S. LOTMAN SON, INC. v. SOUTHEASTERN FINANCIAL CORP

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Docket Number

6 Div. 931.

Attorney(S)

Denaburg, Schoel Meyerson and Richard F. Ogle, Birmingham, for appellant. Under the law of the State of Alabama and the equitable doctrine of marshaling, "(w)here one has a line upon different things, and other persons have subordinate liens upon, or interests in, some but not all of the same things, the person having the prior lien, if he can do so without risk of loss to himself, or of injustice to other persons, must resort to the property in the following order, on the written demand of any party interested: 1. To the things upon which he has an exclusive lien; 2. To the things which are subject to the fewest subordinate liens; 3. In like manner inversely to the number of subordinate liens upon the same thing; and 4. When several things are within one of the foregoing classes, and subject to the same number of liens, resort must be had (1) to the things which have not been transferred since the prior lien was created; (2) to the things which have been so transferred without a valuable consideration; and (3) to the things which have been so transferred for a valuable consideration in the inverse order of the transfer." Code of Alabama 1940 (Recomp. 1958) Title 33, Section 4. This is true even if the paramount creditor is required to foreclose a real estate mortgage to obtain satisfaction. Gordon Stokes v. Bell, 50 Ala. 213 (1874); Henderson v. Ala. Gold Life Ins. Co., 72 Ala. 32 (1882); Federal Land Bank of New Orleans v. First Natl. Bank of Scottsboro, Ala., 237 Ala. 84, 185 So. 414. Where the paramount creditor is not substantially injured, mere delay in collecting his debt is not sufficient to prevent the application of the role of marshaling. Cotzian v. Shakman, 61 N.W. 304, 89 Wis. 52; Stowe v. Powers, 19 Wyo. 291, 116 P. 576. The delay must be such that it will endanger the paramount creditor, or at least impair his prior right to raise his debt out of both funds. Calhoun v. Fed. Land Bank of Louisville, 230 Ky. 460, 20 S.W.2d 72. Thomas, Taliaferro, Forman, Burr Murray and R. Lee Walthall, Birmingham, for appellee. Priority between conflicting security interests in the same collateral shall be determined by the order of filing if both are perfected by filing. Code of Alabama, 1940, Recompiled 1958 Title 7A, Section 9-312; Platte Valley Bank of North Bend v. Kracl, 185 Neb. 168, 174 N.W.2d 724. The findings of trial court trying case without jury have the effect of a jury's verdict and will not be disturbed by the Supreme Court on appeal unless plainly and palpably wrong. State v. Reynolds Metals Co., 280 Ala. 561, 196 So.2d 308; Gilbert v. Birmingham Transit Co., 276 Ala. 408, 192 So.2d 618; Mrs. O. Z. Donahoo v. Mrs. Carrie Brooks, 272 Ala. 87, 128 So.2d 485.

Judges

MERRILL, Justice.

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Smart Summary

Factual and Procedural Background

This appeal arises from a decree denying relief to the complainant-appellant, S. Lotman Son, Inc., who sought a marshalling of the assets of Portion-Redi Foods, Inc., and an accounting between the parties. The appellant sold equipment to Portion-Redi Foods and retained a security interest in that equipment, but failed to file a financing statement with the Secretary of State before the respondent-appellee, Southeastern Financial Corporation, filed its own security agreement covering the same equipment. The appellee's financing statement was filed first, giving it priority under the Uniform Commercial Code.

Subsequently, appellant obtained possession of the equipment subject to the appellee's security interest through detinue action. The appellant requested marshalling of assets and filed a bill of complaint seeking relief, including an injunction. Portion-Redi Foods later filed for bankruptcy, and a receiver was appointed. The equipment sold for $15,000, and other assets raised the total to $28,000, while the debt owed to appellee was approximately $35,000. The real estate, subject to appellant's third mortgage, was valued between $350,000 and $750,000, with prior mortgages totaling approximately $235,000.

The trial court denied the appellant's request for marshalling and dismissed the complaint with prejudice. The appellant appealed, challenging the refusal to require the appellee to first foreclose its third mortgage.

