Brian Shaw discusses the rule of marshaling assets, which allows a junior creditor to request that a senior creditor, who has access to multiple funds for debt repayment, first satisfy its claims from funds not accessible to the junior creditor, in Law360. The equitable doctrine is designed to ensure fairness among creditors with differing rights to a debtor’s assets. A junior creditor must meet the evidentiary burden to successfully assert the rule of marshaling assets, though courts may deny marshaling if it would unfairly prejudice the other creditors. For example, in U.S. v. Kent Ries, the Chapter 7 trustee attempted to apply the doctrine against the IRS, which held a senior priority lien on exempt real estate. Although the bankruptcy court found that the IRS was not exempt from marshaling, the district court reversed the bankruptcy court and held that both the priorities set forth in Section 726 of the Bankruptcy Code and the Anti-Injunction Act prohibited the application of marshaling against the IRS.

As noted in Law360, the decision’s reasoning is flawed. The categorical exemption of the IRS from marshaling misapplies legal principles and ignores established precedents that already take into account creditor prejudice. If followed by other courts, this misguided decision will remove an important tool from the bankruptcy court’s equitable toolbox.

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