Philko Aviation, Inc. v. Shacket

PETITIONER:Philko Aviation, Inc.
RESPONDENT:Shacket
LOCATION:PACIFIC GAS & ELECTRIC CO.

DOCKET NO.: 82-342
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 462 US 406 (1983)
ARGUED: Apr 20, 1983
DECIDED: Jun 15, 1983

ADVOCATES:
James C. Murray, Jr. – on behalf of the Respondents
Leslie R. Bishop – on behalf of the Petitioner

Facts of the case

Question

Audio Transcription for Oral Argument – April 20, 1983 in Philko Aviation, Inc. v. Shacket

Warren E. Burger:

We will hear arguments first this morning in Philko Aviation, Incorporated, against Shacket.

Mr. Bishop, you may proceed whenever you’re ready.

Leslie R. Bishop:

Mr. Chief Justice and may it please the Court:

This appeal involves a suit to determine the ownership of a 1978 new Piper Navajo airplane sold to both parties in the suit by a fraudulent dealer.

Plaintiff Shacket brought suit in the U.S. district court for a declaratory judgment seeking a determination of the ownership of the Piper Navajo airplane in him.

The Defendant Philko Aviation counterclaimed against Shacket.

As to the ownership of the aircraft, the district court awarded ownership to the Plaintiff Shacket.

There were other counts of fraud, conspiracy, wrongful conversion, and requests for damages, and all of those counts were held by the lower court against the party making the claim.

The Defendant Smith and Smith Aircraft Sales, Inc., the dealer involved in this dispute, did not answer or plead and judgment, default judgment, was taken against that Defendant, together with $29,000 attorney’s fees in favor of Plaintiff Shacket.

Philko appealed to the Seventh Circuit Court of Appeals and the Seventh Circuit Court of Appeals affirmed the judgment of the U.S. district court.

Philko subsequently petitioned to this honorable Court by writ of certiorari and that certiorari was granted, but limited to the first issue presented by the Petitioner Philko as to the question presented: Does state law permit a conveyance of title to aircraft by transfer of possession alone, without the necessity of FAA recording.

Both the Plaintiff Shacket and Philko through Mr. Edward J. McArdle, its president, had had prior dealings, not directly related to this lawsuit, with Roger Smith or Smith Aviation, Inc., the dealer involved.

Mr. Shacket’s first contact with Smith was in 1972, wherein he traded one aircraft for another, and that was in Smith’s context as a dealer of used aircraft.

Mr. McArdle or Philko or corporations related to McArdle Limited, which was Mr. McArdle’s holding company for several business corporations engaged in the leisure time business, became acquainted on a chance meeting with Roger Smith at DuPage County Airport, became apprised of the availability for purchase of a fixed base operation at Aurora Municipal Airport in Aurora, Illinois, and subsequently formed a new Delaware corporation called Philko to buy the assets of Philko Aviation in Aurora.

He then leased that facility to Roger Smith Aircraft Sales, Inc., and Roger Smith Aircraft Sales, Inc., sold fuel, oil and service under the trade name Philko, whereas he maintained his sale of used aircraft under the name Roger Smith Aircraft Sales, Inc.–

Sometime on or about November of ’77 Roger Smith persuaded or sold a new 1978 Piper Navajo airplane to Shacket by means of a purchase order.

The plane had not at that time been manufactured.

The purchase order was signed and $20,000 was deposited by Shacket at that time.

The delivery was to be in early 1978.

In April 19th of 1978, Shacket, after being advised the plane was then ready for delivery, appeared at Aurora Airport from his home in Detroit preparatory to closing and taking possession of the aircraft.

At that time Mr. Shacket paid an additional $106,000 in cash and he had at a prior time given up possession to a 1972 Piper Navajo airplane which was to be used as the trade-in.

So that the total consideration paid by Shacket was the $20,000 at the time of execution of the agreement, $106,000 at the time he took possession and the delivery into Roger Smith Aircraft, Inc. ‘s hands of a ’72 Piper Navajo some time in March of ’78.

Mr. Shacket took possession of the aircraft–

William H. Rehnquist:

Mr. Bishop.

Leslie R. Bishop:

–Sir?

William H. Rehnquist:

Do you think all of these facts are really essential to resolve the legal issue presented in the petition for certiorari?

Leslie R. Bishop:

Yes, sir.

Mr. Shacket took possession of the airplane after being shown copies of the title documents conveying title from Piper in a complete chain up to and including Smith Aviation, Inc. Smith Aviation, Inc., through Roger Smith, provided him with a buyer’s copy of the bill of sale conveying from Smith Aviation to Maurice Shacket.

Maurice Shacket had asked for the original documents.

He was told that they weren’t ready.

Leslie R. Bishop:

He returned to Detroit, but left his friend Mr. Hamburg, who was staying a day later, to bring the copy.

The same story was told to Mr. Hamburg, who did not get the original documents necessary for filing with the FAA.

Next day, on or about April 20th, Mr. Smith takes all of the original documents necessary to file with the FAA and presents them to Mr. McArdle, with the story that he was going to try to borrow $151,000 on the aircraft, but it was exceeding his line of credit.

Mr. McArdle declined through his corporation to extend any further credit to Roger Smith Aircraft, but did agree ultimately to buy the aircraft.

He bought the aircraft by paying $152,000 in cash and cancelling an antecedent debt of $60,000, which had not yet become due but which was shortly to become due.

