This dispute arises out of a complex series of transactions for the sale and financing of aircraft. Summary judgment was rendered against the purchaser’s financier who had sued the seller for foreclosing upon the airplane his client had bought. The summary judgment rested upon the explicit trial court finding that the security interest relied upon by the financier was invalid for lack of consideration, and upon the implicit assumption that the security interest relied upon by the seller to foreclose was valid. We reverse on both points, grant judgment *1223 to the financier, and remand for determination of damages.
The seller, Jack Adams Aircraft Sales, Inc. (Jack Adams) is a Delaware corporation doing business in Mississippi and other states. In November 1972, Jack Adams arranged financing through the First National Bank of Dallas, Texas (Dallas bank) for five airplanes which it intended to resell through its Mississippi operations. In exchange for extending credit, the Dallas bank obtained and filed with the Federal Aviation Administration (FAA) pursuant to 49 U.S.C. § 1401, et seq., a separate chattel mortgage for each of the five planes which Jack Adams intended to purchase. In December 1972, Buckeye Air Service, Inc. (Buckeye) of Cleveland, Ohio, negotiated for the purchase of these five aircraft for use from a base of its operations in Kentucky. To finance the purchase, Buckeye borrowed $18,000 from the Bank of Lexington, Kentucky (Lexington bank), on an unsecured note, payable ninety days after execution. Buckeye used $17,500 of this sum as a down payment when it purchased the five planes on December 26, 1972.
Following the negotiations Jack Adams mailed Buckeye an invoice covering the transaction, as well as a bill of sale for each airplane. The two parties had orally agreed that these bills of sale were not to be recorded with the FAA until the balance owing on the aircraft was paid. The bills of sale show no lien outstanding on the aircraft.
Subsequent to the delivery of the aircraft to Kentucky, Buckeye was unable to meet the terms of its agreement with Jack Adams, who demanded that the bills of sale be returned. Shortly thereafter the two parties reached a new accord whereby Buckeye would return four of the airplanes and purchase the one remaining from the original sale. As before, the parties agreed that there should be no filing with the FAA until the purchase price was paid. The new contract also provided that the original $17,500 down payment would be forfeited, that an additional $10,000 payment would be made immediately, and that the balance of the purchase price, $32,000, would be paid a month later.
Coincident with the signing of this contract, Buckeye executed and delivered a security agreement to the Lexington bank. The agreement secured repayment of the $18,000 debt still owed the bank by encumbering the remaining airplane. The security agreement was purportedly given in return for the bank’s forbearance to sue on the original note. Both the agreement and bill of sale were recorded with the FAA.
Buckeye was again unable to satisfy its obligation to Jack Adams, who this time foreclosed upon the aircraft. The collateral was sold at auction and the proceeds were retained by Jack Adams in satisfaction of Buckeye’s debt. Jack Adams foreclosed upon the authority of the original security agreement covering the five aircraft which had been consummated with the Dallas bank in November 1972. The security interest had purportedly been assigned to Jack Adams upon repayment to the bank of the debt that it owed.
The Lexington bank instituted the present action, alleging that Jack Adams wrongfully interfered with its collateral by not respecting its lien on the repossessed aircraft. The trial court rendered summary judgment for Jack Adams, holding that the security interest asserted by the Lexington bank was invalid for want of consideration and assuming that the security interest asserted by Jack Adams was enforceable. This appeal, duly perfected by the Lexington bank, causes us to review the validity of each of these two competing security interests.
Federal jurisdiction exists in this case by virtue of the diverse citizenship of the parties and the sufficiency of the amount in controversy. 28 U.S.C. § 1332. In a diversity case the federal court is bound to apply state substantive law except in matters governed by federal law.
Erie Railroad Co. v. Tompkins,
In deciding what law to apply we must examine each issue independently. We proceed first to the question of whether the security interest executed and delivered to the Kentucky bank by Buckeye was invalid for want of consideration. The trial court held that this issue was governed by Kentucky law. We agree with that conclusion but, unlike the trial court, reach it by applying the Federal Aviation Act.
The Federal Aviation Act created a framework for a nationwide system to record certain interests in aircraft and major aircraft components. See 49 U.S.C. § 1401, et
seq.
(1976). To the extent that state law conflicts with any part of the Act, it is preempted under the power of Congress to regulate interstate commerce.
State Securities Co. v. Aviation Enterprises, Inc.,
The Act provides that state law shall determine the initial or inherent validity of any instrument recorded under its provisions.
Texas National Bank of Houston v. Aufderheide,
Jack Adams argued below that the fore-bearance on the part of the Lexington bank to sue on its note did not constitute valid consideration because the forebearance was for an indefinite period of time. The district court could find no Kentucky law on this issue. After surveying the majority and minority positions on this question, the district court found the prevailing rule of law to be in Jack Adams’ favor. The court held that forebearance for an indefinite period of time did not constitute consideration and that the bank’s security interest was therefore invalid.
