Marshalling Assets

Such an arment of creditors into classes with respect intervening interests of particular persons to prior satisfaction out of a part of the funds. 1 Story, Eq. 558. The doctrine does not apply unless there are two funds in existence to which claim is made by several having diverse rights. L. R. 3 Eq. 668. But it is immaterial what is the nature of the property which constitutes the fund.

An equitable principle upon which the legal rights of creditors are controlled in order to accomplish an equitable distribution of funds in accordance with the superior equities of different parties entitled to share therein. It springs from the principle that one who is entitled to satisfaction of his demand from either of two funds shall not so exercise his election as to exclude a party who is entitled to resort to only one of the funds. For example, where one creditor has a mortgage upon two parcels of land upon one of which there is a junior incumbrance not otherwise secured, the first mortgagee may be compelled to exhaust in the first instance that parcel of land which is otherwise unencumbered in order that the security of the junior incumbrancer may not be entirely destroyed. In such case, however, the indisposition of equity to interfere with the legal rights of a creditor results in working out the equity of the junior incumbrancer through a substitution to the right of the paramount mortgagee as against the other property; Blsph. Eq. § 27, 340. Marshalling assets is a pure equity; it does not rest at all upon contract, and will not be enforced to the prejudice of either the dominant creditor or third persons, or even so as to do an Injustice to the debtor; Gljliam v. Mc Cormack, 85 Tenn. 697, 4 S. W. 621. See Bruner’s Appeal, 7 W. & S. (Pa.) 269; 2 Lead. Cas. Eq. 260; Norfolk State Bank v. Schwenk, 61 Neb. 146, 70 N. W. 970; Hunter v. Whitfield, 89 111. 229; Kent v. Williams, 114 Cal. 637, 46 Pac. 462. The doctrine applies only when both funds are in the hands of a common debtor; Perry’s Adm'r V. Elliott, 101 Va. 709, 44 S. E. 919. It will not be applied if the doubly charged security is precarious, or where its application would delay or Injure the senior creditor; Kendig v. Landis, 135 Pa. 612, 19 Atl. 1068; Butler v. Elliott, 16 Conn. 187; Everthimself to prevent his getting the fund singly charged free from both debts by throwing both creditors on the fund doubly charged, and is not a right of the inferior against the paramount creditor; Benedict v. Benedict, 16 N. J. Eq. 160; Pope v. Harris, 94 N. O. 62. The equity of marshalling seems capable of being carried into effect in one of two ways: either, first, by restraining the parties against whom it exists from using a security to the injury of another; or, secondly, by giving the party entitled to the protection of this equity the benefit of another security in lieu of the one of which he has been disappointed. In other words, the right might be enforced either by injunction against the paramount creditor, or by subrogation in favor of the junior creditor. In practice, however, the latter of these two methods is the one usually employed, and the sounder doctrine seems to be that the first of the two ought not to be resorted to except under very peculiar circumstances. But there are decisions to the contrary; 2 Lead. Cas. Eq. 280. Of course, when both funds are in court or under its Immediate control, the case is different. One whose securities have been re-hypothecated by a pledgee, together with securities belonging to the latter, has a right to compel the application of the latter securities to the payment of the debt before resort is had to those wrongfully re-hypothecated; Union Pac. Ry. Co. v. Schiff, 78 Fed. 216. A common application of this doctrine is where mortgaged real property is subject to sale under the mortgage in the inverse order of alienation. The leading English case was Barnes v. Racster, 1 Y. & C. Ch. 401, and the rule in that country has been termed the rule of ratable contribution; Sto. Eq. Jur. § 1233; while the American rule was first settled by Kent, Ch., in Clowes v. Dickenson, 5 Johns. Ch. (N. Y.) 235, where the doctrine of exoneration in the Inverse order of conveyance was adopted. It has been noted that in this case a statement in fact obiter has been generally adopted and followed in the United States. See a valuable article by J. M. Gest in 27 Am. L. Reg. n. s. 739, for a critical view of the English and American cases. The rule was held not to apply to a purchase merely of the equity of redemption in a portion of the mortgaged premises so as to relieve