McM farm trustee charges fraud and creditor claims climb to $63.9M

FERGUS FALLS, Minn. -- The trustee in the McM Inc. bankruptcy is alleging fraud in some transactions and said he's gathered $9 million in crop proceeds to be distributed among secured creditors in the large farm bankruptcy.

A gated compound on the Island Lake Irrevocable Trust property includes a bar-like entertainment building and a shop. Photo taken Dec. 16, 2017, in Becker County, Minn., northeast of Detroit Lakes, Minn. (Forum News Service/Agweek/Mikkel Pates)

FERGUS FALLS, Minn. - The trustee in the McM Inc. bankruptcy is alleging fraud in some transactions and said he's gathered $9 million in crop proceeds to be distributed among secured creditors in the large farm bankruptcy.

In February 2017, McM, a large farming company led by Ron McMartin, Jr., of St. Thomas, N.D., filed Chapter 7 bankruptcy in Fargo, estimating $12 million in assets and $50 million in debts.

It was one of the region's largest farms , in 2016 raising some 39,000 acres of high value crops including potatoes and edible beans, from three headquarters in the central and northern Red River Valley.

Subsequently, McM creditor claims have climbed by more than 25 percent - a total of $63,939,805.01. Of that, $43 million is owed to BMO Harris Bank, the primary lender.

It is unclear whether McM would challenge those claims or whether it would make any difference because of the shortfall of funds versus debts. Some of the creditors were initially listed as unknown.


McM's trustee

Erik A. Ahlgren of Fergus Falls, Minn., is McM's bankruptcy estate trustee - a lawyer now put in charge of the corporation's affairs. (In mid-September he replaced lawyer Cheryl Bergian, of Fargo , who initially was trustee but resigned from the trustee practice).

Ahlgren will distribute the $9 million mostly to secured creditors, including BMO Harris and ag input suppliers , according to a mediation agreement that is being negotiated and should be filed soon.

"Ag input suppliers under North Dakota law can jump ahead of working capital providers, like a bank," as long as they file liens properly and timely, according to the type of products supplied, Ahlgren said. There were about $5 million in those claims, and the settlement will allow them to be paid "most of their money" and the rest would go to the bank, he said.

Clawing back

On Dec. 4, Ahlgren filed a complaint against Island Lake Irrevocable Trust, alleging McM funds were fraudulently transferred into it for the benefit of McMartin's daughters. Island Lake is in the Detroit Lakes, Minn., area.

Ahlgren said he is "actively investigating that transaction" and in court documents contends that $318,000 of the transfer should be returned because of fraud - and possibly more. McM has 30 days to reply, which is in the first week of January.

McMartin personally guaranteed most of McM's debts. He filed a separate, individual Chapter 7 liquidation bankruptcy in September 2017, which includes largely the same creditors , other than McMartin's ex-wife. (Ahlgren earlier was also the trustee in the individual case but withdrew to avoid potential conflicts of interest.)


The tavern

McM transferred assets into an irrevocable trust for an Island Lake Trust home in 2015. Ahlgren contends that the farm corporation was already insolvent then.

The home was featured in Lake & Homes Magazine, which describes it as 50-plus acres. In the story, McMartin says he bought the Becker County property in 2007. According to the article, McMartin built a shop in 2009 and improved cabins in 2010, including a "hydraulically-powered staircase that can be lifted to afford more entertaining space."

In 2014 McMartin completed "Sugar Hill Tavern," an "establishment with 20-foot vaulted knotty pine ceilings, a commercial-grade kitchen for party prep, and a set of his-and-hers bathrooms."

The property was appraised and transferred at $1.265 million into a trust for the benefit of McMartin's daughters, Rachel McMartin and Laura Hagameister of Fargo.

Ahlgren notes that appraisers used "comparable" sales in homes to find a "fair market value." Just because someone spends money on distinctive home improvements doesn't mean they're worth that much in the market.

Fraud 'badges'

At the time of the transfer, the property had an $850,000 mortgage against it. Ahlgren contends the trust would have had to pay back at least $318,000 to McM, to make it a legitimate transfer. Instead, Ahlgren said banking records indicate a "circular transaction," starting and ending with McMartin's father.


March 13, 2015:

• Ron McMartin Sr. makes a $318,000 transfer to McM Inc.;

• McM Inc. makes a $317,989.22 transfer to McMartin Jr.;

• McMartin Jr. creates the Island Lake Irrevocable Trust with the funds;

• The trust "purchases" the Island Lakes property for $1.2 million. The trust "assumes" McM Inc.'s real estate mortgage on the property and "pays" McM Inc. $317,989.22 on a Wells Fargo account.

March 17, 2015:

• Trust check is deposited into McM's Ramsey account.

• McM transfers $318,000 to McMartin Sr.


Ahlgren alleges two kinds of fraud. He alleges "actual fraud," in that the transfer was made with "intent and knowledge" to "hinder, delay or defraud creditor." He alleges "constructive fraud," meaning that at the time of the transfer McM was insolvent - with or without McMartin's knowledge - and that the transaction required payment of "reasonably equivalent value" to the company.

To determine "actual fraud" the courts look at "badges" or indicators of fraud, Ahlgren said. Those include whether the debtor knew they were insolvent or soon would be insolvent, or transfers that were made to a close friend or relative.

"Another badge is that it is something the individual continued to be able to use, after the transfer," Ahlgren said. When Agweek took photos of the cabins on Dec. 16, 2017, McMartin emerged from the cabins to inquire about the purpose of the stop.

Since the transfer, McM had been making some of the mortgage payments after the transfer. Records indicate McM paid the trust $35,000 for "storage rent" to the trust. If the court determines fraud in the Island Lake property, the judge could order that it return the property to McM, who could sell it for "whatever we can," Ahlgren said. The sale would have to exceed the $850,000 mortgage to provide excess funds to unsecured creditors. The court also could grant a monetary judgement against the trust for the difference between the transfer price and reasonably equivalent value.

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