraft and engines (including the Engine). It is

undisputed that IAL had actual knowledge of the existence of

the Mortgage when it consummated its purchase of the Engine

from Condren.

On August 27, 1985, ATASCO sued Braniff, Condren and

IAL for conversion, replevin and forfeiture. In addition to

recovery of the Engine and payment of the $135,902 still owing

from Northeastern, ATASCO sought punitive damages of

$5,000,000.

Concluding that the claims made by ATASCO were in

conflict with the 1983 decision of this Court in Philko Avia-

tion, Inc. v. Shacket, 462 U.S. 406 (1983), the United States

District Court for the Southern District of New York entered

summary judgment in favor of all of the defendants and

dismissed the Complaint.’ See Appendix B hereto.

Although the Court of Appeals affirmed the summary

judgments in favor of Braniff and Condren, it reversed the

judgment in favor of IAL and ordered the District Court to

enter a summary judgment in favor of ATASCO as against

IAL. According to the Court of Appeals, ATASCO’s Mortgage

was not valid against Condren because he had purchased

without actual or constructive knowledge of its existence, but,

by filing the Mortgage with the FAA after Condren had

purchased and granted an option to IAL, ATASCO could

prevent Condren from conveying good title to IAL (or to

anyone else). In so holding, the Court of Appeals relied on

various Sections of the New York Uniform Commercial Code

which, in its view. entitle the holder of an unrecorded mort-

gage in an aircraft engine, by filing after an innocent third

party purchased the engine without actual notice of the mort-

gage, to recover against a subsequent purchaser from the

innocent third party even though the subsequent purchaser in

| Northeastern had paid all installments due under its purchase money

Note through January 10, 1985. By the time of suit Northeastern was in

bankruptcy and was not joined as a defendant.

2 Shortly after the Complaint was filed, Pride Air, Inc., a lessee of

IAL who was also originally named as a defendant, filed for bankruptcy and

was effectively dropped from the action.

6

turn will have a claim against the innocent third party for

breach of warranty of title. See Appendix A hereto.

REASONS FOR GRANTING THE WRIT

1. THE DECISION BELOW CONFLICTS WITH THE

DECISION OF THIS COURT IN PHILKO AVIATION,

INC, v. SHACKET, 462 U.S. 406 (1983)

In Philko Aviation, Inc. v. Shacket, 462 U.S. 406 (1983), this

Court held (per Justice White),

ee

. that state laws allowing undocumented or unre-

corded transfers of interests in aircraft to affect innocent

third parties are preempted by the federal [Aviation] Act.”

(462 U.S. at 412)

That holding was expressly premised on recognition of the

fact that

“

. the primary congressional purpose for the enact-

ment of § 503(c), . . . was to create ‘a central clearing

house for recordation of titles so that a person, wherever

he may be, will know where he can find ready access to

the claims against, or liens, or other legal interests in an

aircraft.’ ”

According to the rationale of the Second Circuit in the

present case, even after this Court’s decision in Philko the

Shackets could have recorded their bill of sale and thereafter

obtained summary judgment on a conversion claim against any

subsequent purchaser of the aircraft from Philko Aviation (or

from whoever owned the Aircraft when the Shackets ultimately

recorded). There is nothing in this Court’s opinion in Philko to

support the conclusion impliedly reached by the Second Circuit

in the present case that, simply by filing their bill of sale with

the FAA after Philko Aviation’s purchase (even after the

decision of this Court), the Shackets could have prevented

Philko Aviation from ever selling, leasing cr mortgaging the

aircraft, and would have effectively obtained the relief to

which this Court said the Shackets were not entitled.*

Indeed, such a result would turn the Phi/ko decision into an

exercise in statutory interpretation having no significance for

those who plan commercial transactions in reliance upon the

federal recording statute. As the District Court in the present

case observed:

“Following the logic of [Phi/ko], it would make no

sense for Congress to have established such a [central]

registry if someone with an unfiled security interest could

come along years after the interest was created, and after

subsequent purchasers had relied upon the absence of any

adverse claims on file with the FAA, and nevertheless

succeed in asserting a priority interest in an aircraft or its

parts.” (Appendix B at p. 5b)

By holding that ATASCO may recover against IAL because

ATASCO recorded before IAL completed its purchase, the

Court below effectively made the Mortgage “valid” against

Condren because it disabled him from passing good title to

anyone and, through IAL’s claim against him for breach of

warranty of title, made him liable for Northeastern’s debt to

ATASCO. Thus, Condren’s search of the FAA records before

purchasing the aircraft served no purpose.

Insofar as Condren would have a claim over against Braniff

for breach of its warranty of title, the Second Circuit’s decision

would also effectively nullify Braniff’s reliance upon the fed-

3 It has long been the law that “title” includes the right to transfer

whatever it is the title-holder has, and that “marketable title” includes the

right to transfer free of encumbrances. See, Trimboli v. Kinkel, 226 N.Y. 147,

152, 123 N.Y. 205 (1919); General Motors Acceptance Corp. v. Raz Delivery,

Inc., 238 App. Div. 277, 264 N.Y.S. 412 (4th Dept. 1933). If, as the Second

Circuit held, belated recording of a security interest in aircraft can become

enforceable against the transferee of an innocent purchaser of ‘itle to that

aircraft, the security interest encumbers the title of the innocent purchaser

and is “effectively valid” against him as well.

eral recording structure as it would retroactively encumber

what Braniff had believed was a marketable title.

In short, if the decision of the Second Circuit stands,

airiines, financial institutions and others who purchase or

finance the purchase of aircraft in reliance upon the integrity

of the FAA recording process can never be certain that the

absence of encumbrances on the FAA records actually means

that the title or interest being acquired will prove to be

unencumbered at the time a subsequent transfer is attempted.

In construing the word “until” in Section 403(c) to permit

holders of unrecorded interests in aircraft and aircraft engines,

by late filing, to retroactively encumber marketable title previ-

ously obtained by persons who checked the FAA records and

purchased aircraft or engines without knowledge of any prior

claim, the Second Circuit prevented achievement of the Con-

gressional purpose upon which Phi/ko was premised.

If, as the Court below held, the word “until” in Section

403(c) means that the holder of an unrecorded interest in

aircraft or aircraft engines will become entitled to possession or

damages for conversion against anyone who purchases the

aircraft or engines after the interest is recorded, even if it is

years after the interest was created and there have been

intervening bona fide purchasers, those who obtain interests in

airciaft would have little need or incentive to promptly record.

Indeed, since their causes of action against persons purchasing

after the interest has in fact been filed would not accrue unti!

after the filing has been accomplished, the Statute of Limita-

tions would not begin to run until after the filing, and expedi-

tious recording would not even be encouraged by the potential

running of such a Statute.

