               United States Bankruptcy Appellate Panel
                           FOR THE EIGHTH CIRCUIT



                                  No. 02-6002 MN
                                  No. 02-6003MN


In re:                                       *
                                             *
Fred H. Bame, a/s/f Al & Alma’s Inc.,        *
a/s/f Excelsior Park Tavern Two, Inc.,       *
a/s/f Excelsior Financial Properties,        *
a/s/f Gopher Oil Company,                    *
                                             *
         Debtor.                             *
                                             *
James R. Ramette, Trustee                    *     Appeals from the United States
                                             *     Bankruptcy Court for the
         Plaintiff-Appellee,                 *     District of Minnesota
                                             *
               v.                            *
                                             *
United States of America and                 *
Minnesota Department of Revenue,             *
                                             *
         Defendants-Appellants.              *



                               Submitted: May 29, 2002
                                  Filed: July 2, 2002


Before KOGER, Chief Judge, SCHERMER and FEDERMAN, Bankruptcy Judges

SCHERMER, Bankruptcy Judge
       The United States of America and the Minnesota Department of Revenue
(collectively referred to herein as the “Taxing Authorities”) appeal from the
bankruptcy court1 order and judgment requiring, inter alia, marshaling by the Taxing
Authorities. We have jurisdiction over this appeal from the final order and judgment
of the bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set forth below, we
affirm.

                                        ISSUE

       The issue on appeal is whether the bankruptcy court can require the Taxing
Authorities, the holders of tax claims against the debtor which are secured by liens
on certain real property presently owned by the debtor’s non-debtor spouse, to
proceed first against such property to satisfy their tax claims prior to participating in
any distribution from the bankruptcy estate. We conclude that the bankruptcy court
properly applied the marshaling doctrine to require the Taxing Authorities to proceed
first against the real property to satisfy their claims before participating in any
distribution from the bankruptcy estate.

                                   BACKGROUND

       In 1992, JoAnna Bame conveyed by quitclaim deed her interest in a certain
luxury log home on Lake Minnetonka (the “Homestead”) to herself and her husband,
Fred Bame, as joint owners. On March 16, 1998, Joanna and Fred Bame reconveyed
the Homestead to JoAnna Bame. During the period that the Homestead was jointly
owned by Fred and JoAnna Bame, the United States of America and the Minnesota
Department of Revenue filed tax liens against the Homestead on account of unpaid
tax liabilities of Fred Bame.


      1
       The Honorable Nancy C. Dreher, United States Bankruptcy Judge for the
District of Minnesota.
                                           2
      On February 10, 1999, an involuntary Chapter 7 petition was filed against Fred
Bame (“Debtor”). The case was converted to Chapter 11 and later reconverted to
Chapter 7 on May 19, 1999. James E. Ramette (“Trustee”) was appointed trustee of
the Debtor’s bankruptcy estate.

       On June 7, 1999, the Trustee filed an adversary proceeding against the Debtor
and his wife, JoAnna Bame, seeking to avoid certain transfers of property from the
Debtor to his wife, including the March 16, 1998, conveyance of the Homestead from
the Debtor and JoAnna Bame to JoAnna Bame. The adversary proceeding was
resolved by a settlement agreement which was approved by the bankruptcy court.
Pursuant to the settlement agreement, JoAnna Bame agreed, inter alia, to place the
Homestead on the market, to use all commercially reasonable efforts to close a sale
of the Homestead before September 1, 2000, and to apply the proceeds of sale, to the
extent available, to pay the claims of the Taxing Authorities secured by the liens on
the Homestead. For marketing purposes, the property has been tentatively divided
into two lakefront parcels, one undeveloped lot and one lot improved with the
residence. Despite marketing efforts, the Homestead has not yet sold.

      The Homestead is encumbered by the following liens: a mortgage in favor of
Bank of America recorded August 4, 1995, in the original amount of $1,207,120.00;
a federal tax lien filed October 8, 1997, in the amount of $121,699.43; tax liens
recorded by the Minnesota Department of Revenue in the following amounts on the
following dates: $10,099.75 on June 26, 1997, $10,006.40 on August 8, 1997,
$20,414.06 on October 15, 1997, $51,755.19 on January 16, 1998, and $8,585.02 on
February 6, 1998; and a mortgage in favor of Republic Leasing recorded November
6, 2000, in the amount of $85,000. Additionally, JoAnna Bame has a $200,000
homestead exemption in the Homestead under Minnesota law.

     The balances due on the encumbrances in favor of Bank of America and the
Taxing Authorities are as follows: Bank of America asserts a balance due of

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$1,309,079.64 as of October 30, 2001; the Minnesota Department of Revenue asserts
a tax lien in the amount of $152,439 as of October 30, 2001; and the United States of
America asserts a tax lien in the amount of $136,720.68 as of August 11, 1999.

