#### Henry J. Burchell *v.*Susannah Osborne *et al.*
      *1*

*(Court of Appeals,*

*Filed March 4, 1890.)*

1, Foreclosure—Surplus moseys.

A second mortgage covering eight lots, which had been sold by the mortgagor and upon each of which there were junior mortgages, was foreclosed; the lots were sold in the inverse order of alienation and a surplus left after satisfying the decree and paying the first mortgage. *Meld,*that such surplus was to be regarded as a common fund distributable to all the junior lienors in the order of the dates when they became liens on the debtor’s property.

Appeal from order of the supreme court, general term, first department, reversing in part an order directing distribution of surplus moneys in foreclosure.

*Lilian Herbert Andrews,*for app’lts; *Henry Arden,*for resp’ts.

Affirming 26 N. Y. State Rep., 163.

Gray, J.

The appellants are interested in the disposition of some surplus moneys, arising upon a sale under a decree in foreclosure in this action.

The question is whether the general term, in reversing an order1 for distribution made at special term and in directing distribution according to the priorities of the various junior mortgagees in point of date as liens, have violated those equitable principles by which these matters are guided to the justest result. I am inclined to hold that the opinion of the general term states correctly the general rule for the determination of the equities of junior incumbrancers, in such cases. The mortgage foreclosed covered all of eight lots of land in the city of New York and was second to-another mortgage of like extent of lien. The first mortgagee was made a party to this action and payment of the first mortgage debt was adjudged to be made from the proceeds of the foreclosure sale. After satisfying the terms of the decree, the surplus m question remained. The appellants and the respondent, with other-parties, held mortgages affecting in whole, or in part, these eight; lots, which were subsequent to the mortgage foreclosed and which were made and took effect at different dates.

The decree of sale provided for a sale in separate parcels, in the inverse order of their alienation; that is to say, of the giving of the mortgages upon them. The reason for this direction was-that by such a sale more might be realized than by a sale in block; and upon this mode of sale the junior incumbrancers had insisted. They were parties to the action and such a provision, we may assume, was for their general benefit and protection. The-general term decided that the principle upon which the equities. *789of the parties ought to be determined was that the portions of the mortgaged premises first aliened should be the last to be sold to pay the mortgage debt. They held that the effect of alienation of lands by mortgage is to postpone the application of the property covered to the payment of the general mortgage debt only to the extent of the amount secured by the junior mortgage. It was supposed, at the special term, that the decree in directing this sale in the inverse order of alienation, by separate parcels, liad settled the relative rights and equities of the parties. But I think the learned justice fell into error in this assumption. The whole premises were liable for the debts of the first and second mortgage and, if the sale should be by separate parcels, that would be because the court was satisfied that in so ordering the rights of parties would be better protected. The decree did not and could not settle any question as to the relative priorities and equities of the subsequent incumbrancers. To warrant such a clause in the decree it would have been necessary to have raised some issue in the pleadings and proceedings prior to decree, upon which the judgment of the court might be passed. When a surplus arises upon a foreclosure sale, the question may then come before the court as to the several and relative rights of subsequent lienors to share in its distribution and that can be competently determined upon equitable principles in a, special proceeding, as in this case. The learned justice at special term also thought that such a sale by separate parcels wiped out the specific mortgage debts upon each particular lot, as it was sold towards the satisfaction of the decree. This would, however, be a violation of equitable principles.

Each lot covered by the general mortgage foreclosed was liable in equity to contribute to the payment of the debt represented thereby and, in the case supposed by the learned justice at special term, of the sale stopping short at the seventh lot, because of a sufficient realization at that point, the eighth lot would not have remained *solely*liable to the specific liens of the junior mortgages covering it The equity in that remaining lot would have been subject to the claims of other incumbrancers of the lands sold which were prior in point of time. As such an order of sale was for the very benefit of the junior incumbrancers, who were made parties to the action, equity would not tolerate that their relative rights and equities should be so interfered with as to permit so great an injustice and such an inequality of rights to be worked out. And rather than that should result, a sale of the remaining lot would have been directed that its proceeds might be disposed of as equity might require.

How here the sale of the last lot produced the surplus for distribution. The whole proceeds of sale formed a common fund to be applied, first to the payment of the first and second mortgage debts and then the surplus became, obviously, as it seems to my mind, subject to the claims of lienors upon the lands which had been sold, and applicable to those claims, in the order of their priority; subject, of course, to the limitation that no greater amount should be paid in discharge of the lien on any lot than was realized for the lot at the sale. It is clear enough that in such *790a sale by separate parcels instead of in block, each parcel, as it went to discharge the general mortgage, contributed to relieve the last lot from that lien.

If, therefore, through the sale, a surplus arose, it cannot be regarded as constituting a specific fund subject to the specific liens upon the last lot; but, under equitable rules in the marshalling of the debtor’s assets, as a common fund distributable to all of the lienors upon the lands sold, in the order of the dates when they became liens upon the debtor’^ property. The lien of each junior incumbrancer, which had been affixed to the land sold to discharge the general lien of the mortgage foreclosed, would, it seems to me, equitably attach to the fund, resulting from the sale of the lands, in the order in which the lien had been originally created.

Upon such a sale as this, when a surplus arises as the final result, the liens would, in equity, be transferred from the land sold to the ultimate fund arising and, naturally, in the order of their priority as such.

I think, for the reasons stated in the general term opinion, as well as for those here briefly given,. the order of the general term was right and should be affirmed, with costs.

All concur.