Question

On November 12, Drowner filed for relief under the provisions of Chapter 7 of the Bankruptcy Code. Prior to filing, Drowner advised his attorney that he had engaged in the following activities and transactions. On June 1, he paid the equivalent of three mortgage payments on his home to Fidelity Funding. On August 15, his prior landlord seized $4,100 from his bank account to satisfy a three year old judgment for rent. On November 1, he (Drowner) paid off his car note with a check for $4,500. Sun Finance held the note and the car title, with its lien noted thereon. The mortgage debt of approximately $220,000 was properly recorded and the house had a fair market value of $245,000. Drowner’s car is worth $11,000. Drowner’s attorney should advise Drowner that:

A) The money seized by his former landlord constitutes a preferential transfer.

B) The money paid on his car note constitutes a preferential transfer.

C) The money paid to his mortgage company constitutes a preferential transfer.

D) All of the above payments and seizures were preferential transfers.

Answer 1

Solution: the money seized by his former landlord constitutes a preferential transfer.

Explanation: Transfers, of money or property, or of a lien on property, whether voluntary or involuntary, are allowed to be set aside by the trustee as preferential when the transfer improves the position of transferee's in the case. In the current scenario former landlord's seizure of Draper's bank account is categorised as such a transfer. The car payment and mortgage payment are not categorised preferential because creditors have not improved their positions on account of the transfers. The reason is that they are fully secured and would get full payment, even in a bankruptcy, upon the sale of their respective collateral.