# U ni te d S ta te s B an kr up tc y A pp el la te P an el For the Eig hth Circu it

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No. 1 7- 60 28

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In re: Kent McDo ug al l, d oi ng bu si ne ss as Twi n C reek Ran ch , do in g b us in es s as

E&K Hol di ng s; Erica M. McDo ug al l

ll ll ll ll ll l Deb to r s

----- ----- ----- ----- ----- -----

Ken t M cDo ug al l; Erica M. McDo ug al l

ll ll ll ll Pla in ti

ff s

v.

Ag Co un try Farm

Cred it Serv ic es , PCA

ll ll ll ll ll ll ll ll ll ll l

Defe nd an t - Ap pe ll ee

Mi ch ael McDo ug al l; Bo ni ta McDo ug al l

ll ll ll ll ll ll ll ll ll ll l Defe nd

an ts - App el la nt

s

Erik Ahl gr en

ll ll ll ll ll ll ll ll ll ll l Tr us te e

__ __ __ __ __ __ App eal fro m

Uni te d S ta te s B an kr up tc y Co ur t fo r th e Dis tri ct of No rth Dako ta - Farg o

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Su bm it te d: Ju ne 19 , 20 18 Fi le d: Ju ly 9, 20 18

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Befo re SC HERMER, NAIL an d DOW, Bank ru pt cy Ju dg es

.

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SCHERM ER, Ban kr up tc y Ju dg e

Mi ch ael an d B on it a Mc Dou ga ll (McDo ug al ls ) ap pe al th e b an kr up tc y co ur t’s (1 ) jud gm en t in fav or of de fen da nt AgC ou nt ry Far m C r e d i t Serv ic es , PCA (Ag Co un try) in an ad ve rs ary pr oc eed in g fil ed by Ken t M. McDo ug al l and Eric a M.
McDo ug al l (De bt or s) ; an d (2 ) or de r de nyin g a m ot io n to alt er o r am en d ju dg m en t.

The McDo ug al ls ha ve as ke d us to co ns id er th e va li di ty of a li en of AgC ou nt ry

on pr op ert y own ed by th e McDo ug al ls ba se d o n a n a r g u men t of st at e la w frau d.
Befo re reac hi ng th at is su e, we ha ve an in de pe nd en t ob li ga ti on t o ex am in e ou r juri sd ic ti on an d th at of th e ba nk ru pt cy co ur t. Sp eci al it y Mil ls

, In c. v. Ci ti

ze ns St at e Ban k, 51 F.3 d 77 0, 77 3 (8 th Ci r. 19 95 ). “ W he n a lo wer fed eral co ur t la ck s juri sd ic ti on , th e ap pe ll at e co ur t ha s ‘j ur is di ct io n on ap pe al
, no t on th e m eri t s bu t

m erel y fo r th e pu rp os e of c o r r e c t in g th e erro r of th e lo wer co ur t in en te rta in in g th e

su it .’ ” Se ar

s v. U.S. Tr us te e (In re AFY

, In c.)
, 73 4 F.3 d 8 10
, 81 6 (8 th Ci r. 20 13 ) (q uo ti ng St eel

Co . v. C it iz en s fo r a Bet te r En v't , 52 3 U.S. 8 3, 9 5 (1 99 8) an d Uni te d
St at es v. Co rr ic k
, 29 8 U.S. 43 5, 44 0 (1 93 6) ). W e rev ie w th e is su e of juri sd ic ti on de

no vo

. Sp eci al it

y Mil ls , Inc

., 51 F.3d at 7 73

.

Bec au se we de te rm in e th at th e b a n k r u pt cy co ur t di d no t ha ve juri sd ic ti on to de te rm in e th e d is pu te pe rta in in g t o t he McDo ug al ls , we do no t d eci de th e m eri ts of
th is ap pe al

. W e rem an d th is m at te r to th e ba nk ru pt cy co ur t wit h i n s tru ct io n to

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-di sm is s th e McDo ug al ls ’ cl ai m reg ard in g th e va li di ty of AgC ou nt ry ’s li en ag ai ns t th e

Hom e Qua rte r (as de fin ed as f ol lo ws).

