Marshalling of Assets

Many, many years ago when the world was young and the biggest bailout around was actually a cleanup of the S & L mess; I was a young lawyer working in an ivory tower briefing issues for RTC, FDIC and FSLIC — among other deep-pocketed clients.   One of those briefs was on whether or not the doctrine of marshalling of assets could be used against the Government.  I don’t remember the details.  I just remember being fascinated by the term “marshalling assets”.  I was young.

Anyway, earlier this month in Massachusetts a court has held that the U.S. Government (IRS) can be forced to marshall its assets in order to allow for a distribution to the unsecured creditors.  It is a creditor’s decision in a bankruptcy case, but I thought it was kind of cool anyway.

Ok, so just in case you didn’t have to research this when you were a young lawyer locked in a library for days on end, marshalling assets is a doctrine that applies when one creditor has more than enough collateral available and another creditor only has access to some of that collateral.  By forcing the over-secured creditor to go after the collateral on which it has an exclusive claim first, more of the other assets are available for other creditors.

In the Massachusetts case the Debtor had exempt equity in a homestead and another asset that was not exempt.  An IRS lien does attach to exempt property (remember, they rank with death and taxes).  Obviously, the unsecured creditors couldn’t reach the Debtor’s exempt homestead equity.  So, the Bankruptcy court required the IRS to go after the exempt homestead equity first.  Then, it could finish satisfying its secured claim from the non-exempt asset.  The remainder of the non-exempt asset would then be available for a distribution to the unsecured creditors.

The case is Houghton v. United States (in re:  Szwyd), BK No. 05-50837-HJB, Adv. No. 06-04274 in the Bankruptcy Court for the District of Massachusetts, Western Division.  The case was decided September 8, 2008.


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