Ahlgren v. Morrison (In re MCM, Inc.)

• Decision Date: 05 November 2019
• Docket Number: Adversary No. 19-07002,Bankruptcy No. 17-30061
• Citation: Ahlgren v. Morrison (In re MCM, Inc.), 609 B.R. 511 (Bankr. N.D. 2019)
• Parties: IN RE: MCM, INC., Debtor. Erik A. Ahlgren, Trustee, Plaintiff, v. Scott Morrison in his capacity as trustee of the Morrison Family Trust, and Elkhorn Farms, LLP, Defendants
• Court: U.S. Bankruptcy Court — District of North Dakota

609 B.R. 511

IN RE: MCM, INC., Debtor.

Erik A. Ahlgren, Trustee, Plaintiff,

v.Scott Morrison in his capacity as trustee of the Morrison Family Trust, and Elkhorn Farms, LLP, Defendants,

Bankruptcy No. 17-30061

Adversary No. 19-07002

United States Bankruptcy Court, D. North Dakota.

Signed November 5, 2019

Matthew R. Burton, Morrison Sund, PLLC, Minnetonka, MN, for Plaintiff.

Robert C. Fleming, Fleming, DuBois & Fleming, Cavalier, ND, for Defendants.

MEMORANDUM AND ORDER

SHON HASTINGS, JUDGE, U.S. BANKRUPTCY COURT

PlaintiffErik A. Ahlgren, Trustee, filed a Complaint on January 9, 2019, alleging DefendantScott Morrison(in his capacity as Trustee of the Morrison Family Trust) transferred a leasehold interest that was property of Debtor McM, Inc.'s estate.Doc. 1 at ¶ 18.He asks the Court to avoid the transfer as an unauthorized postpetition transfer under 11 U.S.C. § 549(Count I).The Trustee also alleges Morrison breached the lease with Debtor by entering a new lease with Defendant Elkhorn Farms with respect to the same property Debtor originally leased from Morrison (Count II).Id.at ¶ 23.Next, the Trustee alleges that both Morrison and Elkhorn violated the automatic stay under 11 U.S.C. § 362(a)(3)(Count III).Id.at ¶ 27.Finally, the Trustee objects to any claim by Elkhorn or Morrison under 11 U.S.C. § 502(d) until the bankruptcy estate is made whole (Count IV).Id.at ¶ 31.Morrison and Elkhorn each filed an Answer on February 8, 2019.Docs. 5, 6.Both Morrison and Elkhorn deny the Trustee's allegations and seek dismissal of the Complaint.Docs. 5, 6.

The Trustee filed a motion for summary judgment.Doc. 18.Morrison and Elkhorn filed a joint opposition to the motion for summary judgment.Doc. 21.For the reasons that follow, the Trustee's motion for summary judgment is DENIED.

I.BACKGROUND

Morrison Family Trust leased 110 acres of farmland to McMartin Family Partnership under a lease with a five-year term, 2013 through 2018.McMartin Family Partnership was reorganized and renamed McM, Inc., which is the debtor in the bankruptcy case underlying this adversary proceeding.On February 2, 2017, Ronald G. McMartin, Jr., a principal of Debtor, wrote a $22,000 personal check to Morrison for the 2017 land rent under the lease.

Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code on February 10, 2017.

On March 22, 2017, Morrison Family Trust and Elkhorn entered a two-year (2017 and 2018) lease for the same land Debtor leased from Morrison Family Trust.Doc. 18at 17.On April 26, 2017, Elkhorn paid McMartin $22,500, issuing a check notated "Land Rent Reimbursement."

II.ANALYSIS

A.Summary Judgment Standard

Summary judgment is appropriate when there is no genuine dispute regarding any material fact, and the moving party is entitled to judgment as a matter of law.Fed. R. Bankr. P. 7056;Fed. R. Civ. P. 56(a);Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265(1986);Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202(1986).The party seeking summary judgment bears the initial responsibility of identifying pleadings, discovery, testimony and other evidence which it believes demonstrate "the absence of a genuine issue of material fact."Celotex Corp., 477 U.S. at 323, 106 S.Ct. 2548.The moving party satisfies this burden by showing "an absence of evidence to support the nonmoving party's case."Id. at 325, 106 S.Ct. 2548.When the moving party has met its burden, the nonmoving party must then "go beyond the pleadings and by her own affidavits, or by the ‘depositions, answers to interrogatories, and admissions on file,’ designate ‘specific facts showing that there is a genuine issue for trial.’ "Id. at 324, 106 S.Ct. 2548(citingFed. R. Civ. P. 56).The Court views the record in the light most favorable to the nonmoving party and must afford that party all reasonable inferences.Blocker v. Patch(In re Patch ), 526 F.3d 1176, 1180(8th Cir.2008)(citingLiberty Lobby, Inc., 477 U.S. at 252, 106 S.Ct. 2505;Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538(1986) ).

