CBA Record

Y O U N G L A W Y E R S J O U R N A L

In re Ferguson and the Equitable Remedy Marshaling in Bankruptcy Courts By Sean P. Williams, Alex J. Whitt, and E. Philip Groben

B ankruptcy courts are courts of equity, and therefore have the power to apply the principles and rules of equity jurisprudence, which include the marshaling of assets among competing creditors. In its classic form, marshaling involves two creditors, one senior and one junior, whereby the junior creditor may protect its security interest by forcing the senior creditor to exhaust remedies not available to the junior credi- tor. Marshaling may benefit more than one junior creditor, and a majority of bankruptcy courts allowmarshaling claims to also be brought by a chapter 7 trustee given the trustee’s status as a lien credi-

tor. Marshaling is a remedy governed by state law, and the Illinois Supreme Court has long recognized a creditor’s right to marshal assets. To promote fair dealing between credi- tors, marshaling prevents a senior credi- tor from satisfying its debt and thereby arbitrarily prejudicing a junior creditor, which may have no other recourse. As marshaling is a form of equitable relief, a bankruptcy court will not authorize it if there is an inequitable result to the senior creditor, such as delay or inconvenience, where the property to the senior creditor is of an uncertain value, or where a mar- shaling order would render an otherwise

oversecured creditor undersecured or unsecured. A party asking the court to issue a marshaling order bears the burden of demonstrating that the senior creditor will not suffer prejudice or hardship as a result of the marshaling. The recently reported decisions in In re Ferguson are especially instructive for junior creditors attempting to apply the doctrine of marshaling in bankruptcy courts. See In re Ferguson , No. 10-81401, 2011 WL 5910659, at *1 (Bankr. C.D. Ill. Nov. 28, 2011) (“Ferguson I”). The Marshaling Analysis in In Re Ferguson

40 APRIL/MAY 2017