In Finstad v. Gord (In re Finstad), 4 F.4th 693 (8th Cir. July 21, 2021), the Eighth Circuit affirmed the decisions of the North Dakota bankruptcy court and the BAP, holding that a prior federal appellate decision that the debtors did not have any interest in certain farmland precluded any relitigation of that issue in the debtors’ reopened chapter 12 case.
In their chapter 12 bankruptcy case, the debtors settled, in October of 2005, to remove the debtor’s farmland from the bankruptcy proceedings. As part of the settlement, which was approved by the bankruptcy court and confirmed in the chapter 12 plan, the debtors delivered a quitclaim deed for the farmland but were permitted to remain on the land as tenants and were granted an option to purchase the land back. Soon after, the debtors borrowed another $525,000 from another lender, the plaintiffs in this action, and purported to grant the plaintiffs a second mortgage on the farm. In 2008, the debtors defaulted on the settlement agreement, the original secured lender sold its interests to the plaintiffs, and the plaintiffs initiated eviction proceedings against the debtors.
The debtors have subsequently failed, now seven times, to convince any court that they have any interest in the farmland. First, in 2012, the debtors filed an action in North Dakota state court seeking a determination that they owned the farmland subject to an equitable mortgage to the original secured creditor and a second mortgage to the plaintiffs. The state court rejected this position (1) and held that the debtors had no interest in the farmland, and Supreme Court of North Dakota affirmed (2). Finstad v. Gord, 844 N.W.2d 913 (N.D. 2014). The debtors then attempted to seek relief through a diversity contract action filed in the North Dakota federal court, which also dismissed the debtors’ claims (3), and the Eighth Circuit affirmed on grounds of estoppel (4). Finstad v. Beresford Bancorporation, Inc., 831 F.3d 1009, 1015 (8th Cir. 2016). Next, in 2018, the debtors reopened their chapter 12 case and initiated an adversary proceeding in yet another attempt to get a determination that they retain a property interest in the farmland. The bankruptcy court dismissed the adversary complaint (5), and the BAP affirmed (6). In re Finstad, 612 B.R. 180 (B.A.P. 8th Cir. 2020).
In this decision, the Eighth Circuit affirmed (7) on the basis of issue preclusion. The court first determined that, while federal rules of res judicata apply to a federal court determination in a federal-question case and a federal diversity case, state res judicata law applies where the claims depend upon substantive state law. The court then applied North Dakota law of issue preclusion to determine that the debtor’s arguments are, in fact, precluded.
Co-Editors in Chief
Alexander J. Beeby, Larkin Hoffman
Kesha Tanabe, Tanabe Law