POWNAL DEVELOPMENT v. Pownal Tanning Co.

• Decision Date: 17 November 2000
• Docket Number: No. 98-577.,98-577.
• Citation: 765 A.2d 489
• Court: Vermont Supreme Court
• Parties: POWNAL DEVELOPMENT CORPORATION v. POWNAL TANNING CO., INC., Staff Indus., Inc., Vermont Agency of Natural Resources, and Vermont Department of Taxes

765 A.2d 489

POWNAL DEVELOPMENT CORPORATION v. POWNAL TANNING CO., INC., Staff Indus., Inc., Vermont Agency of Natural Resources, and Vermont Department of Taxes

No. 98-577.

Supreme Court of Vermont.

November 17, 2000.

James J. Cormier, Jr., of Cormier and Cormier, Bennington, for Plaintiff-Appellee.

William H. Sorrell, Attorney General, and John H. Hasen and Mark J. Di Stefano, Assistant Attorneys General, Montpelier, for Defendant-Appellant Agency of Natural Resources.

David W. Gartenstein of Downs Rachlin & Martin, PLLC, Brattleboro, for Intervenor Town of Pownal.

Present: MORSE, J., and KATZ, Supr. J., TEACHOUT, Supr. J., ALLEN, C.J. (Ret.), and GIBSON, J. (Ret.), Specially Assigned

KATZ, Supr. J.

This appeal brings together hoary principles of foreclosure law with contemporary concerns regarding polluted land. The State appeals the trial court's decree of partial foreclosure, arguing that permitting the mortgagee to foreclose on nine valuable parcels, and leave a tenth polluted lot behind, is both inequitable and impermissible under the common law and also contrary to Vermont's Waste Management Act. See 10 V.S.A. §§ 6601-6632. We affirm.

For decades, Pownal Tanning Co. permitted industrial waste to spill about its mill site (the Mill Lot), including the bed of the Hoosic River in Pownal, Vermont. That site eventually was included on the federal "Superfund" list, through which it has received clean-up actions, presumably at great expense. The State of Vermont received a payment from the tannery, which it holds in escrow for further cleanup. The tannery ceased doing business in 1990. In 1984, it borrowed a sum from First National Bank of Boston, giving as security a mortgage on ten separate, preexisting, mostly noncontiguous parcels, one of which is the Mill Lot.¹ In 1995, long after the tannery's default and demise, plaintiff Pownal Development Corp. bought the mortgage note and guaranty at a substantial discount. It then initiated the present foreclosure on nine of the ten mortgaged parcels, purposely omitting the polluted Mill Lot. The State of Vermont Agency of Natural Resources was named as a defendant in the underlying foreclosure action in part because it possesses a subordinate judgment lien on the Mill Lot for monies already expended to investigate and undertake waste removal at the site.

The Bennington Superior Court granted a decree of foreclosure. This appeal followed.

I. Partial Foreclosure Under the Common Law

We first consider the State's claim that plaintiff's partial or selective foreclosure of less than all the mortgaged property is not permitted under the common law.

Quite simply, the State has cited no authority for the proposition that a foreclosing mortgagee must seek to recover all mortgaged lands or none at all. We conclude that that is not the law, either in Vermont or anywhere, and never was. Indeed, all the authority cited by the State implicitly supports quite the opposite conclusion: A foreclosing mortgagee may determine to recover some, but not all, the lands to which it might be entitled under its mortgage instruments.

More specifically, the authority gathered by the State supports the conclusion that a foreclosing mortgagee may not enjoy its remedy piecemeal—foreclosing on some of the property at first, and more at some later time. For example, in Layden v. Layden, 228 N.C. 5, 44 S.E.2d 340, 342 (1947), the court held that "[t]he law does not recognize partial foreclosure." Id. (internal citations omitted). Having so stated, however, the Layden court went on to elaborate: Once the mortgagee chooses to foreclose partially, "[s]uch an election releases the remainder of the pledged property from the lien of the foreclosed instrument," even if the foreclosed parcels are not sufficient to extinguish the entire debt. Id. In other words, a foreclosing mortgagee is not prohibited from making a deliberate decision not to foreclose on all possible parcels in the first place. But should it make such a decision, it is thereafter barred from seeking additional satisfaction of its underlying debt.

This principle has been recognized in other jurisdictions as well. See, e.g., Bankers Trust Co. v. G.H. Equities, Inc., 57 A.D.2d 601, 394 N.Y.S.2d 30 (1977) (assignor of mortgage waived any right to parcel of land when he excluded such parcel in his own foreclosure action); Bodner v. Brickner, 29 A.D.2d 441, 288 N.Y.S.2d 342, 346 (1968) (failure in mortgage foreclosure proceeding "to proceed against all the security is an abandonment of the lien on portion omitted"); Dooly v. Eastman, 28 Wash. 564, 68 P. 1039, 1043 (1902) ("One having a mortgage on several pieces of land to secure the same debt cannot foreclose it by piecemeal, and if he attempt to do so he waives his lien upon the premises not included in the decree."). Here, there is no question that plaintiff Pownal Development has made its election and understands that it will have to live with it; having determined to leave untouched the polluted Mill Lot, it later will not be able to recover it.

