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JAY VENDING (09/22/75)

SUPERIOR COURT OF PENNSYLVANIA


decided: September 22, 1975.

JAY VENDING, INC., ET AL. APPEALS

Appeals from order of Court of Common Pleas of Montgomery County, No. 73-15375, in case of In Re: Distribution of Proceeds From Sheriff's Sale of Premises 250 Bell Road, Lower Merion Township, Montgomery County Pennsylvania. Appeal of: Jay Vending Inc., Michael Margolies, John H. McCoy, and William L. O'Hey, Jr.

COUNSEL

Edward Fackenthal and Edward N. Kurland, with them Charles Blasband, and Henderson, Wetherill, O'Hey and Horsey, for appellants.

L. Carter Anderson, with him George M. Brodhead, James A. Cassel, Thomas E. Waters, and Rawle & Henderson, and Waters, Fleer, Cooper & Gallager, for appellee.

Watkins, P. J., Jacobs, Hoffman, Cercone, Price, Van der Voort, and Spaeth, JJ. Opinion by Price, J.

Author: Price

[ 236 Pa. Super. Page 260]

This is an appeal by judgment creditors from an order of Judge Richard E. Lowe of the Court of Common Pleas of Montgomery County, sustaining exceptions by appellee-judgment creditor to a sheriff's schedule of distribution. The controversy arises from the following facts.

Appellee, Boenning and Scattergood, Inc. (Boenning) obtained a judgment against John E. Jennings and Helen M. Jennings, his wife, in the amount of $30,500 on April 14, 1966. On July 3, 1970, Boenning initiated execution proceedings against real property owned by Jennings located at 250 Bell Road, Montgomery County. However, this writ of execution was not formally recorded in the judgment index in the Prothonotary's Office in Montgomery County. Mr. and Mrs. Jennings moved for a stay order which was issued on July 13, 1970, to abide resolution of the judgment's validity. On July 29, 1972, the stay order was discharged by the lower court and that dismissal was affirmed per curiam by this court in Boenning & Company v. Jennings, 222 Pa. Superior Ct. 712, 294 A.2d 739 (1972).

Boenning then attempted to effect a second execution upon the Jennings' property, but again neglected to properly index the writ. Shortly thereafter, Mr. and Mrs. Jennings obtained an injunction from the United States District Court for the Eastern District of Pennsylvania which stayed the proceedings until December of 1973, when the United States Court of Appeals for the Third Circuit reversed the District Court. Boenning, at that time, instituted its third execution and the property was listed for sheriff's sale on February 20, 1974. On the same day the property was also scheduled for sale on the foreclosure of a first mortage in favor of the Equitable Life Assurance Society. The sum of $85,000 was realized from the sale, and after satisfaction of liens for taxes, costs of execution, and the Equitable mortgage, all of

[ 236 Pa. Super. Page 261]

    which had undisputed priority, the sum of $66,679.50 was available for distribution. The liens asserted against the remaining funds are as follows:

Approx. Amt.

     of Debt

Debt Date of Lien with Interest

1. Boenning Judgment April, 1966 $48,500

2. Strawbridge and Clothier

Judgment March, 1971 1,650

3. McCoy Mortgage August, 1971 30,000

4. Margolies Mortgage December, 1971 17,500

5. Jay Vending Co. Judgment June 19, 1973 21,000

6. McCoy Judgment June 20, 1973 1,300

7. O'Hey Judgment June 20, 1973 21,000

The mortgage and judgment of John H. McCoy were recorded with knowledge of the Boenning judgment. However, the liens of Margolies and Jay Vending Co. against the realty were entered of record more than five years from the entry of the unrevived Boenning judgment of April 14, 1966. Moreover, these lienholders at no time had any knowledge of the Boenning judgment, nor of the execution proceedings relating thereto.

Since Boenning's judgment had not been entered in the judgment index for nearly eight years preceding the date of the sale, the sheriff did not include it in his proposed schedule of distribution. Boenning filed exceptions to the schedule, seeking to maintain its position, claiming its lien had been improperly omitted.