In this respect, the Second Circuit’s interpretation of the

Statute disregarded the import of this Court’s observation in

Philko that a definition not be read “mechanically into

§ 503(c) [where] to do so would render the recording system

ineffective and thus would defeat the purpose of the legisla-

tion.” (462 U.S. at 412)

9

A post-Philko decision by the Court of Appeals for the

Third Circuit reinforces the conclusion that the decision of the

Second Circuit in the present case was erroneous. In South

Shore Bank v. Tony Mat, Inc., 712 F.2d 896 (3d Cir. 1983), a

lender, who had loaned without notice of an unrecorded

conveyance and had promptly recorded its security interest,

was held entitled to prevail against the transferee under the

prior conveyance, even though that conveyance was recorded

with the FAA while the action was pending. As the Third

Circuit noted, “Tony Mat’s belated compliance with Section

503 does not alter the result reached by the disirict court”

[summary judgment in favor of the lender] (712 F.2d at 998).

The reference in Jony Mat to the implications under Massa-

chusetts law of the eventual recording by Tony Mat does not

justify the Second Circuit’s conclusion that State law may

allow a belatedly-recorded mortgage or title to prevent the

innocent purchaser of title, who did not have notice of the

unrecorded interest, from conveying good title without expos-

ing his purchaser to liability for conversion, replevin or fore-

closure, and himself to liability for breach of warranty of title.”

4 Reliance of the Court below on applicability of New York law in this

case to determine “priorities” is misplaced: the question raised by the conflict

between Condren’s title and ATASCO’s lien related to the existence of

Condren’s interest (i.e. did he obtain unencumbered “title”), not to “priort-

ties” between coexisting interests. By definition full title, to be “marketable”,

“is free from encumbrances and any reasonable doubt as to its validity, and

such as a reasonably intelligent person, who is well informed as to facts and

their legal bearings, and ready and willing to perform his contract, would be

willing to accept in exercise of ordinary business prudence. . . . Such a title

as is free from reasonable doubt in law and in fact; not merely a title valid in

fact, but one which readily can be sold or mortgaged to a reasonably prudent

purchaser or mortgagee. . .” Black’s Law Dictionary, p. 875 (Sth ed. 1979)

(emphasis added). By definition, a title that can readily be sold to a

reasonably prudent purchaser must be superior to the rights of lien-holders

whose interests would prevent unencumbered resale. Thus, a mortgage on

property that is “subordinate” to the rights of a holder of “marketable” title

to that property is a contradiction in terms: an interest that would impair

resale cannot exist if it 1s “subordinate” to the title its existence would

encumber.

10

Similarly, the decisions of State Courts in South Shore Bank

v. Johnson Hydraulic Mfg. Co., 131 Ill. App. 3d 1024, 477

N.E.2d 1 (1985) and Bank of Honolulu v. Davis, 709 P.2d 613

(Intermed. Ct. App. 1985) interpret Phi/ko to require the result

reached in the present case by the District Court, not by the

Second Circuit. The question as stated by the Illinois Court in

Johnson Hydraulic was

“Whether a federally recorded security interest in an

airplane is superior to the interest of a prior buyer of the

same airplane in the ordinary course of business who first

attempts to record the transfer of title fourteen months

after the security interest is recorded.” (477 N.E.2d at 1)

In disposing of this question, the Court expressly recognized

that it was confronted by the issue this Court did not reach in

Philko—“whether State law determines priorities of conflicting

interests in aircraft where both the security interest and the

purchaser’s interest are federally recorded.” (477 N.E.2d at 3)

Citing Philko, and realizing that to permit a belated federal

recording of full title to have any effect vis-a-vis the prior

recorded security interest

“Would defeat the primary congressional purpose for

enacting the federal recordation statute, /.e., ‘to create a

central clearing house for recordation of titles so that a

person, wherever he may be, will know where he can find

ready access to the claim against, or liens, or other legal

interests in an aircraft’ ” (477 N.E.2d at 4),

the Illinois Court held as a matter of preemptive federal law

“that the belated ‘recording’ in this case was a nullity” against

a prior recorded lien. If a subsequently-recorded full title is a

“nullity” against a prior recorded /ien, and is not merely

“subordinated” to that lien, a fortiori the subsequently-

recorded lien in the present case should be a “nullity” against a

prior recorded marketable title which, by definition, may not

be subordinated to the lien and still be “marketable” title.

1]

In the Bank of Honolulu case, the Hawaii Court ruled,

relying on Philko, that

“Cacho’s failure to register his title to the aircraft for at

least two fuil years before Pamela, without actual notice

of the conveyance, levied execution to satisfy her judg-

ment against Daniel, is fatal to Cacho’s ownership inter-

est, being unrecorded at the time Pamela levied on the

aircraft, was invalid asito her and could not operate to cut

off her right to levy on the aircraft. Philko Aviation,

supra... .”

Since Pamela’s levy necessarily involved a transfer of title to

the aircraft with actual knowledge of Cacho’s unrecorded title,

the decision of the Court implicitly rejected the position

adopted by the Second Circuit in the present case—that, after

an unrecorded interest in aircraft has been extinguished by the

transfer of a conflicting interest to an innocent third party for

value, it may nonetheless be resurrected by subsequent con-

structive or actual notice to the potential transferee of the

innocent third party.

The conflict between the decision of the Court below and

this Court’s decision in Philko justifies the grant of certiorari

to review to judgment below.

2. THE DECISION BELOW JEOPARDIZES THE IN-

TEGRITY OF THE FEDERAL SYSTEM FOR CEN-

TRALLY RECORDING INTERESTS IN AIRCRAFT

AND AIRCRAFT ENGINES.

As a result of the decision of the Court below Condren will

have to pay to ATASCO the amount of Northeastern’s indebt-

edness that was secured by the Mortgage, even though Con-

dren checked the appropriate FAA records before he purchased

the aircraft and found no record of ATASCO’s lien. The fact

that the Court below held that Condren could not be liable

directly to ATASCO does not preserve the integrity of the

recording structure. If, by recording after Condren purchased,

ATASCO became entitled to replevin the Engine or to recover

12

the value of its interest from anyone to whom Condren might

sell the Engine with a warranty of title, Condren did not in fact

obtain “marketable” title to the Engine. Thus, his search of the

FAA records proved to be pointless and his expectations,

reasonably generated by that search, were frustrated.

