Marshalling in Judicial or Nonjudicial Foreclosure in Colorado
| Publication year | 1984 |
| Pages | 1809 |
| Citation | Vol. 13 No. 10 Pg. 1809 |
1984, October, Pg. 1809. Marshalling in Judicial or Nonjudicial Foreclosure in Colorado
In today's economic climate, there has been an increasing number of judicial and nonjudicial foreclosures of real property. When faced with the foreclosure of a senior mortgage, junior lienors or later purchasers often must deal with the unappetizing prospect of paying the entire senior mortgage indebtedness to preserve their security or equity in real property. Marshalling has been defined as "the ranking or ordering of several estates or parcels of land for the satisfaction of a judgment or mortgage to which all are liable."(fn1) Marshalling can be used to limit the amount that a client in many cases must spend to preserve an interest in real property.
Marshalling is not a new legal concept, but is unknown or at least unfamiliar to many practitioners. Attorneys representing junior lienors or later purchasers faced with the foreclosure of a senior mortgage or deed of trust(fn2) should understand the basic principles of marshalling to represent their clients effectively in appropriate cases.
Marshalling may apply where parcels of property subject to a senior mortgage in foreclosure have been sold or encumbered by the mortgagor at different times to different purchasers or lienors. The senior mortgage may encumber a single tract of land conveyed or encumbered by the owner in parcels, or two or more separate tracts secured by a single indebtedness. Marshalling is an equitable doctrine which adjusts the rights of the senior foreclosing mortgagee, the mortgagor, junior lienors and later purchasers with respect to which portions of mortgaged property must be first sold to satisfy the senior mortgage indebtedness.
The manner in which parcels of property are applied to satisfy the senior mortgage indebtedness is governed by two rules typically referred to as (1) the rule of sale in the inverse order of alienation ("inverse order rule") and (2) the two funds doctrine.(fn3) The inverse order rule applies where there are two or more owners of separate parcels of property securing a single indebtedness. The two funds doctrine applies where there are two mortgages, one a mortgage on two tracts of land and the other, a junior mortgage that encumbers only one of the tracts. These principles are not mutually exclusive and frequently are applied in a single case. The application of these principles is sometimes confused, since the order of sale of separate parcels subject to two or more junior mortgages is in the inverse order of alienation.(fn4)
The inverse order rule applies where property subject to a mortgage is conveyed(fn5) by the mortgagor in parcels at different times, without reference to the mortgage, or where a portion of the mortgaged property is conveyed while the residue is retained by the mortgagor. The rule of sale in the inverse order of alienation is:
where an estate is subject to a mortgage and is sold by the mortgagor in parcels at different times, the mortgage shall be satisfied, first, out of that portion of the estate still in the hands of the mortgagor, and then out of the parcels aliened in the inverse order of alienation.(fn6)
This rule is based on the equitable principle that "[a]s between the grantee and the mortgagee, the residue remaining in the hands of the mortgagor shall be first applied to payment of the mortgage debt."(fn7)
Because the first grantee of a portion of the mortgaged property has an expectation that the portion retained by his grantor will be applied first to satisfy the mortgage indebtedness, this expectation follows portions of the retained property subsequently conveyed to later grantees.
This rule operates as follows: R (mortgagor) mortgages lots 1,2 and 3 to E (mortgagee). The mortgage is properly recorded. R then sells lot 1 to P-1 (Purchaser). P-1 pays full value for lot 1, and no reference is made in the deed to the existing mortgage. At this point, if E forecloses, P-1 could require E to sell lots 2 and 3, which remain in the hands of R, first, to satisfy the mortgage indebtedness. If the sale of these lots
Because of modern emphasis on title insurance and title examinations, situations where the pure inverse order rule will apply are rare, although such situations do still occur. For example, it is common practice for companies involved in mineral exploration to lease parcels of property with only a cursory examination of the property records, or no examination at all. Since a mineral lease creates a valuable interest or estate in land,(fn8) which will be foreclosed along with the lessor's property interest,(fn9) a mineral lessee would be able to assert the doctrine of sale in the inverse order of alienation to protect its interest.(fn10)
The right of a grantee to require that the mortgaged property be sold in the inverse order of alienation may be altered by language contained in the deed or instrument of conveyance.(fn11) The most common language of modification contained in a deed is that the grantee takes "subject to" the mortgage or that the grantee assumes the mortgage. Where the senior mortgage indebtedness is referred to in the instrument of conveyance, the trial court must determine how the parties intended the property to be applied to the senior mortgage indebtedness.
Where property is conveyed "subject to" the senior mortgage, the inverse order rule does not apply, and a grantee may not require the senior mortgagee to resort first to that portion of the security retained by his grantor or in the hands of subsequent grantees. When a portion or portions of the property...
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