Opinion ID: 450777
Heading Depth: 3
Heading Rank: 2

Heading: Marshaling.

Text: 34 Owens-Corning argued before the bankruptcy and district courts that it was entitled under California law 15 to request a marshaling of assets, requiring Union Bank to satisfy its claim out of the assets on which Owens-Corning did not have a lien before the Bank could turn to Center's Owens-Corning inventory for satisfaction. In other words, Owens-Corning asserts that it had a valid property right in all of Center's Owens-Corning inventory, even that part ($990,000 worth) in which Union Bank had a senior lien. We disagree. 35 Section 544 of the Bankruptcy Code, the strongarm clause, vests the trustee or debtor in possession 16 with all of 36 the rights and powers of ... a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained a judicial lien, whether or not such a creditor exists .... 37 11 U.S.C. Sec. 544(a)(1) (1982). 38 In its position as a judicial lien creditor under section 544, Center objected to Owens-Corning's request for marshaling on the ground that it would do injustice to third persons, namely the estate. Cal.Civ.Code Sec. 3433. If Union Bank used collateral other than Center's Owens-Corning inventory to satisfy Union's claim, permitting Owens-Corning exclusively to use the Owens-Corning inventory to satisfy Owens-Corning's claim, there would be $990,000 less in assets in the estate to divide up among the unsecured creditors than if the Bank used the Owens-Corning inventory and thereby foreclosed Owens-Corning's ability to use that portion ($990,000 worth) of the collateral to satisfy its debt. 17 Judge King agreed with the suggestion by the debtor [in possession] that there would be prejudice to the debtor [in possession], and also to the unsecured creditors, if this marshaling approach were to be taken long after the initial order was entered. He therefore denied Owens-Corning's Rule 60(b) motion in part because marshaling would be inappropriate and prejudice the estate. 39 In In re Forester, 529 F.2d 310 (9th Cir.1976), we concluded in an alternate holding that, under the Bankruptcy Act of 1968, 18 the trustee 19 of a bankrupt estate could not block a request for marshaling made by a junior secured creditor to a senior secured creditor. Id. at 316-17. 40 However, after Forester was decided, the California courts clarified the rights of a judicial lien creditor in Shedoudy v. Beverly Surgical Supply Co., 100 Cal.App.3d 730, 161 Cal.Rptr. 164 (1980). In holding that a judgment creditor is entitled to a marshaling order, Shedoudy implied that such a creditor is also entitled to block a marshaling order prejudicing his interest. 41 Because the validity, nature, and effect of liens are governed by the law of the state where the property is located, and because California law after Shedoudy gives judicial lien creditors, such as the debtor in possession under Sec. 544, the power to block a marshaling order, we hold as a matter of law that Center has standing to block Owens-Corning's request for marshaling. 20 Otherwise, Owens-Corning would be able to take advantage of collateral for which it never bargained, namely, $990,000 worth of Center's inventory other than Owens-Corning goods, to the detriment of the general unsecured creditors. Our holding, therefore, limits Owens-Corning's property rights to the portion of Center's Owens-Corning inventory that exceeds in value Union Bank's senior lien, namely, $224,303 worth of Owens-Corning goods under the alleged facts. 42