In so ruling that ATASCO’s belated recording may encumber

Condren’s title the Court below defeated “the primary con-

gressional purpose for the enactment of § 503(c), which was to

create a central clearing house for recordation of titles so that a

person, wherever he may be, will know where he can find

ready access to the claims against, or liens, or other legal

interests in an aircraft.” Cf. Philko Aviation, Inc. v. Shacket,

462 U.S. 406, 411 (1983). The rule adopted by the Second

Circuit—which allows the holder of an unrecorded interest in

aircraft or aircraft engines to prevail over anyone who pur-

chases after an untimely recording notwithstanding the number

of innocents in the chain of title who purchased prior to such

filing—effectively eliminates any need or incentive to record

interests promptly and “thereby prevent{s] the ‘central clearing

house’ from providing ‘ready access’ to information” about

the quality of aircraft titles. As the Court observed in Philko,

“this is not what Congress intended.” (462 U.S. at 411).

The suggestion in the Second Circuit’s Opinion that affirm-

ance of the District Court judgment in favor of IAL “would

discourage lenders from taking security interests and would

thereby inhibit commerce” (Appendix A at p. 16a) disregards

judicially noticeable commercial realities. According to the

Court below, the “rule” urged by IAL would enable a buyer

under a purchase-money security interest to cut off the rights

of the secured party by reselling immediately—before the

secured party might have an opportunity to record. In fact, it

is common knowledge that those who are regularly engaged in

the financing of aircraft purchases have a _ representative

present at the FAA office at the time the transaction is

consummated to ensure that the appropriate documents are

filed immediately.

13

Indeed, by holding that a review of FAA records will never

enable a purchaser or lender to learn with certainty that its

interest will not be encumbered by unrecorded interests, it is

the decision of the Court below that will discourage lenders

from taking security interests in aircraft and will thereby

inhibit commerce.

The judgment and opinion of the Court below has engen-

dered uncertainties concerning aircraft titles and concerning

the significance of the federal recording system and will inevi-

tably affect millions of dollars of aircraft sales and financings.

Thus, the Court below has decided an important question of

federal law which should be settled by this Court.

CONCLUSION

For the reasons set forth above, a writ of certiorari should

issue to review the judgment and opinion of the Second

Circuit.

Respectfully submitted,

JEFFREY A. FILLMAN

Box 465

Lakeville, Connecticut 06039

(203) 435-2924

Counsel for Petitioners

August 18, 1987

D vy ;

APPENDIX A

la

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

oe

No. 807—August Term, 1986

(Argued: February 13, 1987 Decided: May 22, 1987)

Docket No. 86-7981

ae

AIRCRAFT TRADING AND SERVICES, INC.,

Plaintiff-Appellant,

— against —

BRANIFF, INC., WILLIAM CONDREN, INTERNATIONAL AIR

LEASES, INC., PRIDE AIR, INC..,

Defendants,

BRANIFF, INC., WILLIAM CONDPEN, INTERNATIONAL AIR

LEASES, INC.,

Appellees.

Before:

FEINBERG, Chief Judge, PIERCE and MINER,

Circuit Judges

314]

2a

Appeal from summary judgment entered in the United

States Disrict Court for the Southern District of New

York (Goettel, J.) rejecting claims asserted by plaintiff

predicated on chattel mortgage covering a jet aircraft

engine. Recorded as required by the Federal Aviation Act

before sale of the engine to defendant International Air

Leases, Inc., but after intermediate sales to other defen-

dant purchasers, the mortgage was held ineffective as to

all defendants.

Reversed and remanded as to defendant International

Air Leases, Inc

+

DONALD S. ZAKARIN, New York, NY (David

Nicholas, Pryor, Cashman, Sherman &

Flynn, New York, NY, of counsel) for

Plaintiff-Appellant.

RICHARD M. KRAVER, New York, NY (Lewis

S. Fischbein, Kraver & Parker, New York,

NY, of counsel) for Defendant-Appellee

Braniff, Inc.

(Jeffrey A. Fillman, Finley, Kumble, Wagner,

Heine, Underberg, Manley, Myerson &

Casey, New York, NY, of counsel) for

Defendants-Appellees William Condren

and International Air Leases, Inc.

+

MINER, Circuit Judge:

Plaintiff-appellant Aircraft Trading and Services, Inc.

(“ATASCO”) appeals from a judgment entered in the

3142

3a

United States District Court for the Southern District of

New York (Goettel, J.) in favor of defendants-appellees

Braniff, Inc., William Condien, and International Air

Leases, Inc. (“IAL”), following ATASCO’s motion for

summary judgment against IAL only and defendants’

cross-motion for summary judgment. ATASCO’s action

arose out of its sale of a jet aircraft engine, subject to a

chattel mortgage that secured the payment of the purchase

price, to Northeastern Airlines. ATASCO failed to record

the chattel mortgage with the Federal Aviation Adminis-

tration (“FAA”), as required for perfection of its security

interest under the Federal Aviation Act, 49 U.S.C.

S§ 1403-1406 (1982 & Supp. II 1985) (“the Act”), until

after the engine had been conveyed by Northeastern to

Braniff, and then by Braniff to Condren, culminating in a

lease from Condren to IAL with an option to purchase.

IAL subsequently exercised its option to buy after

ATASCO recorded its interest and after IAL had actual

notice of ATASCO’s security interest in the engine.

ATASCO brought suit for conversion, replevin and forfei-

ture of the engine, claiming that its rights were superior to

those of Braniff, Condren, and IAL.

The district court denied ATASCO’s motion for sum-

mary judgment against IAL and granted defendants’

cross-motion for summary judgment, finding that the

intermediate transfers of the engine, prior to ATASCO’s

perfection of its security interest, extinguished ATASCO’s

security interest under 49 U.S.C. § 1403(c). On appeal,

ATASCO asserts that its interest in the engine is superior

to IAL’s under U.C.C. Article 9. We nnd merit in ATAS-

CO’s claim and reverse the denial of ATASCO’s motion

for summary judgment against IAL. We affirm the grant

of defendants’ cross-motion for summary judgment as to

Braniff and Condren, but reverse as to IAL.

3143

EEE

4a

BACKGROUND

In December 1982, ATASCO, a Panamanian company

engaged in the business of selling and leasing aircraft and

aircraft engines, sold a jet aircraft engine to Northeastern

Airlines (“Northeastern”), a commercial airline carrier.

The purchase price of the engine was $412,344.00. The

sales agreement provided that Northeastern would pay

ATASCO $36,000.00 as a down payment, with the bal-

ance to be paid in 36 equal installments of $10,454.00,

due monthly, beginning in March 1983. Northeastern’s

obligation to pay the debt was secured by a chattel mort-

gage dated December 31, 1982, held by ATASCO. The

chattel mortgage provided that Northeastern would be in

defauit if it (1) failed to pay any note when due; (2) dis-

posed of the engine before all payments were made; or, (3)

was subject to bankruptcy proceedings.

Northeastern paid the monthly installments on the

engine through January 10, 1985, but has made no pay-

ments since then, and is now in bankruptcy. The balance

due on the engine is $135,902.00 plus interest. ATASCO

failed to record the chattel mortgage with the FAA, as

required under 49 U.S.C. § 1403(c), until March 1985S.

