Legal Definitions - marshaling doctrine

The marshaling doctrine is a principle that applies when a senior creditor has access to multiple funds to pay off their debt, while a junior creditor only has access to one fund. In this situation, the senior creditor must first use the funds that the junior creditor does not have access to before using the fund that the junior creditor relies on.

Let's say that a company owes money to two creditors: Bank A and Bank B. Bank A has a senior position and has access to two funds: Fund X and Fund Y. Bank B has a junior position and only has access to Fund Y. If the company defaults on its debt, Bank A must first use Fund X to pay off its debt before using Fund Y. Only after Bank A has exhausted Fund X can it use Fund Y. This ensures that Bank B has a chance to recover its debt from Fund Y.

This principle is important because it protects the rights of junior creditors and ensures that they have a fair chance to recover their debt. Without the marshaling doctrine, senior creditors could use all available funds, leaving junior creditors with nothing.