Fact Pattern 14-1
In January, Jazz Dance Studio owes Kay, its musical director, $1,800 for current wages, receives $700 as a down payment for dance lessons from Lora, and pays a Music, Inc., a sheet music supplier, $1,500 of $3,000 owed. In February, the studio files for bankruptcy under Chapter 7.
-Refer to Fact Pattern 14-1. Based on the size of the studio's estate in bankruptcy, each of Jazz's creditors will get only 10 percent of their claims. Regarding the payment to Music, Inc., the trustee may

Question

Quizplus · Accepted Answer

A trustee in bankruptcy can recover payments made by the debtor within 90 days before the bankruptcy filing as a voidable preference. Since Jazz Dance Studio paid Music, Inc. $1,500 within 90 days of filing for bankruptcy, the trustee can recover it as a voidable preference. Priority claims, such as those owed to employees, are not affected by the 10 percent payout. While fraudulent transfers can also be recovered, there is no indication that this payment was made with the intention of defrauding creditors. Insiders (such as family members or business partners) may be subject to additional scrutiny, but Music, Inc. is not described as an insider in this fact pattern.

Fact Pattern 14-1 In January, Jazz Dance Studio Owes Kay, Its Musical Director