Mr. McArdle did so, however, only after his bank, who was the provider of the $152,000 cash and was going to make the loan on the aircraft, inspected the documents, determined them to be valid documents, had checked with the FAA recording facility in Oklahoma City, determined that the Piper aircraft had been manufactured and that there were no intervening title interests.

At that point Mr. McArdle authorized the disbursement of funds for the loan to be delivered to or for the account of Roger Smith Aircraft Sales.

Warren E. Burger:

Are you repeating all these facts to demonstrate or persuade us that we’re confronted with two bona fide purchasers here?

Leslie R. Bishop:

Well, we have a slight difference, Your Honor, Mr. Chief Justice.

Shacket was perhaps a buyer in the ordinary course under the UCC.

Philko was a purchaser, a good faith purchaser for value.

The difference being under our UCC, Mr. Chief Justice, is one uses an antecedent debt as part of the consideration.

At any rate, the documents were duly filed with the FAA on or about May 31st.

They were noted as filed for record.

About June, mid-June, Shacket had found out of McArdle’s interest, and that was the first contact Mr. McArdle had or was aware of Shacket’s involvement in the transaction.

Byron R. White:

Shacket had the airplane, didn’t he?

Leslie R. Bishop:

Yes, sir.

He took possession of the airplane at the time he paid his money.

Mr. McArdle was told that the aircraft was in Michigan with a Piper dealer being fitted with avionics.

We have here, then, a conflict between the Illinois Uniform Commercial Code and the federal recording statute.

Section 49 U.S.C.–

Byron R. White:

You agree that, except for the federal law, the right result was reached below?

Leslie R. Bishop:

–I’m sorry?

I didn’t hear your question.

Byron R. White:

If there were no federal recording statute, the result reached below would be correct in your view?

Leslie R. Bishop:

Not entirely, Your Honor.

Byron R. White:

At least it wouldn’t concern us, because it would be a matter of state law.

Leslie R. Bishop:

That is correct, that is correct.

Byron R. White:

So your focus is on the impact of the federal statute.

Leslie R. Bishop:

That is correct, yes, sir.

Leslie R. Bishop:

The federal statute says under 1403 that no document will be accorded validity as to third parties without notice unless and until it is filed for record.

Shacket never filed his interest for record.

McArdle or Philko, looking at the FAA records through its bank, finds no intervening interest, has all of the original documents in its hands, duly files them with the FAA.

Plaintiff… Shacket makes the allegation, well, even if we had sent them down for recording you would not have known in time.

But that really begs the question, because if they’d been sent down for proper recording at Oklahoma City you wouldn’t have had the documents in Smith’s hands to perpetrate the fraud in Philko.

So we have an interplay here of two statutes, one under the Illinois Uniform Commercial Code that would purport to pass title by possession of the document, and the enactment of 1401 and 1403 which require the registration of an owner of aircraft, and upon that registration under 1401 either having the document recorded under 1403 or having recordable documents under 1403.

Shacket takes the position that if you look at 1406 you are directed to the state law in which the document is delivered.

1406 was enacted in 1964 to solve a problem that dealt with the choice of law to determine the respective rights or validities of the parties of the contract.

That is to say that you had a choice of where the aircraft was located, you had a choice of the place of execution or place of delivery.

1406, appropriately, we think, chose the place of delivery of the document as the most logical choice for highly mobile, highly valuable pieces of machinery, where often consortiums of lenders, 60 or more, get together.

One reads the Congressional Record and you come away with the inescapable conclusion that, in their analysis of enacting 1406, they are viewing 1406 as a choice of law, a federal choice of law as to the parties to that agreement to determine validity.

William H. Rehnquist:

Well, Mr. Bishop, I think you’ve got some problems in your argument with the language of Section 1406.

It says

“the validity of any instrument the recording of which is provided for by section 503. “

“shall be governed by the laws of the state. “

Now, why shouldn’t the UCC govern as to priorities under that section?

Leslie R. Bishop:

Well, it’s a question I think where we have our problem, Mr. Justice, is that if you have resort to state law for substantive ownership rights, you’ve gone beyond the scope of 1406.

The determination of validity is, quite properly I think, limited to the execution: Is it proper, does it properly describe the asset, does it meet the test of that jurisdiction in which it’s delivered, and, analyzed from the two parties that are involved in that particular instrument, does it meet the test as a valid instrument?

Obviously, you must have some machinery to eliminate fraudulent acts.

But the minute you logically extend 1406 into the substantive law of the state, now you’re giving credence to a transfer of ownership, if you will, without having recorded it under 1403.

And 1403 says no interest in any aircraft will be valid unless recorded in 1403.

So 1406 can’t be used to bypass the effect of recording under 1403 without making 1403 almost a useless tool.

The object of recording was to provide for the Government and for the aviation industry a rather neat set of rules whereby lenders could take some comfort in the status of title; whereby investment capital would flow in in such a way that lenders or investors would be reasonably certain to have an interest in the specific chattel that they’re looking at; and so that the Government would be empowered to send out notices to owners of defects discovered by the Federal Aviation Administration.

And how could it do it if–

John Paul Stevens:

Mr. Bishop, you would agree, would you not, that because of 1406 that the validity of the instruments describing the second transaction, which were in fact recorded, are governed by Illinois law because of 1406?

Leslie R. Bishop:

–Yes, sir, and there is no dispute that those documents are properly executed under Illinois law and that they are the original documents to the transactions that they purport to represent.

That’s in the record, Your Honor.