the purchaser upon taking an assignment of the mortgage from his proportion of it and entitling him to enforce the law against the remaining portion; Parkey v. Veatch, 68 Mo. App. 67. See Carpenter v. Koons, 20 Pa. 222; Lovelace v. Webb, 62 Ala. 271. It is said that on a sale of a part of mortgaged lands the unsold portion is pri- A trustee in bankruptcy is in the same position as the mortgagor himself. The court in marshalling will adjust the rights of the respective assignees of the mortgagor by directing the claim of the paramount creditor to be apportioned between the assignees of the various properties according to their values; 22 L. Q. Rev. 307. * The term marshalling liens has been used to express the application of the particular equity Just referred to, being said to mean “the ranking or ordering of several estates or parcels of land, for the satisfaction of a judgment or mortgage to which all are liable, though successively conveyed away by the debtor.” 1 Black, Judgm. § 440. It would s^m, however, that the phrase is not an apt one in the application made of it, as the case put is the most ordinary one of marshalling assets, though as a matter of course there is always a marshalling of liens, in a certain sense, whenever a fund is distributed to lien creditors, as, even in an ordinary case of the application of the proceeds of a sheriff’s sale. This is not, however, to be confused with the great equitable doctrine under consideration. Another phrase, sometimes used, is marshalling securities, which is an expression for the same practice of equity to secure a class of creditors having but one fund available from having their security exhausted by another class who have two. This equitable doctrine cannot be Invoked as against those who have superior equities, and in this light the right of a wife to her own property is superior to that of her husband’s creditors; Ayres v. Husted, 15 Conn. 604; Johns v. Reardon, 11 Md. 466; nor is it applied in favor of a creditor of the debtor; Dorr v, Shaw, 4 Johns. Ch. (N. Y.) 17; Wise V. Shepherd, 13 111. 41; 17 Ves. 520; unless the creditor is a mere surety; Wise V. Shepherd, 13 111. 41; but it does not apply where the exclusive fund is the property of the surety for the debt for which such fund is bound; Mason v. Hull, 55 Ohib St. 256, 45 N. B. 632. The doctrine cannot be made available to create a fund, the two must exist; L. R. 3 Eq. 668; but once existing, it cannot be affected by the intervention of subsequent creditors; Ziegler v. Long, 2 Watts (Pa.) 205; Withers v. Carter, 4 Gratt. (Va.) 407, 60 Am. Dec. 78. A mortgagee having double security for his debt is not required by the existence of subsequent judgments against the mortgagor, of which he has no knowledge, to shape his action in the collection of his demand in accordance with the principle of marshalling the assets; Annan V. Hays, 85 Md. 505, 37 Atl. 20. The doctrine of marshalling is applied to an infinite variety of cases, and is liable to be resorted to wherever there Is necessity for the distribution of two funds among credclasses of persons are sometimes mentioned to whom it may be applied: (1) Creditors, (2) Legatees, (3) Between creditors and legatees, (4) Between legatees and vendors, (5) Between widows and legatees. As to its application in cases of successive purchasers, see 27 Am. L. Reg. 739; partnership; 20 id. 465; 21 id. 800; 24 Alb. L. J. 305; 34 id. 344, 364; devisees and legatees; 24 Ir. L. T. 239; homestead cases; 16 W. Jurist 28; 9 Ins. L. J. 677. See generally, 2 Wh. & Tud. L. Cas. Eq; 228; Bisph. Eq. §§ 341-350 and cases cited; Tied. Eq. Jur. 532. See Assets; Lien. Marshalling is applied to mortgage liens; thus where there is an unrecorded first (chattel) mortgage, a second mortgage recorded but with notice of the first and a recorded third mortgage, the third mortgagee receives so much of the proceeds of a foreclosure sale as would be applicable on his mortgage after satisfying the second mortgagee’s prior lien, and the latter is entitled to so much as would be applicable to his debt after satisfjdng the prior lien of the first, leaving the third mortgage out of the question. The first mortgagee is then entitled to the residue; Day v. Munson, 14 Ohio St. 488. In New Jersey where a first mortgage had priority over a second but was subordinate to a third, which was subordinate to the second, the proceeds go: First, to the third mortgagee to the amount secured by the first mortgage; second, to the second mortgagee, third, to the residue of the third mortgage and lastly to the first mortgagee; Hoag v. Sayre, 33 N. J. Eq. 652.