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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1987
- **Citation:** 484 U.S. 856

## Text

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
kk a 0 i
Eg 8 |. I IV
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.

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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.

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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

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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

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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).

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10a

(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-

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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

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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

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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

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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)

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EE

|

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

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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:

3158

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

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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

nos

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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0809%3A1. Public record. Not legal advice.