On November 28, 1984, Northeastern agreed to sell the

aircraft containing the engine subject to ATASCO’s chat-

tel mortgage to Braniff, a commercial airline carrier.

Northeastern, in :ts bill of sale to Braniff, represented that

it was conveying good and marketable title for both the

aircraft and the engine. Braniff, which was planning to sell

this aircraft immediately to William Condren, a private

individual, checked the FAA records for prior claims or

liens upon the aircraft or its parts, and found no record of

any incumbrances. After the sale to Braniff was consum-

mated, Braniff filed the bill of sale with the FAA on

3144

Sa

November 30, 1984. On December 7, 1984, Braniff sold

the aircraft to Condren after Condren also checked the

FAA records for a prior claim. Condren subsequently

filed his will of sale.

In early February !985, Condren leased the aircraft,

with an option to buy, to IAL. The lease was not filed with

the FAA as required by 49 U.S.C. § 1403. ATASCO

finally filed its chattel mortgage with the FAA in March of

1985. In April of 1985, IAL learned of ATASCO’s chattel

mortgage when Condren notified IAL of ATASCO’s inter-

est by letter. Nevertheless, in late July or early August of

1985, after procuring a copy of ATASCO’s chattel mort-

gage directly from the FAA, IAL exercised its option to

buy the aircraft. That bill of sale was filed with the FAA

on August 5th.

ATASCO brought suit for conversion, replevin, and

forfeiture against Braniff, Condren and IAL. ATASCO’s

central contention before the district court was that its

rights were superior to those of IAL because its chattel

mortgage was filed prior to IAL’s filing, and IAL had

actual knowledge of the terms of the instrument when it

exercised its option to purchase. The district court

granted summary judgment in favor of IAL, Condren,

and Braniff, noting that if the only transaction at issue

were the sale to IAL, then ATASCO might prevail. How-

ever, the district court ruled that, because of the interme-

diate transfers to Braniff and Condren prior to ATASCO’s

fling of the chattel mortgage, Braniff received good title

and passed good title to Condren, who in turn passed

g00d title to IAL.

3145

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DISCUSSION

A. The Federal Aviation Act

Under the Federal Aviation Act, an interest in aircraft

or aircraft engines, including a chattel mortgage, see 49

U.S.C. § 1403(a), 1s not valid against an innocent third

party’ “until such conveyance or other instrument is filed

for recordation in the office of the Secretary of

Transportation.” 49 U.S.C. § 1403(c). Federal law thus

requires recordation with the FAA to perfect a security

interest in an aircraft engine. The district court, relying on

the language and purpose of 49 U.S.C. § 1403, concluded

that Congress must have intended intervening convey-

ances to render invalid the late recordation of a security

interest in an aircraft engine. Therefore, the court denied

plaintiffs motion for summary judgment and granted

defendants’ cross-motion for summary judgment.

The district court interpreted section 1403(c) of the Act

to mean that a security interest in an aircraft engine is

void unless filed with the FAA before the engine is con-

veyed again. This reading misinterprets the phrase “until

such conveyance or other instrument is filed,” 49 U.S.C.

§ 1403(c) (emphasis added). The district court’s construc-

tion effectively replaces “until” with “unless,” and reads

into the statute a timely filing requirement. “The use of

the word ‘until’ ... rather than ‘unless’ indicates that

mere delay ... [is] not enough to cause forfeiture.”

Washingtonian Pub. Co. v. Pearson, 306 U.S. 30, 39

(1939) (rejecting argument that failure promptly to regis-

ter copyright precluded infringement claim, where Copy-

‘Section 1403(c) invalidates an unfiled interest in an aircraft as against

“any person other than the person by whom the conveyance or other

instrument ts made or given, his heir or devisee, or any other person hav-

ing actual notice thereof... .” 49 U.S.C. § 1403%(c)

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right Act of 1909 provided that no action could be

maintained “until” registration requirements were com-

plied with).

The purpose of section 1403 is “to create ‘a central

clearing house for recordation of titles so that a person,

wherever he may be, will know where he can find ready

access to the claims against, or liens, or other legal inter-

ests in an aircraft.” Philko Aviation, Inc. v. Shacket, 462

U.S. 406, 411 (1983) (quoting Hearings on H.R. 9738

before the House Committee on Interstate and Foreign

Commerce, 75th Cong., 2d Sess. 407 (1938) (testimony of

F. Fagg, Director of Air Commerce, Dep't of Com-

merce)). Guided by this statement, the Supreme Court

ruled that section 1403 preempts state laws that allow

unrecorded interests in aircraft to affect innocent third

parties. Philko Aviation, 462 U.S. at 412. The district

court, relying on this language, stated that

it would make no sense for Congress to have estab-

lished such a registry if someone with an unfiled

security interest could come along years after the

interest was created, and after subsequent purchasers

had relied upon the absence of any adverse claims on

file with the FAA, and nevertheless succeed in assert-

ing a priority interest in an aircraft or its parts.

The district court’s conclusion ignores both the

Supreme Court’s limitation on the Act’s preemption of

state law, and section 1406 of the Act. Section 1406 pro-

vides that “[t]he 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 ... in which such

instrument is delivered.” 49 U.S.C. § 1406. Under the

plain language of this section, state law determines valid-

itv. Citing with favor /n re Gary Aircraft Corp.. 681 F.2d

3147

8a

365 (Sth Cir. 1982) (rejecting contention that section

1403 preempts a// state laws dealing with priority of inter-

ests in aircraft), cert. denied, 462 U.S. 1131 (1983), the

Supreme Court in Philko Aviation concluded:

Although state law determines priorities, all interests

must be federally recorded before they can obtain

whatever priority to which they are entitled under state

law. As one commentator has explained: “The only

situation in which priority appears to be determined

by operation of the [federal] statute is where the

security holder has failed to record his interest. Such

failure invalidates the conveyance as to innocent

third persons. But recordation itself merely validates:

it does not grant priority.” Scott, Liens in Aircraft:

Priorities, 25 J. Air L. & Commerce 193, 203 (1958)

(footnote omitted).

Philko Aviation, 462 U.S. at 413 (emphasis added). See

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

869, 870 (4th Cir. 1978) (per curiam) (Act does not pre-

empt U.C.C. rule that buyer in ordinary course of busi-

ness takes free of a security interest created by his seller);

Sanders v. M.D. Aircraft Sales, Inc. 575 F.2d 1086, 1088

(3d Cir. 1978) (same); R.A. Anderson, Anderson on the

U.C.C. § 9-104:12, at 537-38 (3d ed. 1985). We note that

resort to state law for priority rules avoids the need for a

separate federal priority system for aircraft.