BACKGRO UND Fact s ab ou t th is m at te r were st at ed in ou r Decem be r 21
, 20 17 de ci si on gr an ti ng in pa rt an d de nyin g in pa rt AgC ou nt ry ’s m ot io n to di sm is s th is ap pe al
, so m e of whi ch

we rep eat he re. The Deb to rs a r e f a r mer s an d ran ch ers who pu rch as ed 88 0 acre s of
la nd un de r a co nt ract f

o r d e e d an d li ve d on 16 0 acre s wit hi n th at pa rcel (Ho m e Qua rte r). Afte r th e Deb to rs so ld th e Hom e Qua rte r to th e Mc Dou ga ll s, the Deb to rs

oc cu pi ed th at po rti on of t he ir l an d re nt -fre e.

W he n th e Deb to rs ex ha us te d t he ir li ne s of cred it wit h a di ffer en t len de r, th ey bo rro wed m on ey fro m AgC ou nt ry to pa y th ei r op erat in g ex pe ns es

. Dur in g th e pe rio d
of ti m e fro m Aug us t 20 14 to Decem be r 20 15
, th e Deb to rs ob ta in ed al m os t $4 00 ,00 0
fro m AgCo un try un de r ei gh t s ep arat e lo an s, t wo o f whi ch were s ecu red

.

In Mar ch 20 16 whe n th e Deb to rs ha d de pl et ed th e i r a v a i la bl e fin an ci al

res ou rces , th e Deb to rs wer e a dv is ed th at in or de r to co nt in ue wor ki ng on an

arra ng em en t to refi na nc e th ei r de bt an d bo rro w ad di ti on a l fu nd s fro m AgC ou nt ry , th ey ne ed ed lo an ex te ns io ns

. On Mar ch 30 , 2 01 6 , Ag Co un try ap pr ov ed sh or t te rm lo an ex te ns io ns in ret ur n fo r th e Deb to rs pr ov id in g AgC ou nt ry wit h a se cu rit y in te res t in ad di ti on al real es ta te

. On Mar ch 31
, 20 16 th e Deb to rs : (1 ) si gn ed ei gh t Pro m is so ry N o t e s an d Loa n Agr eem en t Mo di fic at io ns ; an d (2 ) ex ecu te d a m or tg ag e to se cu re
pa y m en t of th e no te s. Alt ho ug h th e le ga l de sc rip ti on in t h e mo rtg ag e in cl ud ed a
po rti on of th e Hom e Qua rte r in th e m an y pa rcel s of real es ta te it id en ti fie d, th e McDo ug al ls
, no t th e Deb to rs , own ed th e Hom e Qua rte r at th at ti m e. Fi ve da y s la te r,

on Apri l 5 , 20 16 , th e Mc Dou ga ll s con ve y ed th e Hom e Qua rte r to th e Deb to rs . The
McDo ug al ls tra ns ferr ed th e Hom e Qua rte r to th e Deb to rs be cau se th ey be li ev ed th at

wou ld he lp th e Deb to rs qu al ify fo r an op erat in g l o a n

. On Apr il 7, 20 16
, whe n th e Deb to rs le arn ed th at Ag Co un try was no t lo an i n g m or e fu nd s to th em , th e Deb to rs

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-reco nv ey ed th e Hom e Qua rte r ba ck to th e McDo ug al ls

. U n f o rtu na te ly fo r th e McDo ug al ls
, th e Hom e Qua rte r was al read y en cu m be red by AgC ou nt ry ’s m or tg ag e, whi ch ha d b een reco rd ed on Apri l 5 , 20 16

.

Si x m on th s la te r, th e Deb to rs fil ed a vo lu nt ary pe ti ti on fo r rel ie f un de r Ch ap te r 12 of th e Ban kr up tc y Co de

. The Deb to rs th en fil ed an ad ve rs ary pr oc eed in g na m in g th e McDo ug al ls an d Ag Co un try as de fen da n t s

. I n th ei r an swe rs to th e Deb to rs ’

co m pl ai nt an d am en de d co m

pl ai nt , th e McDo ug al ls as ke d th e ba nk ru pt cy co ur t to in va li da te AgC ou nt ry ’s l ie n on th e Ho me Q u a r t e r ba se d on frau d. The ba nk ru pt cy

co ur t en te red ju d gm en t in th e ad ve rs ary pr oc eed in g fo r AgC ou nt ry an d ag ai ns t th e Deb to rs

