Some of you may have heard your attorney talk about the “equitable doctrine of marshalling.” This doctrine is sometimes used when a senior creditor has a lien that covers two separate funds owned by a borrower. If a junior creditor has recourse as to only one of those funds, the senior creditor may be required to exhaust the fund that is not available to the junior creditor before going after the other fund.
There are three elements that must exist for marshalling to apply: (1) the senior creditor and junior creditor must be creditors of the same debtor; (2) there must be two funds that belong to the debtor; (3) only one of the creditors can have the right to resort to both funds.
This concept does not come out of the Uniform Commercial Code; it is an equitable principal that courts may apply.
Author: Lori Young (bio)
Phone: 812.452.3560
email: lyoung@bamberger.com
Tags: borrower, creditor, equitable doctrine of marshalling, Uniform Commercial Code