United States Bankruptcy Appellate Panel of the Eighth Circuit
In re: Kent McDougall, doing business as Twin Creek Ranch, doing business as E&K Holdings; Erica M. McDougall Debtors
Ag Country Farm Credit Services, PCA Defendant-Appellee Kent McDougall; Erica M. McDougall Plaintiffs Michael McDougall; Bonita McDougall Defendants - Appellants Erik Ahlgren Trustee
Submitted: June 19, 2018
from United States Bankruptcy Court for the District of North
Dakota - Fargo
SCHERMER, NAIL and DOW, Bankruptcy Judges.
SCHERMER, BANKRUPTCY JUDGE
and Bonita McDougall (McDougalls) appeal the bankruptcy
court's (1) judgment in favor of defendant AgCountry Farm
Credit Services, PCA (AgCountry) in an adversary proceeding
filed by Kent M. McDougall and Erica M. McDougall (Debtors);
and (2) order denying a motion to alter or amend judgment.
McDougalls have asked us to consider the validity of a lien
of AgCountry on property owned by the McDougalls based on an
argument of state law fraud. Before reaching that issue, we
have an independent obligation to examine our jurisdiction
and that of the bankruptcy court. Speciality Mills, Inc.
v. Citizens State Bank, 51 F.3d 770, 773 (8th Cir.
1995). "When a lower federal court lacks jurisdiction,
the appellate court has 'jurisdiction on appeal, not on
the merits but merely for the purpose of correcting the error
of the lower court in entertaining the suit.'"
Sears v. U.S. Trustee (In re AFY, Inc.), 734 F.3d
810, 816 (8th Cir. 2013) (quoting Steel Co. v. Citizens
for a Better Env't, 523 U.S. 83, 95 (1998) and
United States v. Corrick, 298 U.S. 435, 440 (1936)).
We review the issue of jurisdiction de novo.
Speciality Mills, Inc., 51 F.3d at 773.
we determine that the bankruptcy court did not have
jurisdiction to determine the dispute pertaining to the
McDougalls, we do not decide the merits of this appeal. We
remand this matter to the bankruptcy court with instruction
to dismiss the McDougalls' claim regarding the validity
of AgCountry's lien against the Home Quarter (as defined
about this matter were stated in our December 21, 2017
decision granting in part and denying in part AgCountry's
motion to dismiss this appeal, some of which we repeat here.
The Debtors are farmers and ranchers who purchased 880 acres
of land under a contract for deed and lived on 160 acres
within that parcel (Home Quarter). After the Debtors sold the
Home Quarter to the McDougalls, the Debtors occupied that
portion of their land rent-free.
the Debtors exhausted their lines of credit with a different
lender, they borrowed money from AgCountry to pay their
operating expenses. During the period of time from August
2014 to December 2015, the Debtors obtained almost $400, 000
from AgCountry under eight separate loans, two of which were
March 2016 when the Debtors had depleted their available
financial resources, the Debtors were advised that in order
to continue working on an arrangement to refinance their debt
and borrow additional funds from AgCountry, they needed loan
extensions. On March 30, 2016, AgCountry approved short term
loan extensions in return for the Debtors providing AgCountry
with a security interest in additional real estate. On March
31, 2016 the Debtors: (1) signed eight Promissory Notes and
Loan Agreement Modifications; and (2) executed a mortgage to
secure payment of the notes. Although the legal description
in the mortgage included a portion of the Home Quarter in the
many parcels of real estate it identified, the McDougalls,
not the Debtors, owned the Home Quarter at that time. Five
days later, on April 5, 2016, the McDougalls conveyed the
Home Quarter to the Debtors. The McDougalls transferred the
Home Quarter to the Debtors because they believed that would
help the Debtors qualify for an operating loan. On April 7,
2016, when the Debtors learned that Ag Country was not
loaning more funds to them, the Debtors reconveyed the Home
Quarter back to the McDougalls. Unfortunately for the
McDougalls, the Home Quarter was already encumbered by
AgCountry's mortgage, which had been recorded on April 5,
months later, the Debtors filed a voluntary petition for
relief under Chapter 12 of the Bankruptcy Code. The Debtors
then filed an adversary proceeding naming the McDougalls and
Ag Country as defendants. In their answers to the
Debtors' complaint and amended complaint, the McDougalls
asked the bankruptcy court to invalidate AgCountry's lien
on the Home Quarter based on fraud. The bankruptcy court
entered judgment in the adversary proceeding for AgCountry
and against the Debtors. It examined North Dakota law and after
discussing the McDougalls's transfer of the Home Quarter
to the Debtors and the Debtors' grant of a mortgage in
the Home Quarter to AgCountry, it stated that the Debtors did
not meet their burden of showing actual fraud. According to
the bankruptcy court, AgCountry held a "valid and
enforceable mortgage lien against the Home Quarter." The
effect of the bankruptcy court's decision was to
determine the nature of the McDougalls' rights in the
Debtors converted their bankruptcy case to Chapter 7. The
bankruptcy court then denied a motion to alter or amend its
judgment entered in the adversary proceeding.
Debtors, the McDougalls, and the Chapter 7 Trustee filed a
notice of appeal from the bankruptcy court's: (1)
judgment; and (2) order denying the motion to alter or amend
judgment. On December 21, 2017, we granted a motion by
AgCountry to dismiss the appeal by the Debtors based on lack
of standing and the appeal by the Chapter 7 Trustee ...