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FILED

MAR 26 2014

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. CC-13-1370-KuPaTa

)

ROARK MONTGOMERY MERRILL, ) Bk. No. 11-52820

)

Debtor. ) Adv. No. 12-01111

______________________________)

)

PATRIC J. KELLY; EDWARD )

ROUPINIAN; ARLENE ROUPINIAN, )

)

Appellants, )

)

v. ) MEMORANDUM*

)

ROARK MONTGOMERY MERRILL, )

)

Appellee. )

______________________________)

Argued and Submitted on February 20, 2014

at Pasadena, California

Filed – March 26, 2014

Appeal from the United States Bankruptcy Court

for the Central District of California

Honorable Gregg W. Zive, Bankruptcy Judge, Presiding

 

Appearances: Robert Schachter of Hitchcock, Bowman & Schachter

argued for appellants Patric J. Kelly, Edward

Roupinian and Arlene Roupinian; David Brian Lally

argued for appellee Roark Montgomery Merrill.

 

Before: KURTZ, PAPPAS and TAYLOR, Bankruptcy Judges.

*This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may

have (see Fed. R. App. P. 32.1), it has no precedential value. 

See 9th Cir. BAP Rule 8013-1.
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INTRODUCTION

Patric J. Kelly, Edward Roupinian and Arlene Roupinian

(collectively, “Lenders”) obtained a state court judgment against

Roark Montgomery Merrill for roughly $160,000 based on Merrill’s

personal guaranty of a third party’s debt. After Merrill filed

bankuptcy, the Lenders commenced an adversary proceeding seeking

to except the judgment debt from discharge under 11 U.S.C.

§ 523(a)(2)(B).1 After trial, the bankruptcy court entered

judgment in favor of Merrill and against the Lenders. The

bankruptcy court held that it would not except the judgment debt

from discharge because any reliance by the Lenders in Merrill’s

written financial representations was unreasonable. The Lenders

filed this appeal. 

We cannot conclude on the record before us that the

bankruptcy court’s ultimate finding of no reasonable reliance was

illogical, implausible or without support in the record. In

addition, even though the bankruptcy court did not make an

explicit finding on the Lenders’ actual reliance, based on the

entire record, and especially on the court's comments after

trial, we are convinced that the bankruptcy court implicitly

found that the Lenders did not actually rely on Merrill’s

financial representations before entering into the underlying

lending transaction.

Because the bankruptcy court’s reasonable reliance and

actual reliance findings were not clearly erroneous, we AFFIRM

1Unless specified otherwise, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

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its decision declaring the judgment debt dischargeable.

FACTS

The Lenders from time to time lent money to third parties

through a company known as California Western Financial

Investments Inc. (“Cal. Western”). Cal. Western was a mortgage

brokerage firm that would find individual investors, like the

Lenders, willing to fund real estate secured loans for individual

borrowers.

In 2006, Cal. Western arranged for the Lenders to make a

“hard money loan”2 to Daniel and Sandra Levy in the principal

amount of $254,600, to fund the construction of a residence on

vacant land located in San Jacinto, California. Before making

the loan, the Lenders insisted on receiving a guaranty of the

Levys’ loan obligations from Merrill. Apparently, Cal. Western

advised the Lenders that Merrill had a financial stake in the

land and its development and that he would be willing execute a

guaranty in order to induce the Lenders to make the loan to the

Levys. 

The record is quite thin regarding what documents the

Lenders received and reviewed in advance of funding the Levy

loan. In fact, the sole document the Lenders testified to

2One bankruptcy court has described a “hard money loan” as a

loan “too risky to meet the criteria of a bank or other

conventional lender, typically involving loan fees and interest

rates substantially higher than those charged by conventional

lenders.” Rigby v. Mastro (In re Mastro), 465 B.R. 576, 585 

(Bankr. W.D. Wash. 2011). It also has been said that hard money

lenders specialize “in short term real estate bridge loans to

borrowers who are unable to access conventional financing due to

creditworthiness and other high risk factors.” In re WN Truck

Stop, L.L.C., 2011 WL 65928 (Bankr. N.D. Tex. 2011).

