Strictly speaking, a creditor who has a lien or a charge (such as a mortgage) and thus, a priority on an asset (or fund), and also has access on another asset, can collect off one or the other or both, to the satisfaction of his debt. This frustrates other creditors who do not have access to the charged asset or fund. They see their only source of payment depleted by a creditor who could of obtained satisfaction from the charged asset.
In stepped equity to the rescue, to construct a principle of fairness and which has become known as the doctrine of marshalling, requiring the creditor with the enforcement choices to act first upon the asset upon which he alone has rights or access.
In Lanoy (1742), Justice Hardwicke wrote:
"It is not then the constant equity of this court that if a creditor has two funds, he shall take his satisfaction out of that fund upon which another creditor has no lien.
"Suppose a person, who has two real estates, mortgages both to one person, and afterwards only one estate to a second mortgagee, who had no notice of the first; the court, in order to relieve the second mortgage, have directed the first to take his satisfaction out of the estate only which is not in mortgage to the second mortgagee, if that is sufficient to satisfy the first mortgage, in order to make room for the second mortgage, even though the estates descended to two different persons."
In Ernst Brothers (1920), the Ontario court wrote:
"The doctrine of marshalling, in its application to mortgages or charges upon two estates or funds, may be stated as follows: If the owner of two estates mortgages them both to one person ... the second mortgagee may insist that the debt of the first mortgagee shall be satisfied out of the estate not mortgaged to the second, so far as that will extend. This right is always subject to two important qualifications: first, that nothing will be done to interfere with the paramount right of the first mortgagee to pursue his remedy against either of the two estates; and, second, that the doctrine will not be applied to the prejudice of third parties ...."
More recently, in Bockhold (1999), Madam Justice Morrison of the British Columbia Supreme Court wrote in her typical clear and succinct style:
"Marshalling is an equitable remedy that may arise when you have two creditors of the same debtor, with one creditor, sometimes referred to as the senior creditor, having the right to resort to two funds of the debtor for payment of the debt, and the other creditor, the junior creditor, has the right to resort to one fund only. The court can marshal or arrange the funds so that both creditors are paid to the greatest possible extent.
"Equity will be invoked to protect the junior creditor, make the senior creditor realize on assets in such a way that the senior creditor will not wipe out assets that would only be available to the junior creditor. The junior creditor will be subrogated and will have a charge on the second or subsequent funds."
In the 8th Edition of Fisher and Lightwood's Law of Mortgages, the author writes:
"The doctrine of marshalling rests upon the principle that a creditor who has the means of satisfying his debt out of several funds shall not, by the exercise of his right, prejudice another creditor whose security comprises only one of the funds."
REFERENCES:
- Bockhold v Lawson Lundell Lawson 10 CBR 4th 90 (1999)
- Duhaime, Lloyd, Maritime Law Dictionary
- Ernst Brothers Co. v Can. Permanent Mortgage Corp. 47 OLR 362 (Ontario, 1920)
- First Investors Corp. v Veeradon Developments Ltd. 57 Alta. LR 2d 104; also poublished at (1988) 3 WWR 254, 84 AR 364, 47 RPR 293 or 47 DLR 4th 446 (ABCA, 1988)
- Lanoy v Duke and Duchess of Athol 26 ER 668 (1742)
- Tyler, E., Fisher and Lightwood's Law of Mortgages, 8th Edition (London: Butterworths, 1969), at page 446.