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January 12, 1976


The opinion of the court was delivered by: LUONGO



 In 1969 Leasing Consultants Incorporated (LCI or Bankrupt) purchased an aircraft with money it borrowed from The Philadelphia National Bank (PNB). As part of the transaction LCI leased the aircraft to W. A. Wheatland Associates, Inc. (Wheatland) and assigned the lease and payments thereunder to PNB as collateral for the loan. In October 1970, LCI was adjudicated bankrupt. On August 2, 1973 George Feldman, Trustee in Bankruptcy for LCI, instituted this suit against PNB to recover payments made by Wheatland to PNB after the date when LCI was adjudicated bankrupt. The suit is based on the Trustee's contention that PNB's failure to record the lease and the assignment of lease with the Administrator of the Federal Aviation Agency renders the instruments invalid as to creditors of LCI, and that the Trustee has the power, under applicable provisions of the Bankruptcy Act, to recover for the benefit of the bankrupt estate all payments made subsequent to the adjudication.

 PNB resists the Trustee's claim on several grounds: (1) the claim is barred by the statute of limitations; (2) the Federal Aviation Act does not require the recording of a lease of an aircraft; (3) PNB has a perfected security interest under the Uniform Commercial Code entitling it to the lease payments; and (4) the Trustee's claim is barred by his own actions and omissions.

 The matter was tried to the Court on September 29, 1975. The parties submitted an extensive stipulation of facts and exhibits (Document No. 49). From the evidence submitted at trial and the stipulations of the parties, I make the following


 1. Leasing Consultants Incorporated, now bankrupt, is a New York corporation which engaged in the business of purchasing equipment which it leased to its customers. The customers gained certain tax advantages from such leasing arrangements.

 2. On April 28, 1969, LCI requested The Philadelphia National Bank to finance the purchase of a 1969 Aerostar Aircraft, Model 601, Serial Number 61-0012-33, Registration Number N36DW, for $98,750, less a $20,750 trade-in allowance, so that LCI might lease the Aircraft to W. A. Wheatland Associates, Inc. On May 1, 1969, PNB agreed to finance the purchase at 9 1/2% interest.

 3. On May 1, 1969, LCI and Wheatland executed both a lease (Lease) and a document entitled "Aircraft Schedule," duly referenced to the Lease, covering one (1) 1969 Aerostar, Model 601 Turbo Charged Aircraft, Serial No. 61-0012, Registration No. N36DW. PNB thereafter took possession of the Lease and the Aircraft Schedule. (Stip. No. 1)

 4. The Lease expressly provided that it was assignable without Wheatland's consent and that Wheatland had an absolute obligation to make its payments to any Assignee of LCI's "whether or not this Lease is terminated by operation of law or otherwise," with Wheatland's recourse for any claim being solely against LCI.

 5. The Lease expressly limited Wheatland's interest to that of lessee only, all right, title, and interest being reserved in LCI, so that a true lease was created to afford Wheatland the favorable tax treatment associated therewith.

 6. A separate writing executed by George Rodda, Vice President of LCI, granted Wheatland the option to purchase the aircraft for one dollar if all payments under the lease were made. The purchase option agreement was secret and did not become known to PNB until February 1971 when PNB received a copy of a letter from Richard Miller, President of Wheatland, to Daniel Zimmerman, counsel for George Feldman, LCI's Trustee in Bankruptcy.

 7. By resolution of its Board of Directors, on May 13, 1969, Wheatland authorized the Lease Agreement with LCI in amounts up to $134,000. (Stip. No. 2)

 8. LCI agreed to purchase the Aircraft from Eastern Prop Jet Sales, Inc. (Eastern) pursuant to a Purchase Agreement dated May 20, 1969 for a projected delivery date of June 20, 1969, for the sum of $98,750, less a trade-in allowance of $20,750. (Stip. No. 3)

 9. By check dated June 26, 1969, LCI paid to Eastern the sum of $98,750 for the Aircraft. Eastern executed a Bill of Sale conveying title to the Aircraft to LCI, free of encumbrances, on June 27, 1969. (Stip. No. 4)

 10. On June 27, 1969, Wheatland executed an acknowledgment of receipt of the Aircraft. (Stip. No. 5)

  11. On June 30, 1969, LCI instructed PNB to apply a portion of the proceeds of the loan from PNB to discharge the balance of the debt owed on the aircraft used as a trade-in. LCI forwarded the Lease and the other Wheatland documents to PNB, and PNB took possession thereof.

 12. On July 2, 1969, the Bill of Sale for the Aircraft was duly recorded with the Federal Aviation Administration (FAA) showing Eastern as seller, and LCI as purchaser/owner. (Stip. No. 6)

 13. By letter of July 10, 1969, PNB forwarded to LCI a Demand Collateral Note and a Security Agreement for its execution, said documents to embody the finalized terms of the loan: Principal, totalling $93,138.22, plus $31,811.88 in interest to be paid in 70 equal monthly installments of $1,785 plus $112 on account of sales tax. (Stip. No. 7)

 14. The Note provided, inter alia :

 (1) that the LCI-Wheatland Lease was pledged as collateral;

 (2) that PNB had the right at any time to notify any person obligated on the collateral to make payment due thereon directly to PNB;

 (3) that PNB had the right to take control of any proceeds of the collateral;

 (4) that "default" under the Note was constituted by, inter alia :


(a) nonpayment of amounts due;


(b) insolvency, assignments for the benefit of creditors, and the filing of any petition by or against the debtor, under any law or statute, alleging that the debtor was insolvent.

 (5) that the Note became fully payable upon default without notice or demand by PNB;

 (6) that PNB could exercise any of its Uniform Commercial Code remedies at any time after default; and

 (7) that PNB had the right, at any time before or after default, to apply any proceeds of collateral received by PNB to pay down any liabilities owed by the debtor to PNB as PNB might elect.

 15. The Security Agreement provided that LCI granted PNB a security interest, as governed by Pennsylvania's Uniform Commercial Code, in the Aircraft and all replacements thereof to secure the payment of the $93,138.22 loan evidenced by the Note's terms "as therein set forth," and any future advances, plus interest upon either.

 16. The Security Agreement provided that the institution of any proceedings under the Bankruptcy Act constituted default thereunder, whereupon all sums became due and payable to PNB and PNB could exercise any rights it possessed by law or by agreement.

 17. On July 16, 1969, LCI executed the Demand Collateral Note and LCI and PNB executed the Security Agreement. (Stip. No. 8)

 18. On July 16, 1969, PNB credited LCI's account with the amount of $93,138.22, the proceeds of the loan, to finance the purchase of the Aircraft, and notified LCI by letter of the same date. On the same date, PNB debited LCI's account in the amount of $17,116.86 to pay off a prior loan. (Supp. Stip. No. 1)

 19. On July 16, 1969, PNB mailed the Security Agreement to the FAA for recordation. (Stip. No. 10)

 20. The Security Agreement was received by the FAA on July 18, 1969, and recorded by the FAA on August 19, 1969. (Stip. No. 11)

 21. LCI executed and delivered to PNB on or about July 22, 1969 an undated document entitled "Assignment of lease dated May 1, 1969, between Leasing Consultants Incorporated, Lessor and W. A. Wheatland Associates, Inc., Lessee, covering one new Aircraft, registration #N36DW [the Aircraft]." (Stip. No. 12)

 22. The "Assignment of Lease" was intended only as a device for payment of LCI's indebtedness to PNB.

 23. On July 22, 1969, Wheatland executed and delivered to PNB a document entitled "Lessee's Acknowledgment." (Stip. No. 13)

 24. PNB took possession of the Assignment and the Lessee's Acknowledgment on July 22, 1969.

  25. LCI billed Wheatland for monthly payments due under the Lease and Wheatland sent these payments to PNB. (Stip. No. 14)

