Last updated 7 December 2012
Under the equitable doctrine of marshaling (alternatively spelled “marshalling”) a creditor with a lien in two properties, one of which is subject to a junior lien, must first attempt to realize payment from the unencumbered property.(1)
Table of contents for this topic:
- Exceptions
- Footnotes
Prevent prejudice to senior lien creditor. In re Snyder, 436 B.R. 81, 87 (Bankr.D.D.Ill. 2010), points out that:
Marshaling should not be applied when the result would be inequitable to the senior creditor. In re Bank of Oakley, 131 Cal.App. 203, 210, 21 P.2d 164 (Cal.App. 1 Dist. 1933). Inequity might be in the form of mere delay or inconvenience to the senior creditor. Toledo Blank, Inc. v. Pioneer Steel Serv. Co., 98 Ohio App.3d 109, 114, 648 N.E.2d 1 (Ohio App. 6 Dist. 1994). The remedy has been denied where the fund or property available to the senior creditor is of uncertain value. Id. Most certainly, the prejudice to be avoided is rendering an oversecured senior creditor undersecured because of an ill-advised marshaling order. SeeSowell v. Federal Reserve Bank of Dallas, Tex., 268 U.S. 449, 457, 45 S.Ct. 528, 69 L. Ed. 1041 (1925). The party seeking to invoke marshaling bears the burden to show that the senior lienholder will not be prejudiced or suffer a hardship if marshaling is ordered. Herzog v. NBD Bank of Highland Park, 203 B.R. 80, 83 (N.D.Ill. 1996).
Protect debtor exemptions. Meyer v. U.S., 375 U.S. 233, 84 S.Ct. 318, 11 L.Ed.2d 293 (1963), lists numerous exceptions to application of the doctrine:
[S]tate courts have refused to apply it where state-created homestead exemptions would be destroyed, Sims v. McFadden, 217 Ark. 810, 23 S.W.2d 375; or where the rights of insurance beneficiaries would be adversely affected, Bruns v. First Trust & Deposit Co., 250 App.Div. 370, 295 N.Y.S. 412; or where the rights of third parties having equal equity would be prejudiced, Barbin v. Moore, 85 N.H. 362, 159 A. 409, 83 A.L.R. 62; or where the ‘head of the household’ exemption was involved, Westgrove Savings Bank v. Dunlavy, 190 Iowa 1054, 181 N.W. 404, and Pugh v. Whitsitt & Guerry, 161 S.W. 953 (Tex.Ct.Civ.App.). Federal courts have likewise accepted this principle of the nonapplicability of the doctrine where, as here, one of the funds is exempt under state law. See In re Bailey, 8 Cir., 176 F. 990, where a state legislative homestead exemption was held to be a superior equity in the hands of a bankrupt, preventing the marshaling of assets to his disadvantage; Robert Moody & Son v. Century Savings Bank, 239 U.S. 374, 378, 36 S.Ct. 111, 113, 60 L.Ed. 336 (1915), where Iowa’s requirement that a homestead, even when validly mortgaged, may be sold only for a deficiency remaining after exhausting all other property was declared available to a junior mortgagee to prevent a marshaling of assets; and Lockwood v. Exchange Bank, 190 U.S. 294, 300—301, 23 S.Ct. 751, 753—754, 47 L.Ed. 1061 (1903), where a waiver of state exemption statutes was held to have no effect in bankruptcy since the title to the exempted property remained in the bankrupt and never reached the trustee’s hands. It, therefore, seems clear that the courts have considered state exemption statutes when weighing the equities between parties to determine the applicability of the marshaling doctrine.
1 : Meyer v. U.S., 375 U.S. 233, 236, 84 S.Ct. 318, 11 L.Ed.2d 293 (1963).