We believe that the trial court erred in applying the common law rule which requires consideration as a prerequisite to the creation of a security interest. 2 We reach this conclusion by applying the Uniform Commercial Code (UCC) as adopted in Kentucky. If there were no Federal Aviation Act, the UCC would govern the creation and validity of a security interest in aircraft. Ky.Rev.Stat. §§ 355.9-302 Comment 8, 9-104 Comment 1 (1970). See Feldman v. Philadelphia National Bank, supra, at 37. Because the Federal Aviation Act incorporates Kentucky law on the issue of the validity of the security interest, the Kentucky UCC should be the source of that reference.
The UCC does not require, in the strict common law sense, that consideration be given as a prerequisite for a security interest to attach to collateral — only “value” need be given. Ky.Rev.Stat. § 355.9-204 (1970). According to § 1-201, “a person gives value for rights if he ac
*1225
quires them . . .(b) as security for or in total or partial satisfaction of a pre-existing claim.” Ky.Rev.Stat. § 355.1-201(44). There can be no question that the Lexington bank gave “value” when it took a security interest in Buckeye’s remaining aircraft to secure its preexisting claim.
See In re Samuels & Co.,
Having decided that the Lexington bank possessed a properly perfected security interest in the airplane, we must now determine whether Jack Adams also held a valid security interest in the same collateral. The security interest which he now claims is the same one which he originally executed and delivered to the Dallas bank to cover his purchase price of the aircraft. The Dallas bank assigned the security interest back to Jack Adams upon the satisfaction of the underlying obligation. The Lexington bank argues that the Dallas bank could not validly assign the security interest to Jack Adams, since Jack Adams was the promisor under the original note. When Jack Adams tendered the consideration for the assignment to the Dallas bank, so the argument goes, the underlying obligation was extinguished. By granting judgment to Jack Adams, the trial court judged his security interest to be valid, implicitly rejecting Buckeye’s position.
In reviewing this issue, we are again faced with the threshold question of which state’s law applies. Because the security agreement was filed with the FAA, our inquiry must once again begin with the provisions of the Federal Aviation Act. The Act preempts only that portion of state law which conflicts with its provisions. State Securities Co. v. Aviation Enterprises, Inc., supra, at 229; Feldman v. Philadelphia National Bank, supra, at 36; Ky.Rev.Stat. § 355.9-104(1) and Comment 1. See also J. White and R. Summers, The Uniform Commercial Code 948 (1972). Because no provision of the Federal Aviation Act addresses our question of the viability of the assignment of a security interest, state law will provide our rule of decision.
In order to determine which state’s law applies, we turn to the conflict of laws rules of the forum state, Mississippi.
See Klaxon Co. v. Stentor Electric Mfg. Co.,
The UCC defines security interest as “an interest in personal property or fixtures which secures payment or performance of an obligation.” Ky.Rev.Stat. § 355.1-201(37) (1970). A security interest thus has no validity absent its underlying obligation; the satisfaction of that obligation extinguishes the security interest.
See Texas Bank & Trust Co. v. Custom Leasing, Inc.,
In order to urge the continuing viability of the security interest, Jack Adams must therefore establish that the consideration he paid for the assignment of the security interest did not eliminate the underlying debt. Authority, either sanctioning or rejecting this unorthodox position, is understandably scarce. Rare is the debtor who argues that tender of the amount due on his note does not satisfy his obligation. Not *1226 withstanding this lack of authority however, we find the conclusion inescapable that tender of the consideration to the Dallas bank in return for the assignment of the security interest was, in effect, a satisfaction of the debt owed the bank by Jack Adams. 3 This satisfaction extinguished the security interest.
Because the security interest claimed by Jack Adams was invalid, the foreclosure upon the airplane was wrongful and in derogation of the rights of the Lexington bank. We accordingly reverse the judgment of the district court and direct that judgment be entered for plaintiff-appellant Bank of Lexington, and remand the case to the district court for determination of damages.
REVERSED and REMANDED.
Notes
. The law of five states is potentially implicated. Jack Adams is a Delaware corporation, but for the purposes of this suit was doing business in Mississippi. The Dallas bank, which handled the original financing of the airplanes, is located in Texas. Buckeye, the purchaser of the aircraft, is an Ohio company. The Lexington bank from which Buckeye secured its financing, is a Kentucky institution. Kentucky is also the state where the security agreement delivered by Buckeye was executed, as well as the state where the airplane has sat from the day of its purchase.
. Because of our belief that consideration was not needed, we refrain from deciding whether forebearance for an indefinite period of time can constitute consideration in the State of Kentucky.
.
United States
v.
Boston & Berlin Transportation Co.,