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receiving from Merrill in advance of funding the loan was a form

loan application containing Merrill’s financial information. It

is undisputed that the Lenders “requested and required” Merrill

to submit the loan application. Joint Pretrial Order and

Stipulation (June 18, 2013) at p. 3. But it also is undisputed

that the Lenders only received an unsigned and undated version of

that application.

It is less than clear what the Lenders did with Merrill’s

loan application once they received it. Two of the Lenders,

Kelly and Roupinian,3 testified at trial. Their direct testimony

was presented by declaration. They both stated in their trial

declarations, in a conclusory manner, that they relied on

Merrill’s loan application and that the financial information in

the loan application was an “important fact” they considered

before making the loan. Kelly Decl. (Aug. 2, 2013) at ¶¶ 36, 37,

43; Roupinian Decl. (Aug. 2, 2013) at ¶¶ 35, 36, 42. During

redirect examination, Kelly went even further and testified as

follows:

Q: What caused you to finally make the loan?

A: Mr. Merrill’s application.

Q: And the information provided in his application?

A: Yes.

Trial Tr. (June 19, 2013) at 140:14-18.

On the other hand, there is no evidence in the record that

the Lenders verified any of the information set forth on

3Our references to “Roupinian” refer solely to

Mr. Roupinian. The record indicates that Ms. Roupinian did not

actively participate in the trial.

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Merrill’s loan application, such as by obtaining and reviewing a

credit report or Merrill’s tax returns. This seems odd, given

that Kelly was a veteran attorney who had prior experience

serving as a foreclosure trustee and who felt comfortable enough

with the topic of mortgage loan origination to volunteer his

opinion during cross-examination concerning how loan applications

typically are prepared and processed. As for Roupinian, he

testified to having many years of experience as a mechanical

engineer, as an account executive for various brokerage firms,

and as a real property investor on behalf of his family trust,

including his investment in over thirty loans through Cal.

Western.

Notwithstanding their stated reliance on Merill’s financial

information in deciding to make the Levy loan, neither Kelly nor

Roupinian insisted on receiving a signed and dated version of

Merrill’s form loan application before they funded the loan. 

According to Roupinian’s testimony, he did not even notice that

Merrill’s loan application was not signed.

After the Levys defaulted on the loan, the Lenders sued

Merrill in the Los Angeles County Superior Court (Case No.

NC052256) and, in May 2011, obtained a judgment after trial for

$158,511. Merrill never satisfied any portion of the judgment

and commenced his chapter 7 bankruptcy case several months later,

in October 2011.

In January 2012, the Lenders commenced an adversary

proceeding against Merrill seeking to except the judgment debt

from discharge under § 523(a)(2)(B), in essence alleging that

Merrill’s loan application constituted a false written financial

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statement. In relevant part, the Lenders alleged that the loan

application misrepresented the aggregate value of Merrill’s real

estate assets, the aggregate amount of equity Merrill had in

those assets and the amount of monthly income Merrill was

earning.

After a one-day bench trial, the bankruptcy court held that

the judgment debt was dischargeable. The court found that

Merrill’s loan application contained knowing and material

misrepresentations regarding his financial condition that he made

with the intent to deceive in order to induce the Lenders to

enter into the loan. The court further found that, as a

proximate result of Merrill’s misrepresentations, the Lenders

incurred damages in the amount of Merrill’s judgment debt.

As set forth in the bankruptcy court’s findings, Merrill’s

loan application represented that he had total real estate assets

worth nearly $7 million, when in reality his real estate assets

were worth only $4.5 million. In light of the stated $3 million

in secured debt encumbering his real property, instead of having

nearly $4 million in equity, the court explained, Merrill

actually had only $1.5 million in equity.

Meanwhile, as for income, the court pointed out that,

according to the loan application, Merrill earned $186,265 per

month, which would amount to earnings of over $2.2 million per

year. However, based on Merrill’s testimony and his 2005 tax

return, the court found that he in reality was earning closer to

$31,000 per month, or $372,000 per year.

