VS. ADV. NO. 93-2081






This matter is before the Court on cross Motions for Summary Judgment. The plaintiff has filed a Response to the defendant's Motion. The issue here is the dischargeability of the defendant's debt to the plaintiff in the amount of $2,500.00. This Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(I).

This matter was initiated by the filing of the plaintiff's Complaint on September 10, 1993. The plaintiff filed its Motion for Summary Judgment on November 30, 1993. It contends that the debt is non-dischargeable pursuant to 11 U.S.C. '523(a)(6) because the defendant sold collateral which secured the debt and did not pay the proceeds over to the plaintiff. The defendant filed his Motion for Summary Judgment on January 10, 1994. He contends that the debt must be discharged because the plaintiff cannot prove that it is a secured creditor. The plaintiff filed its Response on January 24, 1994.

The parties filed an Agreed Stipulation of Facts on December 3, 1993. It provides the following pertinent facts:

1. Debtor filed his Chapter 7 petition in this Court on June 3, 1993.

2. On or about April 28, 1988, debtor executed and delivered to plaintiff one Creditor Plan and Truth in Lending Disclosure Statement in the principal amount of $5,500.00.

3. On the same date, debtor executed in favor of plaintiff one Credit Plan Advance Voucher and Security Agreement, in which debtor granted to plaintiff a security interest in one 1966 Cessna C-150-F airplane.

4. Debtor used all or part of the above-referenced loan to purchase the 1966 Cessna airplane.

5. On or about October 8, 1991, debtor sold the Cessna airplane for the sum of $2,500.00 without remitting the proceeds to the plaintiff in satisfaction of the debt.

6. The subject airplane was registered and titled in debtor's name with the Federal Aviation Administration, and at no time prior to the sale did the plaintiff note its lien upon the title.

There is no dispute between the parties that a security interest in the airplane attached pursuant to Kentucky law. See KRS 355.9-203(1) and (2). There is further no dispute that the effect of Kentucky law is that a security interest is enforceable between the parties when the interest attaches, and that perfection is significant only in terms of the interests of third parties and the determination of priority of subsequent liens. The defendant, however, contends that federal law preempts the entire field of security interests in aircraft.

The pertinent federal statute, 49 App. U.S.C.A. '1403, is concerned with the recordation of aircraft ownership, and provides in pertinent part:

(a) Establishment of recording system

The Secretary of Transportation shall establish and maintain a system for the recording of each and all of the following;

(1) Any conveyance which affects the title to, or any interest in, any civil aircraft of the United States;


(c) Validity of conveyances or other instruments; filing

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, .... against any person other than the person by whom the conveyance or other instrument is made or given, his heir or assignee, or any other person having actual notice thereof, until such conveyance or other instrument is filed for recordation in the Office of the Secretary of Transportation.

The validity of such instruments is governed by 49 App. U.S.C.A. '1406 which states in part,

The validity of any instrument the recording of which 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...

The defendant interprets the language of '1403 to mean that a security interest in an aircraft can only be perfected as set out above. The defendant goes further, however, in arguing that perfection of the plaintiff's security interest is the sole factor which determines whether or not an objection to discharge pursuant to '523(a)(6) may be sustained.

In order for the plaintiff to prevail it must demonstrate that the defendant's disposal of its collateral before perfection of the security interest and before the filing of the bankruptcy petition is a "willfull and malicious injury" within the meaning of '523(a)(6). Several cases support this proposition. The court in In re Ogden, 119 B.R. 277 (Bkrtcy.M.D.Fla. 1990), held that "[t]he law is well settled that the sale of collateral without the consent of the lienholder constitutes willful and malicious injury giving rise to an exception to discharge under '523(a)(6)". At page 279.

