COURT OF
APPEALS DECISION DATED AND
RELEASED October
31, 1996 |
NOTICE |
A party may file with the Supreme Court a petition to review an
adverse decision by the Court of Appeals.
See § 808.10 and Rule
809.62, Stats. |
This opinion is subject to further editing. If published, the official version will appear in the bound
volume of the Official Reports. |
No. 95-2104
STATE OF WISCONSIN IN
COURT OF APPEALS
DISTRICT IV
BANK
ONE WISCONSIN TRUST COMPANY, N.A.,
Plaintiff-Respondent,
v.
COTTON
MILLS ASSOCIATES LIMITED PARTNERSHIP,
Defendant,
CITY
OF JANESVILLE, AND THE COMMUNITY
DEVELOPMENT
AUTHORITY OF THE CITY OF
JANESVILLE,
WISCONSIN,
Defendants-Appellants,
CHARLES
I. TRAINER, DANIEL J. MC CARTY, THOMAS
G.
BEACH d/b/a TMB DEVELOPMENT COMPANY,
A
WISCONSIN GENERAL PARTNERSHIP, CHARLES I.
TRAINER,
DANIEL J. MC CARTY AND THOMAS G.
BEACH,
Defendant-Respondents.
APPEAL
from a judgment of the circuit court for Rock County: PATRICK J. RUDE, Judge. Dismissed.
Before
Eich, C.J., Dykman, P.J., and Vergeront, J.
VERGERONT,
J. This appeal arises out of a
foreclosure action by Bank One Trust Company involving certain property owned
by Cotton Mills Associates Limited Partnership. The City of Janesville and The
Community Development Authority of the City of Janesville (collectively the
City) claim an interest in the property.
The City appeals from a judgment dismissing its counterclaim against
Bank One for marshaling of assets, that is, requiring the bank to pursue other
assets before foreclosing on the property.
The
trial court held that the City was not entitled to a marshaling of assets
because there were not two funds belonging to the same debtor. We agree with the trial court. We concluded
that because the guarantors of the indebtedness had not pledged specific property,
there were not two funds belonging to the same debtor. Since the City is not entitled to a
marshaling of assets, and since there is no other relief now available to the
City, we dismiss the appeal as moot.
BACKGROUND
Cotton Mills developed
and owned a multi-family housing project located in Janesville, Wisconsin (the
property). As part of the City's
rehabilitation efforts, the City issued Series A and B multi-family housing revenue
bonds in the aggregate amount of $1,400,000.
Bank One held the bonds as trustee.
Bank One Janesville owned the Series A bonds and Robert W. Baird &
Co., Inc. owned the Series B bonds. In
connection with the bond issue, Cotton Mills issued a mortgage note in the
principal amount of $1,400,000. The
mortgage note was secured by a mortgage against the property and a limited
guaranty agreement signed by Charles I. Trainer, Daniel J. McCarty and Thomas
G. Beach, d/b/a TMB Development Company, and Charles I. Trainer, Daniel J.
McCarty and Thomas G. Beach as individuals.
Trainer, McCarty and Beach are general partners of Cotton Mills' general
partner. The City also loaned Cotton
Mills $300,000. This note was
nonrecourse and secured only by a mortgage against the property.
Cotton
Mills defaulted when it failed to make a principal payment on the bond note and
failed to pay its 1993 real estate taxes.
Bank One filed a foreclosure action against Cotton Mills, the guarantors
and the City. Neither Cotton Mills nor
the guarantors answered the complaint.
The City answered the complaint, admitted the priority of the Bank One
mortgage and Bank One's right to foreclose, but in its counterclaim sought
application of the marshaling of assets doctrine. Bank One and the City entered into a stipulation providing for
foreclosure judgment to be entered against Cotton Mills and the guarantors, as
demanded by Bank One in its amended complaint, and judgment was entered.
Because
no party filed an answer to the counterclaim, the City obtained a default
judgment requiring Bank One to first enforce its claim against the guarantors
before enforcing its claim against the property. After the entry of this judgment, the guarantors sought leave to
intervene on the City's counterclaim.
Bank One moved to vacate the default judgment and for leave to file a
reply to the counterclaim denying that the City was entitled to application of
the marshaling of assets doctrine. The
trial court granted the motion to intervene, vacated the default judgment and
dismissed the counterclaim, concluding that the marshalling of assets doctrine
did not apply.
On
appeal, the City challenges both the trial court's decision to grant relief
from the default judgment and its decision to dismiss the counterclaim. Bank One responds that the City's appeal is
moot because the bank has completed the foreclosure process, the property has
been sold to an independent third party, and the indebtedness due Bank One has
been satisfied. The City responds that
the controversy is not moot because, since it was entitled to have the trustee
first satisfy its indebtedness from sources other than foreclosure of the
property, it is entitled to marshaling by way of subrogation or an award of
damages.[1]
The
City appears to concede that if it were not entitled to have other assets
marshaled, the appeal would be moot.
