Based on statutory language and the Supreme Court’s Jevic decision, District Judge Matthew J. Kacsmaryk of Amarillo, Texas, took sides on a circuit split in holding that “a bankruptcy court may not, as a per se matter, invoke the equitable remedy of marshaling against the United States in a tax collection case.”

Although the case involved marshaling when the Internal Revenue Service had a priority claim, Judge Kacsmaryk’s February 10 opinion could be read to mean that marshaling is never permissible in bankruptcy.

The IRS Priority Claim and Lien 

The individual chapter 7 debtors owned real property allegedly worth $1.1 million that was exempt under Texas law. The IRS had recorded a tax lien against the property, but the tax lien was not subject to the state exemption.

The IRS also had a valid, unsecured $255,000 priority claim for the same debt covered by the tax lien. The chapter 7 trustee was holding almost $470,000 for distribution for creditors.

The trustee filed a motion asking the bankruptcy court to require marshaling by compelling the IRS to collect its priority claim by foreclosing the lien on the exempt real estate. To the extent that foreclosing came up short, the bankruptcy court would have allowed the IRS to be paid any deficiency through the priority claim.

Without marshaling, the IRS presumably would recover the $255,000 tax claim in full by recovery on the priority claim. Without marshaling, the distribution to other creditors would be cut in half. Moreover, the debtors would retain all of the $1.1 million in exempt property.

With marshaling, the IRS still would be paid in full by foreclosing the tax lien, but other creditors would have a larger recovery. With marshaling, the debtors would be paying the IRS, not creditors.

The trustee and the IRS cross moved for summary judgment. The bankruptcy court granted the trustee’s motion to require marshaling and denied the cross motion by the IRS. Judge Kacsmaryk granted a motion by the IRS for an interlocutory appeal.

The Split 

Judge Kacsmaryk described marshaling as “an equitable doctrine that allows courts to require a creditor who can resort to two or more funds for payment to seek payment from a fund other than the only one that another creditor may access.” Quoting the Supreme Court, he said it was designed “‘to prevent the arbitrary action of a senior lienor from destroying the rights of a junior lienor or a creditor having less security.’” Meyer v. U.S., 375 U.S. 233, 237 (1963).

As courts of equity, Judge Kacsmaryk said that bankruptcy courts “can order marshaling even without explicit statutory authority,” given that marshaling traces its origin to English common law.

With regard to bankruptcy and governmental claims, Judge Kacsmaryk said that the circuits are split. Among other courts, he listed the Ninth and Second Circuits and the Ninth Circuit Bankruptcy Appellate Panel for having held that marshaling “may not be invoked against the government.”

On the other side of the fence, Judge Kacsmaryk said that “some circuit and district courts have applied it against the government.”

Although the Fifth Circuit has not addressed the question, Judge Kacsmaryk cited a district court in Texas for holding that it “may not be invoked against the United States.”

The Statutory Answer

Judge Kacsmaryk found the answer in Sections 507 and 726.

Section 726 says that property of the estate “shall” be paid “first” toward priority claims in Section 507, where the IRS has an eighth priority claim. Citing Jevic, he said, “This order is not negotiable.” Czyzewski v. Jevic Holding Corp., 580 U.S. 451, 457 (2017). Quoting the Court, he said that “‘priority is an absolute command’” in chapter 7 liquidations. Id. at 464.

Judge Kacsmaryk rejected the trustee’s idea that marshaling only obliged the IRS to pursue its lien first. “But when Congress prescribes an order of claim disbursement with mandatory language,” he said, “it removes the bankruptcy court’s discretion to deviate for mere equitable reasons.”

Judge Kacsmaryk cited a bankruptcy court in Texas in 1990 and scholarly commentators from 1985 and 1990 for having called the “doctrine of marshaling in bankruptcy . . . into question.”

Based on Sections 507 and 726, Judge Kacsmaryk held that “a Trustee representing unsecured creditors may not seek to marshal against a government agency like the IRS with a valid, priority, unsecured tax claim in a bankruptcy estate.”

The Anti-Injunction Act

Judge Kacsmaryk had another statutory basis for his holding: the Anti-Injunction Act, 26 U.S.C. § 7421(a). He quoted the Supreme Court as saying that the “manifest purpose” of the Act “‘is to permit the United States to assess and collect taxes alleged to be due without judicial intervention.’” Enoch v. Williams Packing & Navigation Co., 370 U.S. 1, 7 (1962).

“The Anti-Injunction Act,” Judge Kacsmaryk said, “allows no exceptions for a bankruptcy court to raise hurdles to tax collection.” He cited the Second Circuit for holding that a junior lienholder cannot invoke marshaling against the government.

Judge Kacsmaryk found a violation of “the Anti-Injunction Act’s plain text” by demanding “that the IRS seek its revenue outside the bankruptcy estate.” He reversed the bankruptcy court and granted the IRS’s motion for summary judgment on marshaling.