Marshaling Allowed in Farm Bankruptcy Case.

Confirmation in this Chapter 12 case was delayed  until the U.S. Supreme Court ruled in Hall, et ux. v. United States, 132 S. Ct. 1882 (2012) on whether post-petition taxes are dischargeable.  The court later determined that they were not estate obligations that could be treated as unsecured claims. The debtors reorganization plan was then submitted that proposed paying post-petition taxes through the plan with estate assets.  Confirmation was denied and the case converted to Chapter 7.  The debtors' real estate and equipment were sold and a Chapter 7 discharge was received. A junior secured creditor filed a motion for marshaling of assets. The bank held a first mortgage on land, a first priority lien on equipment and a first priority lien on crop proceeds and the creditor held a second priority lien on equipment and crop proceeds and no junior mortgage on the real estate.  There were insufficient funds in the debtors' bankruptcy estate to pay all claims and the IRS asserted a  claim for priority taxes.  If marshaling were denied, it would allow more non-tax debt to be paid and the debtors claimed that allowing marshaling would inhibit the debtors' fresh start.  The court noted that the “inequity” of another creditor receiving less or nothing is not a valid reason to deny marshaling.  Accordingly, the requirements for marshaling were satisfied.  The motion to marshal assets was granted because the real estate had been sold and, the court held that the fact that a creditor’s receipt of a portion of the sale proceeds would prevent the IRS debt from being reduced was not grounds to deny marshaling which, the court noted, prefers interests of the junior lienholder.  The court ordered that a hearing was to be held to address the issues of distribution, including trustee compensation.  In re Ferguson, No. 10-81401, 2013 Bankr. LEXIS 3386 (Bankr. C.D. Ill. Aug. 20, 2013).  On further review, the court reversed.  The court determined that the bankruptcy court mistakenly looked to the conditions present at the time of the original marshaling request to determine whether to allow marshaling.  Instead, the appellate court determined that the elements that permitted marshaling no longer existed because the crops and equipment had been sold with the proceeds of sale paying the priority lien.  Ferguson v. West Central, FS, Inc., No. 14-1071, 2015 U.S. Dist. LEXIS 121096 (C.D. Ill. Sept. 11, 2015).

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