Under the teaching of Phi/lko Aviation, the first to per-

fect by filing with the FAA is not necessarily assured pri-

ority. Philko Aviation, 462 U.S. at 413. Rather, because

section 1403 requires recordation to validate or perfect

the security interest, federal law will only determine prior-

ity where the security holder has nor recorded his interest.

Id. An interest that intervenes before a creditor perfects

3148

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under section 1403 does not necessarily extinguish the

creditor’s subsequently recorded security interest. In such

a situation, a court must look to state law to determine

priority. See South Shore Bank v. Tony Mat, Inc., 712

F.2d 896, 899 (3d Cir. 1983) (state law determines prior-

ity where buyer of airplane eventuaily recorded ownership

with FAA after bank with intervening security interest

brought suit).

In the case before us, although both Braniff and Con-

dren purchased the engine and filed with the FAA prior to

the time that ATASCO filed and perfected its interest,’

ATASCO eventually did file and perfect in March of

1985. Therefore, state law determines priority as between

ATASCO and Braniff and Condren, and as between

ATASCO and IAL. All parties concede that New York’s

Unitorm Commercial Code applies to determine priority

in this case. We therefore turn to an analysis of the New

York U.C.C., particularly Article 9, to determine how

ATASCO’s late perfected security interest should be

treated.

B. The Uniform Commercial Code

1. Buyer in the Ordinary Course of Business

Appellees contend that, under New York’s Uniform

Commercial Code section 9-307(1), Braniff was a buyer in

the ordinary course of business who could subsequently

convey the engine free of ATASCO’s security interest.

Section 9-307 provides:

*The date of perfection of a security interest in aircraft generally is held

to coincide with the date that the securiiy interest is filed for recordation.

In re Gelking, 754 F.2d 778, 780 (8th Cir.), cert. denied, 105 S. Ct. 3529

(1985).

3149

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(1) A buyer in ordinary course of business ... takes

free of a security interest created by his seller even

though the security interest is perfected and even

though the buyer knows of its existence.

N.Y.U.C.C. Law § 9-307(1) (McKinney 1964). It generally

is recognized that the purpose of section 9-307(1) is to

protect the buying public where the secured party finances

inventory that is sold to the public by the debtor in the

regular course of the debtor’s business. J. White & R.

Summers, Uniform Commercial Code § 25-13, at 1067 (2d

ed. 1980); N.Y.U.C.C. Law § 9-307 practice commentary

1 (McKinney 1964).

Under section 9-307(1), if Braniff were a buyer in the

ordinary course of business, it would “take free” of the

security interest created by its seller, Northeastern, extin-

guishing ATASCO’s interest, whether or not ATASCO

subsequently perfected. Section 9-307(1) thereby provides

an exception to the general rule, codified in section

9-306(2), that “a security interest continues in collateral

notwithstanding sale, exchange or other disposition

thereof uiuless the disposition was authorized by the

secured party.” N.Y.U.C.C. Law § 9-306(2) (McKinney

Supp. 1987).

A buyer in the ordinary course of business is defined as

“a person who in good faith and without knowledge that

the sale to him is in violation of the ownership rights or

security interest of a third party in the goods buys in ordi-

nary course from a person in the business of selling goods

of that kind... .” N.Y.U.U.C. Law § 1-201(9) (McKinney

Supp. 1987) (emphasis added). This definition requires,

inter alia, that the buyer in ordinary course buy from a

seller who ordinarily sells similar goods. ATASCO argues

that Northeastern, an airline carrier, was not in the busi-

3150

lla

ness of selling airplanes, and therefore Braniff was not a

buyer in the ordinary course of business. Appellees

counter that it is a practice in the airline industry for air-

lines periodically to sell off airplanes and therefore North-

eastern sold the plane to Braniff in the ordinary course of

business.

Northeastern evidently was selling jets and engines to

upgrade its fleet, which may be a practice in the industry.

However, under New York law, whether a sale is an ordi-

nary sale of similar goods turns on whether the goods sold

are classified as capital equipment or as inventory. In

Hempstead Bank v. Andy’s Car Rental Sys., 35 A.D.2d 35,

312 N.Y.S.2d 317 (2d Dep’t 1970), the court held that a

rental company’s used car sales were not in the ordinary

course of business, even though such sales are common in

the industry, because the used cars were capital equip-

ment of the leasing company and not inventory. Accord

Sindone v. Farber, 105 Misc. 2d 634, 432 N.Y.S.2d 778

(Sup. Ct. 1980). IAL’s reliance on Tanbro Fabrics Corp. v.

Deering Milliken, Inc., 39 N.Y.2d 632, 350 N.E.2d 590,

385 N.Y.S.2d 260 (1976), is misplaced. In Tanhro Fabrics

the unfinished textiles sold off by a converter were inven-

tory and not capital equipment. Therefore, the sale was in

the ordinary course of business, a result that accords with

the Hempstead Bank holding. See 69 Am. Jur. 2d Secured

Transactions § 469, at 328 (1973) (“a buyer of collateral

that is classified as equipment will rarely if ever be a buyer

in ordinary course of business, even where the debtor

makes it a regular practice to sell used or obsolescent

equipment at regular intervals”).

Northeastern’s aircraft and engines clearly were capital

equipment. See N.Y.U.C.C. Law § 9-109(2) (McKinney

1964). Therefore, we hold that the sale to Braniff was not

315]

12a

in the ordinary course of business, and section 9-307(1)

does not extinguish ATASCO’s security interest. We note

that neither Condren nor [AL attempts to establish status

as a buyer in the ordinary course of business. Even if Con-

dren or IAL qualified as a buyer in the ordinary course of

business, however, they would be unable to avail them-

selves of section 9-307(1) protection because section

9-307(1) applies only to security interests created by the

buyer’s seller. Here, Northeastern created the security

interest and therefore Braniff was the only party in a posi-

tion to invoke section 9-307(1) in its own right.

2. Priority Between ATASCO and Braniff & Condren

We now turn to a determination of the strength of

ATASCO’s claim as against Braniff and Condren. Section

9-301(1) provides that:

(1) an unperfected security interest is subordinate to

the rights of

(b) a person who becomes a lien creditor before the

security interest is perfected;

(c) in the case of goods, instruments, documents, and

chattel paper, a person who is not a secured party and

who is a transferee in bulk or other buyer not in ordi-

nary course of business ... to the extent that he gives

value and receives delivery of the collateral without

knowledge of the security interest and before it is per-

fected.

N.Y.U.C.C. Law § 9-301(1) (McKinney Supp. 1987) (em-

phasis added). Both Braniff and Condren bought without

knowledge of ATASCO’s security interest and before it

was perfected. Therefore, as buyers not in the ordinary

3152

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course of business, their respective rights to the engine

were superior to ATASCO’s, by application of section

9-301(1)(c).

