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United States v. McOuat

United States District Court, E.D. North Carolina, Western Division

December 19, 2017




         This 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.

         I. BACKGROUND

         In 2007 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.)

         On 29 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.)

         The 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.[1] (Compl., DE # 1, ¶ 32.)

         On 15 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, ¶ 33.)

         On 25 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.)

         Contrary 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.)

         Defendant 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).

         On 23 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.)

         On 26 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.)

         Following 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.”[2] (Compl., DE # 1, ¶ 1.)

         On 29 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.


         A. Defendant's Motion for Directed Reference ...

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