       The Taxing Authorities filed proofs of claim against the Debtor’s bankruptcy
estate. On February 28, 2000, the Minnesota Department of Revenue filed a priority
proof of claim in the amount of $172,048.92. Of this amount, $152,439 was owed
as of October 30, 2001, on account of taxes which accrued during the period the
Debtor had a recorded interest in the Homestead, plus interest thereon. On August
11, 1999, the Internal Revenue Service filed a proof of claim in the amount of
$136,720.68. The Internal Revenue Service’s claim arises out of a civil trust fund
recovery penalty against the Debtor and is secured by the federal tax lien filed
October 8, 1997. As of the petition date the Debtor owned no property to which the
Taxing Authorities’ liens attached. Consequently, their claims are allowed as
unsecured claims against the Debtor’s bankruptcy estate.

       The Trustee holds approximately $1 million for distribution to creditors. Total
claims exceed $4.5 million. The Taxing Authorities would like to be paid from the
estate funds. If the Taxing Authorities participate in the distribution of estate funds,
the available funds for other creditors will be reduced from $1 million to
approximately $700,000.

      On February 12, 2001, the Trustee filed an adversary proceeding against the
Taxing Authorities seeking an order requiring the Taxing Authorities to look first to
the Homestead to satisfy their liens prior to receiving any distribution from the estate.

      At trial, an appraiser testified that the value of the Homestead is $2.8 million,
$1 million attributable to the undeveloped lot and $1.8 million attributable to the
improved lot. The listing agent testified that he would expect the property to sell for



                                           4
$2.5 million if it had no house on it and that the tear down costs would approximate
$100,000.

      The United States asserted that it would incur costs of up to $10,041 to
foreclose on the Homestead and costs of $1,790 in connection with a redemption and
sale of the Homestead.2 The costs of maintaining the Homestead until it is sold
approximate $800 per month.

      The Minnesota Department of Revenue asserted that it would incur costs of up
to $100,900 to foreclose on the Homestead and estimated its costs to redeem in a
foreclosure situation at $1,559,000, with estimated carrying costs of $15,600 per
month. An additional $4,000 would be incurred evicting the Bames if necessary.

      The bankruptcy court concluded that marshaling was appropriate under the
circumstances. The Taxing Authorities appeal the order and judgment requiring
them to look first to the Homestead before receiving any distribution from the
Debtor’s bankruptcy estate.

                            STANDARD OF REVIEW

      We review the bankruptcy court’s findings of fact for clear error, its
conclusions of law de novo, and its application of the equitable doctrine of
marshaling for abuse of discretion. C.T. Development Corp. v. Barnes (In re Oxford
Development, Ltd.), 67 F.3d 683, 685 (8th Cir. 1995).




      Additionally, the United States would be required to satisfy the foreclosed
      2

mortgage in order to redeem. Therefore, its redemption costs would include the
Bank of America mortgage balance in excess of $1.3 million.
                                         5
                                    DISCUSSION

       Pursuant to the federal doctrine of marshaling, if a senior lien holder has a lien
that extends to two funds or two potential funds, and a junior lien holder has recourse
to only one of those funds, the senior lien holder may be required to exhaust the fund
to which only it has access before proceeding against the fund that is also available
to the junior lien holder. Meyer v. United States, 375 U.S. 233, 236, 84 S.Ct. 318,
321, 11 L.Ed.2d 293 (1963); C.T. Dev. Corp. v. Barnes (In re Oxford Dev., Ltd.), 67
F.3d 683, 687 (8th Cir. 1995); Berman v. Green (In re Jack Green’s Fashions for Men
Big and Tall, Inc.), 597 F.2d 130, 132-33 (8th Cir. 1979). The doctrine of marshaling
is designed to promote fair dealing and justice and is applied when it can be equitably
fashioned as to all parties. Meyer, 375 U.S. at 237; Oxford Dev., Ltd., 67 F.3d at 686-
87.

       Bankruptcy courts may apply the doctrine in proper cases where it is equitable
to do so. Oxford Dev., Ltd., 67 F.3d at 687; Jack Green’s Fashions for Men Big and
Tall, Inc., 597 F.2d at 133. The court must balance the equities to determine whether
marshaling is equitable in any given situation. Oxford Dev., Ltd., 67 F.3d at 687.
Marshaling is not appropriate where it will cause prejudice. Whitaker Corp., Juster
Steel Div. v. St. Cloud Nat’l Bank & Trust (In re St. Cloud Tool & Die Co.), 533 F.2d
387, 391 (8th Cir. 1976).

       The Taxing Authorities challenge the marshaling order on two bases:
(1) governmental taxing authorities should not be subject to marshaling and (2)
requiring the Taxing Authorities to look first to the Homestead will severely
prejudice the Taxing Authorities. We address these arguments in turn.




                                           6
               Applicability of Marshaling to Taxing Authorities

      The Taxing Authorities argue that the doctrine of marshaling should not be
applied to governmental agencies engaged in the collection of revenue. We reject
such a per se rule.