None of these findings are challenged on appeal, inasmuch as

Merrill did not file a cross-appeal from the bankruptcy court’s

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decision. Instead, the Lenders’ appeal focuses on the court’s

finding that the Lenders did not reasonably rely on the financial

information contained in Merrill’s loan application.

The bankruptcy court made a number of subsidiary findings

regarding the reasonable reliance issue. These subsidiary

findings reflect: (1) that the court recognized there was

evidence supporting both sides of that issue, (2) that the court

weighed the conflicting evidence and (3) that the court chose to

give varying weight to its subsidiary findings in making its

ultimate finding regarding reasonable reliance. 

For instance, there were several subsidiary findings

concerning the terms contained in Merrill’s guaranty. Some of

these terms indicated that the Lenders were not relying on

Merrill’s financial information while others indicated precisely

the opposite. Ultimately, however, the bankruptcy court

determined that the guaranty was not a red flag and, while poorly

drafted, was on the whole intended to provide the Lenders with

additional comfort and assurance that the Levys’ loan obligations

would be satisfied one way or another. In essence, the

bankruptcy court found the guaranty to be more of a red herring

than a red flag.

Similarly, the court commented on the overall strangeness of

Merrill’s involvement in the property and in the loan

transaction. The court considered it strange, even suspicious,

that, if Merrill really had as much equity and income as his loan

application reflected, why would he invest $100,000 in the Levys’

property and be willing to sign the guaranty to support the

Levys’ financing efforts, but at the same time be unwilling or

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unable to directly loan the Levys the necessary funds to complete

the property development? On the one hand, this led the court to

state: “[t]hat should have raised some questions about the

accuracy of [Merrill’s] financial information.” Findings of Fact

and Conclusions of Law After Trial (July 22, 2013) at 6:21-22. 

On the other hand, the court also stated that the overall

strangeness of Merrill’s involvement in the transaction was not a

red flag and did not create any duty for the Lenders to

investigate before they could reasonably rely on Merrill’s

financial information. Ultimately, the bankruptcy court’s

reasonable reliance finding did not hinge on this factor.

Instead, in finding no reasonable reliance, the court

focused on three things: (1) on the fact that Merrill’s loan

application was unsigned and undated; (2) on the fact that

Merrill inflated the value of his real property assets by roughly

$2.5 million; and (3) on the fact that his stated income was

obviously false, especially in light of the size of the

investment at issue. According to the court, these three facts

were red flags that should have led the lenders to conduct at

least some inquiry into Merrill’s financial information. One

thing the lenders easily could have done, the court noted, was

obtain and review Merrill’s 2005 tax return. If they had done

so, the court further noted, they would have discovered that the

net income reported on the tax return was a small fraction of

what Merrill had stated in his loan application.

As the bankruptcy court put it, the Lenders did not offer

any evidence that they did anything to attempt to verify

Merrill’s true financial condition and instead chose to accept

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Merrill’s loan application on its face. Given the red flags and

the complete absence of any investigation into Merrill’s

financial representations, the court reasoned, the Lenders had

failed to meet their burden of proof to establish that they had

reasonably relied on Merrill’s loan application.

On July 22, 2013, the bankruptcy court entered its judgment

declaring the judgment debt dischargeable, and on August 2, 2013,

the Lenders timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C.

§§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.

§ 158.

ISSUE

Did the bankruptcy court err when it declared Merrill’s

judgment debt dischargeable?

STANDARDS OF REVIEW

In nondischargeability appeals, we review the bankruptcy

court's fact findings under the clearly erroneous standard and

its legal conclusions de novo. Oney v. Weinberg

(In re Weinberg), 410 B.R. 19, 28 (9th Cir. BAP 2009), aff'd,

407 Fed.Appx. 176 (9th Cir. 2010). In addition, we review de

novo "mixed questions" of fact and law that require

consideration of legal concepts and the exercise of judgment

about the values that animate governing legal principles. Id.

