View source for Doctrine of marshalling

{{Equitable doctrines}}
'''Marshalling''' is an [[Equity (law)|equitable]] doctrine applied in the context of lending. It was described by [[Leonard Hoffmann, Baron Hoffmann|Lord Hoffmann]] as:

{{cquote|
[A] principle for doing equity between two or more creditors, each of whom are owed debts by the same debtor, but one of whom can enforce his claim against more than one security or fund and the other can resort to only one. It gives the latter an equity to require that the first creditor satisfy himself (or be treated as having satisfied himself) so far as possible out of the security or fund to which the latter has no claim.<ref>{{cite BAILII|litigants=Morris and Others v. Rayners Enterprises Incorporated and Another|link=|court=UKHL|division=|year=1997|num=44|para=|eucase=|parallelcite= [1998] 1 AC 214|date=30 October 1997|courtname=|juris=}}, 230{{endash}}231</ref>
}}

In the United States, [[Harlan F. Stone|Justice Stone]] described that:

{{cquote|
... [it] rests upon the principle that a creditor having two funds to satisfy his debt may not, by his application of them to his demand, defeat another creditor, who may resort to only one of the funds.<ref>''Sowell v. Federal Reserve Bank'', {{ussc|268|449|1925}}, at 457</ref>
}}

==General principles==

It has been held that marshalling applies to all forms of secured indebtedness, including [[liens]].<ref>{{cite CanLII|litigants=Gerrow v. Dorais|link=|year=2010|court=abqb|num=560|format=|pinpoint=|parallelcite=|date=2010-09-03|courtname=auto|juris=}}</ref><ref>{{cite web|author = Thomas G. Heintzman|title = The Equitable Doctrine of Marshalling Applies To Construction Liens|url = http://www.constructionlawcanada.com/construction-and-builders-liens/priority/the-equitable-doctrine-of-marshalling-applies-to-construction-liens/|publisher = constructionlawcanada.com|date = 1 August 2011}}</ref>

A claim for marshalling will not be allowed by the courts where it would be unjust or unfair to allow the junior creditor to marshal, and therefore:<ref>{{cite web|author1 = Tushara Weerasooriya|author2 = Stevie O'Brien|title = Marshalling: A Remedy for a Junior Creditor|url = http://www.mcmillan.ca/Files/121642_Marshalling%20-%20A%20Remedy%20for%20a%20Junior%20Creditor%20(T%20Weerasooriya)%20(February%202011).pdf|publisher = [[McMillan LLP]]|date = February 2011}}</ref>

#It cannot interfere or prejudice the position of the senior creditor.
#It cannot prejudice third parties.
#It must be brought in a fair and timely fashion

Marshalling is not available to a second mortgagee where the first mortgagee is contractually bound to look first to the other property to satisfy the debt due to him.<ref>{{cite AustLII|litigants=Miles v Official Receiver In Bankruptcy|link=|court=HCA|num=24|year=1963|pinpoint=|parallelcite=(1963) 109 CLR 501|date=26 July 1963|courtname=|juris=}}, quoted in {{cite BAILII|litigants= Szepietowski v The National Crime Agency|link=|court=UKSC|division=|year=2013|num=65|para=38|eucase=|parallelcite= |date=23 October 2013|courtname=|juris=}}</ref>

While quite similar to the doctrine of [[subrogation]], the two are quite distinct equitable remedies:<ref>{{cite BAILII|litigants= Serious Organised Crime Agency v Szepietowski & Ors|link=|court=EWHC|division=Ch|year=2010|num=2570|para=|eucase=|parallelcite= |date=15 October 2010|courtname=|juris=}}, 230{{endash}}231</ref>

:* Subrogation applies where there is only one debt.
:* Subrogation entitles one party to stand in the shoes of another party having repaid indebtedness due to that party, while marshalling requires separate debts due from a debtor to separate secured creditors at the outset.
:* The restitutionary principles applicable to subrogation have no application to marshalling.