In In re Petsch, 82 B.R. 605 (Bkrtcy N.D. Fla. 1988), the court had earlier held that a security interest, even though unperfected, was "property" within the meaning of '523 (a)(6), and clarified that "the phrase `willful and malicious injury' covers a willful and malicious conversion". At 607. In re Cardillo, 39 B.R. 548, 550 (Bkrtcy D. Mass. 1984), held that

[when a] debtor has disposed of collateral without the permission or knowledge of the lienholder, and the debtor understands the effect of the security agreement, such unauthorized disposition constitutes a willful and malicious conversion so as to render the debt arising therefrom nondischargeable.

See also General Motors Acceptance Corp. v. Dotson, 155 B.R. 389 (W.D.Va. 1993).

In In re Posta, 886 F.2d 364 (10th Cir. 1989), the court stated that the "malicious prong" of '523(a)(6) is satisfied by the debtor's "actual knowledge or the reasonable foreseeability that his conduct will result in injury to the creditor." Malicious intent may be shown "by evidence that the debtor had knowledge of the creditor's rights, and that, with that knowledge, proceeded to take action in violation of those rights." See also In re Imbody, 104 B.R. 830 (Bkrtcy N.D. Ohio 1989), wherein a debtor committed nondischargeable conversion by selling the bank's collateral and intentionally paying the IRS ahead of the bank to satisfy a personal tax obligation. The court opined that the element of maliciousness was satisfied by wrongful acts that lacked justification, even in the absence of personal hatred, spite, or ill-will.

The Petsch and Cardillo cases, as well as In re Sidic, 44 B.R. 167 (Bkrtcy E.D. Wisc. 1984), also stand for the proposition that while the failure to perfect a lien may render such lien subordinate to the rights of third parties, as between the debtor and the creditor, the security interest is valid and the debtor is estopped from denying its validity. The issue of whether a creditor is defeated by its failure to perfect its security interest until after the debtor's willful and malicious conversion is addressed by In re Duranti, 1 B.R. 54 (Bkrtcy W.D. Wisc. 1979).

The Duranti case focuses on whether there was an "injury" to the creditor. Therein the court stated that "the bank's failure to perfect its lien prior to disposal of the collateral is irrelevant to the injury." At 56. See also In re Smith, 11 B.R. 20 (Bkrtcy.N.D. Ohio 1981). This Court has previously applied these principles in "In re Saylor", Case No. 89-00155; "Standard Federal Bank v. Edward M. Saylor and Mary A. Saylor", Adv. No. 89-0148 (E.D.Ky. August 27, 1990)

In light of the above-stated principles, the defendant's argument concerning whether or not the plaintiff properly perfected its lien is irrelevant, as well. In addition, this Court is not convinced by the defendant's argument that all state law in this area is preempted by 49 App. U.S.C.A. '1403. One of the cases cited by the defendant in support of this proposition, In re Gelking, 754 F.2d 778 (8th Cir. 1985), ruled that the federal statute did preempt North Dakota law, but only because a state statute provided for such preemption.

Further, in Haynes v. General Elec. Credit Corp., 432 F.Supp. 763 (W.D.Va. 1977), the court found that

...Congress did not intend to displace state laws that would otherwise govern priorities of lien and title interests in aircraft. The very language of the statute seriously undermines any attempt to characterize the Act as completely preempting state laws on secured transactions. ...

The purpose of Congress in enacting the Federal Aviation Act and its predecessor statute was reportedly to eliminate the confusion engendered by a multitude of state recording systems by providing a single national filing system for registering documents of title and security documents of the kind normally comprehended by state law. ... Congress did not intend, however, to create affirmative priority of federally recorded interests as against competing rights of state law.

At page 765. In Matter of Gary Aircraft Corp., 681 F.2d 365 (5th Cir. 1982), the court found that "...the FAA does not displace state law assignment of priorities to interests in aircraft." At page 369. This Court agrees with these interpretations.

In consideration of all of the foregoing, it is therefore the opinion of this Court that the defendant's Motion for Summary Judgment should be overruled, and that the plaintiff's Motion for Summary Judgment should be sustained. The attorneys shall submit a Judgment in conformity with this Opinion.


By the Court -






Copies to:


John J. Schmidt, Esq.

Keith A. McMain, Esq.