Whether the Lenders reasonably relied on Merrill’s financial

information is a question of fact subject to the clearly

erroneous standard. Siriani v. Nw. Nat'l Ins. Co.

(In re Siriani), 967 F.2d 302, 307 (9th Cir. 1992); Gosney v. Law

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(In re Gosney), 205 B.R. 418, 421 (9th Cir. BAP 1996). A finding

of fact is clearly erroneous if it is “illogical, implausible, or

without support in the record.” Retz v. Samson (In re Retz),

606 F.3d 1189, 1196 (9th Cir. 2010). We may not reverse simply

because we would have decided the factual issue differently. See

Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573

(1985). And when a finding of fact is based on credibility

determinations, we must give even greater deference to the

bankruptcy court's finding, because the bankruptcy court as the

trier of fact is in the best position to assess the credibility

of witnesses. See id. at 575.

We can affirm on any ground supported by the record. See

Black v. Bonnie Springs Family Ltd. P’ship (In re Black),

487 B.R. 202, 211 (9th Cir. BAP 2013) (citing Shanks v. Dressel,

540 F.3d 1082, 1086 (9th Cir. 2008)).

DISCUSSION

To prevail on their § 523(a)(2)(B) claim, the Lenders needed

to establish by a preponderance of evidence each of the following

elements:

(1) a representation of fact by the debtor,

(2) that was material,

(3) that the debtor knew at the time to be false,

(4) that the debtor made with the intention of

deceiving the creditor,

(5) upon which the creditor relied,

(6) that the creditor's reliance was reasonable, [and]

(7) that damage proximately resulted from the

representation.

Cashco Fin. Servs., Inc. v. McGee (In re McGee), 359 B.R.

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764, 772 (9th Cir. BAP 2006) (quoting Candland v. Ins. Co. of N.

Am. (In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996)); see

also In re Siriani, 967 F.2d at 304.

Here, the bankruptcy court’s decision hinged on its finding

that the Lenders did not prove the reasonable reliance element. 

As this Panel recently stated, reasonable reliance is determined

“on a case-by-case basis in light of the totality of the

circumstances.” Heritage Pac. Fin., LLC v. Machuca

(In re Machuca), 483 B.R. 726, 736 (9th Cir. BAP 2012) (citations

omitted). And a “prudent person test” is used to make the

reasonable reliance assessment. Id. That test requires the

bankruptcy court to examine “whether the creditor exercised the

same degree of care expected from a reasonably prudent person

entering into the same type of business transaction under similar

circumstances.” Id.

At the same time, the Ninth Circuit Court of Appeals has

been reluctant to impose a fixed duty to investigate on lenders

as a prerequisite to their reasonably relying on a borrower’s

financial representations. See In re Candland, 90 F.3d at 1471;

Lansford v. La Trattoria, Inc. (In re Lansford), 822 F.2d 902,

904 (9th Cir. 1987). And this Panel similarly has been reluctant

to impose such a duty to investigate on defrauded creditors. 

See Gertsch v. Johnson & Johnson, Fin. Corp. (In re Gertsch),

237 B.R. 160, 170 (9th Cir. BAP 1999) (“[A]lthough a creditor is

not entitled to rely upon an obviously false representation of

the debtor, this does not require him or her to view each

representation with incredulity requiring verification.”).

As for red flags, we have been careful to avoid broadly

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calling any transaction peculiarity a red flag, so as to not

inadvertently impose an investigation standard beyond that which

the Ninth Circuit might require. See In re Gertsch, 237 B.R. at

170-71.

With these legal principles in mind, we turn to the Lenders’

argument on appeal that the bankruptcy court committed reversible

error when it found no reasonable reliance. In essence, the

Lenders contend that the “red flags” the bankruptcy court found

were not really red flags; they were not obviously false

misrepresentations regarding Merrill’s financial condition, nor

did these so-called red flags demonstrate that Merrill’s

financial statement was inherently unreliable. As a result, the

Lenders reason, they had no duty to verify Merrill’s financial

information before they could rely on it. 

