United States District Court, E.D. North Carolina, Western Division
EARL BRITT SENIOR U.S. DISTRICT JUDGE.
matter is before the court on defendant's motion for
directed reference to the bankruptcy court, (DE # 23), and
motion for judgment on the pleadings, (DE # 21). Plaintiff
(the “government”) filed a response to each
motion. (DE ## 26, 27.) This matter is ripe for disposition.
or early 2008, defendant began discussions with the U.S.
Department of Agriculture-Farm Service Agency
(“FSA”) to obtain a loan to purchase a farm.
(Compl., DE # 1, ¶ 10; Answer, DE # 5, ¶ 10.) On 13
March 2008, defendant informed the FSA that she had found a
farm property to purchase in Lillington, North Carolina,
(Compl., DE # 1, ¶ 11; Answer, DE # 5, ¶ 11), and
that she would need an operating loan in order to cover
various expenses, (Compl., DE # 1, ¶ 13; Answer, DE # 5,
¶ 13). On 28 March 2008, defendant submitted an FSA-2001
form, Request for Loan Assistance, requesting an operating
loan in the amount of $53, 000. (Compl., DE # 1, ¶ 15;
Answer, DE # 5, ¶ 15.) On this form, defendant did not
list a fence as an expenditure nor state her intention to
erect a fence. (Compl., DE # 1, ¶ 17; Answer, DE # 5,
¶ 17.) On 30 April 2008, defendant submitted an FSA-2038
form, Farm Business Plan Worksheet, detailing projected
income and expenses for the farm for the production cycle of
1 May 2008 to 30 April 2009. (Compl., DE # 1, Ex. A.) On that
document, defendant did not list a fence as an expenditure,
state her intention to erect a fence, or state her intention
to purchase a nearby residence. (Compl., DE # 1, ¶ 21;
Answer, DE # 5, ¶ 21.)
August 2008, defendant notified the FSA of “[r]ecent
financial changes, ” including, among other things,
purchasing and paying for a 33-foot travel trailer meaning
that she would no longer have any monthly rent or house
payments. (Compl., DE # 1, Ex. B.) Defendant also listed
needed operating expenses that were “their own
collateral, ” including a greenhouse. (Id.)
Defendant further detailed approximately $20, 000 worth of
operating expenses needing collateral. (Id.)
government alleges that in late September 2008, defendant
signed a Farm Assessment form acknowledging “there were
no planned changes to the operation from the proposed plan,
” (Compl., DE # 1, ¶ 29), as well as a Form
FSA-2028, Security Agreement, listing a greenhouse as
collateral for the operating loan, (id. ¶ 30),
and stating she would “use the operating loan funds for
the purpose for which they were advanced, comply with the
farm operating plan, and care for and maintain collateral in
good condition, ” (id. ¶ 31). According
to the government, the operating loan proceeds in the net
amount of $43, 000 were disbursed to defendant on 25
September 2008. (Compl., DE # 1, ¶ 32.)
February 2009, defendant spent $18, 657 of the farm operating
loan proceeds on a fence erected on her farm, which was not
listed in prior communications or agreements with the FSA.
(Id. ¶ 33; Answer, DE # 5, ¶ 33.)
Defendant alleges that the fence was an “essential farm
operating expense, ” as wild animals were destroying
her crops and killing her livestock. (Answer, DE # 5, ¶
February 2009, defendant obtained a new loan from a separate
lender for a nearby residence in the amount of $157, 916.00.
(Compl., DE # 1, ¶ 34; Answer, DE # 5, ¶ 34.)
Defendant paid a $4, 000 deposit and $3, 973 in closing
costs. (Id.) The government contends that these
payments were drawn from the farm operating loan proceeds,
(Compl., DE # 1, ¶ 34), while defendant claims the money
was paid out of her wages and 401K, (Answer, DE # 5, ¶
34). Defendant made four mortgage payments of $1085.98 each
on the 2009 residential loan. (Compl., DE # 1, ¶ 35;
Answer, DE # 5, ¶ 35.) The parties dispute whether these
payments were drawn from the operating loan proceeds or
defendant's personal finances. (Id.)
to her representation to the FSA, defendant never acquired a
greenhouse to serve as collateral for the operating loan.
(Compl., DE # 1, ¶ 37; Answer, DE # 5, ¶ 37.)
purportedly defaulted on her operating loan. (Compl., DE # 1,
¶ 36.) By judgment entered 2 March 2015, the government
obtained a default judgment against defendant for $117,
564.92 plus interest, which amount included the amount owed
on the operating loan. United States v. McOuat, No.
5:14-CV-562-BO (E.D. N.C. ) (DE # 8).
September 2015, defendant filed a voluntary petition for
bankruptcy under Chapter 13 of the United States Bankruptcy
Code, 11 U.S.C. § 1301, et seq. (Answer, DE #
5, Ex. A.) The government's default judgment constituted
a judicial lien, and on 29 October 2015, defendant filed in
the bankruptcy court a motion to avoid the lien pursuant to
11 U.S.C. § 522(f). (4/26/16 Order, DE # 22-1, at 1, 3,
8.) In its response to defendant's motion, the government
argued that the motion should be denied as:
[defendant] potentially made fraudulent misrepresentations
and/or committed a fraud on the United States that could
result in (a) violation(s) of the False Claims Act, 31 U.S.C.
§ 3729, et seq., (b) imposition of a constructive trust
in the Property in favor of the United States, excluding the
property from the bankruptcy estate under § 541(d)
and/or (c) a finding that the [defendant] had unclean hands .
. . .
(DE # 22-2, ¶ 7.)
April 2016, the bankruptcy court granted defendant's
motion to avoid the lien, (DE # 22-1, ¶ 28), finding
“insufficient evidence of fraud or wrongdoing to deny
[defendant] her entitlement to a homestead exemption in the
Property, ” (id. ¶ 22), and that
“[e]ven though purchase of the fence was not part of
[defendant's] Farm Business Plan Worksheet, the Court has
no hesitation in finding the fence to be a necessary expense
for [defendant's] farming operations in this instance,
” (id. ¶ 24). The court further concluded
“[defendant's] actions and manner in which she used
the Operating Loan proceeds do not shock the Court or rise to
the level of egregious conduct that has been condemned by
other courts.” (Id. ¶ 26.)
the bankruptcy court's ruling, the government commenced
the present case on 21 July 2016, asserting claims “to
recover statutory damages and civil penalties under the False
Claims Act (hereafter ‘FCA'), 31 U.S.C.
§§ 3729, et seq., and to recover all available
damages for unjust enrichment and payment under mistake of
fact.” (Compl., DE # 1, ¶ 1.)
March 2017, defendant filed her motion for judgment on the
pleadings pursuant to Federal Rule of Civil Procedure 12(c).
Then, on the following day, she filed a motion for directed
reference of this action to the bankruptcy court.
Defendant's Motion for Directed Reference ...