It is critical to note for the discussion that follows that

ATASCO’s unperfected security interest, though subordi-

nate, continued to exist. Section 9-301(1) explicitly pro-

vides that “an unperfected security interest is subordin-

ate” to the rights of certain buyers and lien creditors. The

language of subordination indicates that the secured

party’s rights live on, although junior to the buyer’s rights.

Contrast the language of section 9-307—“[a] buyer in

ordinary course... takes free of a security interest created

by his seller”—which terminates the secured party’s inter-

est for all time. Some courts seemingly ignore the subordi-

nation language of section 9-301(1) and state that a senior

buyer “takes free” of an unperfected security interest, see,

e.g., United States v. Handy & Harman, 750 F.2d 777,

780-81 (9th Cir. 1984); In re Miguel, 30 Bankr. 896, 898

(Bankr. E.D. Cal. 1983), but those cases do not involve

subsequent buyers and apparently use the phrases “takes

free” and “has priority over” interchangeably. One com-

mentator has suggested that the U.C.C. drafters intended

that an unperfected security interest terminates upon sub-

sequent sale of the collateral to a buyer not in the ordinary

course of business, but that an unperfected security inter-

est subject to a senior lien continues. D.G. Carlson, Death

and Subordination Under Article 9 of the Uniform Com-

mercial Code: Senior Buyers and Senior Lien Creditors, 5

Cardozo L. Rev. 547, 553-57 (1984). We decline, how-

ever, to interpret section 9-301(1) in a manner that would

give “subordinate” two different meanings in the same

sentence depending upon the particular subsection that is

relevant to the case at bar—section 9-301(1)(c) (buyers

not in the ordinary course of business) or section

3153

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9-301(1)(b) (lien creditors). Rather. we are convinced that

a plain reading of the statute requires that “subordinate”

be given consistent meaning within section 9-301. and

that the difference in phrasing between sections 9-301(1)

(“is subordinate” and 9-307 (“takes free”) is to be given

effect, notwithstanding cases that use language of termina-

tion interchangeably with language of subordination.

3. Shelter Provision of Article 2. Sales

Appellees argue that if Branitf and Condren are buyers

not in the ordinary course of business, their priority over

ATASCO’s security interest under section 9-301(1) would

pass to IAL with the conveyance. Relying on the shelter

provision of Article 2, Sales, section 2-403, appellees

assert that Braniff conveyed title to Condren, and Con-

dren conveyed that title to IAL, subject at most to ATAS-

CO’s subordinated unperfected security interest. Section

2-403 provides that:

(1) [a] purchaser of goods acquires all title which his

transferor had or had power to transfer except that a

purchaser of a limited interest acquires rights only to

the extent of the interest purchased.

N.Y.U.C.C. Law § 2-403(1) (McKinney 1964). Appellees

have directed us to no authority for their assertion that

the shelter provision of Article 2 may be applied to immu-

nize transferees from a buyer who ts protected under sec-

tion 9-301(1)(c). It is a novel theory that we believe must

fail.

Appellees’ reliance on /n re Gary Aircraft Corp., 681

F.2d 365 (Sth Cir. 1982), is misplaced. In Gary Aircraft,

the secured party contended that it was entitled to posses-

sion of an aircraft because the last purchaser in the chain

of sale was not a purchaser for value without notic: , and

3154

lSa

therefore could not escape the secured party’s interest as

a buyer in the ordinary course of business. Rejecting that

analysis, the Fifth Circuit held that the last purchaser was

not subject to the secured party’s interest because an

intervening purchaser qualified under section 9-307 as a

buyer in the ordinary course of business. That special sta-

tus of the intervening purchaser extinguished the security

interest in the collateral such that a subsequent sale could

not resurrect it, and the last purchaser therefore prevailed.

New York law is in agreement. See Marine Midland

Bank, N.A. v. Smith Boys, Inc., 129 Misc. 2d 37, 41, 492

N.Y.S.2d 355, 358 (Sup. Ct. 1985) (if any party in the

chain of title takes free of the security interest under sec-

tion 9-307, “all succeeding buyers likewise take free of the

security interest”). However, this is a narrow exception to

the general rule stated in section 9-306(2) that a security

interest in collateral continues upon the sale of the collat-

eral unless the sale was authorized by the secured party.

Id. at 43, 492 N.¥.S.2d at 360. The case before us does

not fall within this narrow exception because ATASCO’s

security interest was not extinguished, but merely subor-

dinated, by the sale to Braniff: Braniff did not “take free”

of ATASCO’s interest under section 9-307; it took subject

to ATASCO’s subordinated claim. See T.M. Quinn,

Uniform Commercial Code Commentary and Law Digest

| 9-306[A][2], at 9-169 (1978) (“[A]nyone dealing with the

collateral deals with it subject to the continuing security

interest.”).

As the Fifth Circuit recognized in Gary Aircraft, “the

rule is that section [2-403(1)] is not available to save one

who buys when the seller’s title 1s subject to a security

interest but who does not qualify under section [9-307]”

for preferred status as a buyer in the ordinary course of

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business.* Gary Aircraft, 681 F.2d at 377. See Commercial

Credit Equipment Corp. v. Bates, 159 Ga. App. 910, 285

S.E.2d 560 (1981). But see Executive Financial Services,

Inc. v. Pagel, 238 Kan. 809, 715 P.2d 381 (1986) (buyer in

the ordinary course of business may prevail on “entrust-

ment” theory under section 2-403(2) and (3) even though

he could not prevail under section 9-307(1)). Similarly, in

National Shawmut Bank v. Jones, 108 N.H. 386, 388, 236

A.2d 484, 486 (1967), the court recognized section 9-307

as the only provision of Article 9 “under which a buyer of

goods can claim to take free of a security interest where a

sale, exchange or other disposition of the collateral was

without consent of the secured party... . Article 9-306(2)

gives the court no leeway to create any other exceptions to

its dictates.” Accord Matteson v. Harper, 297 Ore. 113,

117, 682 P.2d 766, 769 (1984). See J. White & R. Sum-

mers, Uniform Commercial Code § 25-15, at 1073 (2d ed.

1980).