Legal Issues Presented

Whether the trial court erred in refusing to require marshalling of the assets of Portion-Redi Foods, Inc.
Whether appellee should be required to first resort to foreclosure of its third mortgage on the real estate before enforcing its prior lien on the equipment.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Gordon Stokes v. Bell, 50 Ala. 213 (1874)	Application of equitable doctrine of marshaling liens and order of resort to property.	Supports the principle that a prior lienholder must resort to property in a specified order if it can do so without risk of loss.
Henderson v. Ala. Gold Life Ins. Co., 72 Ala. 32 (1882)	Equitable marshaling doctrine and lien priority.	Reinforces marshaling rules under Alabama law cited by the court.
Federal Land Bank of New Orleans v. First Natl. Bank of Scottsboro, 237 Ala. 84, 185 So. 414	Application of marshaling liens and creditor rights.	Confirms applicability of marshaling doctrine even when foreclosure of real estate mortgage is necessary.
Cotzian v. Shakman, 61 N.W. 304, 89 Wis. 52	Delay in collection insufficient to prevent marshaling absent substantial injury.	Supports that mere delay does not defeat marshaling rights unless it endangers paramount creditor.
Stowe v. Powers, 19 Wyo. 291, 116 P. 576	Delay and risk of injury to paramount creditor in marshaling context.	Similar principle that delay must endanger creditor to prevent marshaling.
Calhoun v. Fed. Land Bank of Louisville, 230 Ky. 460, 20 S.W.2d 72	Delay must impair prior creditor's rights to bar marshaling.	Supports court's view on risk of loss standard in marshaling.
Platte Valley Bank of North Bend v. Kracl, 185 Neb. 168, 174 N.W.2d 724	Priority of security interests by order of filing; risks of extended litigation.	Used to highlight risks of extended litigation and speculative legal action if marshaling forced here.
State v. Reynolds Metals Co., 280 Ala. 561, 196 So.2d 308	Appellate deference to trial court findings in equity cases.	Supports affirming trial court's findings absent plain error.
Gilbert v. Birmingham Transit Co., 276 Ala. 408, 192 So.2d 618	Trial court findings and appellate review standards.	Reinforces standard of review applied by court.
Mrs. O. Z. Donahoo v. Mrs. Carrie Brooks, 272 Ala. 87, 128 So.2d 485	Trial court's fact findings given deference on appeal.	Supports court's adherence to trial court's factual conclusions.
Kelley v. Cassels, 226 Ala. 410, 147 So. 597	Interpretation of marshaling statute (Tit. 33, § 4, Code 1940).	Distinguished by court as factually inapposite to present case.
Rice v. Hill, 278 Ala. 342, 178 So.2d 168	Appellate review of equity findings.	Supports deferential standard of appellate review.
Lamar v. Lamar, 263 Ala. 391, 82 So.2d 558	Appellate review standards in equity.	Reinforces deferential approach to trial court findings.

Court's Reasoning and Analysis

The court analyzed the applicability of the equitable doctrine of marshaling under Alabama Code Title 33, Section 4, which prescribes the order in which a prior lienholder must resort to property subject to multiple liens. The statute requires that the prior lienholder resort to property in a particular order only if it can do so without risk of loss or injustice to itself or others.

The court found several reasons supporting the trial court's refusal to order marshaling in this case: the equipment had already been sold and proceeds were in court; the appellee held the prior lien on the equipment; the appellant failed to file its financing statement timely and thus lost priority; proceeds from sale are safer than attempting to foreclose on the third mortgage encumbered by substantial prior mortgages; resorting to real estate could cause conflicts with unsecured creditors and the bankruptcy receiver; and forcing marshaling could prolong litigation and cause speculative legal disputes.

The court emphasized the standard of appellate review, deferring to the trial court's factual findings unless clearly erroneous, and concluded that no reversible error was shown in denying the requested relief.

Holding and Implications

The court affirmed the trial court's decree denying the appellant's request for marshalling of assets and dismissed the bill of complaint with prejudice.

The direct effect of this decision is that the appellee, holding the prior lien, is not required to first resort to foreclosure of its third mortgage on the real estate before enforcing its lien on the equipment. The court did not establish new precedent but applied existing principles of lien priority, marshaling, and equitable discretion to the facts of this case.

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S. LOTMAN SON, INC., a Corporation v. SOUTHEASTERN FINANCIAL CORPORATION, a Corp.

MERRILL, Justice.

This appeal is from a decree denying relief to complainant-appellant seeking a marshalling of the assets of Portion-Redi Foods, Inc., and an accounting between complainant and respondent.

A very condensed statement of the facts as stated in the evidence and stipulations follows. Appellant, S. Lotman Son, Inc., sold certain items of equipment to Portion-Redi Foods, Inc., a meat packing company. The equipment is described in Exhibit "A" of the bill. This equipment sold for $20,000.00 and had been reduced by the down payment and monthly installments to $11,200.00. A security interest had been retained by appellant but a financing statement on this security agreement had not been filed with the Secretary of State when the respondent-appellee, Southeastern Financial Corporation, and Portion-Redi Foods, Inc., entered into a security agreement on December 1, 1970, covering all the equipment of Portion-Redi Foods including that described in Exhibit "A". On February 5, 1971, appellant took a third mortgage on all the real estate of Portion-Redi Foods which was given as additional security to the advancement of an additional $30,000.00.

