Opinion ID: 1989216
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Heading: The Doctrine of Marshaling Assets

Text: The doctrine of marshaling assets is a familiar and equitable doctrine, providing that where a creditor has a lien on or interest in two funds or properties in the hands of the same debtor, and another creditor has a lien on one of those funds or properties, equity at the request of the latter creditor will compel the creditor with two funds to satisfy his debt out of that fund to which the other creditor cannot resort. C. Gotzian & Co. v. Shakman, 89 Wis. 52, 61 N.W. 304 (1894); Dahlman v. Greenwood, 99 Wis. 163, 170, 74 N.W. 215 (1898); Andersen Yard Co. v. Citizens State Bank, 187 Wis. 60, 62, 203 N.W. 921 (1925); United States v. Le May, 346 F. Supp. 328 (E.D. Wis. 1972). Because the doctrine is purely equitable, it is irrelevant that the onefund creditor is junior to the creditor who can resort to other funds. This interference with the strict legal rights of the prior lienor is based on the principle that justice requires that he should not arbitrarily or capriciously ignore the rights of another creditor of the same debtor having a less favored security. Andersen Yard Co. v. Citizens State Bank, supra at 63. Marshaling has regard to the rights of all who have interest in the property involved. 55 C.J.S., Marshaling Assets and Securities, sec. 1 at 959 (1948). But as with all equitable doctrines, marshaling assets is not an absolute right: `The doctrine of marshaling [assets] being a rule of equity and having its foundation in principles of natural justice, its application will not be inforced when it would so operate as to work substantial injustice or injury to any party in interest. Thus marshaling will not be applied to the detriment of a third person having an equity equal or superior to that of the person seeking to invoke the rule.' (Citations omitted.) Estate of Snell, 227 Wis. 455, 467, 279 N.W. 24 (1938). Moser argues that, since Midland can satisfy its claim against North Shore out of the Polka and Frey residences as well as out of North Shore's accounts receivable while Moser can resort only to the accounts receivable, equity should compel Midland to resort first to the collateral to which Moser cannot resort. [4] As a general rule before a court of equity will marshal assets and securities between two creditors, it must appear that (1) they are creditors of the same debtor, (2) that there are two funds belonging to that debtor, and (3) that one of them alone has the right to resort to both funds. 53 Am. Jur.2d, Marshaling Assets, sec. 7 (1970); 55 C.J.S., Marshaling Assets and Securities, sec. 6 (1948). Thus, even though one creditor is secured by the debtor's surety while a second creditor is not, equity will not in the ordinary case compel the secured creditor to exhaust his remedy against the surety before proceeding against the principal debtor. 135 A.L.R. 738 (1941). The trial court applied these well-accepted rules and concluded that because the funds Moser seeks to marshal are the property of different debtors, i.e., because the garnisheed accounts receivable belong to North Shore while the residences belong to Polka and Frey, who are only sureties of North Shore, the doctrine of marshaling should not be applied. However, Polka and Frey are not merely sureties of North Shore. In this case the sureties, Polka and Frey, have pledged their residences to secure not only their note and their performance as sureties but the debtor North Shore's original $100,000 debt. This distinction makes the rule stated in the above-cited annotation inapplicable. The cases contained in the annotation are cases where the surety has simply guaranteed the debtor's obligation. They stand for the proposition that, even though the surety is liable at law to pay the principal's debt, equity administers a more exact justice and will not normally permit the surety's property to be made to satisfy the principal debt when the principal's property will suffice. See also: Annot., 37 A.L.R. 1262 (1925). But here a superior equity exists. The residences of Polka and Frey are more than the property of a surety. The mortgages secure the aggregate obligation of North Shore, Polka, and Frey directly. The value of the two residences are a fund out of which the North Shore's obligation to Midland can be primarily satisfied. [5] We have previously held that the doctrine of marshaling assets does not require that the debtor have legal title to the funds that are to be marshaled. C. Gotzian & Co. v. Shakman, supra . In Gotzian the plaintiffs were general unsecured creditors of a partnership clothing business. They reduced their claims to judgment and sought to execute on that judgment by attaching the