250 Bell Road, Lower Merion Tp., Montgomery County, In re
| Decision Date | 05 July 1978 |
| Docket Number | No. 322,Nos. 289,322,No. 289,289,s. 289 |
| Citation | 388 A.2d 297,479 Pa. 222 |
| Parties | In re Distribution of Proceeds from Sheriff's Sale of Premises 250 BELL ROAD, LOWER MERION TOWNSHIP, MONTGOMERY COUNTY, Pennsylvania. Appeal of John H. McCOY and William L. O'Hey, Jr., inAppeal of BOENNING & SCATTERGOOD, INC., in |
| Court | Pennsylvania Supreme Court |
Henderson, Wetherill, O'Hey & Horsey, Edward Fackenthal, Norristown, for appellants at No. 289 and appellees at No. 322.
Waters, Fleer, Cooper & Gallagher, Thomas E. Waters, Norristown, Rawle & Henderson, George M. Brodhead, L. Carter Anderson, Philadelphia, for appellant at No. 322 and appellee at No. 289.
Edward N. Kurland, Philadelphia, for appellee, Jay Vending, Inc.
Charles Blasband, Norristown, for appellee, Michael Margolies.
Before EAGEN, C. J., and O'BRIEN, ROBERTS, POMEROY, NIX, MANDERINO and PACKEL, JJ.
This case involves two appeals from an order of the Superior Court reversing an order of the Court of Common Pleas of Montgomery County. The Court of Common Pleas sustained exceptions to a sheriff's schedule of distribution of proceeds from the sale of real estate. In dispute is the allocation of such proceeds among competing creditors of the property owners.
The parties to this appeal are appellants, Boenning and Scattergood, Inc. (Hereinafter: Boenning), holder of a 1966 judgment, and John H. McCoy, holder of a 1971 mortgage, and appellees, Michael Margolies, holder of a 1971 mortgage dated later than McCoy's, Jay Vending, holder of a 1973 judgment, and William L. O'Hey, Jr., also holder of a 1973 judgment.
The controversy arises from the following facts:
On April 14, 1966, Boenning entered judgment on a note for $30,500 against John and Helen Jennings (Hereinafter: Jennings) in the Court of Common Pleas of Montgomery County. On July 3, 1970, Boenning initiated execution proceedings against real property owned by Jennings at 250 Bell Road, Lower Merion Township, Montgomery County. Although issued, the writ of execution was never recorded in the judgment index. Thereafter, Jennings, in an attempt to challenge the underlying debt, moved to open judgment and requested a stay order. The stay was issued on July 13, 1970, pending resolution of the judgment's validity. On July 29, 1972, the stay order was discharged by the trial court, and that dismissal was affirmed per curiam by the Superior Court in Boenning & Company v. Jennings, 222 Pa.Super. 712, 294 A.2d 739 (1972).
Boenning immediately reinstituted execution proceedings by securing a second writ on August 23, 1972, which it again did not index. Jennings obtained an injunction from the United States District Court for the Eastern District of Pennsylvania staying execution proceedings; in December, 1973, however, the United States Court of Appeals for the Third Circuit reversed. Jennings v. Boenning & Co., 482 F.2d 1128 (3rd Cir. 1973).
Boenning then instituted its third execution again, without indexing the writ and the property was listed for sheriff's sale on February 20, 1974. On that day, the property was also scheduled for sale as a result of foreclosure of a first mortgage held by The Equitable Life Assurance Society. The property was sold on the scheduled date pursuant to Equitable's writ, and the sum of $85,000 was realized from the sale. Certain liens for taxes, costs of execution, and the first mortgage of Equitable had undisputed priority to the proceeds of the sale. After satisfaction of these claims, the sum of $66,679.50, which was insufficient to pay the remaining creditors in full, was available for distribution. Accordingly, the matter in controversy is the validity and priority of the competing liens.
The liens being asserted against the remaining funds are as follows:
Approx. Amt
Debt Date of Lien with Interest
---- -------------- -------------
1. Boenning Judgment April 1966 $48,500.00
2. McCoy Mortgage August 1971 30,000.00
3. Margolies Mortgage December 1971 17,500.00
4. Jay Vending Co.
Judgment June 19, 1973 21,000.00
5. McCoy Judgment June 20, 1973 1,300.00
6. O'Hey Judgment June 20,1973 21,000.00
McCoy's mortgage was executed and recorded on August 6, 1971, more than five years after entry of the Boenning judgment, while execution proceedings on that judgment were stayed pending disposition of Jennings' petition to open judgment. Depositions disclose that, at the time of his mortgage, McCoy was aware of the Boenning lien and knew that it would have priority over his mortgage unless Jennings was successful in challenging the debt. McCoy's attorney was a partner in a law firm which also represented Jennings against Boenning. McCoy accepted a second mortgage on Jennings' realty on counsel's assurances that the Boenning lien would be invalidated.
