McM trustee loses $740K claim against Johnson

The trustee in the McM Inc. bankruptcy sued landowner Kenneth “Kenny” Johnson of Walhalla for $740,000, saying land lease payments to him, authorized by Ron G. McMartin Jr., were an inside transfer. The judge ruled in favor of Johnson, who went on to form Elkhorn Farms, in the region’s largest-ever farm bankruptcy.

FARGO, N.D. — A Fargo bankruptcy judge has dismissed a claim filed by the trustee of McM Inc., who had sought $740,882.50 from Kenneth “Kenny” H. Johnson of Walhalla, N.D.

U.S. Bankruptcy Judge Shon Hastings on Oct. 13, 2020, rejected allegations of improper transfers from McM to Johnson. Trustee Erik A. Ahlgren, a lawyer from of Fergus Falls, Minn., alleged that McM Inc., had transferred pre-petition lease payments to Johnson in the year before the company petitioned for Chapter 7 bankruptcy, and that the amount should be paid back.

Ahlgren said he respects the court and will not likely appeal.

Rob Fleming, a Cavalier, N.D., lawyer representing Johnson, said the suit against his client was “ridiculous” and a “blatant attempt at overreach” and “shakedown.”

“It’s unfortunate that they’re chasing claims that cost the bankruptcy (trust) money,” he said. He said the trustee gets a percentage of whatever is retrieved, and that the proceeds will go to BMO Harris Bank, a secured creditor.


Ahlgren said the last piece that’s open in the McM bankruptcy is a decision on personal property issues relating to the sale of an Island Lake property, near Detroit Lakes, Minn. The trust also has to collect $500,000 from Ron G. McMartin Jr.’s father, Ron G. McMartin Sr., relating to a settlement. McMartin Sr. was supposed to make his payment Sept. 1, 2020, and the trust is working to get the payment by the end of the year. The personal bankruptcy won’t be done until the piece on the personal property is done.

The biggest

The McM Inc. bankruptcy is the one of the largest farm bankruptcies ever to hit the Red River Valley and surrounding states. The company was controlled by Ron G. McMartin Jr., of St. Thomas, N.D. — once the largest sugar beet farmer in Minnesota and North Dakota. McMartin farmed up to 50,000 acres of high-value crops at North Dakota farms based in three locations — St. Thomas, Grand Forks and Fargo, including on land he leased from Johnson.

McMartin filed for Chapter 7 bankruptcy liquidation in Feb. 10, 2017, and personal bankruptcy on Sept. 11, 2017. The cases are separate. There were $62 million in claims from creditors, including $43 million from BMO Harris Bank in the bankruptcy.

As trustee on the McM case, seeking to acquire assets for creditors, Ahlgren and his associate Matthew Burton in Minnetonka alleged Johnson was an “insider,” and they attempted to void lease payments made by McM to Johnson as “preferential transfers.” Johnson denied the allegations.

In 2016, before and after payments to Johnson, McM experienced cash flow problems and a “deficit” of $916,280, Melissa Gauthier, McM’s bookkeeper, testified. Gauthier said McMartin’s plan was to pay “small local suppliers first” and prioritize “land lease payments,” but not “Johnson over any other landowner.”

Hastings, in her decision, said McM’s decision to “pay Johnson at a time when it was not paying other creditors gives the Court pause, this conduct, without more, does not show that the payments to Johnson demonstrate a close relationship resulting in Johnson unfairly receiving special treatment.” Johnson testified that he noticed rental payments were late but had “no idea” that McMartin’s business was failing.


No officers

Ahlgren and Burton had argued that Kyle Zak — a nephew of Johnson — was a “managing agent” or “person in control” of McM. Zak managed McM’s Grand Forks site. In 2010, Johnson told Zak that McM would lease Johnson’s land and Zak inquired with McM about a position.

“Johnson did not contact McMartin about hiring Zak,” Hastings said. “McMartin was familiar with Zak because Zak farmed Johnson’s land for Johnson.”

Zak started as an equipment operator before managing McM's Larimore, N.D., farm and later the Grand Forks farm. The judge said Zak couldn’t spend more than $1,000 without prior approval from McMartin and did not have “unfettered authority” to hire and fire employees.

Erik Ahlgren, a Fergus Falls, Minn., lawyer, specializes in bankruptcy trustee cases He is the “trustee” in the McM Inc. farm bankruptcy. Photo taken March 22, 2018, at Warren, Minn. (Mikkel Pates / Agweek)

By 2016, Zak testified he knew McM was struggling financially. Some suppliers had stopped allowing the company to charge on accounts. McMartin told Zak to use a farm credit card to pay for supplies. Zak was not aware that land lease payments to Johnson remained unpaid. In December 2016, when McM defaulted on the land deal with Johnson, Zak didn’t discuss the defaults with Johnson.

The judge said that besides McMartin, none of McM’s managers were corporate officers of McM Inc.

McMartin made all final decisions about the number of acres McM would plant of each crop, and contracted with suppliers, marketed crops and submitted insurance paperwork.


Inside, or ‘out'?

But Johnson said he never asked Zak to influence McM.

“I had no business with McM inside McM’s walls. None,” Johnson testified. “The only business I had with McM was outside McM as a landowner leasing land. Period.”

In fact, McMartin testified he did not “see or speak to (Kenneth) Johnson in 2016,” and that McM paid “market price” for leasing Johnson’s land.

Ahlgren and Burton relied heavily on an early February 2017 email from McMartin to Kinetic Leasing of Fargo, responding to McM’s past-due lease payment notices. In the email, McMartin claimed Johnson was his “new farm partner.” At trial, McMartin testified he had been “pondering a partnership at the time but had not discussed — and never discussed — the possibility with Johnson,” and was trying to keep the creditor “holding on” while McMartin scrambled to try to keep the business afloat.

Johnson also testified that he “never intended to partner” with McM.

Kenneth Johnson learned when McM filed Chapter 7 bankruptcy that he was “getting his land back.” Kenneth called Brian Johnson, a cousin and CEO of Choice Financial Group, Grand Forks, N.D., to talk about his options. Brian had been Kenneth's banker for 20 years.

In consultation with Brian, Kenneth decided that he and another cousin, Al Johnson, of Walhalla, would form Elkhorn Farms as a limited liability company, on Feb. 23, 2017, to farm land that had been rented by McM Inc. Brian worked with John Deere and Kinetic Leasing to equip Elkhorn. Brian said Kenneth had almost no direct contact with Kinetic Leasing other than signing promissory notes.

Zak went to work for Elkhorn Farms as a farm manager. At the same time, “Elkhorn hired McMartin to help with the logistics of farming, a field in which McMartin was unquestionably experienced.” The court said McMartin worked for Elkhorn from March to April 2017. He contacted other McM landowners (including Morrison Family Trust) and referred them to Elkhorn.


Elkhorn arranged to use McMartin’s parents' farm headquarters at St. Thomas “in exchange for custom work” and leased the parents’ land in 2017. McMartin’s daughter, Rachel McMartin, also worked for Elkhorn, for a time, but the parties did not “flesh out the details” of her employment.

“According to McMartin, he left Elkhorn because ‘in the infancy of that company, they really didn’t know what they needed for either technical help — managerial or labor on the farm — and it became apparent that the type of work I’m good at, they did not need.'”

Neither Zak nor McMartin selected Elkhorn equipment and Brian advised Kenneth that “the less Ron (McMartin) has to do with it, the better.”

Mikkel Pates is an agricultural journalist, creating print, online and television stories for Agweek magazine and Agweek TV.
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