There are at least two significant flaws in the Lenders’

argument. First, it places undue emphasis on the bankruptcy

court’s red flag findings and improperly de-emphasizes the larger

question of whether, under the totality of circumstances, a

reasonably prudent lender facing similar circumstances would have

funded the Levy loan without doing anything to attempt to verify

Merrill’s financial information. And second, it does not

reference, let alone address, the appropriate standard of review

we must apply: the clearly erroneous standard of review.4

The real question the Lenders have asked us to decide is

4In their opening appeal brief, the Lenders twice conceded

that reasonable reliance is a question of fact, but also twice

misstated the applicable standard of review as the abuse of

discretion standard.

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whether the bankruptcy court clearly erred when it found that,

under all of the facts and circumstances presented, a reasonably

prudent lender would have made at least some effort to verify

Merrill’s financial information.5 And, under the clearly

erroneous standard of review, we could not overturn this finding

unless it was illogical, implausible, or without support in the

record. See In re Retz, 606 F.3d at 1196.

This is the onerous appellate burden the Lenders needed to 

satisfy. The Lenders attempted to meet this burden by pointing

to Smith v. Lachter (In re Smith), 242 B.R. 694, 702 (9th Cir.

BAP 1999) as an example of an appeal in which this Panel upheld

the bankruptcy court’s reasonable reliance finding under somewhat

similar circumstances. See id. But there is a critical

distinction between In re Smith and the appeal currently before

us. Unlike here, the bankruptcy court in In re Smith found that

the plaintiff reasonably relied on the debtor’s financial

information. As such, to the extent In re Smith is pertinent to

our resolution of this appeal, it stands for the proposition that

this Panel will not reverse a bankruptcy court’s finding of

reasonable reliance if it is “plausible and supported by

substantial evidence.” Id. As In re Smith also put it: “[w]here

there are two permissible views of the evidence, the factfinder's

choice between them cannot be clearly erroneous.” Id. at 700. 

5The Lenders have not contested on appeal the bankruptcy

court’s finding that they did nothing to verify Merrill’s

financial information.

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Accord, Anderson, 470 U.S. at 574.6

In this case, while we may or may not agree with each and

every subsidiary finding the bankruptcy court made, there was

still sufficient evidence in the record to support the bankruptcy

court’s ultimate finding of no reasonable reliance and, on the

whole, that finding was not illogical or implausible. In the

parlance of Anderson, having reviewed the “entire evidence,” we

are not “left with the definite and firm conviction that a

mistake has been committed” regarding the bankruptcy court’s

ultimate finding of no reasonable reliance. Id. at 573 (citing

United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948)). 

Put another way, any error the bankruptcy court might have

made in its red flag findings was harmless error. And we must

ignore harmless error. See Van Zandt v. Mbunda (In re Mbunda),

484 B.R. 344, 355 (9th Cir. BAP 2012).

More importantly, even if we were to hold that the

bankruptcy court’s no reasonable reliance finding was clearly

erroneous, we would nonetheless affirm the bankruptcy court’s

decision on an alternate ground. Having reviewed the entire

record and all of the court’s findings and conclusions, we are

convinced that the bankruptcy court also found that the Lenders

did not actually rely on Merrill’s financial information.

6At oral argument, the Lenders also referenced the following

unpublished BAP decisions that reached the same result as

In re Smith: Tovar v. Heritage Pac. Fin., LLC (In re Tovar),

2012 WL 3205252 (9th Cir. BAP 2012); and Kempf v. Hitachi Capital

Am. Corp. (In re Kempf), 2012 WL 603805 (9th Cir. BAP 2012). For

the same reason we find that In re Smith does not support the

Lenders’ position on appeal, we also find In re Tovar and

In re Kempf do not support that position.

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As an appellate court, we must construe the bankruptcy

court’s findings of fact favorably, such that any doubt as to

what the bankruptcy court meant is resolved in favor of upholding

rather than invalidating the bankruptcy court’s judgment. See

Brock v. Big Bear Market No. 3, 825 F.2d 1381, 1384 (9th Cir.

