The opinion of the court was delivered by: BARTELS
Petition by Mann-Forbes Co., Inc. (hereafter 'Mann-Forbes'), a judgment-creditor of the bankrupt, for review of an order by Honorable William J. Rudin, Referee in Bankruptcy, dated November 20, 1961, as amended on December 1, 1961, determining the priority of distribution of funds realized from the sale of the real property of the bankrupt. The property in question has been subjected to unpaid liens, in the following chronological order:
1. Mann-Forbes' judgment in the amount of $ 2,546.48;
2. A mortgage to Donald Capobianco subsequently recorded for services with regard to the property, in the amount of $ 10,000; and
3. Mechanics' liens filed subsequent to the above two liens, pursuant to New York Lien Law.
After the payment of other prior liens, the funds in the hands of the Trustee are admittedly insufficient to satisfy all of the foregoing liens.
Section 13(1) of the New York Lien Law, McKinney's Consol. Laws, c. 33 provides, in part, as follows:
'A lien for materials furnished or labor performed in the improvement of real property shall have priority over * * * a money judgment hereafter recovered upon a claim, which, in whole or in part, was not for materials furnished, labor performed or moneys advanced for the improvement of such real property; and over any claim or lien acquired in any proceedings upon such judgment. * * *'
The Mann-Forbes Judgment was one for money only and did not arise out of work or services with respect to the property, whereas the Capobianco mortgage was given for services performed for the improvement of said property. The Capobianco mortgage being prior in time to the mechanics' liens is superior to them, while the Mann-Forbes judgment, although prior in time to both the mechanics' liens and the Capobianco mortgage, is inferior to the mechanics' liens but superior to the Capobianco mortgage.
The question raised by these facts is, how can the superiority of the MannForbes judgment over the Capobianco mortgage be maintained, while at the same time preserving both the priority of the mechanics' liens the Mann-Forbes judgment and the priority of the Capobianco mortgage over the mechanics' liens?
Faced with circuity of liens, the Referee, relying on In re American Zyloptic, D.C.E.D.N.Y.1960, 181 F.Supp. 77, made the following determination:
1. The judgment being prior to the mortgage, the amount to be paid to the mortgagee should be reduced by the amount of the judgment and as thus reduced the mortgage should be satisfied;
2. Since the mechanics' liens take precedence over the judgment, the $ 2546.48 thus deducted from the mortgage should be first applied to the payment of the mechanics' liens;
3. The balance remaining shall be applied to the satisfaction in full of the mechanics' liens and the surplus, if any, ...