BMO Harris Bank N.A. v. McMartin (In re McMartin)
| Decision Date | 26 February 2021 |
| Docket Number | Adversary No. 18-7022,Bankruptcy No. 17-30558 |
| Parties | In re: Ronald G. McMartin, Jr., Debtor. BMO Harris Bank N.A., Plaintiff, v. Ronald G. McMartin, Jr., Defendant. |
| Court | U.S. Bankruptcy Court — District of North Dakota |
Plaintiff BMO Harris Bank N.A. filed a Complaint seeking a denial of Debtor/Defendant Ronald G. McMartin, Jr.'s discharge under 11 U.S.C. § 523(a)(2)(B).1 Doc. 1. Specifically, BMO alleges that Debtor, the president and sole shareholder of McM, Inc., made materially false written statements to BMO about McM's financial condition to induce BMO to loan McM money. Id. It further alleges Debtor made the statements knowing they were false and intending to deceive BMO, and BMO relied onthe statements. Id. Debtor filed an Answer, denying the allegations. Doc. 18. For the following reasons, the Court finds in favor of Debtor and dismisses the Complaint.
Debtor's long history with agriculture began in 1985 when he farmed 200 acres of land. Over the years, Debtor's farming operation grew as opportunities to farm more land arose. Debtor operated his farming business as an individual until 1995 when he formed McM, Inc. As the president, sole shareholder and sole director of McM, Debtor expanded its farming operation, producing a variety of crops on nearly 59,000 acres in 2012 and 2013. McM's annual gross income grew from $16.7 million in 2009 to a high of $41.4 million in 2013, but its profits never exceeded the $3,544,778 realized at the end of 2012 when commodity prices were high.2 McM suffered net losses in excess of $4 million in both 2014 and 2015. McM downsized dramatically in 2016 and petitioned for bankruptcy relief in 2017.
In his early years as a farmer, Debtor used an informal bookkeeping system based on his check ledger. McM's accounting became more complex as the size of its farming operation grew. Consequently, Debtor outsourced McM's accounting to a certified public accountant (CPA) who worked with Farm Credit Services (FCS), McM's lender. Debtor submitted his bank statements to FCS, and FCS's employee(s) input the data into its accounting software. Debtor never discussed the functionality of thesoftware with FCS, but FCS informed him it prepared his financial statements using a cash basis method of accounting.
Several years after he incorporated McM, Debtor switched McM's lender, and McM began borrowing from Bremer Bank. Debtor also transferred McM's accounting to a new accountant, who entered and processed McM's financial data. Like FCS's accountant, the new accountant prepared McM's financial statements using cash basis accounting.
After two years with Bremer Bank, Debtor transferred McM's borrowing relationship to Ramsey National Bank. Ramsey National Bank required McM to submit annual financial statements using cash basis accounting. McM continued to work with the same accountant for two more years after it transferred its business to Ramsey National Bank, and then Debtor transferred McM's business to another accountant. The new accountant also prepared McM's financial statements using cash basis accounting.
In the early 2000s, McM transferred its accounting business to Mortenson & Rygh. Mortenson & Rygh used QuickBooks and encouraged McM to use this software in-house, but McM did not begin using QuickBooks until 2009 or 2010 when McM became "big enough" to hire office staff. At that time, McM hired Heidi Beck to "handle some ancillary accounting in-house and save McM money by not having to pay an outside accountant to do the bookkeeping."
Mortenson & Rygh accountants helped McM, presumably through Beck,3 transfer its financial data to QuickBooks. McM used QuickBooks for payroll, writing checks anddepositing money, but Mortenson & Rygh continued to prepare McM's financial statements. Debtor granted Mortenson & Rygh access to McM's QuickBooks system, allowing its accountants to review data without the assistance of an McM employee.
In 2011, McM switched lenders again, transferring its borrowing relationship to Rabo AgriFinance. Like Ramsey National Bank, Rabo required McM to submit annual financial statements using cash basis accounting.
As discussed in more detail below, McM switched lenders in 2012, this time to BMO. Unlike McM's former lenders, BMO required borrowers to provide financial statements using accrual basis accounting. The parties dispute whether BMO communicated this requirement to Debtor.
In August or September 2013, Beck left McM, and Melissa Gauthier assumed McM's office manager and bookkeeper responsibilities.4 Gauthier and a co-worker divided Beck's duties. Gauthier assumed responsibility for processing accounts payable and accounts receivable using QuickBooks. Gauthier also tracked McM's land lease payments, received and deposited checks, answered the telephone, and generally helped with paperwork. According to Gauthier, Beck trained Gauthier for a few days in the two weeks before Beck left McM,5 and Gauthier continued to use Beck'spractices and procedures after Beck left. Although Debtor was Gauthier's supervisor, he did not provide any training to Gauthier, but he answered any questions she asked.
According to Debtor, he did not tell McM's office staff how to do their jobs because he assumed they were receiving directions from the accountants. Although Debtor prioritized payments to local creditors and landowners when funds ran low, Debtor asserted he never told his staff what data to include or not to include in QuickBooks or in the general ledger.
Both parties' claims and defenses rely, in part, on the method McM used to record its debts to input suppliers. McM purchased crop input supplies, including seed, chemical and fertilizer from several suppliers including J.R. Simplot Company, Johnson Potato Company, Inc., Crop Production Services, Inc. (CPS) and Columbia Grain, Inc. During the years when BMO served as McM's lender (2012-2016), Debtor negotiated the terms of McM's agreements with all its suppliers. McM submitted its needs to the suppliers and entertained their bids, including terms related to pricing and payment. McM used these negotiations to realize the most competitive prices and to ensure suppliers would not file crop liens. Debtor explained that it was important to him to secure the suppliers' agreement to refrain from filing liens because he was loyal to BMO and would not have agreed to terms that might have jeopardized BMO's lien priority.
Gauthier described McM's process for paying McM's debts for seed, chemical, fertilizer and other supplies. McM typically received statements from suppliers at the end of each year (December) for inputs McM used during the previous crop season. Whenever McM received a statement from an input supplier, Gauthier placed it on a stack of bills she kept on her credenza or in a file cabinet. She did not enter data fromthe invoices in QuickBooks when McM received them; she entered the invoices when she paid them or recorded them in accounts payable at the end of the quarter in which the bills were due, typically in March of the following year. D-244 at 29-30.
Gauthier could not say who established this process, but it was the process in place when she transitioned to office manager in the fall of 2013. She reviewed the history of McM's payments to these suppliers in QuickBooks, and McM had always paid them in March. Consequently, she continued to do so until she stopped working full-time for McM in late July 2016. Debtor confirmed that McM reported expenses when they became due under the cash basis accounting method McM used.
In early 2012, Gary Sloan, a loan officer and senior vice president at BMO, contacted Debtor. According to Debtor, Sloan pursued large agricultural "credits"6 and told Debtor that BMO recognized McM's potential to further expand its farming operation. That spring, Sloan visited McM's farm to observe potato planting and to discuss McM's crop diversity and credit needs with Debtor.7 Although Debtor was satisfied with McM's lending relationship with Rabo, BMO offered McM a better interest rate. Consequently, McM submitted financial information necessary for the loan application process, including its 2009, 2010 and 2011 financial statements.
In considering whether to recommend loans to borrowers like McM, BMO loan officers and managers are guided by BMO policy. BMO's credit policy provides: "Generally, business credits of $2,000,000 or more require annual CPA audits or CPA reviews, especially if Bank's credit is dependent on receivable and inventory valuations." D-135 at 37. BMO's policy describes audited, reviewed and compiled financial statements and when each should be obtained:
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