But the validity of those documents does not mean that you allow the substantive state law to operate beyond the parties to those instruments or beyond the scope of them to divest what would appear to be the titleholder.

Byron R. White:

Were 1403 and 1406 passed at the same time?

Leslie R. Bishop:

No, sir.

Leslie R. Bishop:

1403 was in a sense part of the 1926 Act–

Byron R. White:

And so when did–

Leslie R. Bishop:

–It was voluntary.

It became really in its present form as you now know it in 1938.

Byron R. White:

–When did 1406 come along?

Leslie R. Bishop:

1964, 1964.

Byron R. White:

So… and both sections use the word, either “validity” or “valid”, didn’t they?

Leslie R. Bishop:

Do both sections?

Byron R. White:

No transfer–

Leslie R. Bishop:

Validity or valid, yes.

The determination of validity.

Byron R. White:

–Don’t you have to say that the validity means different things in those two sections?

Leslie R. Bishop:

Oh, yes, I think so.

But in looking at them, Mr. Justice, you’re looking… when you’re talking about 1406 you’re talking about the validity of a document.

There are parties to the document, and the analysis of the validity of that document–

Byron R. White:

What are you talking about in 1403?

Leslie R. Bishop:

–1403, you’re talking about any document, and you are talking about the substantive rights of the whole world apart from the document.

That is to say, any right affecting aircraft must be, if it is going to enjoy validity, it must be recorded under 1403.

There is no interplay–

John Paul Stevens:

Well, that’s a slight overstatement, isn’t it, Mr. Bishop?

Isn’t it valid as to the parties to the transaction and all persons who have actual notice of the transaction?

Leslie R. Bishop:

–Yes, sir.

John Paul Stevens:

Even if it’s not recorded.

Leslie R. Bishop:

In this context, I mean third parties without notice.

John Paul Stevens:

So that if it should develop that the relationship between your client and the fraudulent dealer was such that your client should be deemed to have been on actual notice, then you would be bound?

Leslie R. Bishop:

The result would be otherwise, that is quite correct, sir.

The notice… returning to 1406, 1406 can only operate if you have a recorded document under 1403, because if you don’t have a document under 1403 it isn’t valid by operation of 1403.

So you must have something of record.

Otherwise you have what would essentially be a useless recording statute, because some items would be a matter of record and some need not be a matter of record.

Byron R. White:

Well, it wouldn’t be only useless, would it?

Byron R. White:

Suppose it had been filed.

Leslie R. Bishop:

I’m sorry?

Byron R. White:

Suppose the Shacket papers had been filed with the FAA.

I suppose that filing would have had some operative consequences.

Leslie R. Bishop:

We are saying that this 1403 is not framed in language–

Byron R. White:

Your client wouldn’t be in the fix he is if Shacket had filed his papers.

Leslie R. Bishop:

–That’s quite so.

It may even go further than that.

If Shacket had just taken the photocopies that he had and made them part of the record, he might have muddied the waters sufficient to have alerted a wary person.

But the requirements of 1403, Mr. Justice, are that you must file the original documents.

The original documents are what Roger Smith delivered to Mr. McArdle and Mr. McArdle on behalf of Philko delivered to the Sandwich State Bank.

And there is no dispute in the record as to those documents.

If you look at 1403, it is to advise the wide world of the recorded status or title or security interest in an aircraft.

1406 was an attempt by Congress, and I think a very excellent attempt, to develop a choice of forum so that… not a choice of forum, but a choice, a federal choice of law so that you could determine the validity of a document.

They examined in the Congressional deliberations at great length what the alternatives were and gave some almost scary examples of the problems engendered with, say, a small airline fleet flying over the country, trying to make a mortgage with a consortium of banks out of New York.

They discussed the problems with analyzing the transaction from the location of the aircraft, some of which were in the air and operational at the time, and the choice of law keyed into the point of execution, but often you have multiple signers of a document in different locations, and finally came to the resolution that the one thing that generally happened to any document about one time was its delivery, and it wasn’t an effective instrument in most every jurisdiction until delivery.

So 1406 very correctly selected the place of delivery as the federal choice of law to determine the validity of the document.

Sandra Day O’Connor:

Mr. Bishop, I am concerned by the legislative history, which you have not really mentioned.

The original Senate bill contained a clear provision saying that every instrument so recorded will have priority over all other claims arising afterwards.

The Congress knew how to draft language that would have clearly required priority effect here and that language was dropped from the legislation.

And in the maritime bill Congress clearly provided for priorities.

In the motor vehicle registration it did not.

It had the language to do it here and took it out.

Now you’re asking us to write it back in.

Leslie R. Bishop:

Not really, Justice O’Connor.

I think if you look at it it may be as simple an explanation as a term of art.

There is no requirement under 1403 as such that you must file.

That’s under 1401 and it involves then the registration of the aircraft which is necessary to operate it.

But it also says under 1401 that this shall not be determinative of any title if that title is in dispute.

Then you drop down to 1403 and, while there is no affirmative compelling statutory language to record under 1403, it very clearly says that if you don’t record the instrument isn’t valid as to third parties without notice… clearly, as much a penalty clause as one could hope for.

Leslie R. Bishop:

And if you have no validity for an unrecorded instrument, whether that transaction is represented by a document or not, if 1403 says you have no validity you have nothing to consider under the statute.

And yet you look at the various state statutes that deal with personal property and that transfers personal property all over the place by delivery of possession.

