Court Opinion

ID: 9701010
Source: CourtListenerOpinion
Date Created: 2023-08-25 21:59:01.300482+00
Date Added: 2024-06-11T18:21:17.184124
License: Public Domain

KATZ, Bankruptcy Judge.
I
The question presented is whether a trustee in bankruptcy, as a judicial lien creditor pursuant to Bankruptcy Code § 544(a)(1), has standing to block the issuance of an order requiring a senior lienholder to marshal its collateral.
II
The debtors have three types of assets from which to satisfy claims of creditors: equipment, inventory, and accounts receivable. Heidelberg West, Inc. (“Heidelberg”), held the senior lien on the debtor’s equipment to secure a debt of $132,750. National Acceptance Company of California (“NACC”) held a blanket lien against all assets of the debtor. The NACC lien was junior only to the Heidelberg lien against the equipment of the debtor and senior on the inventory and equipment. Wells Fargo Bank, National Association (“Wells Fargo”), had a security interest only in the debtor’s equipment. That lien was junior to both Heidelberg and NACC. The trustee, Charles Duck, claims to have a blanket lien as a judicial lien creditor subordinate to all of those liens by virtue of § 544(a)(1). Secured claims were held in the following manner:
ACCOUNTS EQUIPMENT INVENTORY RECEIVABLE
1 Heidelberg NACC NACC
2 NACC (Trustee) (Trustee)
3 Wells Fargo
4 (Trustee)
The debtor’s equipment was sold at a trustee’s sale and the Heidelberg lien was extinguished with a portion of the proceeds. The remainder was to be applied to the amount owed to the junior lienors. The lien of NACC exceeded the remainder. Wells Fargo sought and obtained from the bankruptcy court an Order to Compel Mar-shalling of Assets and to Determine Priority of Rights in Property of the Estate. The trustee, Charles Duck, appeals the issuance of that order.
Ill
“Marshalling is an equitable doctrine developed historically and traditionally used to prevent a junior lienholder with a security interest in a single property from being squeezed out by a senior lienholder with a security interest not only in that property, but in one or more additional properties. The doctrine requires the senior lienholder to first resort to assets free of the junior lien to avoid the inequity which would otherwise result from the unnecessary elimination of the junior
*399lienholder’s security with the increased likelihood the junior creditor will be unable to satisfy its claim.”
Shedoudy v. Beverly Surgical Supply Co., 100 Cal.App.3d 730, 733, 161 Cal.Rptr. 164 (1980). The basis for marshalling is in California Civil Code §§ 2899 and 3433.
There are four basic requirements which must be met before a marshalling order may be imposed on a second lienholder. First, there must be two or more funds. Second, only one of the creditors may have the right to resort to both funds. Third, there must be an absence of prejudice to the senior lienholder. Finally, the imposition of marshalling must avoid injustice to third persons. Victor Gruen Associates v. Glass, 338 F.2d 826, 829 (9th Cir.1964).
The sole element at issue in the case is the final one. The trustee asserts that, in his capacity as a hypothetical judicial lien creditor, under § 544(a)(1), he is prejudiced by the order. He claims the order should have been denied on that ground. All parties agree that injury or prejudice to a third party constitutes adequate grounds to deny an order to marshal assets. We agree with the claim that the trustee is prejudiced when assets, potentially belonging to the estate, are lost as a result of a marshalling order.
When the trustee is given status under § 544(a)(1) to act as a judicial lien creditor, he obtains the right and power to protect the assets of the estate to the same degree that any judicial lien creditor would be able to.
The question of a trustee’s status as a hypothetical judicial lienholder under § 544 was previously dealt with by § 70(c) of the Bankruptcy Act. The legislative history of the “strong-arm clause” indicates that the basic purpose underlying the section was to avoid the “evil” of secret liens and transfers of the debtor’s property. 45 Cong.Rec. 2277 (1910). However, that basic purpose is not its sole purpose. Concerning § 70(c), the court in Sampsell v. Straub, 194 F.2d 228 (9th Cir.1951), held:
“[Wjhether its impact in a particular case is upon secret liens or upon some other impediment to the distribution of the property of the debtor .. . Section 70 sub. c embodies a comprehensive conception of according the trustee such status as a diligent general creditor might have achieved but for the intervention of bankruptcy.”
Sampsell v. Straub, supra, at 231.
The stature of the trustee as a judicial lien creditor has been expanded consistently over the 80 years of the existence of the Code sections. Today, under § 544(a), the trustee may act not only to avoid transfers of the property of the debtor, but he is granted all other rights and powers that a creditor holding a judicial lien would have had after prevailing in a simple contract action, whether or not such creditor exists in fact.
We are mindful of the holding of the Ninth Circuit Court of Appeals in Forester v. Steward, 529 F.2d 310 (9th Cir.1976), denying a marshalling order to a trustee in bankruptcy. That decision standing alone would result in affirmance of the judgment below.
We note, however, that the validity, nature and effect of liens are governed by the law of the state where the property is situated. In re Knox-Powell-Stockton Co., 100 F.2d 979 (9th Cir.1939); Porter v. Searle, 228 F.2d 748 (10th Cir.1955).
The case of Shedoudy v. Beverly Surgical Supply Co., supra, is dispositive of the mar-shalling question herein. Shedoudy stands for the proposition that a judgment creditor is a junior claimant entitled to a marshall-ing order even when no foreclosure is pending.
The marshalling order in the instant case prejudices the interests of the trustee in his capacity as a judicial lien creditor.
We believe that prior to the Shedoudy, supra holding California law was unclear as to whether a judicial lien creditor was within that class whose interests could not be prejudiced by a marshalling order. It is our opinion that Shedoudy, supra resolved the *400confusion by recognizing that such a creditor could indeed be prejudiced. That creditor should, therefore, be permitted to block such a motion.
We believe that the Ninth Circuit court, deciding the issue today, after the holding in Shedoudy, supra, would arrive at a different result than it did in Forester.
We therefore REVERSE the trial court with directions to vacate the marshalling order.