Marshaling

“A rule designed to prevent a secured creditor holding liens on two separate assets from liquidating the one asset that is subject to a second creditor’s lien, thereby unfairly leaving that second creditor with no collateral (or less collateral).

The courts have historically given the concept of marshaling limited application, using it only when there are two or more secured creditors of the same debtor (the “common debtor” requirement), when the assets at issue are owned by that common debtor and when no prejudice will accrue to the senior creditor by making it resort to one asset before the other. But some courts (beginning with the 8th Circuit’s oft-criticized Jack Green decision in 1979) have expanded the use of marshaling to benefit unsecured creditors’ committees and other estate representatives, essentially treating another entity or its property as a second asset and ignoring the “common debtor” requirement of the marshaling doctrine. This usually has been done at the expense of guarantors.”

This definition is courtesy of our friends at Polsinelli who publish the Devil’s Dictionary of Bankruptcy Terms. You can access the Devil’s Dictionary here.

For more information about marshaling, read Dealing with Corporate Distress 09: All About “Claims” in Bankruptcy.