Question

On February 28, Master, Inc. had total assets with a fair market value of $1,200,000 and total liabilities of $990,000. On January 15, Master made a monthly installment note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note. On March 15, Master voluntarily filed a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold for less than the balance due on the note to Acme.Master’s payment to Acme could:___________.

A. Be set aside as a preferential transfer because the fair market value of the collateral was greater than the installment note balance.
B. Be set aside as a preferential transfer unless Acme showed that Master was solvent on January 15.
C. Not be set aside as a preferential transfer because Acme was over secured.
D. Not be set aside as a preferential transfer if Acme showed that Master was solvent on March 15.

Answer 1

C) Not be set aside as a preferential transfer because Acme was over secured.

Step-by-step explanation:

In this case, when Master made the monthly installment payment to Acme, the fair market value of the equipment was higher than the value of the note. This means that Acme was over secured (collateral was higher than loan).

Since Acme's rights on the asset were perfectly secured, its rights are not affected by the bankruptcy filing. Acme has the right to receive repayment of its debt with the sale of the asset. It is something similar to a bank that holds a first mortgage. It will be paid first in case the house is foreclosed and sold.