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In re McDougall

United States Bankruptcy Appellate Panel of the Eighth Circuit

July 9, 2018

In re: Kent McDougall, doing business as Twin Creek Ranch, doing business as E&K Holdings; Erica M. McDougall Debtors
v.
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

          Appeal from United States Bankruptcy Court for the District of North Dakota - Fargo

          Before SCHERMER, NAIL and DOW, Bankruptcy Judges.

          SCHERMER, BANKRUPTCY JUDGE

         Michael 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.

         The 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.

         Because 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 as follows).

         BACKGROUND

         Facts 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.

         When 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 secured.

         In 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, 2016.

         Six 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.[1] 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 Home Quarter.

         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.

         The 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 ...


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