Critical Thinking Exercise 19-1

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Florida International University *

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Law

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Feb 20, 2024

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Critical Thinking Exercise 19-1 1. Can the trustee obtain from Carl the $3,000 Able paid to him in March? If so, on what basis? Yes, the trustee in Able's Chapter 7 bankruptcy case could seek to obtain the $3,000 paid to Carl in March. As noted by Sprague (2020), on the basis of voidable preferences, “if the debtor made a payment within 90 days of filing to a creditor such that the creditor received more than it otherwise would have under a Chapter 7 distribution”, the trustee can void this transfer and reclaim the money (p. 439). In this case, the payment falls within the 90-day period, as the payment was issued in March and the bankruptcy filing took place on April 12. Given that Able's nonexempt estate totals $5,000, which includes $2,000 from the sale of landscaping supplies, there would be $3,000 left to distribute among creditors, and it would be up to the trustee to decide if Carl was received more than he would have during Chapter 7 distribution. Therefore, the trustee could pursue Carl to recover the $3,000 payment, ensuring equitable treatment of all creditors in the bankruptcy proceedings. 2. What amount will each creditor receive from Able’s nonexempt estate, in order of priority, and why? Considering that Able's nonexempt estate totals $5,000, which includes $2,000 received for the landscaping supplies purchased from Johnson Garden Supplies, and based on the Bankruptcy Code for distribution of the debtor’s nonexempt property, listed below is how much each creditor will be paid, in order of priority: 1. Johnson Garden Supplies: As a creditor with a secured interest in the landscaping supplies, they will receive the full amount the trustee recovered from selling the supplies, which is $2,000. The remaining $3,000 balance, “becomes an unsecured loan payable to the creditor” and follows the same priority order as other unsecured loans (Sprague, 2020, p. 440). 2. Smith: The accountant retained by the bankruptcy trustee, has an administrative expense claim associated with the bankruptcy filing. Smith will receive the full $1,000 owed to him as an administrative expense. 3. Harold: Able’s only employee is owed $1,000 for unpaid wages for March and April, since these unpaid wages were earned within 180 days of the filing and are under
$12,850, he will receive the full amount he is owed given there are sufficient funds in the nonexempt estate. 4. IRS: Able owes $2,000 to the IRS, which falls within unpaid income and property taxes, and they will only receive $1,000 since those are the remaining funds in the debtor’s state. Given that Able’s nonexempt estate was completely used to pay creditors listed above, there are some creditors who will only receive part of the debt, like the IRS and Johnson Garden Supplies, and others who will not receive any money at all, like Carl and debit card companies. Reference: Sprague, R. (2020). Law for Entrepreneurs and Small Business Owners, Second  Edition. Aspen Publishing.
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