Trustee goes after McMartin's parents: Alleges fraud, $2M in “insider” transfers
FARGO — The trustee in the McM Inc. farm bankruptcy is asking a judge to require the parents of a bankrupt farmer to cough up more than $2 million in assets that he alleges were improperly transferred as "inside" transactions.
Erik Ahlgren, a lawyer from Fergus Falls, Minn., the court-appointed bankruptcy trustee in the McM Inc. case, in a complaint filed May 3 in Fargo, alleges the parents of principal Ron McMartin Jr. were involved in a "scheme to move" the farm assets to a "safe haven" from creditors for the benefit of their son, and not his creditors.
McM Inc. was a high-value crop farm operated by Ron McMartin Jr., of St. Thomas, N.D., and filed Chapter 7 liquidation on Feb. 10, 2017. The farm, one that grew up to 50,000 acres, rolled up $62 million in creditor claims, including $43 million to operating loan banker BMO Harris Bank N.A.
Ahlgren alleges that Ron McMartin Sr. and his wife, Bonita A. "Bonnie" McMartin, were involved in improper transfers totaling nearly $2 million. Ahlgren wants the court to order those transfers void and the money returned to the creditors. The transfers are described as civil "fraud," but no criminal charges have been filed. No response was yet filed in the adversary case against the parents.
One of the alleged primary transfer involves money to the Island Lake Irrevocable Trust.
On about June 6, 2011, McM Inc. purchased a lake place at 41106 County Rd. 126, Detroit Lakes, Minn., and paid $1.3 million for it. Ron Sr. "lent" McM the amount of $318,000 in a transaction that came back to himself four days later.
First Security Bank Minnesota held a first mortgage on the Island Lake property.
On March 24, 2015, McM transferred the Island Lake Property to the Island Lake Irrevocable Trust, for the benefit of McMartin Jr.'s daughters. On March 25, 2015, a copy of the trust document was recorded in Becker County, Minn. On March 28, 2015, the parties registered a new mortgage with a mortgage company in Becker County indicating a "balance due" of $946,000.The parties filed a quit claim deed of $1.26 million. From the total, they subtracted $946,000, for a difference of $319,000.
"Since this was a sham transaction (McM) had no intention of receiving actual payment for its equity in the Island Lake Property from the ILI Trust," Ahlgren alleges. "Therefore, in order to make the sale appear to be an arms-length transaction at fair market value (McM) and the ILI Trust created the appearance of value, to round out an exchange of funds," Ahlgren writes.
Among other allegations, Ahlgren says:
- McM farmed about 50,000 acres in each of 2014 and 2015 and cut back to 28,087 in 2016. "Unbeknownst" to BMO Harris, McM in 2016 provided custom harvesting for Ron Sr. for about 9,451 acres leased by Ron Sr. So Ron Jr. used McM assets and employees to benefit his parents rather than other McM creditors.
- BMO Harris Bank claimed that in June 2016 the parents owed $3.7 million to Ramsey Bank in Devils Lake, N.D., but "that amount was reduced that year to approximately $1 million despite no significant payments having been made by" the parents.
- McM didn't "adequately charge" his parents for agricultural services because Ron Jr. "personally benefited from the diversion of resources, as he either controlled or had unfettered access to" his parents funds through power-of-attorney. "McMartin needed an accumulation of wealth on the part of the (parents) because his own personal fortunes were declining along with those of (McM Inc.)."Ahlgren said that Ron Jr. since 2015 has used his parents' bank accounts for such things as paying life insurance, credit cards, funding the Island Lake property, and paying taxes and utilities.
Conversely, benefits by the parents for not paying for agricultural services are estimated by the trustee to be more than $1 million.
Still other allegedly improper diversion of assets to the parents include:
- McM made more than 14 transfers of various descriptions to the parents' accounts from 2015 to May 2016 totaling $1.837 million. All should be voided by the bankruptcy judge, in addition to the $318,000 transfer for the lake property, Ahlgren says.
- C&M Ford of Hallock, Minn., operated by Ron Jr.'s longtime friend, Paul Blomquist (also the Island Lake Irrevocable Trust trustee) in January 2017 purchased three of the McM, Inc.'s vehicles for a total of $33,000 but paid entities under the parents' names, not Ron Jr.'s.
- The parents "likely possess property" of McM, "including computers and documents" and "collector tractors."
Despite the transfers, McM's year-end statement in 2016 included a "balance due" from his father of $220,000. "The preferential transfers enabled (the parents) to recover more than they would have received as creditors in this Chapter 7 case," he says.