Memorandum of Decision Re: Insider Status

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re LENDVEST MORTGAGE, INC.,                                                                              No. 1-88-01058        Debtor. ___________________________/ CHARLES E. SIMS, Trustee,        Plaintiff,    v.                                                                                                                             A.P. No. 1-90-0115 THOMAS and KATHLEEN HUEY,        Defendants. ______________________________/
Memorandum of Decision
     Debtor Lendvest Mortgage, Inc., was at one time a legitimate mortgage brokerage. However, it gradually deteriorated into little more than a Ponzi scheme, depending on new investor funds to pay off old investors. The debtor kept two sets of books, and was involved in money laundering and other illegal activities at the time of its collapse. An involuntary bankruptcy petition was filed against it on June 14, 1988.      Defendant Kathleen Huey was a low-level bookkeeping and clerical worker for Lendvest. She and her husband, defendant Thomas Huey, also invested money with Lendvest and made two unsecured loans, totalling about $100,000.00, which were paid in full about six months before the bankruptcy petition was filed. By this adversary proceeding, the Trustee seeks to avoid these payments as preferences pursuant to section 547 of the Bankruptcy Code. The sole issue is whether the Hueys are to be considered "insiders" so that the provisions of section 547(b)(4)(B) apply and the preference period is one year.      The court finds that Kathleen Huey was not an insider by virtue of her employment by Lendvest. She received no special treatment by virtue of her employment. She had no more control over the affairs of Lendvest than any other investor. While the court doubts that any special knowledge of a debtor's financial troubles makes someone an insider, it does not matter in this case because Mrs. Huey had no such knowledge. In short, the court finds that Mrs. Huey is not to be considered an insider unless a narrow reading of the Bankruptcy Code mandates such a finding. While the court has some discretion in deciding how far to expand the definition of "insider," it may not contract the definition so as to eliminate anything included in the statutes. In re Ribke, 64 B.R. 663, 666 (Bkrtcy.D.Md. 1986).      The principal shareholder of Lendvest was David G. Hanson, its founder and majority shareholder; at no time did he own less than 40% of the stock of Lendvest. The Hueys find themselves in their present unhappy situation by virtue of having been his neighbor at one time. He convinced them to refinance their home and invest the proceeds with him.      In addition to their loans to Lendvest, the Hueys entered into several investments directly with Hansen. Together with other couples, they would buy single family residences for rental and resale. Although the ventures were documented by a contract entitled "Tenancy in Common Agreement," they were clearly in substance partnerships. The Hueys are to be treated as insiders only if their participation in these investments with Hanson means that they fall inescapably within the statutory definition. The court reluctantly so finds.      Pursuant to sections 101(2)(A) and (15) of the Code, a person who owns more than 20 percent of a corporation is an affiliate of that corporation. Section 101(31)(E) provides that an insider of an affiliate is to be considered an insider of the debtor. Thus, if the Hueys are insiders as to Hanson they are insiders of Lendvest, because Hanson owned more than 20 percent of Lendvest.      Pursuant to section 101(31)(A)(iii), a general partner of an individual is an insider. Thus, the court is led to the inescapable conclusion that the Hueys must be considered insiders of Lendvest, because they were general partners of Hanson and Hanson owned more than 20 percent of Lendvest.      The Hueys' argument that the Tenancy in Common agreement is not a partnership agreement is not sound. Whether or not an agreement creates a partnership is governed by its content, not its title. Smith v. Grove (1941) 47 Cal.App.2d 456, 461. Provisions in the agreement for majority votes binding on all parties, mandatory contributions, rights of first refusal, venture bank accounts and the like all belie tenant in common status. In fact, the agreement is a standard partnership agreement in every detail except its caption.      All of the elements of a preference under section 547(b) have been either clearly established or stipulated to. The ordinary course of business defense is not available to the Hueys, both because the payments they received are not the sort of payments covered by that defense and because the defense is not available at all where the business was not legitimate. Accordingly, judgment must be rendered in favor of the Trustee and against the Hueys in the amount of $101,418.31, together with interest at the legal rate from and after the commencement of the case and costs of suit.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052. Counsel for the Trustee shall submit an appropriate form of judgment.
Dated: April 5, 1991                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy