Question

On June 1, Year 2, Rusk Corp. was petitioned involuntarily into bankruptcy. At the time of the filing, Rusk had the following creditors:

I. The February 1 repayments of the directors' loans were preferential transfers even though the payments were made more than 90 days before the filing of the petition.
II. The February 1 repayments of the directors' loans were preferential transfers because the payments were made to insiders.
Which of the following statements is true regarding the February 1 repayments of the directors' loans?
1) The repayments were preferential transfers because they were made more than 90 days before the filing of the petition.
2) The repayments were preferential transfers because they were made to insiders.
3) The repayments were not preferential transfers because they were made more than 90 days before the filing of the petition.
4) The repayments were not preferential transfers because they were made to insiders.

Answer 1

The February 1 repayments of the directors' loans qualify as preferential transfers not because they were made more than 90 days before the filing of the petition, but because they were made to insiders within a year before the bankruptcy filing.

Step-by-step explanation:

The February 1 repayments of the directors' loans were preferential transfers because they were made to insiders. In bankruptcy law, a preferential transfer is a payment made that benefits one creditor at the expense of others.

There's a specific look-back period for preferential payments, typically 90 days.

However, if the payment is made to an insider, which directors often are, the look-back period is extended to one year prior to the bankruptcy petition.

Therefore, even though the payments were made more than 90 days before the filing of the petition, they were within the one-year period for insiders, making them preferential.

This means that these payments could potentially be reversed by the bankruptcy trustee.