 26. Neither the Demand Collateral Note nor the Lease nor the Assignment nor the Lessee's Acknowledgment nor the Purchase Option were mailed or otherwise delivered to the FAA for recordation, and none of these documents were recorded with the FAA by means other than as a result of the recordation of the Security Agreement. (Stip. No. 15)

 27. Neither the Security Agreement nor the Demand Collateral Note nor the Lease nor Wheatland's Acknowledgment nor the Assignment of the Lease nor the Purchase Option for the Aircraft, nor any financing statement with respect thereto, were recorded or filed for record with any State recording office under or pursuant to the Uniform Commercial Code or otherwise. (Stip. No. 32)

 28. LCI filed a Petition for an Arrangement under Chapter XI of the Bankruptcy Act in the United States District Court for the Eastern District of New York on August 18, 1970. (Stip. No. 17)

 29. On September 11, 1970, PNB sent LCI a statement of the outstanding LCI leases held by PNB -- among which was listed the Wheatland Lease with an outstanding balance due PNB of $78,757.56 -- and directed LCI to continue billing its accounts and to have the lessees continue sending payments directly to PNB.

 30. LCI was adjudged a bankrupt on October 16, 1970, and George Feldman was appointed, duly qualified, and is presently acting as Trustee in Bankruptcy of LCI. (Stip. No. 18)

 31. On November 4, 1970, PNB notified Wheatland that it was exercising its rights under the Note by reason of LCI's default and made demand upon Wheatland to continue to send payments directly to PNB.

 32. A first meeting of LCI's creditors was held on November 20, 1970, after which meeting the Trustee advised PNB that it should continue to accept all payments from LCI's lessees, and represented that he would make claim only to payments in excess of LCI's debt to PNB.

 33. In February 1971 Wheatland inquired of PNB as to what information they had "concerning the pay-off of the aircraft." Ronald Turner, Commercial Officer for PNB, responded that he would contact Daniel Zimmerman, counsel for the Trustee of LCI.

 34. In a letter dated February 18, 1971, Daniel Zimmerman represented to PNB, inter alia, that (1) "the entire rental obligation of Wheatland is payable to your bank on the underlying note;" (2) "Leasing has no equity therein;" (3) "Leasing's only equity is in the Aircraft itself;" (4) "The lease, which expires May, 1975, contains no purchase option whatsoever;" (5) "[We] have no objections to Wheatland paying up the lease to you at whatever payout figure you may give them. At best this is of no real consequence to us."

 35. A copy of Zimmerman's letter of February 18 was delivered to Richard Miller, President of Wheatland. On February 24, 1971, Miller wrote to Zimmerman "enclosing a copy of a purchase option for $1.00 signed by Mr. George Rodda, Vice President of Leasing Consultants." Miller further stated that "it was on this basis that we took the lease from Leasing Consultants." A copy of Miller's letter was forwarded to Ronald Turner, Commercial Officer for PNB.

 36. In a letter dated May 11, 1971, counsel for the Trustee disputed the validity of the purchase option claimed by Wheatland.

 37. On July 14, 1971, Wheatland made an offer (the offer to expire July 30, 1971) to pay the Trustee $1,000 for the Aircraft's "mortgaged title," which the Trustee held.

 38. On July 20, 1971, the Trustee in Bankruptcy filed with the United States District Court for the Eastern District of New York an "Application for Authority to Compromise Controversy." (Stip. No. 21)

  39. In the petition, the Trustee, by his counsel represented, inter alia, that (1) "The bankrupt . . . assigned all the remaining lease rentals to the Philadelphia National Bank ('PNB'). PNB duly perfected its mortgage by filing with the F.A.A. in Oklahoma City," and (2) "[Title] to the aircraft is in the bankrupt."

