Case Invoking Doctrine of Marshaling

06 May Case Invoking Doctrine of Marshaling

In re Szwyd, 2008 WL 1766591 (Bkrtcy.D.Mass. 2008), the Massachusetts Bankruptcy Court rejected the position of the IRS that it could not be required to marshal assets to satisfy tax liens for the benefit of the bankruptcy estate. Marshaling is a rarely invoked doctrine that, as the Court noted, “rests
upon the principle that a creditor having two funds to satisfy his debt, may not by his application of them to his demand, defeat another creditor, who may resort to only one of the funds.”

The debtor in this Chapter 7 case had a homestead of sufficient value to satisfy his outstanding federal tax liens. The bankruptcy trustee had already sold another property of the debtor and had proceeds on hand, but they were insufficient to cover the tax liens.

The debtor’s homestead was effective against the bankruptcy estate, but not against the IRS. If the IRS did not sell the homestead and instead waited to take its distribution from the bankruptcy estate, unsecured creditors would have ended up with nothing.

Since a Massachusetts homestead was ineffective against the tax liability, the trustee contended that the IRS should be forced to marshal assets by looking first to the homestead. Again, the homestead was effective against the bankruptcy estate and therefore could not be reached by the trustee.

The Court agreed with the trustee that the IRS could be compelled to proceed first against the homestead so that the bankruptcy estate (and the return to unsecured creditors) could be maximized.

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