We find further support for this rule in other sections of

the U.C.C. Section 9-306(2) provides for continuance of

a security interest upon sale of the collateral “[e]xcept

where this Article otherwise provides.” We interpret this

clause as expressly limiting exceptions to those found

within Article 9. Moreover, section 2-402(3)(a) specifies

that “[nJothing in this Article shall be deemed to impair

the rights of creditors of the seller ... under the provi-

sions of [Article 9].” We conclude that the general scheme

of the U.C.C. contemplates that a security interest is to be

governed by Article 9, unimpaired by Article 2. See

National Shawmut, 108 N.H. at 389, 236 A.2d at 486; J./

Case Credit Corp. v. Foos, 11 Kan. App. 2d 185, 188-89,

31AL purchased with knowledge of ATASCO’s security interest after

ATASCO filed and perfected its claim. Therefore IAL cannot invoke pro-

tection in its own might under section 9-301(1 (c)

3156

EE

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17a

717 P.2d 1064, 1067 (Kan. Ct. App. 1986); Carlson,

supra, at $50 n.9 & 556 (“section 2-403 does not contem-

plate the destruction of unperfected security interests”);

Anderson, supra, §9-102:9, at 453. Furthermore, the

drafters of the U.C.C. explicitly provided shelter else-

where in Article 9. See N.Y.U.C.C. Law § 9-302(2) (Mc-

Kinney Supp. 1987) (“If a secured party assigns a per-

fected security interest, no filing under this Article is

required in order to continue the perfected status of the

security interest against creditors of and transferees from

the original debtor.”). “[T]heir failure to do so in section

9-301(1)(c) should be taken as significant.” Carlson, supra,

at 558.

Finally, we note that the U.C.C. does not require a

security interest to be filed immediately or promptly,

Anderson, supra, § 9-302:20, at 77-78, although it is the

most prudent course for a cautious lender. Delay in per-

fection does not preclude perfected status at a later time

upon filing. While the secured party’s interest may be sub-

ordinated to interests of others arising prior to filing, “[h]e

can, of course, file, even after a delay, and protect himself

against interests arising subsequent to such filing.” 53

N.Y. Jur. Secured Transactions § 175, at 152 (1967); 69

Am. Jur. 2d Secured Transactions § 422, at 271 (1973);

Anderson, supra, § 9-301:9, at 29-30. The rule appellees

urge us to adopt effectively would freeze a secured party’s

priority status as of the time of the first intervening con-

veyance: If one failed to file a security interest the day of

the sale, the buyer could, by immediately reselling, for-

ever destroy the security interest. While eppellees urge

that their rule would result in an increment of certainty in

such transactions, we believe that such an extreme result

would discourage lenders from taking security interests

and would thereby inhibit commerce. The U.C.C. does

3157

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18a

not attempt to remove all uncertainty from secured trans-

actions. It provides automatic perfection in certain situa-

tions, see N.Y.U.C.C. Law §§ 9-302(1)(b) (10-day

automatic perfection for documents, proceeds), 9-302(1)

(d) (purchase money security interest in consumer goods),

& 9-304(4) (21-day automatic perfection for certain

instruments) (McKinney Supp. 1987), and allows a filing

to relate back to the time of attachment in others, see

N.Y.U.C.C. Law §§ 9-103(1)(d), 9-103(3)(e) (McKinney

Supp. 1987) (in multistate transaction, secured party has

four months to file in state to which collateral has been

removed). The U.C.C. aims to balance the competing

concerns of protection for secured lenders and encourage-

ment of trade.

4. Priority Between ATASCO and IAL

Having determined that ATASCO’s security interest

was not extinguished by the subsequent conveyances to

Braniff and Condren, we now address the priority in the

engine as between ATASCO and IAL.

At the time the engine was conveyed from Northeastern

to Braniff and then to Condren, ATASCO’s claim was

subordinate to Braniffs and Condren’s under section

9-301 as discussed above, because it was unfiled and

unperfected. However, ATASCO eventually did file and

perfect its security interest, and therefore section 9-301,

which determines priority where an interest is unper-

fected, has no bearing on the issue of priority as between

ATASCO and IAL, who have competing perfected inter-

ests in the engine.

Section 9-312(5)(a), the catch-all priority section of

Article 9, governs conflicts between competing perfected

interests:

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19a

Conflicting security interests rank according to prior-

ity in time of filing or perfection. Priority dates from

the time a filing is first made covering the collateral or

the time the security interest is first perfected, which-

ever 1s earlier, provided that there is no period there-

after when there is neither filing nor perfection.

N.Y.U.C.C. Law § 9-312(5)(a) (McKinney Supp. 1987).

As previously discussed, section 403 of the Federal Avia-

tion Act requires filing with the Secretary of the FAA to

perfect an interest in an aircraft engine. Therefore, time of

filing is identical to time of perfection in the case before

us. Under section 9-312(5)(a), the first to file an interest

with the FAA will rank first in priority. It is undisputed

that ATASCO filed its chattel mortgage with the FAA in

March 1985, and IAL filed its interest on August 5, 1985.

Therefore, under the first to file or perfect rule of section

9-312(5)(a), ATASCO’s security interest in the engine has

priority over IAL’s interest. We therefore reverse the dis-

trict court’s grant of summary judgment in favor of IAL

and the denial of ATASCO’s motion for summary judg-

ment as against IAL, and remand the case for a determi-

nation of damages.

C. Sanctions

Appellees request that we award double costs and attor-

ney’s fees against appellant for bringing an appeal “totally

lacking in merit, framed with no relevant supporting law,

conclusory in nature, and utterly unsupported by the

evidence.” As is clear from our discussion of appellant’s

claims, we are of the view that this appeal was highly mer-

itorious and well supported by relevant law. But even if

we are wrong, the issues are obviously not frivolous.

Appellees’ request for sanctions therefore borders on the

frivolous, and we caution that we will not hesitate to

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impose appropriate penalties in the future for frivolous

requests for sanctions.

CONCLUSION

For the reasons stated above, we reverse the district

court's grant of summary judgment in favor of IAL. We

affirm the district court’s grant of summary judgment for

Braniff and Condren, on the grounds herein stated. We

reverse the denial of ATASCO’s summary judgment

motion as against IAL, and remand for a determination of

damages and entry of judgment.

3160

APPENDIX B

é « * Z ty s

lb

Transcript of October 3, 1986 Decision by

Hon. Gerard L. Goettel, District Judge

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

85 Civ. 6852 (GLG)

October 3, 1986

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AIRCRAFT TRADING AND SERVICES, INC.,

Plaintiff,

—_vV.—

BRANIFF, INC., WILLIAM CONDREN, NTERNATIONAL AIR

LEASES, INC., PRIDE AIR, INC., and CITIBANK, N.A.,

Defendants.

Before:

HON. GERARD L. GOETTEL,

District Judge.

