## Facts

- Robert E. Derecktor of Rhode Island, Inc. operated a shipbuilding and repair business and filed for Chapter 11 relief.
- The Rhode Island Port Authority and Economic Development Corporation loaned the debtor about $6.5 million and held liens on specified collateral; about $4.975 million remained unpaid as of February 1992.
- The Bank of New England loaned the debtor $6.5 million to purchase a floating dry dock and took a broad security interest covering the dry dock and substantially all debtor assets; it later extended an additional $2.5 million secured by accounts and equipment.
- After the bank failed, the FDIC became the senior secured creditor with a blanket lien on essentially all assets, including the floating dry dock; the Port Authority held narrower liens and a junior interest in the dry dock proceeds.
- During the Chapter 11 case, the debtor’s assets were liquidated, including the floating dry dock (sold for about $6.6 million) and other proceeds (contract, insurance, equipment, and related collateral).
- The Port Authority moved to compel marshaling so the FDIC would look first to collateral not subject to the Port Authority’s liens, preserving shared collateral (including dry dock proceeds) for the Port Authority.
- Unsecured creditors objected, arguing marshaling would reduce assets otherwise available for unsecured distributions.

## Issues

1. Whether the bankruptcy court should order marshaling when the FDIC held a senior lien on two debtor funds and the Port Authority held a junior lien on only one, notwithstanding unsecured creditors’ objections that marshaling would reduce their recovery.

## Decision

- The court granted the Port Authority’s motion and ordered marshaling.
- The FDIC, as senior secured creditor, was required to satisfy its claim first from collateral not subject to the Port Authority’s liens before resorting to collateral encumbered by both creditors.

## Legal Principles

- Marshaling is an equitable doctrine generally requiring: (1) two creditors of the same debtor; (2) two funds belonging to the debtor; and (3) a senior creditor with access to both funds while a junior creditor has access to only one.
- When these elements are met, a court may require the senior creditor to proceed first against the fund unavailable to the junior creditor, so long as doing so does not cause inequitable prejudice.
- Reduced distributions to unsecured creditors, standing alone, are not the type of prejudice that bars marshaling where the junior creditor has a bargained-for security interest and unsecured creditors lack rights in specific collateral.
- Marshaling ordinarily applies only to funds that are property of the same debtor and within the senior creditor’s legal reach; speculative or third-party sources do not satisfy the “two funds” requirement.

## Conclusion

The bankruptcy court applied marshaling to protect a junior secured creditor’s bargained-for collateral position, holding that unsecured creditors’ diminished recovery did not, by itself, justify denying marshaling where the senior creditor could be paid from alternate debtor collateral.


In re Robert E. Derecktor of Rhode Island, Inc., 150 B.R. 296 (Bankr. D.R.I. 1993)