I think it’s clearly apparent from the Congressional record that they did not want to have aircraft or aircraft financing the subject matter of non-recorded transactions.

Sandra Day O’Connor:

Well, they may have been concerned more with having a central registry than with requiring the priorities.

While I have you interrupted, may I ask you if you think the Mortgage Convention affects the case?

Leslie R. Bishop:

The Mortgage Convention?

I am sorry, Your Honor?

Sandra Day O’Connor:

The treaty dealing with–

Leslie R. Bishop:

The treaty.

No, Your Honor, I do not.

The treaty does not affect the operation of this case.

John Paul Stevens:

–May I follow up, Mr. Bishop, on what Justice O’Connor was asking you about.

Would you not agree that if there had been two recorded documents, one by each purchaser, that state law then would govern the priority as between the two?

Isn’t that the–

Leslie R. Bishop:

No, I would not agree with that, Mr. Justice.

If you–

John Paul Stevens:

–At least if they were both security interest documents?

Leslie R. Bishop:

–I would not agree with that.

In looking at the Congressional record, what Congress is trying to do here, Mr. Justice, is create a satisfactory forum for the flow of investment money or capital.

I cannot conceive under the current state of the case law where any lender would make a loan on anything other than the borrower’s, the individual’s credit.

He isn’t looking… he always takes, of course, a security interest in the aircraft.

But it is such a frail thing, if you can pass it around and defeat it under Uniform Commercial Codes or pass title around by other than non-recorded documents–

John Paul Stevens:

Well, but I’m suggesting that if there had been two recorded documents.

1403 really just deals with the kind of document that has never been recorded, and I’m just asking you about, had there been two recorded documents.

Then it seems to me you would be in a state law situation.

Leslie R. Bishop:

–Well, I think you have, as we suggested in our brief, Mr. Justice, a race-notice statute.

From the original enactment of 1403, which originally provided for validity upon recordation, that was subsequently changed in 1940… 1976, to be keyed into the filing for record, rather than recording, and mandated the FAA to keep a register of all documents filed for record.

Now, it would seem not really important unless it was in Congress’ mind to establish a priority of the filing of documents.

And they don’t come out and say that, we’re going to establish a priority, but the structure of the whole thing, if you look at it, can’t really effectively operate from its Congressional intent standpoint unless you have a race-notice statute.

Warren E. Burger:

When your client made the purchase, did he… where was the airplane?

Leslie R. Bishop:

It was actually, we found out later, in Mr. Shacket’s hands back in Detroit.

We don’t know exactly where it was, but it had been delivered to him or given to him either one or three days before the actual transaction with our client.

Our client had been told that the aircraft was with a Piper dealer in Michigan being fitted with avionics.

For a new airplane, Your Honor, that’s a rather normal thing to have happen.

Warren E. Burger:

Suppose, instead of a conflict between two purchasers in good faith, at the time your client made the purchase, consummated the transaction, the airplane was in the custody of some repair organization and had a claim for $50,000 for repair and maintenance.

Now, is there a provision for recording mechanic’s liens under this Act?

Leslie R. Bishop:

Mechanic’s liens?

Any and all, the statute says, any and all interests to or affecting aircraft shall be recorded.

Warren E. Burger:

Well, if it was in the possession of the company making alterations and the alterations had not been completed, there wouldn’t be any occasion to record.

They might not know the total amount.

Leslie R. Bishop:

Of the claim.

Warren E. Burger:

Of the claim.

Now, wouldn’t your client take subject to whatever that claim was?

Leslie R. Bishop:

If that claim is not a matter of record, I would say to you–

Warren E. Burger:

Under the federal Act?

Leslie R. Bishop:

–Under the federal Act, yes, sir, that I would say that anybody who is not on notice should not have to deal with that claim.

Warren E. Burger:

Well then, what does the repairman have to do, file his lien before he starts his work?

Leslie R. Bishop:

Yes, sir.

And if the Court adopts the rule as we think it should be or Congress intended, rather, you will find the procedure, I think, in transactions where all aircraft are financed through escrows, the document is recorded first and the money disbursed later.

William H. Rehnquist:

Well, don’t most state laws require that a mechanic, to preserve a lien on a moving vehicle, has to retain possession of it?

He doesn’t file a lien.

Leslie R. Bishop:

Yes, he must retain possession to assert his lien.

But here you come again into a conflict between 1403 and state lien law.

1403 says the interest must be recorded, any and all interests.

Warren E. Burger:

Well, did your client have no obligation to find out where this aircraft was and whether someone in possession might have a mechanic’s lien claim, as yet unrecorded because as yet unknown?

Leslie R. Bishop:

Well, Mr. Chief Justice, how… where would you search?

It’s a practical problem.

Where would you begin?

But I draw the Court’s attention to the fact that the statutory language expressly says that you look to the validity of the document without regard to the location or presence of the aircraft.

The whole idea of 1406 was to get away from physical delivery of possession.

Leslie R. Bishop:

It becomes eminently impractical when you’re thinking of a Boeing 747 on a route between Miami and Lisbon.

How is the airline going to finance it in a New York bank unless you have the rule and the rule is the law that Congress enacted?

Warren E. Burger:

Mr. Murray.

James C. Murray, Jr.:

Mr. Chief Justice, may it please the Court:

In essence, this case only requires this Court to consider basically four factors, four factors that are determined, already determined, either by the U.S. district court or the Court of Appeals, and are reflected in the depositions that were taken in this case.