. It ex am in ed Nor th Dak ot a la w an d aft er di sc us si ng th e M c D o ug al ls ’s

1

tra ns fer of th e Hom e Qua rte r to th e Deb to rs an d th e Deb to rs ’ gr an t of a m or tg ag e in
th e Hom e Qua rte r to AgC ou nt ry , it st at ed th at th e Deb to rs di d no t m eet th ei r bu rd en of sh owi ng act ua l frau d. Acco rd in g to th e ba nk ru pt cy co ur t, AgC ou nt ry he ld a “ va li d

an d e n f o r c e a b le m or tg ag e li en ag ai ns t th e Hom e Qua rte r.” The effe ct of th e ba nk ru pt cy co ur t’s de ci si on was to de te rm i n e th e na tu re of th e McDo ug al ls ’ rig ht s in th e Hom e Qua rte r.

The Deb to rs co nv ert ed th ei r ba nk ru pt cy cas e to Ch ap te r 7. The ba nk ru pt cy

co ur t th en de ni ed a m ot i o n t o al te r or am en d it s jud gm en t en te red in th e ad ve rs ary
pr oc eed in g.

The De b t o r s , th e McDo ug al ls
, an d th e Ch ap te r 7 Trus te e fil ed a no ti ce of

ap pe al fro m th e ba nk ru pt cy co ur t’s: (1 ) jud gm en t; an d (2 ) or de r de nyin g th e m ot io n
to al te r or am en d jud gm en t. On Decem be r 21
, 20 17
, we gr an t e d a mo t i on by AgC ou nt ry to di sm is s th e ap pe al by th e D e b to rs ba se d on la ck of st an di ng an d th e

Earl ie r in th e pr oc eed in gs , th e ba nk ru pt cy co ur t gr an te d su m m ary jud gm en t 1 fo r AgC ou nt ry on Deb to rs ’ co m pl ai nt ba se d on Ban kr up tc y Co de § 54 8. Thi s or de r

was no t ap pe al ed

.
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-ap pe al by t he Ch ap te r 7 Trus te e be cau se it was u n t i mel y. W e de ni ed AgC ou nt ry ’s

req ue st to di sm is s t he ap pe al by the McDo ug al ls

.

DISCUSS IO N Bec au se th e ap pe al s fil ed by th e Deb t o r a n d t h e Ch ap te r 7 Trus te e were di sm is se d by ou r pr e v i o u s o r de r, we do no t co ns id er an y is su es ad va nc ed by or
pe rta in in g t o t ho se pa rti es

.

Th e on ly m at te r le ft fo r us to co ns id er is th e McDo ug al ls ’ ar g u men t s

co nc ern in g th ei r in te res t in th e Hom e Qua rte r. Unf or tu na te ly fo r th e McDo u g a l l s , th ere i s n o ba si s fo r ba nk ru pt cy co ur t ju ris di ct io n o ve r th e cl ai m th ey ass ert

.

Ban kr up tc y co ur ts , by refe ren ce fro m th e di st ric t co ur ts , ha ve “ or ig in al bu t no t

ex cl us iv e juri sd ic ti on of al l ci vi l pr oc eed in gs ari si ng un d e r ti tl e 11 , o r ari si ng in or rel at ed to cas es un de r ti tl e 1 1.” 28 U.S.C. § 1 33 4( b) ; 2 8 U.S.C. § 15 7( a).

Ban kr up tc y pr oc eed in gs are co m pr i s e d o f co re pr oc eed in gs an d no n- co re, rel at ed pr oc eed in gs

. S

pe ci al ty Mil ls , I

nc

. , 5 1 F.3 d at 77 3. A c or e pr oc eed in g is on e th at “ ari se [s ] on ly in ba nk ru pt cy or in vo lv e[s ] a ri gh t cr eat ed by feder al ba nk ru pt cy la w. Id

. (ci ta ti on om it te d) ; se e 28 U.S.C. § 15 7( b) (2 ). Rel at ed pr oc eed in gs are no nco re. The y “ do no t in vo ke a su bs ta nt iv e rig ht crea te d by fed eral ba nk ru pt cy la w an d

co ul d e xi st ou ts id e o f a ban kr up tc y , al th ou gh th ey m ay be rel at ed to a ba nk ru pt cy .”
Id . at 7 74

.