==United States==

US jurisprudence has expanded upon the British and Commonwealth authorities, declaring that the requirement for a common debtor means that marshalling is not available where the two funds in question consist of an interest in estate property and an interest in property of a non-debtor, subject to certain exceptions:<ref name="Karwowski">{{cite journal|author = Henry Karwowski|title = Marshaling Against Guarantors: Not a Fool's Errand?|url = http://www.trenklawfirm.com/publications/marshaling_against_guarantors.pdf|journal = American Bankruptcy Institute Journal|volume = XXIII|issue = 10|year = 2005|publisher = [[American Bankruptcy Institute]]|url-status = dead|archiveurl = https://web.archive.org/web/20150610204635/http://www.trenklawfirm.com/publications/marshaling_against_guarantors.pdf|archivedate = 2015-06-10}}</ref>

#It has been applied where a non-debtor (typically a corporate debtor's controlling shareholder or guarantor) qualifies as the “alter ego” of the debtor, or where the non-debtor has rendered the debtor inadequately capitalized.
#The debtor's obligation and not solely the non-debtor's obligation, may equitably be deemed a “capital contribution” to the debtor and hence subject to marshalling.
#Courts have invoked marshalling where the non-debtor has engaged in inequitable conduct such as fraud, breach of fiduciary duty or unjust enrichment.
#It has been applied against non-debtor shareholders solely for the equitable purpose of preserving a distribution for the debtor's unsecured creditors.

In certain circumstances, that jurisprudence has also held that, while subrogation may normally render payment of a debt by a guarantor outside the scope of marshalling, equitable subordination may bring the assets of a guarantor within its reach.<ref name = "Karwowski"/>

==Civil law jurisdictions==

While marshalling is found only in [[common law]] jurisdictions, similar concepts exist in several of those governed by [[Civil law (legal system)|civil law]].

[[Scots law]] possesses the equivalent doctrine of "catholic securities", and [[Robert Reed, Lord Reed|Lord Reed]], in a 2013 judgment of the [[United Kingdom Supreme Court]] described its effect as being similar to marshalling:

{{cquote|
83. Securities are neutral in their effect upon the debtor. Their effect is to strengthen the position of the secured creditor at the expense of unsecured creditors, since the holder of a security holds a right, accessory in nature, which he can exercise to secure the payment of the debt that is distinct from, and additional to, the right of action and execution which any creditor can exercise to enforce the performance of the debtor's personal obligation. The doctrine of catholic securities can therefore operate to the prejudice of unsecured creditors, but it cannot affect the interests of the debtor.<ref>''Szepietowski'' (UKSC 2013), par. 81{{endash}}84</ref>
}}

A similar concept is found in art. 2754 of the ''[[Civil Code of Quebec]]'', which states:

{{cquote|
'''2754'''. Where later ranking creditors are secured by a [[hypothec]] on only one of the properties charged in favour of one and the same creditor, his hypothec is spread among them, where two or more of the properties are sold under judicial authority and the proceeds still to be distributed are sufficient to pay his claim, proportionately over what remains to be distributed of their respective prices.
}}

Recent jurisprudence has suggested that this provision produces a result equivalent to marshalling.<ref>{{cite CanLII|litigants=Maisons Marcoux inc. (Syndic de)|link=|year=2012|court=qcca|num=192|format=|pinpoint=|parallelcite=|date=2012-02-02|courtname=auto|juris=}}{{in lang|fr}}</ref><ref>{{cite web|author = Marc-André Morin|title = The doctrine of marshalling does not apply in the Province of Quebec, but then again…|url = http://www.mcmillan.ca/the-doctrine-of-marshalling-does-not-apply-in-the-Province-of-Quebec-but-then-again|date = March 2012|publisher = [[McMillan LLP]]}}</ref>

==References==
{{reflist}}
*{{cite web|url=http://chestofbooks.com/real-estate/Mortgage-Law/Sec-137-Marshalling-and-subrogation.html |title=Sec. 137. Marshalling and subrogation |publisher=Chestofbooks.com |date= |accessdate=2014-05-11}}

[[Category:English law]]
[[Category:Equity (law)]]
[[Category:Common law legal terminology]]