It is undisputed that Philko Aviation recorded bills of sale, the original bills of sale.

Whether Mr. McArdle saw the original bills of sale at the time he consummated his transaction is a question, but it’s unimportant for this Court to determine the issue before it.

The second fact is that my client on April 19th, 1978, took possession of his $235,000 custom-made vanity number aircraft, flew it off from Aurora Airport and flew it to Detroit, and he has been in possession of that aircraft since that time.

The third fact that this Court has to look at is that the district court and the Court of Appeals, based upon this record, determined that my clients had title interest in this aircraft under state law under two separate theories: one, it was a buyer in the ordinary course of business; and second, it was a bona fide purchaser for value.

The fourth factor is that both the district court and the Court of Appeals determined that Philko Aviation was not a buyer in the ordinary course of business, and the Court of Appeals determined that it was not a bona fide purchaser for value.

And let me address the question, Mr. Chief Justice, that you asked Mr. Bishop regarding whether or not Philko Aviation was a bona fide purchaser for value.

It is clear under Illinois law that it would not be, and the reason under 2-401, subparagraph (2) of the Uniform Commercial Code, there is one element.

Although Mr. Bishop is correct, he did give value under the Uniform Commercial Code, an antecedent debt, if he cancelled it… and that’s a question… if he had cancelled the antecedent debt, that would give value.

But what he didn’t tell you is the fact that under Illinois law you have to physically take possession of the goods, the delivery of the goods.

And the Code speaks, that section of the Code speaks, about physical delivery of the goods.

It doesn’t talk about delivery.

Those are the essential–

John Paul Stevens:

Mr. Murray, is it not possible that, even though the second purchaser wasn’t a purchaser under Illinois law, that either he or the bank had a security interest in the claim?

There’s been no ruling on that question?

James C. Murray, Jr.:

–There has been no ruling.

And to answer your question, Justice Stevens, I do not believe so.

Under Article 9 of the Uniform Commercial Code… and that issue was not raised–

John Paul Stevens:

No, but if it hasn’t yet been decided don’t we have to, for purposes of analyzing the federal statute, at least consider that one possibility is that the second purchaser did acquire a security interest in the plane?

James C. Murray, Jr.:

–Yes, I’m not disagreeing with you.

John Paul Stevens:

And then you’d have to decide whether such a security interest would be valid as against a prior unrecorded transaction, assuming that the security interest person did not have notice.

James C. Murray, Jr.:

That’s correct.

And I would ask… and I would suggest to you, Justice Stevens, that you would have to focus your attention on whether or not this secured party who took an interest in an aircraft, whether or not… as you know, under the Code you have certain elements in order for a security interest to attach.

One of those interests is that your borrower has a proprietary interest in the aircraft.

Their interest is predicated on the bill of sale between Philko Aviation and Roger Smith Aircraft Sales.

Under Illinois law it is clear under the Uniform Commercial Code that that conveyance… that Roger Smith had nothing to convey under that instrument, and there was nothing to convey.

John Paul Stevens:

Well, you may be entirely right, but all I’m suggesting is that it has not yet been decided whether the second purchaser got a security interest, because the district court didn’t really address that.

James C. Murray, Jr.:

That’s absolutely correct.

John Paul Stevens:

And it seems to me that we have to assume that possibility in order to resolve the proper construction of the federal statute, that it is at least possible that on remand, because we have a summary judgment situation–

James C. Murray, Jr.:

That’s correct.

John Paul Stevens:

–that a trial would show there was a security interest.

And then the question is, would the federal statute protect that security interest against a prior unrecorded sale of the aircraft?

James C. Murray, Jr.:

And I don’t… first of all, if you’re suggesting that this case, in order for that issue to be determined, should be remanded for further consideration, I would suggest to you, Justice Stevens, that that is unnecessary, because all the facts in this case are in the record.

And my analysis–

John Paul Stevens:

Normally we don’t decide questions of state law, is all I’m suggesting.

James C. Murray, Jr.:

–I agree with you, and I’m not suggesting that you should decide it.

But if that… but you had suggested, Justice Stevens, that that issue might be critical to your determination as far as, although this looks like an absolute title situation, under old common law mortgages under the absolute deed types of cases, which were taken solely for security purposes, were given some effect.

And all I’m suggesting to you, Justice Stevens, is that when you look at Article 9 and what is required for purposes of creating a security interest, and based on the facts in this case, it is clear that Philko Aviation would not take a security interest.

That’s all I’m saying.

John Paul Stevens:

Well, even if that’s true, what that means is that even if you lose the battle here you may win the war.

James C. Murray, Jr.:

That’s correct.

Those are the four factors that this Court should consider with respect to its interpretation of a federal statute, 1403.

This Court is called upon to interpret this statute as not only preempting state law with respect to recording statutes, but also the substantive legal rights.

This Court is being called upon to interpret this statute in such a way as to strip my client of his rights in his new aircraft, those rights which would be recognized and upheld in virtually every single state of the Union.

William H. Rehnquist:

Well, I suppose Philko claims that it’s being stripped of its rights to its new aircraft.

I mean, both of the parties probably have equities.

James C. Murray, Jr.:

I’m not suggesting, Justice Rehnquist, that both parties do not have equities.

I am not suggesting that at all.

I am suggesting the fact is, is that under this particular factual situation the equities lie with my client, because I do not believe Congress intended 1403 to preempt state law substantive title questions.

I will agree that Congress intended to preempt state recording laws, and that I would agree.