1987)(citing Wells Benz, Inc. v. United States ex rel. Mercury

Elec. Co., 333 F.2d 89, 92 (9th Cir. 1964)). As a result,

“whenever, from facts found, other facts may be inferred which

will support the judgment, such inferences will be deemed to have

been drawn.” Id. Accord, Caterino v. United States, 794 F.2d 1,

6 n.2 (1st Cir. 1986); Grover Hill Grain Co. v. Baughman-Oster,

Inc., 728 F.2d 784, 793 (6th Cir. 1984); Brown v. Lykes Bros.

S.S. Co., Inc., 484 F.2d 61, 62 n.4 (5th Cir. 1973); Triangle

Conduit & Cable Co. v. Federal Trade Commission, 168 F.2d 175,

179 (7th Cir. 1948), aff'd sub nom., Clayton Mark & Co. v.

Federal Trade Commission, 336 U.S. 956 (1949); Clyde Equipment

Co. v. Fiorito, 16 F.2d 106, 107 (9th Cir. 1926).

While the bankruptcy court here did not make an explicit

finding concerning the Lenders’ actual reliance, it did state as

follows:

And I think what happened here is that -- the paperwork

being done, they fund the loan, and they're comfortable

with that. But when the transaction goes sour, then

everybody begins to take a hard look at the documents

they paid little or no attention to when they entered

into the transaction.

Tr. Trans. (June 20, 2013) at 20:11-16. Taking into

consideration all of the court’s other findings, and the entirety

of the record, we construe this statement as an implicit finding

that the Lenders did not actually rely on Merrill’s financial

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information.

As explained in In re Siriani, 967 F.2d at 304, and

In re McGee, 359 B.R. at 772, actual reliance is a separate and

independent element that a creditor must plead and prove to

support its § 523(a)(2)(B) claim. And as this Panel recently 

opined, there can be no reasonable reliance unless the creditor

first proves actual reliance. See Heritage Pac. Fin., LLC v.

Montano (In re Montano), 501 B.R. 96, 115 (9th Cir. BAP 2013).

Importantly, whereas reasonable reliance is determined under

an objective standard and focuses on what a hypothetical prudent

person would do under similar circumstances, see In re Machuca,

483 B.R. at 736-37, the actual reliance inquiry necessarily is

subjective and focuses on the state of mind of the creditor –

what he or she actually considered to be important in deciding to

enter into the transaction in which the misrepresentation

occurred. See AT&T Universal Card Servs. v. Mercer

(In re Mercer), 246 F.3d 391, 412-13 & n.24 (5th Cir. 2001)

(indicating that actual reliance inquiry focuses on whether

misrepresentation was a substantial factor in influencing the

creditor to act); RESTATEMENT (SECOND) OF TORTS §§ 537, 546 (same).

In this case, all of the circumstances the bankruptcy court

considered in rendering its reasonable reliance finding, other

than its red flag findings, were sufficient to support a finding

of no actual reliance. In other words, under the specific

circumstances of this case, the absence here of any activity by

the Lenders upon receipt of Merrill’s unsigned and undated loan

application, other than their funding of the Levy loan, was

sufficient to support the reasonable inference that the Lenders’

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did not actually consider Merrill’s financial information

important to their lending decision.

We acknowledge the existence of conflicting evidence. 

Specifically, two of the Lenders, Kelly and Roupinian, testified

that Merrill’s financial information was important to them in

making their decision to fund the Levy loan and that they relied

on Merrill’s financial information. But this testimony was both

conclusory and self-serving. Moreover, the above-quoted

statement of the bankruptcy court regarding what it thought

really happened indicates that the court did not find the

Lenders’ testimony credible on this point. On this record,

neither the court’s credibility finding nor its actual reliance

finding were clearly erroneous. 

CONCLUSION

For the reasons set forth above, we AFFIRM the bankruptcy

court's judgment declaring Merrill’s judgment debt dischargeable.

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