2b

THE CouRT: The following is the opinion of the Court:

This diversity action for conversion, replevin, forfeiture, and

punitive damages is brought by plaintiff Aircraft Trading and

Services, Inc. (ATASCO) against defendant Braniff, Inc. and

others in a chain of sale of a jet aircraft engine.

in December, 1982, ATASCO sold the engine, serial number

P655021B, to Northeastern Airlines for $412,344. The sales

agreement required a downpayment of $36,000 with the bal-

ance to be paid in 36 monthly installments of $10,454 each

beginning March 10, 1983. Northeastern executed 36 promis-

sory notes for these payments and a chattel mortgage giving

ATASCO a security interest in the engine until all payments

were made. The chattel mortgage provided that Northeastern

would be in default if it (1) failed to pay any note when due, (2)

disposed of the engine before all payments were made, or (3)

instituted proceedings in bankruptcy (or had proceedings

brought against it).

Pursuant to federal law, this chattel mortgage should have

been filed with the Federal Aviation Administration (FAA), but

it was not so filed until March, 1985.

Northeastern paid the monthly installments through January

i0, 1985, but not thereafter. The balance due is $135,902 plus

interest.

Northeastern, at the present time, is in bankruptcy, this

occurring shortly thereafter.

On November 28, 1984, Northeastern entered into an agree-

ment to sell an aircraft to Braniff. One of the engines in that

aircraft was the one that ATASCO had sold to Northeastern.

Northeastern gave Braniff a bill of sale for the aircraft,

including engines, that represented that it was conveying good

and marketable title. Braniff checked the FAA records to see if

there were any prior claims or liens to title upon the aircraft or

parts thereof; it found no record of any encumbrances and

3b

therefore consummated the sale with Northeastern. Braniff

filed the bill of sale with the FAA on November 30, 1984.

On December 7, 1984, Braniff sold the same aircraft to

defendant William Condren for $2,200,000. Condren had been

previously negotiating with Northeastern to obtain the plane

directly from it. The sale to Condren was prearranged by

Northeastern as part of the sale to Braniff, or at least it was

Braniff’s contemplation that it would be able to resell it to

Condren thereafter.

Prior to this sale, both Condren on Braniff had the FAA

records searched to be* sure no prior claims were on record

relating to the aircraft, its engines, etc. None were found and

the sale was finalized. Condren then filed his bill of sale with

the FAA.

In early February, 1985 Condren leased the aircraft to

defendant International Air Leases, Inc. (IAL). The lease

included an option to buy. The lease was not filed with the

FAA; such filing is required pursuant to 49 U.S.C. Section

1403 in order to affect rights of third parties.

In March of 1985, after the aircraft had been leased,

ATASCO filed its chattel mortgage with the FAA. It was

recorded by the FAA on March 29, 1985. IAL learned of the

chattel mortgage in April of 1985 when plaintiff’s counsel

notified Braniff that ATASCO was claiming a security interest

in the engine on the plane. In late July or early August of 1985,

IAL nevertheless exercised its option to buy the aircraft. The

bill of sale for this purchase was filed with the FAA on August

5, 1985.

Plaintiff has moved for summary judgment against defen-

dant IAL on its claim of foreclosure and conversion. Plaintiff

concedes that it can only get a single remedy so that success

against IAL would conclude this action.

4b

Defendants Braniff, Condren, and IAL oppose plaintiff’s

motion and cross-move as well for summary judgment in favor

of all defendants.

Pursuant to federal law, “any conveyance which affects the

title to, or any interest in, any civil aircraft” must be filed with

the FAA before it can affect the rights of innocent third party.

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

The federal statute does not specify any time in which such a

document must be filed. It only notes that any such interest in

aircraft or engine, etc. is not valid against a third party who

has no actual knowledge of the interest or conveyance until

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

Plaintiff alleges that its rights are superior to those of IAL

because plaintiff’s chattel mortgage was filed prior to IAL’s

purchase of the aircraft, and IAL had actual knowledge of the

terms of that instrument when it exercised its option to pur-

chase.

If the only transaction involved here were the sale to IAL

and not the intermediary transfers to Braniff and Condren, the

plaintiff might prevail. However, IAL, Condren, and Braniff

argue that the plaintiff’s rights were extinguished when Braniff

obtained title to the aircraft, inciuding its parts and engines,

from Northeastern without notice of any prior interest in the

jet engine and filed its bill of sale with the FAA. Braniff then

passed good title to Condren who passed good title to IAL.

The defendants argue that the plaintiff cannot revive its

security interest in the engine by belatedly filing its chattel

mortgage after the sales to Braniff and Condren were consum-

mated and properly recorded.

The defendants point out that the purpose of the federal

statute requiring filing of any interest in the aircraft “was to

create a ‘central clearing house for recordation of titles so that

a person, wherever he may be, will know where he can find

ready access to the claims against, or liens, or other legal

ne

Sb

interests in an aircraft.’ ” Philko Aviation, Inc. v. Shacket, 462

U.S. 406, 411, (1983) (quoting legislative history of 49 U.S.C.

Section 1403).

Following the logic of that case, it would make no sense for

Congress to have established such a registry if someone with an

unfiled security interest could come along years after the

interest was created, and after subsequent purchasers had

relied upon the absence of any adverse claims on file with the

FAA, and nevertheless succeed in asserting a priority interest in

an aircraft or its parts.

A host of other claims and arguments are sprinkled through-

out the many briefs submitted in support of and in opposition

to the motions and cross motions before us. We do not reach

most of them because it is clear that as a matter of law once

Braniff and Condren took their interest in the engine without

actual notice of the plaintiff’s chattel mortgage which had not

been properly filed with the FAA, any subsequent sale passed

good title to the engine free of plaintiff’s initial security

interest.

Plaintiff alleges no facts to show that any subsequent pur-

chaser of the engine prior to plaintiff’s filing of its security

interest with the FAA had actual knowledge of plaintiff’s

security interest.

The parties have completed discovery in this suit so that

facts not presently known to all parties are unlikely to surface

at some later time to defeat summary judgment.

In support of its own summary judgmeit motion and in

opposition to defendants’ motions, the plaintiff submits affi-

davits from counsel in which he speculates upon the inferences

to be drawn from various documents and events. These allega-

tions are insufficient on a motion for summary judgment to

create a factual issue regarding defendants’ knowledge of the

events in question. See Matsushita Electric Industrial Co. Ltd.,

et al. v. Zenith Radio Corp., et al. 54 U.S. Law Week 4319

_

aaa aa i,

(U.S. March 26, 1986); Celotex Corp. v. Catrett, 54 U.S.L.W.

4775 (U.S. June 25, 1986).

Plaintiff clearly has a claim against Northeastern based

upon the latter’s default on its promissory notes. However, as

noted earlier, Northeastern filed in bankruptcy in January

1985, leaving plaintiff to whatever preference it can claim in

the bankruptcy proceedings based upon the unpaid portion of

the promissory note in the amount of $135.902 plus interest.

In this proceeding, however, plaintiff’s motion for summary

judgment must be denied and the defendants’ motions granted.

Consequently, this action is dismissed against all defendants.