On October 30, 1974, the lower court sustained the exceptions of Boenning and directed that they be accorded priority over all judgment creditors with the exception of Strawbridge and Clothier. We disagree with that result. Boenning's argument that the July 14, 1970, stay order*fn1 had the effect of relieving it of its duty to

[ 236 Pa. Super. Page 262]

    revive its judgment is incorrect. Traditionally, an order opening a judgment for the purpose of letting in a defense neither extinguishes nor impairs a lien, and a judge is powerless to amend the lien. Duffey v. Houtz, 105 Pa. 96 (1884); Kittanning Insurance Company v. Scott, 101 Pa. 449 (1882). The language in Duffey at 101-02 is: "The pendency of the proceedings does not operate to revive the judgment or continue its lien during the intervening time; Styers' Appeal, 9 Harris, 86; nor when it is opened for defence [sic], can an order of court that 'the judgment remain as security' extend the lien. Fricker's Appeal, 1 Watts, 393."

This language refers to the prevailing lien law of that time*fn2 which provided, ". . . no order or rule of court, or any other process or proceeding thereof, shall have the effect of obviating the necessity of the revival in manner herein prescribed of any judgment whatever." The present lien law,*fn3 while not containing language identical to the 1827 lien law, does limit the duration of a lien to five years unless it is revived as provided.*fn4 A lien is not affected by the opening of a judgment to permit a defense. Sanctis v. Lagerbusch, 213 Pa. Superior Ct. 483, 249 A.2d 919 (1968). Whatever effect the litigation involving the stay order had with respect to Boenning's

[ 236 Pa. Super. Page 263]

    judgment, it did not preclude or excuse Boenning from properly reviving its lien.

As of July 3, 1970, when the writ of execution was issued, Jennings' premises at 250 Bell Road were subject to Boenning's lien. McCoy, who has a lien junior to Boenning's, had full knowledge of the Boenning lien, since McCoy's attorney, Mr. William O'Hey, was also representing Mr. and Mrs. Jennings in their litigation against Boenning.*fn5 The appellants rely upon the fact that the writ of execution issued on July 3, 1970, was not indexed. However, it is well established that the sole purpose of indexing is to give notice of the lien to subsequent lienors and purchasers. Where there is actual notice, indexing is not necessary. In Russeck v. Shapiro, 170 Pa. Superior Ct. 89, 84 A.2d 514 (1951), the court indicated that a purchaser would have taken subject to an incorrectly indexed judgment had he had actual knowledge of such. This court stated in Lambert v. K-Y Transportation Co., 113 Pa. Superior Ct. 82, 172 A. 180 (1934), that a notice theory was adopted under which indexing of the judgment became necessary for priority as to all except those with actual notice of the judgment. Therefore, McCoy and O'Hey, by having actual knowledge of Boenning's lien will take in the same priority as if Boenning had correctly indexed its writ of execution.

Having determined that Boenning's judgment remains superior to those of McCoy and O'Hey, we must align the priorities of all the interested lien creditors. McCoy's mortgage has been shown to be superior to both the Margolies mortgage and the Jay Vending Company judgment. However, it is also clear that Boenning's lien was not revived against Margolies or Jay Vending, neither of which had actual knowledge of the execution proceedings. Therefore, Margolies and Jay Vending have priority over Boenning, and this problem constitutes a circular lien.

[ 236 Pa. Super. Page 264]

Pennsylvania courts have used the temporal priority rule to break the circle and realign the parties: first in time -- first in right.*fn6 This rule was applied in Miller's Appeal, 122 Pa. 95, 15 A. 672 (1888); Thomas' Appeal, 69 Pa. 120 (1871); Manufacturer's and Mechanics' Bank v. Bank of Pennsylvania, 7 Watts and Sergeant 335 (1844); Wilcocks v. Waln, 10 Sergeant and Rawle 380 (1824); and in Dowling v. Vallett, 70 Pa. Superior Ct. 481 (1918).

However, the rule of temporal priority has never been applied when the circuitry of liens has arisen solely as the result of the neglect of a prior lienholder in failing to properly record or revive his lien.

In Wilcocks v. Waln, supra, the circuitry arose by operation of law, wherein a lien of the federal government was given automatic preference by laws of the United States, although that lien arose later in time. The circuitry problem in Manufacturer's and Mechanics' Bank, supra, and Dowling v. Vallett, supra, was not caused by the neglect of one lienholder to record or index, as is the case before us, but by technical imperfections in the lienholder's attempt to record.