But with respect to state substantive title questions, I would disagree.

William H. Rehnquist:

Well, isn’t the real issue that contained in the remark you just made, I think, isn’t it?

What did Congress intend–

James C. Murray, Jr.:

That’s correct.

William H. Rehnquist:

–with respect to two people, each with presumably very substantial equities.

James C. Murray, Jr.:

That’s correct, Justice Rehnquist.

James C. Murray, Jr.:

And it is our position that Section 503 preempts only state recording laws and does not affect the substantive ownership of title interests.

The mere fact of recording does not legitimize an invalid conveyance or a purported ownership interest, and there is no question that under state law Philko did not have a legitimate interest.

Philko claims to have a superior right in this aircraft by virtue of recording of a bill of sale.

Yet, under state law it has no interest to record because Smith, Roger Smith, had no interest to convey and having already sold the aircraft to a bona fide purchaser for value and a buyer in the ordinary course.

The language of the statute clearly preempts state recording statutes, but it does not, as Petitioner suggests, go further and preempt state law as to the ownership interest and priorities.

William H. Rehnquist:

But isn’t your argument that there was no interest to convey at the time it was conveyed, isn’t that essentially based on a recording statute rather than a substantive law?

James C. Murray, Jr.:

No, it’s not, Justice Rehnquist.

I do not believe that my… my client’s rights are not based upon this recording statute.

The recording statute that state law has recognizes, at least under the Uniform Commercial Code, recognizes that interests, especially in the secured party situation, that a buyer in the ordinary course will take priority over a secured creditor if he takes from a merchant.

Even if the buyer in the ordinary course checks with the secretary, in our state, the secretary of state’s office and determines that there’s a financing instrument and has knowledge of that financing instrument, that buyer in the ordinary course takes priority, at least under our state law and under our recording statutes, the statute with respect to–

William H. Rehnquist:

So you really say the federal statute essentially just tells you where to record?

James C. Murray, Jr.:

–That’s right.

The FAA is nothing more than a national county recorder.

William H. Rehnquist:

Yes.

Everything that follows from recording, beyond the mere act of recording, still depends on state law under 1406.

James C. Murray, Jr.:

That is our position, Your Honor, and the first… in order for us to determine that intent, the first thing we look at is the statute itself, and–

Byron R. White:

Well, what does 1403 mean, then?

It says no instrument shall be valid.

That’s just… doesn’t that have some substantive bite?

James C. Murray, Jr.:

–Well, I can only refer this, Justice White, I can only refer this Court to the decision–

Byron R. White:

You say that that word “valid” just has no force at all.

James C. Murray, Jr.:

–No, I’m just saying–

Byron R. White:

That you have to look to state law for every substantive consequence of the filing?

James C. Murray, Jr.:

–As it relates to title, that’s correct.

In fact, Justice Wisdom in the Gary Aircraft versus General Dynamics case says that the literal interpretation would lead to a ridiculous result and could create unenforceable interests without giving value, simply by recording.

For example, if, rather than giving fair consideration, there was no consideration and that the bill of sale between Philko, Philko Aviation and Roger Smith was properly executed under an Illinois law, but there was no consideration, and if it was filed with the county recorder, under the Petitioner’s interpretation that would have validity.

If for example… and I’m not saying this is the case, but it does demonstrate a ridiculous result under the Petitioner’s interpretation… if you had a three year old child that executed a bill of sale for an aircraft and that bill of sale was recorded, he under state law could disaffirm that contract, even assuming it was properly recorded.

John Paul Stevens:

Well, Mr. Murray, I really don’t think that’s correct, because you’re arguing about the fact that state law controls the meaning and validity of recorded instruments.

But 1403(c) doesn’t deal with recorded instruments; it deals with the failure to record.

It says if you fail to record then that shall not be a valid transaction.

John Paul Stevens:

And here we’re dealing with a situation, unlike the Gary case, in which there was a failure to record.

And why doesn’t the plain language apply?

James C. Murray, Jr.:

Let me tell you that that also could deal with a ridiculous result.

In the record in this case, my client took possession, Justice Stevens, on April 19th.

Mr. McArdle and Mr. Smith had their deal on April… the following day.

It’s unclear as to when the bank checked it, but it certainly checked, the bank, checked title with the FAA prior to the disbursement of the funds, which occurred on April 22nd.

The testimony of Kenneth Rittenhouse, who is the president of Clark Aviation, points out the problems in dealing with this recording statute on a new aircraft.

He states in his testimony that he would not check the recording statute because there would not be any interest in conveyance, because of the fact that when a new aircraft is manufactured and ready to be delivered it is picked up from the manufacturer, which in this case it would be, and physically delivered to the ultimate customer.

It’s not like an automobile, that sits on the lot of an automobile dealer.

In this particular case, if my client took the photocopies, as Mr. Bishop suggests, took the aircraft registration application, attached all those documents, and the day after he took delivery put them in an envelope and mailed them to the FAA at Oklahoma City, and assuming, rather than waiting 30 days later, that on the time they disbursed, the Sandwich State Bank disbursed the funds in this matter, they also did the same thing, the problem you have here is, whichever set of documents gets recorded first is pure happenstance.

And why?

Well, Mr. Andrews, when asked why he waited 30 days to record the bill of sale, it is because of the fact that it takes time in which to record.

With respect to Mr. Rittenhouse, the reason why he doesn’t check the bills of sale is because it takes time.