Because we conclude that the marshaling of assets doctrine does not
apply, we dismiss the appeal as moot without reaching any other issue.
DISCUSSION
The City contends that
the trial court should have required Bank One to first enforce the guaranty
before looking to the property because the guarantors are not "mere
sureties." According to the City,
the principal debtor, Cotton Mills, and the guarantors are "so closely
intertwined" that it makes no sense to say that there are not two funds
belonging to the same debtor. The City
argues that since Bank One can satisfy its claim against Cotton Mills out of
the guaranty as well as out of foreclosure on the property, while the City can
only resort to the property, equity should compel the trustee to enforce the
guaranty. The City refers to the
guaranty as a second fund available to Bank One but not to the City.
As
a general rule, even though one creditor is secured by the debtor's surety while
a second creditor is not, equity will not compel the secured creditor to
exhaust his remedy against the surety before proceeding against the principal
debtor. Moser Paper Co. v. North
Shore Publishing Co., 83 Wis.2d 852, 862, 266 N.W.2d 411, 416 (1978). Where the surety has simply guaranteed the
debtor's obligation, even though the surety is liable at law to pay the
principal's debt, equity will not normally permit the surety's property to be
made to satisfy the principal debt when the principal's property will
suffice. Id. at 862, 266
N.W.2d at 417.
The
doctrine of marshaling assets, when it applies, functions as an exception to
that general rule. The doctrine
provides an equitable remedy when a creditor has a lien on or interest in two
funds or properties in the hands of the same debtor, and another creditor has a
lien on only one of those funds or properties.
In such a situation, equity, at the request of the latter creditor, will
compel the creditor with two funds to satisfy his or her debt out of that fund
to which the other creditor cannot resort.
Id. at 860, 266 N.W.2d at 416.
Before
a court of equity will marshal assets and securities between two creditors, it
must appear that: (1) they are creditors of the same debtor, (2) that there are
two funds belonging to that debtor, and (3) that one of them alone has the
right to resort to both funds. Id.
at 861-62, 266 N.W.2d at 416.
In
Moser, the court addressed the requirement that there be two
funds belonging to the debtor. There
the officers and principal shareholders of the company guaranteed the company's
debts and granted mortgages on their residences in order to secure their own
note and mortgages as sureties and also to secure the company's debt. Id. at 854-56, 266 N.W.2d at
413-14. The Moser court
noted that the guarantors were not "mere sureties" but had pledged
their residences to secure not only their note and their performance but also
the debt of the original debtor. Id.
at 862, 266 N.W.2d at 417. The court
found that the residences of the guarantors were more than the property of a
surety because they secured the aggregate obligation of the debtor and its
officers directly. Id. The court concluded that under these
circumstances the mortgages created a fund which equity will consider a fund of
the company itself and the marshaling of assets doctrine was appropriate. Id. at 864, 266 N.W.2d at 418.
The
trial court here dismissed the City's counterclaim because the requirements for
the marshaling of assets doctrine were not met. Specifically, the court found that while Bank One and the City
had a secured claim against the partnership's real estate, there was no other
"fund" or asset of the partnership to which Bank One had a claim. The court determined that what the City
called a "second fund"--the guarantees of the general partners as
individuals--was not a fund owned by the partnership and therefore was not an
asset that could be marshaled.
The
City argues that since the guarantors and Cotton Mills are so closely
intertwined, the trial court should have extended the exception in Moser
even without a pledge of specific property on the part of the
guarantors. We disagree. Moser is an exception to the
general rule that the second fund must belong to the same debtor, which itself
is an exception to the general rule that a surety's property is not available
to satisfy the principal's debt when the principal's property will
suffice. Unlike Moser,
the guarantors here did not pledge specific property. The assets sought to be marshaled in this case secure only the
guaranty--they do not secure Cotton Mills' debt to the City. We are not convinced that equity requires an
expansion of Moser to the facts of this case. As Bank One points out, the effect of the
City's position would be to force senior secured parties holding guarantees to
forgo attempting to collect against their primary real estate collateral in
favor of pursuing guarantors with possibly uncertain collectability whenever it
would benefit junior creditors who have not obtained guarantees. We conclude that the trial court correctly
decided that the City was not entitled to judgment directing that the trustee
look to the guarantors' assets before satisfying its indebtedness from the foreclosure
of the real estate.
By
the Court.—Appeal dismissed.
Not
recommended for publication in the official reports.
[1] The trial court denied the City's motion for
relief pending appeal on October 31, 1995, and afforded the City forty days
from that date to seek relief pending appeal from this court. In its motion to this court for relief, the
City sought an order that the trustee hold in trust the City's claimed share of
proceeds from the foreclosure sale and that the judgment of foreclosure shall
not be satisfied to the extent of the City's claim plus any deficiency. We denied the City's motion for relief
pending appeal.