The Margolies mortgage was recorded on December 22, 1971. Jay Vending entered judgment against Helen Jennings on June 19, 1973. Like the McCoy lien, both of these liens appeared of record more than five years after entry of the Boenning judgment; but unlike McCoy, there was no showing that the lienholders had any knowledge of the Boenning judgment or the proceedings to open.
The Boenning judgment had been entered in the judgment index more than seven years prior to the sheriff's sale on February 20, 1973. Accordingly, Boenning was not included in the proposed schedule of distribution. Boenning filed exceptions to the schedule claiming that its lien was valid and had been improperly omitted. The Court of Common Pleas sustained the exceptions on the theory that Boenning's judgment lien was revived as to McCoy because the latter had actual knowledge that a writ of execution on the judgment had been issued and docketed within five years of the judgment. Thus, the court held that the claim of McCoy was junior to that of Boenning despite Boenning's failure to index his writ of execution. 1
However, the court also found that Boenning's lien was not revived against subsequent creditors with no actual knowledge of the execution proceedings. The court, therefore, concluded that, while Boenning was superior to McCoy who, in turn preceded Margolies and Jay Vending, the latter two creditors should take before Boenning. This order of rank results in a circular lien, with A (Boenning) having priority over B (McCoy) and B having priority over C (Margolies and Jay Vending), but C having priority over A.
The Court of Common Pleas applied the Pennsylvania temporal priority rule to break the circle and realign the parties: first in time, first in right. 2 Accordingly, the court directed that Boenning's lien be included in the distribution of proceeds and be given priority over all other liens.
On appeal by the remaining parties, the Superior Court reversed and applied a different rule. The court ordered that distribution be made according to a formula applied in Day v. Munson, 14 Ohio St. 488 (1863), and advocated by Judge Dixon, dissenting in Hoag v. Sayre, 33 N.J.Eq. 552 (1881). As applied, the formula gave priority to Jay Vending and Margolies over Boenning to the extent that the sale proceeds exceeded the amount of McCoy's lien. Consequently, the Superior Court ordered distribution as follows:
1. Boenning Judgment $13,470.50
2. Strawbridge and Clothier
Judgment (Undisputed) 1,650.00
3. McCoy Mortgage 16,529.50
4. Margolies Mortgage 17,500.00
5. Jay Vending Co. Judgment 17,529.50
----------
$66,679.50
The issue before us is to determine the applicable rule of distribution in a circular lien situation which arose from the failure of one party to make a required filing. For the reasons hereinafter stated, we hold that the subordination rule is to be applied where the circuity results from a failure to file.
There are at least three situations out of which a circular lien may arise: (1) where the first of three or more claimants waives his priority in favor of another claimant; (2) where there are inconsistent statutory or judicial rules of priority; and, (3) where one of the claimants fails to make a required filing. Pennsylvania has applied the temporal priority rule of distribution in all three situations. 3 We are now concerned only with the failure-to-file situation and expressly confine today's holding to that type of circuity.
A circularity involving failure-to-file arises from the operation of Pennsylvania's race-notice recording system where proper recording of an interest or lien is necessary for priority as to all except those with actual notice of the prior lien. 4 Successive mortgages may be used to illustrate: A takes a first mortgage which he fails to file. B takes a second mortgage, with notice of the mortgage to A, and files. C takes a third mortgage, without notice of the mortgage to A. A has priority over B (because of B's knowledge); B has priority over C because of prior filing); C has priority over A (because of A's failure to file and C's lack of knowledge). In this situation, the circularity arises because of A's failure to file. On a theory of fault, A seems to be the appropriate person to bear the loss.
However, the opposite result is reached by the Pennsylvania temporal priority rule, with C bearing the loss. The Pennsylvania approach is to revert to the common law rule that "first in time is first in right" and distribute the fund to the competing claimants in the chronological order of their claims. A rationale for the Pennsylvania rule was supplied in Dowling v. Vallett, 70 Pa.Super. 481, 484 (1918) (citations omitted);
"The last of three or more liens in...
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