And he estimates five or six days before… from the time you deposit it in an envelope until it gets filed, not recorded but filed, with the FAA.

So what we are faced with is a situation that, if it hits the proper desk–

John Paul Stevens:

You might have the second set of papers filed first, is what you’re saying.

James C. Murray, Jr.:

–That’s right, Your Honor.

John Paul Stevens:

But that would not be within 1403(c) because then there would not be a failure to record.

James C. Murray, Jr.:

No, that’s–

John Paul Stevens:

Then you’d have both transactions recorded–

James C. Murray, Jr.:

–My client under the–

John Paul Stevens:

–and your question arguably would be resolved under state law.

James C. Murray, Jr.:

–No.

John Paul Stevens:

But here you have one set of papers that were simply not recorded.

James C. Murray, Jr.:

No, that’s wrong, Justice Stevens.

If you look at the deposition of my client Maurice Shacket, he attempted–

John Paul Stevens:

Well, I understand, but he did not record.

James C. Murray, Jr.:

–The reason why he didn’t record is the FAA refused to record it.

So you’re never going to get to the situation Your Honor suggests, where we have two sets of bills of sale in which Roger Smith has given a bill of sale to Philko Aviation and Roger Smith has given a bill of sale to my client, because whichever set of bill of sale hits the clerk’s desk and gets stamped first, they’re going to take the second set and turn it back and say, get us a bill of sale in this situation from Philko Aviation.

And that’s exactly what happened in this case.

James C. Murray, Jr.:

So you’re never going to get the situation Your Honor suggests of having two bills of sale from the same seller recorded with the FAA at the same time.

John Paul Stevens:

That’s because of the FAA’s practice of only accepting the original.

Then the statute provides a mechanism that will work.

James C. Murray, Jr.:

No.

Just there is under the regulations that would permit you to file with the FAA some of the photocopies.

They do have a system or a mechanism where title is in dispute to determine.

Like for court decisions or anything like that, you just have to file some sort of notice, and that would be contained in the Section 14 CFR 14.17, which is that section that deals not only with recording but with aircraft registration.

I would direct the Court to the well-reasoned… well I think well-reasoned since it’s in my favor… Justice Wisdom’s opinion in Gary Aircraft, in which he deals with the language “shall be valid” would lead to ridiculous results.

Wisdom suggests, as do the Respondents, that the statute gives validity if the instrument that’s recorded is otherwise valid.

Philko’s interest was not valid.

Mere recordation could not transform it into a valid instrument.

Shacket’s nonrecording against Philko is not fatal to Shacket’s superior rights under controlling state law.

There is nothing in the legislative history which suggests that Congress intended to supplant state substantive law relating to titles to aircraft.

It merely intended to be a simple… simply a central repository.

And in order to determine a legislative intent, because there really is… and Petitioner and I both agree… there is a total absence of legislative history.

And I have attempted to try to locate the hearings, and it’s been very difficult, in order to find out what this is.

I can tell you that Senator Patrick McCarran, Senator from Nevada, from 1935 had submitted various bills.

Then Senator Truman, who was… this bill, which ended up the Civil Aeronautics Act of 1938, was the floor manager for this bill.

And if you look at the drafts of the various Senate and House bills dating back to 1936, you will not find any language of 1403 or comparable language of 1403.

It was only in the last bill, that was eventually passed by Congress.

So because there seems to be an absence of legislative history, we must look at comparable statutes that were in existence at the time this statute was enacted, and that statute is the Ship Mortgage Act of 1930.

That statute has a very similar recording provision as 1403.

Yet Congress in the Ship Mortgage Act defines various types of interests.

For example, it defines what is to be construed under the statute as a preferred mortgage.

It then sets forth in very specific detail as to what needs to be contained in a preferred mortgage, and then it sets out priority rules with respect to such preferred mortgage.

This statute was in existence at the time Congress enacted the Civil Aeronautics Act.

As an aid for interpretation you look at the whole statute.

You do not look and focus your attention on just one provision.

One provision that was in existence at the time the statute was enacted was Section 501(f).

Now, Section 501(f) deals with registration.

James C. Murray, Jr.:

But in order to register an aircraft under the FAA, you must attach ownership interests, basically the bills of sale.

And yet, under 501 they say, if you register an aircraft it is not presumed or is not a decision as to who has title.

And then we look, in 1964 we look at Section 1406.

And they talk about the validity of any instrument the recording of which shall be governed by the laws of the state in which such instrument is delivered.

It is clear, Justice Stevens, that this is merely a choice of law forum, as to what law to apply.

Petitioner would have this Court and suggests to this Court that all that provision did is we look to the mechanics of execution of the documents.

But the legislative history, which is not clear… I’m not suggesting it is… but it seems to indicate, because I have quoted a portion of it in my brief from the hearings and they quoted another section of it, but it seems to me when you read the Senate reports, where they look to the Senate report to determine the validity of such instrument, one would need only look to the substantive law of the particular place in which the relevant instrument is delivered.

Now, it doesn’t define substantive law there, but my understanding of it and I think any reasonable person’s understand is substantive law is the substantive law as far as, if that instrument would convey an interest in property you look to that state’s law.

If it would not, then that instrument, the fact that it’s recorded has no validity.

And vis a vis my client, that’s correct.

They don’t have title, and the fact of their recording does not vest title in Philko Aviation.

