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. 1-90-0118 JAMES and JUDITH FERGUSON,      Defendants. ______________________________/ Memorandum of Decision      Defendant James Ferguson is a CPA. In 1986, he made an unsecured loan of $33,000.00 to the debtor. Thereafter, he went to work for the debtor's accounting firm. About 100 days before an involuntary bankruptcy petition was filed against the debtor, Ferguson obtained full payment. Ferguson had access to financial reports prepared by his firm showing that the debtor was insolvent. The issue before the court is whether Ferguson should be considered to be an insider, so that the payment to him is avoidable as a preference even though it took place more than 90 days before the bankruptcy.      The definition of "insider" at section 101(30) of the Bankruptcy Code is not all-inclusive. Persons have been found to be insiders where they were able to exercise some sort of control over the debtor, or where they had such a close relationship with the debtor that the debtor would have a strong desire to prefer them. In this case, the Trustee wants the court to establish a new definition of "insider": a person who has no control over the debtor, and is not a person the debtor naturally desires to prefer, but who has inside information about the debtor's finances.      A review of the case law shows that the Trustee is in error in asserting that a person becomes an insider for preference purposes merely by having special knowledge of the debtor's financial difficulties. In Gray v. Giant Wholesale Corp., 758 F.2d 1000 (4th Cir.1985), a secured creditor which controlled a financially troubled debtor's bank account was not found to be an insider. In In re Belco, Inc., 38 B.R. 525 (Bkrtcy.W.D.Okla.1984), a bank which instituted a "lock box" system to control its interest in the receivables of a financially troubled debtor was not held to be an insider. Numerous other examples exist of creditors with special knowledge of the debtor's financial distress not being held to be insiders.      A rule which makes a creditor liable for preferences as an insider based on inside information would create chaos in the financial world. Special knowledge of insolvency could come from bounced checks, unpaid bills, or a special financial statement provided to less than all creditors. No one would ever extend credit to a debtor known to need the credit if that very knowledge made any payment received within a year before bankruptcy avoidable. In addition, endless preference litigation would be spawned over what each creditor knew and when it knew it.      Moreover, a simple reading of the Bankruptcy Code as originally drafted makes it clear that Congress did not intend to make everyone with special knowledge an insider. Prior to the 1984 amendments, preferences were only recoverable when made more than 90 days before the bankruptcy if the recipient was an insider and had reasonable cause to believe the debtor was insolvent. Thus, it is clear that knowledge of insolvency by itself did not turn a person into an insider. There is no indication that when Congress deleted the knowledge test it intended to expand the definition of insider to include all those with knowledge of insolvency. Quite the opposite, its clear intent was to make knowledge of insolvency irrelevant.      From the evidence presented, the court finds that the debtor's payments to Ferguson were bona fide arm's-length transactions, in that Ferguson had no control over the debtor or special relation to it. The court deems that any special knowledge Ferguson may have had about the debtor's financial state is irrelevant.      Accordingly, the Trustee shall take nothing by his complaint and this matter shall be dismissed, with prejudice. Defendants shall recover their costs of suit.      This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052. Counsel for defendants shall submit an appropriate form of judgment.

Dated: November 14, 1990                                                                        _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy