Burchell v. . Osborne , 29 N.Y. St. Rep. 788 ( 1890 )

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 order foi distribution made at Special Term, and in directing distribution according to the priorities of the various junior mortgages 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 Hew 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 in question remained. The appellants and the respondents, 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 mortgages upon them. The reason of this direction was, that by such a sale more might be realized than by 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 of the parties ought to be determined was, that the jDortions 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, had 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 mortgages, 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 several mortgages 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.

Now 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 a 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 their mortgages became liens upon the debtors’ 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 he affirmed with costs.

All concur.

-Order affirmed.