Marshalling by a Subsequent Purchaser

In one line

If a man mortgages two properties to one lender and then sells you only one of them, you can insist the lender take his money out of the property he kept.

In exam wording: section 56 provides that if the owner of two or more properties mortgages them to one person and then sells one or more of them to another, the buyer is, in the absence of a contract to the contrary, entitled to have the mortgage debt satisfied out of the property or properties not sold to him, so far as they will extend, but not so as to prejudice the rights of the mortgagee or of persons claiming under him, or of any other person who has for consideration acquired an interest in any of the properties.

Why the rule exists

Marshalling means arranging in order. The idea is one of equity's oldest: where a creditor can help himself from two funds and another person can reach only one of them, the creditor should be made to take from the fund the other cannot touch, provided this costs the creditor nothing.

The unfairness it prevents is easy to see. A mortgagor owes one debt secured on two plots. He sells plot A to a buyer, keeping plot B. If the mortgagee were free to choose, he could enforce entirely against plot A, wiping out the buyer, while the mortgagor keeps plot B free and clear. The buyer would have paid for a plot that was then taken to pay his seller's debt, and the seller would end up better off for having sold.

Section 56 answers that by directing the debt at the property the seller kept. The mortgagor cannot improve his own position at his buyer's expense.

The conditions

One, the same owner must own two or more properties.

Two, he mortgages them to one person. The section requires a single mortgagee holding all of them. If two separate lenders hold one property each, there is nothing to marshal.

Three, he then sells one or more of the properties to another person. The sale must come after the mortgage.

Four, there is no contract to the contrary. Like most of this Act, it is a default rule, and a buyer can be made to take subject to a different arrangement.

The right that follows: the buyer may require the mortgage debt to be satisfied out of the properties not sold to him, so far as those will extend.

The three limits, which are what the section is really about

The right is not absolute, and the section names three groups whose position may not be prejudiced.

The mortgagee. Marshalling must cost the mortgagee nothing. He bargained for security over everything, and equity will rearrange the order in which he takes but never reduce what he gets. So if the retained property is worth less than the debt, the buyer cannot use section 56 to leave part of the debt unpaid; the words are "so far as the same will extend", and the mortgagee may then come against the property sold for the balance.