Case Title: Pownal Development Corp. v. Pownal Tanning Co.

Citation: 171 Vt. 360, 765 A.2d 489

Docket Number: 

State: vermont

Court: Vermont Supreme Court

Date: 2000-11-17T00:00:00Z

Document:
Pownal Development Corp. v. Pownal Tanning Co. (98-577); 171 Vt. 360; 
765 A.2d 489

[Filed 17-Nov-2000]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal  revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of  Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any  errors in order that corrections may be made before this opinion goes
  to press.

                                 No. 98-577

Pownal Development Corporation	                 Supreme Court

                                                 On Appeal from
     v.	                                         Bennington Superior Court

Pownal Tanning Co., Inc., Staff Indus., Inc.,	
Vermont Agency of Natural Resources, and 
Vermont Department of Taxes
                                                 November Term, 1999

John P. Meaker, J.

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

William H. Sorrell, Attorney General, and John H. Hasen and Mark J. DiStefano, 
  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, Super. J., Teachout, Super. J., Allen, C.J. 
  (Ret.), and Gibson, J. (Ret.), Specially Assigned.

       KATZ, Super. 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, pre-existing,  mostly noncontiguous parcels, one of which is the
  Mill Lot. (FN1)  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,  44 S.E.2d 340, 342 (N.C.   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., 394 N.Y.S.2d 30
  (N.Y. App. Div. 1977) (assignor of mortgage waived any  right to parcel of
  land when he excluded such parcel in his own foreclosure action); Bodner v. 
  Brickner, 288 N.Y.S.2d 342 (N.Y. App. Div. 1968) (failure in mortgage
  foreclosure proceeding "to  proceed against all security is abandonment of
  lien on portion omitted"); Dooly v. Eastman, 68 P. 1039, 1043 (Wash. 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, 708 A.2d 1378, 1385 (Conn. 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, 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 (1990) ("restraints on
  alienation are not favored");  Bogie v. Town of Barnet, 129 Vt. 46, 48,