 40. On July 22, 1971, the Court in which the bankruptcy proceedings of the Bankrupt were pending entered an Order authorizing the Trustee in Bankruptcy to transfer to Wheatland his right, title and interest in the Aircraft and the accompanying Lease. (Stip. No. 22)

 41. The Trustee in Bankruptcy executed a Bill of Sale of the Aircraft to Wheatland and forwarded it to Wheatland under cover of letter dated August 13, 1971. PNB received a copy of this Bill of Sale in August 1971. (Stip. No. 24)

 42. On January 16, 1972, the Bill of Sale was filed with the FAA. (Stip. No. 26)

 43. In response to a further inquiry PNB, by letter of August 24, 1971, advised Wheatland that $64,955.42 was the balance due PNB. (Stip. No. 25)

 44. PNB received payments of $1,785 each on July 28, 1969, September 2, 1969, September 23, 1969, October 28, 1969, December 1, 1969, December 29, 1969, January 29, 1970, March 16, 1970, March 24, 1970, April 24, 1970, July 13, 1970, July 26, 1970, August 6, 1970, September 1, 1970, October 16, 1970, November 10, 1970, December 9, 1970, January 14, 1971, February 9, 1971, March 15, 1971, April 22, 1971, June 1, 1971 (2 payments), August 9, 1971 (2 payments), September 30, 1971 (2 payments), December 20, 1971 (2 payments), February 2, 1972 (3 payments), July 11, 1972 (2 payments), August 28, 1972 (2 payments), October 4, 1972 (2 payments), November 13, 1972 (2 payments), December 18, 1972, January 26, 1973 (2 payments), and April 11, 1973. In addition, payments of $112 were received from July 28, 1969 to and including April 12, 1971 in accordance with the foregoing schedule and a payment of $224 was received on June 1, 1971. All of these payments were upon checks of Wheatland or Donald Wolk. PNB did not receive any payments from LCI. (Stip. No. 19)

 45. All payments were received by PNB without objection from the Trustee.

 46. On April 19, 1973, Donald Wolk contacted PNB seeking information as to how much was owed to PNB on the Aircraft.

 47. On April 26, 1973, Daniel Zimmerman, counsel for Trustee, wrote a letter to PNB advising that it was the Trustee's position that he was entitled to all post bankruptcy rental payments on the aircraft made to PNB.

 48. On May 23, 1973, Wheatland mailed a letter to PNB, wherein it stated that it enclosed "a certified check in the amount of $42,433.94 in full payment of the Aerostar 601 Serial #61-0012-33 [the Aircraft]." (Stip. No. 27)

 49. On May 24, 1973, PNB received from Wheatland the check of Henry Weber Distributors, Inc., endorsed by Wheatland, in the amount of $42,433.94 which it applied to satisfy in full the Loan to LCI, and which it acknowledged by letter dated May 24, 1973. (Stip. No. 28)

 50. On May 24, 1973, PNB notified the Trustee that it had accepted the Weber check in payment of the remaining balance on the Lease it had been collecting for LCI.

 51. In agreeing to allow Wheatland to discharge the security interest in the aircraft, PNB relied upon the Trustee's Bill of Sale.

 52. On June 1, 1973, PNB executed a release of lien form and forwarded it to Richard Miller. Donald Wolk forwarded the release of lien form to Henry Weber on June 8, 1973.

 53. From October 16, 1970, until April 26, 1973, the Trustee did not object to PNB's continued receipt of the rental payments, and the Trustee did not file suit to recover the payments until August 2, 1973. 54. The following creditors have filed proofs of claim in the bankruptcy proceedings of LCI, in the amounts set forth opposite their names, and each of these claims is provable under the Bankruptcy Act: (a) Dun & Bradstreet, Inc. $1,886.80 (b) Western Union Telegraph Co. 700.69 (c) 301 Associates 863,947.91 (d) Koehring Company 72,505.80 (e) Kelly Tractor Company 4,400.00 (f) Internal Revenue Service 47,928.51


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