“ Cl ai m s ‘aris in g un de r’ Tit le 11 are ‘tho se pr oc eed in gs th at in vo lv e a cau se of

act io n crea te d or de te rm in ed by a st at ut or y pr ov is io n of ti tl e 11 .’ ” GAF Hol di ng s, LLC v

. Ri n a l di (In re Far mla nd In du s., In c.), 56 7 F.3 d 10 10
, 10 18 (8 th Ci r. 20 09 ) (ci ta ti on s om it te d)

. “ ‘[A] ris in g in ’ pr oc eed in gs are th os e th at are no t ba se d on an y rig ht ex pr es sl y crea te d by ti tl e 11
, bu t ne ve rth el es s, wou ld ha ve no ex is te nc e ou ts id e of th e b an kr up tc y .” Id

. (ci ta ti on om it te d)

.

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-I n t h e Eig ht h Ci rcu it
, th e “ co nc ei va bl e effe ct ” te st is us ed to de te rm in e th e

ex is te nc e o f “ rel at ed to ” juri sd ic ti on :

[T]he te st fo r de te rm in in g whe th er a ci vi l pr o c e e d i n g is rel at ed to ba nk ru pt cy is whe th er the out co m e of th at pr oc eed in g co ul d co nc ei va bl y ha ve an y effe ct on th e es ta te be in g a dm in is te red in th e b an kr up tc y

....

An act io n is rel at ed to ba nk ru pt cy if th e ou tc om e co ul d al te r th e de bt or 's rig ht s, li ab il it ie s, op ti on s, or free do m of act io n

... an d whi ch in an y way im pa ct s up on th e ha nd li ng an d ad m in is tra ti on of th e ba nk ru pt cy es ta te

.
Dog p a tc h Pro

ps ., In c. v. Dog

pa tc h U.S.A., In c. (In re Dog pa tc h U.S.A., In c.)
, 81 0
F.2 d 78 2, 78 6 (8 th Ci r. 19 87 ) (q uo ti ng Pac or , In c. v. Hig

gi ns , 74 3 F.2 d 98 4, 99 4 (3 d
Ci r. 19 84 ), ov er ru le d on ot he r gr ou nd s by Th in gs Rememb er ed

, In c. v. Petr ar ca , 51 6
U.S. 12 4, 1 29 (19 95 )).

The McDo ug al ls were na m ed as de fen da nt s in th e ad ve rs ary pr oc eed in g br ou gh t in th e ba nk ru pt cy co ur t b y th e Deb to rs . Not wit hs ta nd in g t he fact th at th ey

were no t pl ai nt iff

s in th e act io n, th e McDo ug al ls fai le d to as se rt a cro ss -cl ai m or a

co un te rcl ai m

. On app eal
, th e McDo ug al ls se ek to ch al le ng e th e ba nk ru pt cy co ur t’s jud gm en t agai ns t th e Deb to rs an d in fav or of AgC ou nt ry by arg ui ng st at e la w frau d

an d whe th er Ag C o u n t r y h o l d s a li en on th ei r pr op ert y

. W e wil l no t co ns id er on
ap pe al fo r th e McDo ug al ls a m at te r th at was no t pr op erl y br ou gh t by th em be fo re th e ba nk ru pt cy

co ur t.

To th e ex te nt th e McDo ug al ls as se rte d be fo re th e ba nk ru pt cy co ur t th ei r rig ht s

co nc ern in g whe th er AgC ou nt ry h o l d s a li en on th e Hom e Qua rte r, th e ba nk ru pt cy

co ur t ha d no juri sd ic ti on ov er th e di sp ut e be twee n th e McDo ug al ls an d AgC ou nt ry

. The McDo ug al ls br ou gh t no cro ss -cl ai m ag ai ns t AgC ou nt ry an d no co un te rcl ai m
ag ai ns t t he Debt or s. The ba nk ru pt cy co ur t di d no t ha ve “ ari si ng un de r” o r “ ari si ng in ” juri sd ic ti on ov er th e McDo ug al ls ’ st at e la w frau d cl ai m whi ch was no t crea te d or

-6

-de te rm in ed by th e B a n k r u p t c y Co de an d whi ch co ul d cert ai nl y ex is t ou ts id e of

ba nk ru pt cy

.

