Daily Development for Wednesday, January 17, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

HAZARDOUS SUBSTANCES; CERCLA; FORECLOSURE: Mortgagee may foreclose selectively on a group of parcels to avoid a contaminated portion of the security.

Pownal Development Corp. v. Pownal Tanning Company, Inc. 2000 WL 1716965 (Vt. 11/17/2000)

A tanning company had disposed its wastewater into onsite lagoons for many years. All of the pollution resulting from this activity was restricted to a parcel known as the Mill Lot. In 1984, the tannery obtained financing from the First National Bank of Boston and gave mortgages on the Mill Lot and nine noncontiguous parcels of forested land comprising 834 acres.

In 1995, the plaintiff bought the mortgage note at a substantial discount and commenced foreclosure proceedings on all of the parcels except the Mill Lot.

The trial court ruled that the plaintiff could proceed with the partial foreclosure but the State appealed, arguing that partial foreclosure was inequitable and precluded under common law.

The Vermont Supreme Court affirmed the trial court's decision. Basically, it noted that the State had cited no law requiring the "all or nothing approach" advocated by the State. Instead, it concluded that the well established common law nationwide permits a mortgagee to foreclose only on a portion of the security available to it. It noted that in at least some instances the mortgagee would thereby waive its security interest in the property not foreclosed. [It should be noted, however, that waiver would not necessarily result where a single debt is secured by separate security instruments in several different properties. One would assume that the mortgagee could foreclose each instrument in a separate action.]

In response to the State's argument that this approach of permitting a mortgagee to "cherry pick" property granted as security in a single mortgage led to bad public policy, the court responded that in fact there were equitable reasons that might compel a sale of less than all of the property. The court noted that the equitable doctrine of marshalling provided that when a mortgage was secured by several parcels, a junior lienholder could compel a mortgagee to first offer for sale at foreclosure parcels that did not have junior encumbrances.

The State also argued that the public policy of the environmental laws ought to prohibit a mortgagee from dodging a polluted property and still benefitting from the security interest in the mortgagor's other parcels. The court, however, noted a compelling policy concern the other way. It pointed out that if the mortgagee was required to sell all of the parcels together, it was quite possible that all of the property would remain in legal limbo and could not be leased or sold. Such a result, the court reasoned, would violate the law's venerable policy of the free alienability of land.

The fact that the mortgagee had made itself a great deal by buying the mortgage at a heavy discount, presumably because some of the security was polluted, struck the State as inequitable , but the court viewed it as a simple free market transaction.

Note, however, that the court does raise one troubling fact for the mortgagee, or anyone, considering the properties at sale. One of the other lots was in fact contiguous to the Mill Parcel, and had at one time been the site of some of the distribution of pollutants that led to the pollution of the Mill Parcel. Although the contiguous lot was not itself polluted, the court reserved for a later day the question of whether it constituted part of the "facility" that had resulted in the discharge of hazardous substances, and what such a conclusion might mean with regard to the liability for clean up costs that might be borne by new owners of such a 'facility."

Comment: There's really not much new law here, as the court notes. But there is an interesting test of the existing law in light of current environmental policy, and the discussion of a strategy that undoubtedly is being considered in other situations nationwide.

The editor concurs that to require mortgagees to "take the bitter with the sweet," may prevent mortgagees from making mortgage loans at all in situations in which the asset strength of the borrower ought to justify a loan. Instead of encouraging responsible environmental administration, such a policy might indeed choke to death companies that otherwise would be able to continue in business and resolve for themselves the pollution problems on the properties in question. Although, perhaps, the mortgagee might not have loaned at all on the Mill Lot had it known that there was a difficult hazardous substances problem there, at the time the loan was made, in 1984, the mortgagee probably knew only that there was a potential problem. The mortgagor continued to do business on the site until 1990. Would it really have been good policy to have a law that would have dissuaded the mortgagee from viewing the Mill Lot as a potential security in 1984, even if that decision would have resulted in no loan being made?

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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