inventory of the business, just as Moser seeks to execute on its judgment by garnisheeing the accounts receivable of North Shore. However, the plaintiffs' attachment was junior to that of another creditor, Shakman, just as Moser's claim is junior to that of Midland. Shakman had loaned one of the partners the capital he needed to begin the partnership. This loan was secured by mortgages on property owned by this particular partner and his wife. When the business appeared to fail, Shakman chose to satisfy his claim by attaching the inventory of the business rather than foreclosing the mortgages. The plaintiffs contended that Shakman should be required to marshal assets and satisfy his claim out of the mortgages which were available to him alone. Shakman contended, exactly as does Midland, that the marshaling of assets only applies where the two creditors have the same debtor and the two funds are the property of the same person. (Emphasis in the original.) 89 Wis. at 58. However, the court in Gotzian held that such a rule applied only in the ordinary case and that there were additional equitable considerations, not present in the cases in which the rule has been applied, and which must be considered. The court noted that the money loaned to the partner by Shakman was used for the capital of the business to obtain credit for the inventory to be purchased. Id. The court concluded that the mortgages were therefore a contribution to the capital stock of the firm and must be so regarded in equity: In form, it was a security given by a partner upon his individual property; in fact, it was a contribution to the capital of the firm. This plainly constitutes what is termed by Story (1 Eq. Jur., sec. 645) a `supervening equity which must be considered,' and, when considered, it plainly brings the case within the rule, because the two funds are thus, in the contemplation of equity, both partnership funds. 89 Wis. at 59. [6] Here as in Gotzian the money loaned to the individuals was used for working capital for the business. In transactions that permitted North Shore, Polka, and Frey to stay in business until the business was purchased by the Community Newspapers, Inc., Polka and Frey guaranteed the obligations of North Shore, and North Shore guaranteed the obligations of Polka and Frey. In the spring of 1974 after default, all of these obligations had ripened to absolute liability. Most important of all, the mortgages executed by the Freys and the Polkas by their very terms secured the obligations of North Shore directly. Although record title to the residences remained in the hands of Polka and Frey, in the eyes of equity the Polkas and the Freys had placed their residences in the company till. We hold that under these circumstances the mortgages created a fund which equity will consider a fund of North Shore itself. Under these circumstances, the marshaling of assets doctrine is appropriate. The Polka and Frey mortgages given to Midland were both second mortgages on the properties. A real estate salesman testified that the fair market value of the Polka residence in Waukesha County was $76,000. The first mortgage was approximately $42,000. Frey testified that the value of his residence in Du Page County, Illinois, was $94,000, while the first mortgage on it was $63,000. Midland's vice president testified that Midland had already given notice of foreclosure on the Polka property in Waukesha County, since the accounts receivable garnisheed by Moser were not sufficient to satisfy the $19,000 Midland judgment. It thus appears that the equity in the residences available to Midland may be as high as $65,000. Although Gotzian suggests that equity will not require Midland to foreclose in Illinois, the equity in the Polka property in Waukesha County appears to be sufficient to fully satisfy Midland's $19,000 claim. Because the garnisheed funds total only approximately $14,000, Midland to satisfy its claim must foreclose on the mortgages in any event. Indeed Midland has already commenced foreclosure. If upon a sale of the property Midland's $19,000 claim is not fully satisfied, it can still resort to the garnisheed funds since the garnisheed funds can be held in court until the foreclosure sale is consummated. See, e.g., C. Gotzian & Co. v. Shakman, supra at 60. None of Midland's security will be taken from it, while Moser's judgment can be satisfied out of the garnisheed funds. For these reasons, the judgment dispersing the garnisheed funds to Midland must be set aside and the cause remanded. The trial court is directed to apply the doctrine of marshaling assets to the extent that it can be done without injuring Midland. By the Court. Judgment reversed and cause remanded for further proceedings not inconsistent with this opinion.