Key Takeaways

  • The legal definition of occupy in marshalling relates to how creditors can claim debts from multiple funds available to a debtor.
  • The two funds rule of marshalling ensures fairness by requiring a creditor with access to two funds to seek repayment from the one not available to other creditors.
  • Marshalling applies in cases where one creditor has dual security interests and another has a claim against only one of those assets.
  • Courts apply marshalling to protect junior creditors, heirs, and legatees, but not if it unfairly harms the senior creditor.
  • The doctrine is equitable, meaning courts apply it to achieve fairness, not to create new rights.
  • There are limits — marshalling won’t apply if it prejudices the senior creditor, delays debt collection, or harms third parties.
  • Businesses, creditors, and heirs may benefit from consulting an experienced UpCounsel attorney to navigate marshalling disputes and protect their rights.

Marshalling Securities

When a party has two funds by which his debt is secured, and another creditor has a claim only on one of these funds, a court of equity will compel the creditor having a double security to resort to that fund which will leave the other creditor his security, this is called marshalling assets. Marshalling of assets respects two different funds, and two different sets of parties, where one set can resort to either fund, the other only to one. It is grounded on obvious equity. It does no prejudice to anybody, and it effectuates the testator's intent. It takes place in favor of simple contract creditors, and of legatees, devisees and heirs, and in a few other cases, but not in favor of the next of kin.

The Two Funds Rule of Marshalling

The two funds rule of marshalling is the core principle behind the doctrine. It applies when:

  • One creditor has access to two separate funds or assets for repayment.
  • Another creditor has access to only one of those funds.
  • The law requires the creditor with two funds to first satisfy their claim from the fund that is unavailable to the other creditor, provided it does not cause unfair prejudice.

Example: Suppose a debtor has a house and a bank account. Creditor A has claims secured by both the house and the bank account, while Creditor B has a claim secured only by the bank account. Under the two funds rule of marshalling, the court may require Creditor A to first collect from the house so that Creditor B has a fair chance to be paid from the bank account.

This principle prevents stronger creditors from exhausting the only security available to weaker creditors, ensuring a more equitable distribution of assets.

Marshalling Real and Personal Assets for Payment

The cases in which a court of equity marshals real and personal assets for the payment of simple contract debts and legacies, may be classed as follows:

  • Where there are specialty and simple contract debts and legacies and lands left to descend. In this case if the specialty creditors take a satisfaction for their debts out of the personal estate, the simple contract creditors first, and then the legatees, shall stand in the place of the specialty creditors, for obtaining satisfaction out of the lands, to the amount of so much as was received by the specialty creditors out of the personal estate.
  • Where there are specialty and simple contract debts, and lands are specifically devised. In this case if the creditors take a satisfaction for their debts out of the personal estate, the simple contract creditors shall stand in the place of the specialty creditors for obtaining a satisfaction out of the lands to the amount of so much as was received by the specialty creditors out of the personal estate, but then there can be no relief for the legatees, because there is as much equity to support the, specific devise of the lands, as to support the bequest of the legatees.
  • Where the debts are charged upon the lands. Here the legatees shall have the personal estate towards their satisfaction, and if the creditors take it in payment or towards the discharge of their debts, the legatees shall stand in their place pro tanto to have a discharge out of the lands.
  • When simple contract debts and legacies are both charged on the land. In this case, the land shall be sold and all paid equally.

Conditions for Applying Marshalling

Courts do not apply marshalling automatically. Certain conditions must be satisfied:

  1. Two or more creditors – At least two creditors must be involved.
  2. Multiple funds – One creditor must have access to two funds, while the other has access to only one.
  3. No prejudice to senior creditor – The senior creditor cannot be forced to take action that would jeopardize their ability to recover.
  4. No harm to third parties – Marshalling cannot unfairly harm third parties, such as guarantors or other creditors with legitimate interests.

Examples of Marshalling in Practice

To better understand how the doctrine operates, consider the following scenarios:

  • Real property and personal property: A debtor owes money to two creditors. Creditor X has a lien on both the debtor’s house and personal property, while Creditor Y only has a lien on the personal property. Equity may compel Creditor X to seek repayment from the house first, leaving the personal property available for Creditor Y.
  • Partnership and partner’s assets: If a partnership and its partners owe debts, a creditor with claims against both must first collect from the partnership’s assets before seeking payment from a partner’s personal property.
  • Successions and estates: When estate debts are payable from both real and personal property, courts may marshal assets so that heirs and legatees are not unfairly deprived.

Limitations of Marshalling

While equitable in nature, marshalling is not absolute. Courts may decline to apply it in situations where:

  • It would delay or complicate debt repayment.
  • The senior creditor faces an increased risk, expense, or loss by being forced to pursue a particular fund.
  • The debtor is a natural person whose homestead or exempt property would be unfairly burdened.
  • The two funds are held by different debtors, and applying the doctrine would require one debtor to satisfy another’s debt.

In short, the two funds rule of marshalling is designed to balance fairness among creditors without creating new rights or unduly harming others.

Frequently Asked Questions

  1. What is the two funds rule of marshalling?
    It’s a legal principle that requires a creditor with access to two funds to satisfy their claim from the fund not available to another creditor, ensuring fairness.
  2. When does marshalling of assets apply?
    It applies when one creditor can claim against two funds while another has recourse only to one of those funds. Courts apply it to protect fairness among creditors.
  3. Who can benefit from marshalling?
    Typically, simple contract creditors, heirs, and legatees benefit because the rule ensures they are not unfairly deprived of the only security available to them.
  4. Can marshalling harm the senior creditor?
    No. Courts will not apply the doctrine if it would prejudice the senior creditor, cause undue delay, or force them to take unreasonable risks.
  5. Is marshalling the same as subrogation?
    No. While both are equitable doctrines, marshalling allocates multiple funds fairly among creditors, whereas subrogation allows a party to step into another’s shoes to claim repayment.

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