       The Taxing Authorities cite case law from other jurisdictions for the
proposition that governmental taxing authorities should be immune from marshaling.
See, e.g., Ackerman v. United States, 424 F.2d 1148 (9th Cir. 1970); United States v.
Herman, 310 F.2d 846 (2nd Cir. 1962); United States v. Valley Nat’l Bank (In re
Decker), 199 B.R. 684 (B.A.P. 9th Cir. 1996). We do not read the Ackerman and
Herman cases as imposing a per se rule prohibiting marshaling against taxing
authorities. Rather, each case specifically states that based upon the facts of the case
the imposition of marshaling on the government would create a burden on the
collection of revenue. Ackerman, 424 F.2d at 1150 (“substantial burden”) and
Herman, 310 F.2d at 848 (“extreme burden”). Each case can be interpreted as
applying a balancing test to determine that the imposition of marshaling was not
appropriate under the circumstances of the case, rather than imposing a per se rule.
To the extent the Decker court interpreted the Ackerman decision as an express
rejection of the application of marshaling to the enforcement of federal tax liens, we
are neither bound by decisions from the Ninth Circuit Bankruptcy Appellate Panel
nor by the Ninth Circuit Court of Appeals’ decision on which the BAP relied.

      Accordingly, we decline to hold that the application of marshaling to
governmental taxing authorities is per se prohibited. Rather, we conclude that
marshaling must be evaluated on a case by case basis, regardless of whether a taxing
authority is involved.




                                           7
        Equitable Application of Marshaling to the Taxing Authorities

        The Taxing Authorities argue that even if marshaling against taxing authorities
is not prohibited per se, they will be severely prejudiced if they are required to look
first to the Homestead to satisfy the tax obligations. The bankruptcy court weighed
the relevant factors and concluded that the Taxing Authorities would not be unduly
burdened if required to look first to the Homestead to satisfy the tax claims. The
bankruptcy court noted that the Taxing Authorities have valid liens on the Homestead
which they are free to pursue. The value of the property is sufficient to satisfy all
liens on the property as well as JoAnna Bame’s homestead exemption therein.
Normally a creditor of one spouse cannot proceed against the property of the other
spouse to satisfy its claim. In this instance, however, the Taxing Authorities obtained
valid liens on the Homestead while Fred Bame had an interest therein. Fred Bame’s
subsequent transfer of his interest therein to his wife was subject to the existing tax
liens. Furthermore, JoAnna Bame agreed to the payment of the liens of the Taxing
Authorities from the proceeds of sale of the Homestead in the settlement agreement
with the Trustee. She has thus consented to the satisfaction of the valid tax liens from
the property. Consequently, no legal impediment exists which would prevent the
Taxing Authorities from proceeding against the Homestead to satisfy their liens.

       The Taxing Authorities claim they would be prejudiced by having to proceed
against the Homestead because to do so would require them to undertake lengthy and
costly foreclosure proceedings or to redeem the property if foreclosed by the
mortgage holder. The bankruptcy court determined the costs which the Taxing
Authorities would incur if forced to proceed against the Homestead and determined
that such costs were not sufficient to render marshaling inequitable. Furthermore, the
Taxing Authorities are not required to initiate foreclosure proceedings or to redeem
the property. Rather, their liens could be satisfied or extinguished by a voluntary sale
of the property, which is currently being actively marketed, or by a foreclosure of the
consensual mortgage. In the event the property does not fully satisfy the liens of the

                                           8
Taxing Authorities for any reason, the Taxing Authorities will be able to participate
in distributions from the bankruptcy estate to satisfy any remaining allowed claims.
The bankruptcy court weighed the costs and burdens on the Taxing Authorities
against the facts that claims against the bankruptcy estate exceed $4.5 million; neither
the Trustee nor other creditors have the option of proceeding against the Homestead;
and the amount available for distribution to other creditors would be reduced from
approximately $1 million to $700,000 if the Taxing Authorities were paid with estate
funds.

       The marshaling order does not require the Taxing Authorities to forego their
lien rights; rather it asks them to exercise the rights available to them under non-
bankruptcy law prior to sharing in the distribution of bankruptcy estate assets. These
are the same rights the Taxing Authorities would have in the event no bankruptcy
proceeding had been initiated. In contrast, if the Taxing Authorities participate in the
estate distribution, they will, in essence, receive a windfall as a result of the Trustee’s
efforts because they will receive payment in full without incurring their normal
collection costs. Additionally, JoAnna and Fred Bame will receive a windfall by
keeping the Homestead free of the valid tax liens. The Debtor’s unsecured creditors,
on the other hand, do not have the option of proceeding against the Homestead and
will receive substantially less if estate funds are used to pay the Taxing Authorities.

       The bankruptcy court carefully weighed the relevant factors and determined
that requiring the Taxing Authorities to look first to the Homestead for satisfaction
of their liens prior to receiving a distribution from the bankruptcy estate was equitable
under the circumstances. We conclude, therefore, that the bankruptcy court did not
abuse its discretion in applying the doctrine of marshaling. Consequently, the
marshaling order shall not be reversed.




                                            9
                                   CONCLUSION

      Marshaling is an equitable doctrine applicable to all creditors, including taxing
authorities, under appropriate circumstances. In this case, the bankruptcy court
weighed the relevant factors and determined that marshaling was appropriate. The
bankruptcy court did not abuse its discretion in so determining. Consequently, the
order of the bankruptcy court is AFFIRMED.

      A true copy.

             Attest:

                     CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE
                     EIGHTH CIRCUIT




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