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Lake trustee of McM farm denies fraud, says banker BMO was informed

An auction-goer for the BMO Harris Bank bankruptcy collateral sale in Manvel, N.D., for the McM Inc. farm waits in the shade of a row of wagons. The sale brought an estimated $1.3 million to help satisfy the bank’s $42 million debt. (Forum News Service/Agweek/Mikkel Pates)

FERGUS FALLS, Minn. — The trustee for a lake home in Minnesota involved in the McM Inc. farm bankruptcy case has denied any fraud and said the trust should not have to cough up money for creditors of the bankrupt farm.

McM — a large farm based at St. Thomas, N.D. — filed Chapter 7 bankruptcy on Feb. 10, 2017. The McM trustee alleged a transfer of a lake place in 2015 was improper and that value should be returned to McM Inc. The lake property is at 41106 County Road 126, Detroit Lakes.

McM trustee Erik Ahlgren of Fergus Falls working with attorney Matthew R. Burton in Minneapolis, filed a complaint on Dec. 4, 2017, asking for the value of the lake place to be returned.

Paul D. Blomquist, a car dealer in Hallock, Minn., is trustee of Island Lake Irrevocable Trust. The trust's lawyer, George Hanson of Hallock, on Jan. 3 answered the allegations.

In his response, Hanson denied any fraud in the transfer of a lake place and asked the U.S. Bankruptcy Court to reject the allegations. The McM bankruptcy initially stated about $10 million in assets and $48 million in debts, including $43 million to BMO Harris Bank. Creditors later filed proofs showing $64 million in debts. About $9 million in crop proceeds have been paid out, mostly to secured creditors.

The contract

Ahlgren wrote that BMO Harris Bank alleged that McM's financial statements to the bank were false.

"Ron McMartin Jr. knew that (McM) was deceiving BMO Harris Bank, among others, and that (McM's) financial problems would be insurmountable," Ahlgren said.

The trust said Ahlgren hasn't proved it yet.

Ahlgren said McM Inc. entered a contract for deed from the Joyce E. Warner Trust on Sept. 18, 2008. The property was on McM's financial statements starting that year, with mortgages including primarily First Security Bank — Sleepy Eye, Detroit Lakes branch.

In the civil fraud complaint, Ahlgren said McM assumed the mortgage and made a "sham" payment for equity on June 6, 2011. The McM farm "purchased" it for about $1.3 million. Subsequently, McM's "fortunes faded and its financial problems mounted."

On March 24, 2015, Ahlgren said Security Bank transferred the property to McM in a quit claim deed in Becker County, Minn., for about $1.265 million. On March 28, 2015, McM recorded a new mortgage with Security Bank, with a $946,000 balance — a difference of $319,000.

"This was a sham transaction, (McM) had no intention of receiving actual payment of that amount," Ahlgren wrote. "Instead, in order to make the sale appear to be an arms-length transaction, (McM) and the (Island Lake) Trust created the appearance of an exchange of funds."

In the response, Blomquist denied this, and Hanson noted the claims hadn't been proven in court.

What goes up

Ahlgren said McM had "dramatically improved the Island Lake Property," including adding a large shop and a "bar known as the Sugar Hill Tavern." In 2011, it was valued at $2.033 million; in 2012, it was $2.404 million; in 2013, it was $2.498 million. During this time, McM was improving the property.

In 2014, McM switched accounting firms and the "financial statement for that year reduced the value" to $1.26 million, which was "then pegged as the purchase price" to the Island Lake Irrevocable Trust. According to Ahlgren, this was based on an appraisal "done for Ron McMartin Jr." in September 2014. Separately, Security Bank obtained an appraisal, valuing the property at $1.38 million, but the bank noted on the appraisal that it was "not acceptable appraisal," Ahlgren said.

On Sept. 30, 2015, Ahlgren said McM issued a $36,000 check to the irrevocable trust for "storage rent."

"There was not any legitimate business purpose for this check, and the transfer is avoidable," Ahlgren said.

Blomquist said that is "a legal conclusion to which no response is required" but then denied the allegation anyway.

Ahlgren noted that on April 12, 2016 — after the transfer had occurred from McM to the trust — Becker County Planning Commission minutes quote Scott Walz from Meadowland Surveying "on behalf of Ron McMartin and Island Lake Irrevocable Trust." The trust was seeking to survey Tract A, to "accommodate the existing cabin and guest cottage." The minutes describe a "Tract B," where "McMartin is going to construct a future dwelling and the remnant tract has enough lake frontage to possibly subdivide someday for children to make a lake lot and rear non-riparian lots."

Dominion, control

McMartin continued to "exercise dominion and control" after the "transfer" from McM to the trust.

On June 1, 2016, McM paid $3,433 to an insurance company on behalf of the trust. Also, about Sept. 26, 2017, Ahlgren said Hanson said the trust records were at the Vogel Law Firm in Fargo, which is handling the McM Inc. bankruptcy, and not with Blomquist.

Ahlgren described the transactions as "insider" transfers. Hanson denied that McM received "less than a reasonably equivalent value in exchange for the transfers."

In the response, Hanson denied that Ahlgren is entitled to recover property in the transfers.

Hanson said McM and McMartin Jr. had used an "eminently qualified and seasoned law firm (Vogel) to effectuate the establishment of the Trust and the subsequent purchase of the Island Lake Property by the Trust from (McM)."

McM is "generally aware that many companies and residents" from North Dakota own Minnesota property and "try to limit their exposure to Minnesota estate tax through the creation of various legal vessels (like an irrevocable trust)," Hanson wrote.

Hanson said the lake place by McM was disclosed to BMO, the primary financier, "prior to the transaction being consummated." He said the price was according to an independent, licensed appraiser and that Ahlgren's claims of civil fraud are "based substantially on the unproven proclamations of BMO."