In Thomas' Appeal, supra, and Miller's Appeal, supra, the circuitry of liens resulted from subrogation, such as a circuitry arising from the action of one lienholder in gaining priority as a result of a waiver of a widow's statutory exemption (Miller) or a waiver of a debtor's exemption (Thomas) while another benefitted from no such waiver.

Other jurisdictions have been faced with the specific problem we face here -- a circuitry resulting from the

[ 236 Pa. Super. Page 265]

    failure of a prior lienholder to record his lien. The courts in Day v. Munson, 14 Ohio St. 488 (1863), and Hoag v. Sayre, 33 N.J. Eq. 552 (1881), faced this dilemma and fashioned clearly reasoned solutions for it.

In Day v. Munson, supra, there was a circuitous lien involving three mortgages. The first mortgage lost its lien as against the third by failure to re-file within the statutory period of one year, so that the third mortgage was taken without notice of the first. However, the second mortgage lien was taken with actual notice of the prior mortgage, and had also maintained its priority over the third. As is the situation in the present case, the proceeds of the mortgaged property were insufficient to satisfy all the liens. A similar set of facts occurred in Hoag v. Sayre, supra. Both the Hoag court and the Day court used the same approach in solving the priorities problem. Both courts marshalled the funds in the following manner: to the third, if it be for as large a sum or a larger sum secured by the first; then the second encumbrance will be paid in full if the property is sufficient, and then the residue to the third, if there is a residue; and then the first lien will come in. Judge Dixon, in his dissent in Hoag v. Sayre, supra, at 562-63, is credited with extending and detailing, in a manner that has subsequently been widely accepted, this position:

"Therefore, if there be three encumbrancers, A, B and C, in the order of time, and A's lien be prior to B's, and B's to C's, but for A's omission to properly register his lien, it is void as to C's, then the fund should be disposed as follows:

1. Deduct from the whole fund the amount of B's lien, and apply the balance to pay C. This gives C just what he would have if A had no Existence.

2. Deduct from the whole fund the amount of A's lien, and apply the balance to pay B. This gives B what he is entitled to.

[ 236 Pa. Super. Page 2663]

. The balance remaining after these payments are made to B and C is to be applied to A's lien."

In the present case the judgment creditors shall be identified by the following: Boenning -- "A", McCoy -- "B", and "C" will represent both Margolies and Jay Vending Company.

We believe a distribution must be made with compliance to the formula previously expressed for the reasons pointed out in Execution Sales: Lien Divestiture and Distribution of Proceeds in Pennsylvania, 58 Dick. L. Rev. 244, 265-66 (1954): "Where A has failed to record, B has recorded with notice, and C has recorded without notice, C alone is in a completely helpless position. A could have prevented the circuitry by recording. B could have prevented it by refusing to accept a mortgage unless and until the prior mortgage had been recorded. C, however, cannot protect himself at all if he may not rely on the record. He can do nothing to prevent the circuitry. If the only parties involved were A and C, the latter, of course, would be ahead. Shall the intermediation of B be permitted to yield A a windfall merely because B happened to have notice of A's unrecorded mortgage? Since C alone could have done nothing to have prevented the situation from arising, it would seem that he ought to be accorded the protection that reliance on the record was intended to afford. C therefore ought first to be paid that sum which he would have received had the priorities been as they appeared on the record. To hold otherwise would impair the results intended to be achieved by recording acts, and would act as an effective restraint on many security transactions, for no one could safely lend money on the security of real estate if it were already subject to an encumbrance."

An equitable distribution in this case which encourages compliance with the Judgment Lien Law*fn7 is:

[ 236 Pa. Super. Page 2671]

. Boenning Judgment $13,470.50

2. Strawbridge and Clothier

Judgment (Undisputed) 1,650.00

3. McCoy Mortgage 16,529.50

4, Margolies Mortgage 17,500.00

5. Jay Vending Co. 17,529.50

*fn8 $66,679.50

Reversed and remanded to the lower court for a distribution consistent with this opinion.

Disposition

Order reversed and case remanded.


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