Opinion
Case No. 4-02-bk-06383-EWH.
March 6, 2007
MEMORANDUM DECISION
INTRODUCTION
Borrego Springs Bank ("Bank") submitted a Proof of Claim for $312,112.44 in the case of Helen Baldridge ("Debtor"). The Debtor is one of four owners of Plaza Elite Salon Spa, L.L.C. ("Salon"), which filed for Chapter 11 relief on August 20, 2003. The Bank holds a security interest in real property ("Property") owned by the Salon. The Bank's claim is based upon a guaranty executed by the Debtor on a loan made to the Salon.
The Chapter 7 Trustee objects to the Bank's claim. The Trustee requests that the Court disallow the Bank's claim and order the Bank to marshal its assets and satisfy its claim from collateral that is free of the Trustee's junior lien — its fully secured interest in the Property. The Bank argues that the guaranty is a separate obligation of the Debtor, and that the Bank should not be required to exhaust its legally distinct claim against the Salon before it is entitled to payment from the Debtor.
Because the marshaling of assets requires not only the existence of two funds, but that both funds belong to a common debtor, the marshaling doctrine does not apply in this case because the Debtor does not own the Property.
FACTS
The Bank holds an allowed secured claim in the Salon's Chapter 11 case. The confirmed Plan provides that the Salon will continue to make its monthly payments to the Bank pursuant to the parties' original contract, which granted the Bank a security interest in the Property. (First Amended Plan of Reorganization at ¶ 5.3.) A Final Decree and Order closing the Salon's case was entered on April 15, 2005. The Bank is being paid under the Plan.
The Bank filed an unsecured nonpriority claim in the Debtor's case, asserting that "the amount owed is the amount due on the note, and because of the default on the note, the Debtor's obligation has accrued." (Bank's Opposition to Amended Objection, dated August 17, 2006.) The claim is comprised of $309,824.44 in principal and $2,288 in attorney's fees. The Trustee seeks an order requiring the Bank to satisfy its claim against the Salon and only proceed against the Debtor in the event that it is not paid in full under the Plan.
ISSUE
Is this an appropriate case to order marshaling?
STATEMENT OF JURISDICTION
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157. Venue is proper under 28 U.S.C. § 1409.
DISCUSSION
Marshaling is an equitable doctrine which allows the Court "to arrange assets or claims so as to secure the proper application of the assets to the various claims and to allow all parties having equities therein to receive their due proportion." In re Harrold's Hatchery and Poultry Farms, Inc., 17 B.R. 712, 715 (Bankr. M.D. Ga. 1982). When the doctrine is applied, the senior lienholder is required to exhaust the property exclusively available to it before proceeding against the property that is also available to a junior lienholder. In this case, the Trustee seeks to marshal the assets of the Salon.
Relying on In re Spectra Prism Industries, Inc., 28 B.R. 397, 399 (9th Cir. BAP 1983), the Trustee asserts that the four requirements for entry of a marshaling order are met here: (1) there are two or more funds (the Debtor's estate and the Salon's estate); (2) only one creditor, the Bank, has a right to resort to both funds; (3) there is no prejudice to the Bank; and (4) marshaling will not harm third parties. (Trustee's Supplemental Reply, dated November 16, 2006.) The Spectra court does not identify what party must be the owner of the funds; however, its recitation of the four requirements cites Victor Gruen Associates v. Glass, 338 F.2d 826, 829 (9th Cir. 1964), as authority. 28 B.R. at 399. The court in Victor Gruen describes the marshaling of assets as "an equitable doctrine which comes into application where there are two or more creditors which seek satisfaction from one debtor and one of the creditors can reach two funds held by the debtor , whereas the other creditor can reach only one of the funds." 338 F.2d at 829 (emphasis added). The Spectra court's shorthand omission of the phrase "held by the debtor" was of no moment because, factually, that case dealt with three types of assets held by the debtors from which to satisfy creditors' claims. 28 B.R. at 398.
The Trustee notes that "Arizona has adopted much of California's mortgage and redemption law, which law was applied by the Spectra court." Although not briefed by the parties, the Court assumes that, under Arizona state law, a judicial lien creditor may seek to invoke marshaling. See Zellerbach Paper Co. v. Valley Nat. Bank of Ariz., 18 Ariz. App. 301 (1972).
In the instant case, however, only one fund belongs to the Debtor; the other fund, i.e., the Property, belongs to the Salon. The doctrine of marshaling requires that "the assets sought to be marshaled must be in the hands of or owned by a common debtor."In re Harrold's Hatchery, 17 B.R. at 716. Marshaling is inappropriate when this requirement is not met. See In re Harrold's Hatchery, 17 B.R. at 716; In re Francis Construction Co., Inc., 54 B.R. 13, 15 (Bankr. D.S.C. 1985); Bard v. Standard Mortgage Corp., 6 P.2d 582, 583 (Cal.App. 1932).
For example, the trustee in In re Harrold's Hatchery sought to require the bank to look to the assets of the guarantor, Harrold, to satisfy the obligation of the debtor, Harrold's Hatchery and Poultry Farms, before looking to the debtor. 17 B.R. at 716. Harrold, as president of the debtor, had executed a loan agreement on behalf of the debtor, which he personally guaranteed. The bank had two sources from which to seek satisfaction: the assets of the debtor and the real property pledged by the guarantor. The court denied the trustee's motion because "marshaling is only proper when the assets sought to be marshaled are assets owned by a common debtor"; the common debtor was the debtor company — not the guarantor. Id.
Similarly, the trustee in In re Francis Construction sought to invoke marshaling to require the bank to satisfy its mortgage "out of collateral which is not property of the estate." 54 B.R. at 14. Francis, the president and sole stockholder of the debtor, deeded real property to the debtor and executed a mortgage to the bank, which was secured by the deeded property, as well as other property owned by Francis individually. The trustee sought to sell the deeded property free and clear of interests and force the bank to satisfy its claim out of Francis's individually owned property. The court refused to invoke marshaling because "[a]lthough there are two funds, only one belongs to Francis Construction Company, the common debtor; the other fund belongs to Mr. Francis." Id. at 15. Because the two funds did not belong to the common debtor, the court denied the trustee's motion. Id.
Here, the Trustee seeks to marshal the assets of the Salon, but the common debtor is the individual Debtor Baldridge. Because the doctrine of marshaling requires that "the assets sought to be marshaled must be in the hands of or owned by a common debtor," it would be improper to order marshaling in this instance. In re Harrold's Hatchery, 17 B.R. at 716; In re Francis Construction Co., Inc., 54 B.R. 13 at 15.
CONCLUSION
Because the assets sought to be marshaled are not owned by the common Debtor, the Trustee's motion is denied. A separate Order will be entered denying the motion.
It is unclear, however, based upon the pleadings and the guaranty, whether any right to immediate payment by the Bank has been triggered under the Debtor's guaranty, in light of the cure of default through the Salon's Plan. The Court directs the parties to respond to this issue within ten days. The filings shall be no more than five pages and submitted simultaneously.
IT IS SO ORDERED.