The appellant did not timely file a financing statement with the Secretary of State until after the filing of a statement of financing by the appellee. Thus, as the first to file, appellee was entitled to priority. Uniform Commercial Code, listed as Tit. 7A, § 9-312, 1958 Recompilation, Act No. 549, Acts of Alabama 1965.

On May 24, 1971, appellant filed an action of detinue against Portion-Redi Foods, which owed it about $30,000.00, and obtained possession of the personal property that was subject to the security interest of appellee and on which appellant also had a security interest. Appellee gave public notice of sale and written notice to appellant. Appellant requested a marshalling of assets under Tit. 33, § 4, Code 1940, and later filed the bill of complaint, obtained a temporary injunction and posted bond. By agreement of the parties, the property was allowed to be sold and appellee posted a bond of $15,000.00 to indemnify appellant.

On June 25, 1971, Portion-Redi Foods filed a petition in bankruptcy and subsequently a receiver was appointed and qualified.

The sale of the equipment listed in Exhibit "A" to the bill brought $15,000.00 and other assets raised this total to $28,000.00. At that time, the indebtedness of Portion-Redi Foods to appellee was approximately $35,000.00.

The real estate on which appellant held a third mortgage had been appraised at $750,000.00, $550,000.00 and the receiver in bankruptcy testified that the real estate agent he had employed advised him that the total property should be worth $350,000.00 as a minimum. The first and second mortgages represented an indebtedness of approximately $235,000.00.

We quote part of the trial court's opinion and the pertinent part of the decree:

"Basically, the undecided prayers as set forth in the Bill of Complaint are for a marshalling of the assets of Portion-Redi-Foods, Inc. and an accounting by Respondent to Complainant in the event of a sale of 'any of the property described in Exhibit "A" ' (as attached to the Bill of Complaint, and the striking of an account between the parties and an entry of 'judgment for any amount due to the Complainant'.

"The Court finds that Complainant is not entitled to any of the relief prayed.

"Accordingly, it is CONSIDERED, ORDERED, ADJUDGED and DECREED as follows:

"ONE: The bill of Complaint is dismissed with prejudice."

The sole question presented here is whether the trial court erred in refusing to require the marshalling of the assets and to order appellee to resort first to the foreclosure of its third mortgage.

We do not think the trial court committed reversible error.

Title 33, § 4, Code 1940, provides:

"Where one has a lien upon different things, and other persons have subordinate liens upon, or interests in, some but not all of the same things, the person having the prior lien, if he can do so without risk of loss to himself, or of injustice to other persons, must resort to the property in the following order, on the written demand of any party interested:

"1. To the things upon which he has an exclusive lien;

"2. To the things which are subject to the fewest subordinate liens;

"3. In like manner inversely to the number of subordinate liens upon the same thing; and

"4. When several things are within one of the foregoing classes, and subject to the same number of liens, resort must be had (1) to the things which have not been transferred since the prior lien was created; (2) to the things which have been so transferred without a valuable consideration; and (3) to the things which have been so transferred for a valuable consideration in the inverse order of the transfer."

The only Alabama case cited to us referring to this statute is Kelley v. Cassels, 226 Ala. 410, 147 So. 597, but that case is not apt here because of the great difference in facts.

Very few cases arising under this statute would have the same facts.

One of our most quoted rules is that when the evidence is heard orally by the trial court, the court's finding has the effect of a jury's verdict and will not be disturbed on appeal unless plainly erroneous or manifestly wrong. And this applies both in law and in equity. State v. Reynolds Metals Co., 280 Ala. 561, 196 So.2d 408; Rice v. Hill, 278 Ala. 342, 178 So.2d 168; Lamar v. Lamar, 263 Ala. 391, 82 So.2d 558.

The trial court did not enumerate the reasons for not applying Tit. 33, § 4, but we mention a few that we consider pertinent. The prior lienor is not required by § 4 to resort to the property in the order listed in that section unless "he can do so without risk of loss to himself."

(1) The equipment has already been sold and the proceeds are already in court as the result of a practically completed lawsuit.

(2) On this property appellee has the prior lien.

(3) Appellant could have had the prior lien had it chosen to file it with the Secretary of State when it sold the equipment to Portion-Redi Foods.

(4) A first lien of proceeds from a sale is much safer from loss than having to "buy in" after foreclosing a third mortgage when the first and second mortgages amount to approximately $235,000.00.

(5) Any resort to the real estate could also bring conflict with other unsecured creditors and the receiver in bankruptcy.

(6) Following any other course than that of the trial court could require appellant "to resort to conjectural and speculative independent legal action" and it "would extend the period of litigation and possible controversy." Platte Valley Bank of North Bend v. Kracl, 185 Neb. 168, 174 N.W.2d 724.

Since no reversible error has been presented, the decree is due to be affirmed.

Affirmed.

HEFLIN, C. J., and HARWOOD and MADDOX, JJ., concur.

COLEMAN, J., concurs in the result.