Pownal Development Corp. v. Pownal Tanning Co.

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, 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) (where trial court resorted
  solely to documents of record  in determining ownership, "the spirit and
  intent of our recording statutes and . . . [the] public policy  respecting
  reliance upon the land records" were not violated.).  We therefore perceive
  no relevance to  the fact that plaintiff may have known of the mill's
  pollution.

       At oral argument, the State added to its claim of "inequity" by
  stating that refusing plaintiff    the partial foreclosure remedy it seeks
  would "force it to the table" to negotiate with the State. We    merely
  note that any obligation to negotiate with the State must be founded on
  some legal obligation  running from plaintiff for the benefit of the State. 
  Under the common law,  plaintiff, as purchaser of  the senior lien, owes no
  substantive duty to the State as holder of a junior encumbrance.  Likewise, 
  we conclude that 10 V.S.A. § 6615(h), a mechanism which allows secured
  lenders, upon foreclosure,  voluntarily to enter into agreements with the
  state for the purpose of limiting liability 

 

  on contaminated property, does not imply further that lenders, such as
  plaintiff, have an equitable  duty to bear any clean-up costs for polluted
  property they do not seek to foreclose on.  Consequently,  if plaintiff
  owes no duty, it has no duty to negotiate.

       The State next argues that because plaintiff purchased its mortgage at
  a substantial discount,  it also acquired the clean-up obligation.  This
  must be recognized as an irrelevant consideration.   First, neither the
  State nor the public are in any way disadvantaged for dealing with
  plaintiff, as  successor mortgagee, rather than the original grantee of
  that instrument.  Second, at what point  would the law hold that too much
  of a discount is inequitable?  Finally, just as the law favors the 
  alienability of title to real estate, it should also favor the alienability
  of mortgages.  When potential  lenders know that they may sell freely their
  security on the open market, as well as foreclose in the  event of default,
  the law renders it more attractive for them to lend in the first instance. 
  The  principle is well established that Vermont property owners and
  businesses will be benefitted by legal  doctrine that encourages the
  lending of money.  Similarly, the fact that plaintiff may have recovered 
  its discounted purchase cost already by foreclosing on nearby lands in New
  York is also irrelevant.

       The State's final argument that equity should bar plaintiff from the
  relief it seeks is that it is  unfair to permit it to "cherry pick" the
  valuable lands, and walk away from the cost of cleaning up the  polluted
  Mill Lot.  Citing  In re Great Waters of America, Inc, 140 Vt. 105, 109,
  435 A.2d 956, 959  (1981), the State argues, in effect, that plaintiff
  "must take the bitter with the sweet." (quoting Arnett  v. Kennedy, 416 U.S. 134, 154 (1974).  But plaintiff, as holder of a loan instrument, bears
  no  responsibility for the pollution here.  Its benefit is no different
  from that of other members of the  public, particularly other adjacent
  landowners.  As the arm's-length purchaser of a mortgage covering  polluted
  property, long after the pollution was in place, plaintiff cannot be held
  vicariously liable for  causing it in the first place. Were our conclusion
  otherwise, no institution would lend funds to a  business for the purpose
  of cleaning up a polluted site.  Tarring plaintiff with responsibility for 
  cleaning up what it never dirtied serves no equitable purpose.

 

                       III.  Waste-Management Statute

       Finally, in its counterclaim and as an alternative theory of
  liability, the State maintains that  Vermont's Waste Management Act, see 10
  V.S.A. §§ 6601-6632, requires that, even if partial  foreclosure were
  upheld, plaintiff still should be held liable for remediation of the Mill
  Lot.  In  general, a secured lender, "holding indicia of ownership in a
  facility primarily to assure the  repayment of a financial obligation,"
  cannot be held liable as an owner or operator of contaminated  property. 
  10 V.S.A. § 6615(g)(1)(A) (the safe harbor provision).  The State, however,
  contends that  this secured-lender exemption does not apply in this
  instance.  It argues that, by obtaining title to a  contiguous parcel of
  land, Lot 1(A), plaintiff is liable for remediation costs associated with
  the Mill  Lot.  This liability is premised on the State's assertion that
  the Mill Lot and Lot 1(A) are part of the  same "facility."  Id. §
  6602(10).  Thus, by foreclosing on Lot 1A, plaintiff necessarily became the 
  owner of, and thereby liable for, the entire facility, including the Mill
  Lot.  See id. § 6615(a)(1)  (facility owners and operators are liable for
  remediation).

       Under the Act, "'[f]acility' means all contiguous land, structures,
  other appurtenances, and  improvements on the land, used for treating,
  storing, or disposing of waste.  A facility may consist of  several
  treatment, storage, or disposal operational units."  Id. § 6602(10)
  (emphasis added).   "Disposal" is defined as "the discharge, deposit,
  injection, dumping, spilling, leaking, or placing of  any solid waste or
  hazardous waste into or on any land or water so that such solid waste or
  hazardous  waste or any constituent thereof may enter the environment or be
  emitted into the air or discharged  into any ground or surface waters." 
  Id. § 6602(12).

       The parties stipulated that "[w]aste from the Mill Lot was not
  disposed of on the lands of Lot  1A . . . which lie to the west of the west
  bank of the Hoosic River."  Rather, waste water was  discharged, first
  directly (prior to 1962) and then indirectly (after 1962), through a series
  of lagoons,  into the river from a portion of the east bank.  This
  "easterly bank of the Hoosic River from which  the eventual waste water was
  discharged from lagoon 5 is situated within the boundaries of Lot 1A."  As
  a result of this discharge, "there are elevated levels of lead and chromium
  in the riverbed within 

 

  the boundaries of Lot 1A."  At this time, however, "remediation of that
  portion of the Hoosic River  within Lot 1A is not necessary and will not be
  undertaken by the State."

       The trial court concluded that Lot 1A and the Mill Lot are contiguous
  because the two parcels  abut each other.  See, e.g., Route 4 Assocs. v.
  Town of Sherburne Plan. Comm'n, 154 Vt. 461, 462,  578 A.2d 112, 113 (1990)
  (contiguous means "touching").  The trial court, however, did not address 
  the issue of whether the disputed lots constitute a "facility" under §
  6602(10). (FN2)  Although the  trial court does not appear to have ruled on
  the State's counterclaim, per se, by issuing a decree of  foreclosure, that
  claim was rejected implicitly.  Moreover, no party on this appeal argues
  that  pertinent facts went unresolved, requiring a trial below.  Hence we
  are left with the duty to apply the  law to the agreed facts.  See DeWitt
  v. Brattleboro Zoning Bd. Adj., 128 Vt. 313, 324, 262 A.2d 472,  478 (1970) 
  (where  parties do not contend that there is shortage of facts, and
  sufficient undisputed  facts permit resolution of issues, we must "apply
  the applicable law to these undisputed facts").

       Putting aside for the moment questions of ownership, Lot 1A could be
  considered a facility  under § 6602(10).  It is contiguous to the Mill Lot,
  and was used in a broad sense in the disposing of  waste, as some of that
  material evidently passed through it in earlier periods.  This was, of
  course,  long before plaintiff mortgagee had any interest in Lot 1A.  As a
  mere mortgagee, plaintiff is a  "secured lender" subject to the safe harbor
  provision of § 6615(g)(1)(A).  The State concedes as  much.  

       Once a mortgagee commences foreclosure, it is still only a secured
  lender.  The State's  counterclaim must set forth "any claim which at the
  time of serving the pleading the pleader has  against any opposing party .
  . . ."  V.R.C.P. 13(a).  The State has not shown what claim it had, under 
  the waste-management statute, at that time.  At a later time, after the
  decree of foreclosure becomes  choate by expiration of rights of
  redemption, plaintiff will become the owner of Lot 1A.  Whether it  thereby
  becomes liable in some way for being the owner of that lot is not for
  determination at this 

 

  time.  We may decide only claims pending between parties, not all possible
  future claims.  See C. V.  Landfill, Inc. v. Environmental Bd., 158 Vt.
  386, 391, 610 A.2d 145, 148 (1992) (noting the   "general jurisdictional
  prerequisite that a court exercise its power to resolve only real disputes
  - cases and controversies - as opposed to issuing advisory or hypothetical
  opinions") (internal  quotation marks omitted).

       Affirmed.



                                       FOR THE COURT:


                                       _______________________________________   
                                       Superior Judge, Specially Assigned



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                                  Footnotes


FN1.  The parties disputed whether Lot 1A is contiguous with Lot 3, the Mill
  Lot.  The trial court  concluded that the parcels are contiguous, see
  discussion infra, Part III.  This conclusion was not   appealed.
       
FN2.  The trial court's conclusory statement that the parcels "are portions
  of one facility that falls  under single ownership," until one of the
  parcels is foreclosed, does not reveal a § 6602(10) analysis.