Then we look at the interpretation… and in addition, with respect… with respect to this particular interpretation, the… it is of particular note that the letter from the then current Administrator of the FAA to Senator Warren Magnusen relating to Section 1406, and that letter is part of the Senate report, which states in pertinent part:

“As in the case with the recording system, substantive validity of recorded instruments remains a question of local law. “

Then we look at the current regulations of the FAA.

Now, obviously… and I am not attempting to suggest that this Court is bound to take into consideration the regulations of the FAA when in this Court’s opinion that it believes directly contravenes the statute.

However, I do suggest to you, and this Court has held, as we’ve pointed out in our brief, that you give great weight to the interpretations of agencies that have been vested by Congress for the implementation of a statute.

And under 14 CFR Section 4917 of that statute, it states:

“The recording of a conveyance is not a decision of the FAA that the instrument does in fact affect title to or an interest in the aircraft or other property it covers. “

William H. Rehnquist:

Of course, that’s fairly ambiguous, isn’t it, for these purposes?

James C. Murray, Jr.:

I’m not suggesting that it isn’t.

All I’m saying is that the recording, at least as far as the FAA’s position, is that it’s not going to make a title question, render a decision as to who has title to an aircraft, if the instrument is just merely recorded with it.

William H. Rehnquist:

You mention in your brief, Mr. Murray, Section 1403(d).

But I don’t believe either you or your opponent have argued it at any length.

Do you derive some comfort from that section?

James C. Murray, Jr.:

No, Your Honor, other than the fact of… you mean talking about the notarization provision?

William H. Rehnquist:

No, where it talks about something being valid.

The catch title is “Effective Recording”.

I would have thought that perhaps you would have derived some comfort from it.

It’s on page 14 of your brief.

James C. Murray, Jr.:

Thank you.

James C. Murray, Jr.:

Well, no, I do not.

Sandra Day O’Connor:

Mr. Murray, one of the amicus briefs did refer to the Mortgage Convention, the treaty, and indicated that it may have had some application or affect here.

And while you and your opponent didn’t really deal with it, it did seem to have some potential application and conceivably could be read to require not a single recording system, but a recognition of priority for recorded interests.

Would you like to comment on that?

James C. Murray, Jr.:

Yes, I would, Justice O’Connor.

My analysis of that statute is that all that… or that treaty, the Mortgage Convention Act… and all I can give you, Justice O’Connor, is my reading of the Mortgage Convention Act… under Article 1, paragraph 2, makes clear that each contracting state’s substantive law will control rights in an aircraft.

There is no need to adopt a uniform national law.

Article 17 of the Mortgage Convention permits contract states to reference the law of territories.

And I must admit, my interpretation of the law of territories would be analogous to the law of the states.

Third party rights in the aircraft are determined according to the law of the contracting state.

In addition, under Section… when Section 506 or 1406 was enacted by Congress in 1964, the State Department sent a letter to the Senate, and they had the reports and they read it, and they said that they had no objection to 1406.

And I have to submit and I think we have to agree that in my opinion it does affect substantive title law.

I would just like to make mention of the following facts.

The state’s law concept of possession as a factor in determining substantive ownership interest does not violate any federal interest.

The question that somehow lenders are going to be disabused for investing in an airplane if you don’t have a central recording is just simply nonsense.

We do not have a central recording system for heavy equipment, heavy construction equipment.

There is no central recording, and yet lenders on a day-in and day-out basis lend on that kind of equipment and file their interests with the state law.

And that type of heavy construction equipment is as expensive, if not more so, than this particular aircraft which we are dealing with.

Warren E. Burger:

But here, Mr. Murray, we do have a central–

James C. Murray, Jr.:

I’m not arguing that, Your Honor.

Warren E. Burger:

–recording provided by the Congress.

James C. Murray, Jr.:

I am not suggesting, Mr. Chief Justice, that this is not a central recording statute.

All I’m suggesting is, to respond to Mr. Bishop’s argument that somehow lenders will be wary about lending on aircraft if you do not interpret this statute as affecting substantive priorities.

That’s all my comments went to.

The registration provision of Section 501 effectively controls aircraft in this country.

Title 14 CFR 1431 talks about aircraft, application for aircraft registration.

You get an N number.

The N number is like a license number.

It’s the registration number of the aircraft and they control everything through that N number.

With respect to the mobility, if there’s any federal law or agency that controls transportation more than the FAA I don’t know what agency there is.

James C. Murray, Jr.:

They basically control from the time it leaves the airport gate to the time it arrives at its destination.

It controls the manufacturing, the specification.

It oversees continual repair of all this equipment.

And it’s all keyed to the registration number, not the recording statute.

There is no reason that has been advanced by these Petitioners to reject well-established and non-discriminatory state law, and that this Court should end up with a situation and adopt this statute, which is not clear and Congressional intent is not clear, and that there is an ambiguity in it, and to in effect interpret it in such a way that in effect in this situation if, rather than taking the bills of sale, my client left the aircraft and Roger Smith forged the bill of sale.

Thank you very much.

John Paul Stevens:

Mr. Murray, let me ask you just one question of fact, if I may.

Under your view, from whom did Shacket get title, from Smith or from Clark?

James C. Murray, Jr.:

Smith.

John Paul Stevens:

From Smith.

Was Smith in title, then, for at least a moment?

Is that the theory, it went from Clark to Smith?

James C. Murray, Jr.:

That’s correct.

I mean, and my client did have a bill of sale.

Thank you, Justice Stevens.

Thank you, Your Honor–

Warren E. Burger:

Thank you gentlemen, the case is submitted.