B.Count I – Unauthorized Postpetition Transfer

The Trustee argues that the postpetition lease of the land—in which Debtor held a leasehold interest—to Elkhorn was an unauthorized transfer of property of Debtor's estate.Section 549 of the Bankruptcy Code provides in relevant part:

(a) Except as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate—

(1) that occurs after the commencement of the case; and

(2)(A) that is authorized only under section 303(f) or 542(c) of this title; or

(B) that is not authorized under this title or by the court.

* * *

(c)The trustee may not avoid under subsection (a) of this section a transfer of an interest in real property to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value unless a copy or notice of the petition was filed, where a transfer of an interest in such real property may be recorded to perfect such transfer, before such transfer is so perfected that a bona fide purchaser of such real property, against whom applicable law permits such transfer to be perfected, could not acquire an interest that is superior to such interest of such good faith purchaser.A good faith purchaser without knowledge of the commencement of the case and for less than present fair equivalent value has a lien on the property transferred to the extent of any present value given, unless a copy or notice of the petition was so filed before such transfer was so perfected.

11 U.S.C. § 549.

The Trustee alleges that Elkhorn knew about Debtor's bankruptcy filing.Doc. 18at 5.As evidence of this purported knowledge, the Trustee attached to his affidavit an article from AgWeek dated May 8, 2017.Doc. 18at 47-51.The article includes a quotation from Kenny Johnson which evidences his knowledge of the bankruptcy as of the date of the article, May 8, 2017.¹

Elkhorn disputes "that Elkhorn Farms had knowledge of the bankruptcy filing when the assignment of the lease was arranged between Ron McMartin and Elkhorn Farms."Doc. 21at 2.It asserts that it is a good faith purchaser and paid fair equivalent value for the lease.Kenny Johnson, an owner and partner in Elkhorn, testified by affidavit: "We did not have knowledge of Ron McMartin's bankruptcy filing or the pendency thereof until well after the bankruptcy was filed and the information came out in the local newspaper that it had occurred."Doc. 23at 3.Accordingly, Elkhorn argues that the Trustee may not avoid the transfer because Elkhorn meets the criteria under section 549(c).Doc. 21at 4.

Although the article on which the Trustee relies shows that Elkhorn became aware of Debtor's bankruptcy at some point, it does not elucidate with any specificity when Elkhorn learned of the bankruptcy in relation to Elkhorn entering its lease with Morrison Family Trust.For this reason, whether Elkhorn knew about the bankruptcy case at the time of the transfer—and whether it is therefore a good faith transferee—are genuine issues of material fact, rendering summary judgment on this cause of action inappropriate.

Further, the Trustee seeks a money judgment for the value of the transfer including rents paid, the lost lease value and profits realized from the crops Elkhorn grew in 2017. Doc. 1at 3.He also seeks damages for the loss of the 2018 crop year because the lease between Debtor and Morrison Family Trust "was never terminated (and ran through the 2018 crop year)."Id.Specifically, the Trustee seeks $27,932.30 in damages, plus attorney fees.Doc. 18at 9.This figure includes the value of the original lease between Debtor and Morrison, $22,000, and lost profits in the sum of $5,932.30.Id. at 8-9.The Trustee arrived at his claim for $5,932.30 in lost profits by extrapolating data from the Red River Valley 2017 Report.Seeid.

Elkhorn claims that it "lost money on every soybean field that was planted in 2017, when taking into account the crop inputs, seed and fertilizer prices, land rent, etc." Doc. 23 at 2.In fact, Elkhorn explains: "The price of commodities was not enough to offset the expenses that we incurred in trying to grow the crop."Id.Further, Elkhorn discounts the Trustee's valuation of profits, claiming "NDSU has general numbers from over the entire Red River Valley, however our numbers are specific to Elkhorn's operations and the fact that it did not make any money and certainly did not profit $5,932.30."Id.

Because the parties point to contradicting facts regarding lost profits, the Trustee failed to demonstrate the absence of a genuine issue of material fact regarding whether Debtor's bankruptcy estate suffered these damages.Accordingly, the Court denies the Trustee's motion for summary judgment on his cause of action under section 549.

C.Count II – Breach of Contract

To establish that the Court has jurisdiction over his breach of contract claim, the Trustee must show that this cause of action is property of the estate.SeeOsherow v. Wells Fargo Home Mortg.(In re Rhinesmith ), 450 B.R. 630, 632(Bankr. W.D. Tex.2011)(stating that a trustee lacks standing to pursue causes of action that are not property of the estate);Darrah v. Franklin Credit(In re Darrah ), 337 B.R. 313, 317(Bankr. N.D. Ohio2005)(concluding that claims that are not property of the estate fall outside the ambit of the court's "related to" jurisdiction under 28 U.S.C. § 1334; although a debtor's rights and liabilities would be at stake in such claims, the outcome could have no conceivable impact on the administration of the estate, and any benefits resulting from the claims would inure entirely to the debtor).Although the Trustee claims that the lease is property of the estate, he did not offer evidence or argument showing that the cause of action for the purported...