Problem.SP vs. buyer.3

     Aircraft Trading Services (ATS) sold a jet engine to Northeastern Airlines for $400,000, taking $36,000 down and a note, secured by the engine, to be repaid in thirty-six monthly installments of about $10,000 per month.    ATS failed to record its security interest with the Federal Aviation Administration and thus failed to perfect its security interest.  (The federal statutory requirement to record with the Federal Aviation Administration preempts the provisions of Article 9 concerning the method of perfection, but does not otherwise preempt Article 9.  See Commentary.Scope of Article 9).  Thereafter, Northeastern, in violation of the security agreement with ATS, sold the aircraft on which the jet engine had been installed to Braniff Airlines and warranted clean and marketable title to Braniff, something Braniff confirmed by searching the records of the FAA.  Braniff in turn sold the aircraft to an individual named Condron who, prior to purchase, confirmed the absence of any recorded interest with the FAA.  Condron leased the aircraft to United Airlines, with an option to purchase.   Only after the lease transaction was consummated did ATS record its security interest with the FAA.  Although informed of the security interest after entering the lease, United Airlines nonetheless exercised its option to purchase. 

     Northeastern defaulted on its payments to ATS, still oweing $140,000, and soon thereafter went into bankruptcy.  ATS seeks recovery from Braniff, Condron, and United Airlines.  Who should prevail?  U.C.C. 9-317(b), 2-403(1).  Do you think that the facts of this problem are farfetched?  They are taken from Aircraft Trading and Services, Inc. v. Braniff, Inc., 819 F.2d 1227 (2d Cir. 1987), part of the holding of which has been changed by language in U.C.C. 9-317(b).