Beyond mere sanction by negative implication, however, the common law sometimes commands partial foreclosure under the doctrine of marshalling, an equitable principle requiring a mortgagee, in cases of a mortgage secured by several parcels of real estate, to foreclose first on those parcels that do not secure junior encumbrances. See New Milford Sav. Bank v. Jajer, 244 Conn. 251, 708 A.2d 1378, 1385 (1998). In New Milford, the Connecticut court relied on the Restatement (Third) of Property:

[W]hen foreclosing a mortgage covering more than one parcel of real estate, upon the motion or application of the holder of a subordinate interest protected by this section, the mortgagee must proceed against the parcels in the following order:

(1) parcels on which no subordinate interests exist are foreclosed upon before parcels on which subordinate interests exist; and

(2) as among parcels on which subordinate interests exist, those with subordinate interests created more recently are foreclosed upon before those with subordinate interests created at a more remote time.

Id. at 1385 n. 18 (emphasis added) (quoting Restatement (Third) of Property, Mortgages § 8.6, at 633 (1997)). Although the present foreclosure is one in which the State holds a lien on the Mill Lot junior to that of plaintiff, the State has not of course requested plaintiff to so proceed. For in this case, the unfortunate reality is that no party wants to be left holding the polluted Mill Lot, which is surely worthless, and may well burden its owner with immeasurable future clean-up liabilities. Nevertheless, the point is made: partial foreclosure, as described above, sometimes is required of the mortgagee.

The court explained in New Milford that its decision was based on the public policy consideration that an "unconditional ban on partial foreclosures might well disserve all the interested parties because `requiring foreclosure upon all properties would needlessly involve the additional properties in litigation.'" Id. at 1385 (quoting Michigan Nat'l Bank. v. Martin, 19 Mich.App. 458, 172 N.W.2d 920, 922 (1969)). Here, a different but equally strong public policy consideration requires the conclusion that partial foreclosure is permissible. The polluted condition of the Mill Lot makes it something of an untouchable. Were the law to hold that plaintiff mortgagee must take "all or nothing," it would extend the pall from that unfortunate Mill Lot to the remaining eight hundred and thirty acres of forest. They all would remain under the lien of plaintiff's mortgage, but also under the potential clean-up obligation toward which the State so clearly looks. In such a state, they all would be frozen in inutility. They could not be sold, leased for the long term, and perhaps not even logged without risk of offending the rights of the State as junior lienholder. Such an unfortunate result would of course be at loggerheads with the law's venerable policy of free alienability of land. See, e.g., Colby v. Colby, 157 Vt. 233, 236, 596 A.2d 901, 902 (1991) ("restraints on alienation are not favored"); Bogie v. Town of Barnet, 129 Vt. 46, 48, 270 A.2d 898, 900 (1970) (citing the "policy in support of ready alienability of title to good faith, third party purchasers for value"). Were the unpolluted forest lands burdened with the possible future obligations of the Mill Lot, the public as well as the mortgagee would be denied their benefit, and the Town the resultant property taxes. That is why the law favors the free alienability of land, and why any prohibition of partial foreclosure would disserve the public interest.

We therefore hold that the common law imposes no bar against plaintiff's foreclosure of some, but less than all, of the property on which it holds a mortgage.

II. Equitable Considerations

The State next challenges foreclosure by arguing that it would be "inequitable" under the circumstances. Of course, the foreclosure of mortgages is an equitable remedy, see Merchants Bank v. Thibodeau, 143 Vt. 132, 133, 465 A.2d 258, 259 (1983), and thereby subject to the considerations inherent in the exercise of a court of equity's historic jurisdiction. See Merchants Bank v. Lambert, 151 Vt. 204, 206, 559 A.2d 665, 666 (1989). That said, the State points to no facts that would cause a court of equity to deny plaintiff the remedy it seeks here.

The State contends first that plaintiff purchased the mortgage with knowledge of the pollution at the Mill Lot. Plaintiff's purchase, however, did not put the State in a worse position than it would have enjoyed had the original mortgagee retained the lien. Moreover, in cases involving interests in real property, courts make decisions on the basis of matters of record, rather than the personal situation of one or another party to a transaction. See San Remo Realty Corp. v. City of Montpelier, 130 Vt. 607, 612, 298 A.2d 810, 813 (1972) (whe...