Judge names receiver for McMartin
MINNEAPOLIS, Minn. — A federal judge on Aug. 8 granted BMO Harris Bank N.A.'s motion to put a receiver in charge of gathering personal assets of Ron McMartin Jr. to pay off creditor claims and denied the farmer's effort to dismiss the case.
The bank alleges the large-scale, specialty crops farmer, formerly based in northeast North Dakota, purposefully engaged in a pattern and practice of misrepresentation to obtain or continue credit from the bank.
McMartin's lawyer, Jon Brakke of Fargo, N.D., says he hadn't responded earlier because he was asking for the dismissal or change in venue to North Dakota.
"Now that that has been denied, we will have to put in an answer, and you will see our rejection," Brakke says. He says one area of dispute is how much of McMartin's personal assets, if any, are encumbered by the loans.
U.S. District Judge Donovan W. Frank in Minneapolis granted the receivership motion and appointed Philip Kunkel, a St. Cloud, Minn., lawyer, as receiver.
. McMartin was the sole-owner of McM Inc., of St. Thomas, N.D The farm had operations in North Dakota and Minnesota, farming up to 50,000 acres of red potatoes, corn, wheat, soybeans, dry edible beans and sugar beets.
McMartin and McM since 2012 had accumulated debts of $50 million, including $43 million from the bank, and "convinced the bank to extend or continue these loans by providing false financial statements to the bank," the bank said in the receivership request. In court documents the bank also claimed McMartin had failed to comply with terms of loans and had converted loan proceeds and collateral for purposes not permitted by contracts.
As of Jan. 30, BMO Harris Bank said $42.2 million in principal was due: $32 million for the revolving line of credit; $1.4 million for a hedge line; and $8.8 million for the 2016 input loan.
On Feb. 2, the bank lawyers alleged McMartin had "fraudulently misrepresented — by millions of dollars — the financial statements and financial information which it delivered to the bank in support of McM's requests for advances under its revolving credit line with the Bank, and otherwise intentionally converted or transferred the bank's collateral, including cash proceeds thereof, to third parties without the knowledge or consent of the bank."
McM's corporate bankruptcy filing listed about $50 million in debts, including the $42.2 million to BMO Harris, and about $10.2 million in assets. The 40,000 acres in the farm went on to be farmed by others. (The Kenny Johnson family of Walhalla, N.D., one of McM's landlords, scrambled to form Elk Valley Farms LLP, to handle 20,000 acres of the land.)
Brakke on Feb. 23 asked the receivership case be dismissed or moved to North Dakota. In March, the bank's lawyer, Thomas J. Lallier of Minneapolis, called the change-of-venue request a "shameless attempt to delay this case and divert the court's attention from his fraudulent conduct." BMO noted the venue was spelled out in contract and McMartin lives in the Minnesota district. As evidence, they the September/October 2016 issue of Lake and Home Magazine, which featured McMartin's home on Island Lake, Minn. "quite possibly purchased and built with the bank's money." The motion for change of venue was denied on Aug. 8.
In late April, Lallier asked Frank to confer about whether McMartin would intend to file his own personal bankruptcy prior to a May 5 hearing.
"If a personal bankruptcy by Mr. McMartin is a certainty, it would be inefficient, inconvenient and costly for the Bank and this counsel to prepare for and attend the May 5, 2017 hearing," Lallier said. He noted that in a March 27 state court divorce proceeding in Grand Forks District Court, McMartin "represented to the court ... that a bankruptcy filing by him is inevitable."
Lining it up
The receivership request offers a glimpse of the bank's version of the bank-borrower relationship.
McM initially had a revolving line of credit for $25 million on his first master loan, dated July 31, 2012, documents say. McM granted security interest in all of the corporation's personal property, the bank said, but Brakke says he isn't sure any of McMartin's property will relate to the receivership.
McM had interest in a list of 19 partnerships, the bank said. The company pledged 293 shares of American Crystal Sugar Co., stock and unit retains. It assigned crop insurance proceeds.
Significantly, the bank claims McMartin offered "a security interest in all of his personal property."
On June 29, 2016, McM retained James E. Harney of Harney Management Partners LLC, Austin, Texas, as "a turnaround consultant," the bank said. In July 2016, Harney told the bank that projected potato proceeds for 2015 would be $7 million, versus $10 million previously projected by McM and McMartin, and the bank hired Agribusiness Consulting Group LLC to do a field audit.
Later that month, in Grand Forks, McM acknowledged owing $4 million for seed, and then four days later, another $4.38 million, and another $3 million for 2015 crop season payables that were not disclosed earlier.
"Because the 2016 loan funds had been used to pay 2015 crop input expenses, McM obtained additional input financing of more than $5.6 million for the 2016 crop from other vendors and lenders," the bank said. McMartin "admitted these facts" only after he was presented with credit evidence. Harney concluded that McM's accounts receivable and inventory were overstated by at least $11 million.
Advance to arrear
In early 2016, the bank received fiscal year-end statements that indicated McM had $3.39 million as an "investment in future crop" for seed, chemicals and fertilizers. But BMO said that in fact McM had obligations for the 2015 crop of $3 million and was "in arrears, not in advance for 2016."
The bank said McMartin told them he would plant 38,761 acres in 2016, "to make it look as though cost per acre was reasonable and that McM was reasonably expecting certain revenues to be paid as a result of sales of its 2015 potatoes." Instead, BMO contends he only planted 29,087 acres for McM in 2016. The 9,451-acre difference was owned by Ronald G. McMartin Sr., through a McMartin Ronald Sr. & Bonita joint venture.
In May 2016, the bank said McM misrepresented financial statements from the first quarter, including overstatement of receivables for potato inventory and for "investment in growing crop."
In June 2016, the bank said McM overstated revenues. Since fewer acres were planted than the budget assumed, crop loans were more than needed, and McM overstated accounts receivable and inventories by $11 million. The bank said McMartin directed McM to use at least $3 million of loans for uses other than input costs and operating expenses.
While McMartin and McM misused loan proceeds, the bank said they also sought "additional financing from other vendors and lenders," which may mean the collateral is encumbered by others.