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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 Marshaling Analysis in
In Re Ferguson
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”).
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