R e la te d to juri sd ic ti on is br oa d, bu t it is no t wit ho ut li m it s an d “ ba nk ru p t c y

co ur ts ha ve no juri sd ic ti on ov er pro ceed in gs th at ha ve no effe ct on th e es ta te of t he
d e b t o r

. ” Cel ot ex Co rp

. v. Edw ar ds
, 51 4 U.S. 30 0, 30 8 n.6 (1 99 5) ). The al le ge d
di sp ut e be twee n th e McDo ug al ls an d AgC ou nt ry is a st at e la w frau d di sp ut e be twee n
two no n- de bt or s (th e McDo u g a l l s an d Ag Co un try) ab ou t pr op ert y (th e Hom e Qua rte r) th at was ne ve r pr op ert y of th e ba nk ru pt cy es ta te , an d th e ou tc om e of whi ch

wou ld no t effe ct th e ba nk ru p t c y es ta te

. Alt ho ug h “ [p ]rocee di ng s ‘relat ed to ’ th e 2
ba nk ru pt cy in cl ud e

... s u i t s b et ween th ird pa rti es whi ch ha ve an effe ct on th e ba nk ru pt c y e s ta te ,” rel at ed to juri sd ic ti on do es no t ex is t he re be cau se th e McDo ug al ls ’ c l a i m wou ld no t ha ve an effe ct on th e ba nk ru pt cy es ta te

. Far mla nd
, 56 7 F .3d at 1 01 9 (q uo ti ng Cel ot ex Co rp

. , 51 4 U.S. at 30 7 n .5). Si nc e a d at e b efo re th e Deb to rs fil ed th ei r ba nk ru pt cy pe ti ti on , th e tra ns fers of th e Hom e Qua rte r be twee n th e Deb to rs an d th e McDo ug al ls were co m pl et e, ul ti m at el y ret ur n i n g t he
McDo ug al ls ’ ti tl e to th at la nd

. The cl ai m t h e M c Dou ga ll s pr es en t to us on ap pe al

co ns is ts on ly of whe th er th e McDo ug al ls ho ld ti tl e t o t he Hom e Qua rte r free of AgC ou nt ry ’s li en (n ot hi ng m or e). Thi s so ug ht no th in g fro m th e ba nk ru pt cy co ur t on be ha lf o f or fro m

th e Deb to rs or t he ir e st at e.

W he n qu es ti on ed at or al arg um en t co nc ern in g th e ba si s fo r juri sd ic ti on by th e ba nk ru pt cy co ur t, th e pa r t i e s were no t ab le to sa ti sf act or il y ex pl ai n or su bs ta nt ia te ho w th e ou tc om e of th e di sp ut e be twee n th e McDo ug al ls an d AgC ou nt ry co ul d ha ve ha d a co nc ei va bl e effe ct on th e Deb to rs ’ ba nk ru pt cy est at e, an d t he reco rd do es no t

su gg es t th at it di d. Co un se l refe rred at or al arg um en t to th e po ss ib il it y t h a t th e

en cu m br an ce of th e McDo u g a l l s ’ la nd by th e Deb to rs ’ gr an t of th e m or tg ag e to

Si nc e th e Deb to rs ’ an d Trus te e’s ap pe al s were di sm is se d, we do no t co ns id er 2 th e ba nk ru pt cy co ur t’s juri sd ic ti on o v e r o t h e r is su es rai se d by th e Deb to rs an d ad dr es se d b y

th e b an kr up tc y

co ur t.

-7

-AgC ou nt ry crea te d a de bt fro m th e Deb to rs to th e McDo ug al ls

. The ba nk ru pt cy

co ur t’s op in io n an d th e reco rd di d no t sh ow an d wou ld no t su pp or t a fin di ng of su ch
li ab il it y at t he ti m e o f tr ia l.

CONCLUSI ON Bec au se we m ay no t co ns id er on ap pe al th e m eri ts of a m at te r fo r whi ch th ere

wou ld no t ha ve be en juri sd ic ti on in th e ba nk ru pt cy co ur t, we do n o t c o n s id er th e

m eri ts of th e McDo ug al ls ’ arg um en ts on ap pe al

. Thi s m at t er is rem an de d to th e ba nk r u p t c y co ur t wit h in st ru ct io n to di sm is s th e McDo ug al ls ’ cl ai m reg ard in g th e

va li di ty of AgC ou nt ry ’s li en ag ai ns t t he Hom e Qua rte r.

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