## Facts

- The Computer Room, Inc. filed a Chapter 7 case in the United States Bankruptcy Court for the Northern District of Alabama.
- First Alabama Bank of Tuscaloosa, N.A. (FAB) was owed about $9,843 and held a prior perfected, general security interest (perfected July 1981) in the debtor’s accounts receivable, inventory, and contract rights.
- Peoples Bank of Tuscaloosa (Peoples Bank) made a $6,808 loan and obtained a later perfected, specific security interest (perfected September 1981) limited to accounts receivable generated from a contract with the State of Alabama Highway Department.
- The Peoples Bank loan proceeds were used to purchase equipment needed to perform the Highway Department contract.
- Jackson Mathews, the debtor’s president and principal shareholder, personally guaranteed the obligation to Peoples Bank.
- After the bankruptcy filing, the debtor’s attorney collected approximately $9,309 from the Highway Department receivable (the collateral targeted by Peoples Bank’s specific lien) and about $4,044 from other receivables and funds.
- The trustee held inventory valued at approximately $29,100, which was also subject to FAB’s broad security interest.
- Peoples Bank filed an adversary proceeding seeking marshaling to require FAB to satisfy its debt first from collateral in which Peoples Bank had no interest (such as inventory), leaving the Highway Department receivable proceeds for Peoples Bank.

## Issues

1. Whether a junior creditor with a specific security interest in a single receivable may compel a senior creditor with a prior, general lien on multiple asset categories to satisfy its claim first from other collateral, under the doctrine of marshaling of assets.
2. Whether marshaling should be denied where it would prejudice the bankruptcy estate or unsecured creditors, unduly burden administration, or improperly alter the senior creditor’s bargained-for priority.

## Decision

- The court denied Peoples Bank’s request for marshaling.
- FAB was not required to proceed first against inventory or other collateral before resorting to the Highway Department receivable proceeds.
- The court left FAB free to enforce its prior perfected security interest against any collateral within its lien, consistent with bankruptcy priorities and equitable limits.

## Legal Principles

- Marshaling is an equitable, discretionary doctrine that may compel a senior secured creditor with access to two debtor-owned funds to proceed in a manner that does not unfairly harm a junior creditor limited to one fund, but only if it can be done without injustice to the senior creditor or third parties.
- Both “funds” relevant to marshaling must be property of the same debtor; marshaling is not ordered when it would shift burdens to non-debtor sources or otherwise evade core requirements.
- In bankruptcy, marshaling will be refused when it would prejudice unsecured creditors, diminish or distort estate value, or conflict with the Bankruptcy Code’s distribution and priority framework.
- Marshaling is not a tool to revise a senior creditor’s earlier-perfected, broader collateral bargain merely to improve a later-arriving creditor’s position, especially where the junior creditor voluntarily accepted narrower collateral and obtained additional protection (such as a personal guaranty).
- Administrative and liquidation practicalities in Chapter 7 may weigh against marshaling where the remedy would complicate sales, valuation, timing, or costs in a way that harms the estate.

## Conclusion

The court declined to apply marshaling because equity did not justify requiring a prior, broadly secured creditor to exhaust other collateral first where doing so risked harming the estate and unsecured creditors, burdened administration, and effectively reallocated value contrary to the senior creditor’s perfected priority and the junior creditor’s chosen credit structure.


Peoples Bank of Tuscaloosa v. The Computer Room, Inc. (In re The Computer Room, Inc.), 24 B.R. 732 (Bankr. N.D. Ala. 1982)