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FILED

DEC 31 2015

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NOT FOR PUBLICATION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. SC-14-1150-KiKuJu

)

BIRGER GREG BACINO, ) Bk. No. 09-20080-LT

)

Debtor. ) Adv. No. 10-90315-LT

)

 )

)

BIRGER GREG BACINO, )

)

Appellant, )

)

v. ) M E M O R A N D U M1

)

FEDERAL DEPOSIT INSURANCE )

CORPORATION, as Receiver for )

La Jolla Bank FSB, )

)

Appellee. )

______________________________)

Argued and Submitted on January 22, 2015, 

at Pasadena, California

Filed - December 31, 2015

Appeal from the United States Bankruptcy Court

for the Southern District of California

Honorable Laura S. Taylor, Chief Bankruptcy Judge, Presiding

 

Appearances: John L. Smaha, Esq. of Smaha Law Group argued for

appellant Birger Greg Bacino; Duncan N. Stevens,

Esq. argued for appellee Federal Deposit Insurance

Corporation.

 

Before: KIRSCHER, KURTZ and JURY, Bankruptcy Judges.

1 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 8024-1.
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Debtor Birger G. Bacino2 appeals a judgment after trial

determining that his debt to the Federal Deposit Insurance Company

as Receiver for La Jolla Bank FSB (“the Bank”), was excepted from

discharge under § 523(a)(2)(A)3 and (a)(2)(B). Debtor also

appeals a prior ruling granting in part the FDIC's motion for

summary judgment and denying his cross-motion for summary

judgment. We AFFIRM. 

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. Background of Debtor's entities 

Debtor successfully practiced law as a personal injury

attorney, holding licenses to practice law in Texas (surrendered

in 2006), California (surrendered in 2006) and the District of

Columbia (suspended in 2010). Debtor also operated two real

estate development entities: ALB Properties, Inc. of which he was

100% owner, and Barioni Lakes Estates, LLC, in which he held a 90%

interest. These entities acquired residential lots in different

stages of development including properties known as the Roxbury

and the Imperial projects.

In 2002, Debtor also acquired an interest in a healthcare

management conglomerate of several companies collectively called

Premier. Prior to 2004, Premier was the largest provider of

workers' compensation related healthcare services in the state of

2 On September 28, 2015, Appellant’s attorney notified the

BAP that appellant died on August 7, 2015. Although the

notification suggests that no state probate or other death

proceeding will occur, the Panel issues this memorandum on the

merits of the appeal, without considering issues of mootness.

3 Unless specified otherwise, all chapter, code and rule

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

the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.

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California. Premier did not provide medical services directly,

but facilitated patient care, billing, collection and

therapeutical, translation and clinic support for doctors. Debtor

also held a 100% interest in a company called Tammy, Inc. Tammy

provided medical management services to Premier and provided legal

management services to Debtor's law practice. 

From 2003 through 2010, Premier and Debtor defended criminal

and civil litigation by several governmental entities. In late

2004, sweeping changes were proposed in California’s workers'

compensation law. Premier decided to cease obtaining new lien

claims secured by workers’ compensation reimbursements and to

focus on collecting its existing lien claims, which totaled

approximately $400 million, and to defend against litigation

related to those claims. In 2010, Debtor finally resolved the

criminal claims against Premier by negotiating a plea agreement,

wherein he waived all rights to the collection of Premier's

receivables.

During the relevant time period, Debtor's ownership in

Premier, Tammy and his law practice comprised his personal income

and net worth. The management fees he anticipated Tammy would

generate from collecting on Premier's receivables represented a

significant portion of his represented 2004-2008 net worth, which

he believed to be in excess of $300 million.

B. The loans with the Bank

In 2004, an independent loan broker introduced Debtor to

David Yoder, a loan officer and director of loan origination with

the Bank. Yoder recommended to the Bank's loan committee that

Debtor, who Yoder considered a highly desirable borrower, be given

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three loans to fund the Roxbury project, which Yoder considered a

favorable long-term investment. Yoder admitted the Bank actively

recruited Debtor and his projects as a long-term customer for the

Bank. 

Between 2004-2008 Debtor, either individually or as the

principal of ALB or Barioni, obtained eight loans from the Bank to

fund the development projects and also entered into ten

modifications and/or maturity date extensions of the existing

loans. The loans and modifications totaled approximately $39

million; Debtor served either as a borrower or guarantor. The

subject eighteen loans and modifications are as follows:

• Loan 21130 ("Loan 1") - 2004

• Loan 21197 ("Loan 2") - 2004

• Loan 20001 ("Loan 3") - 2004 

• Modification of Loan 2 (21197) ("Loan 4") - 2005 

• Modification of Loan 3 (21001) ("Loan 5") - 2005

• Loan 22090 ("Loan 6") - 2006

• Loan 00033 (also known as 22225) ("Loan 7") - 2006

• Loan 22354 ("Loan 8") - 2006

• First modification of Loan 6 (22090) ("Loan 9") - 2006

• First modification of Loan 1 (21130) ("Loan 10") - 2006

• Loan 00066 ("Loan 11") - 2006

• First modification of Loan 11 (00066) ("Loan 12") - 2007

• Modification of Loan 7 (00033) ("Loan 13") - 2007

• Loan 23203 ("Loan 14") - 2007

• Modification of Loan 8 (22354) ("Loan 15") - 2008

• Second modification of Loan 6 (00033) ("Loan 16") - 2008

• Second modification of Loan 11 (00066) ("Loan 17") - 2008

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• Second modification of Loan 1 (21130) ("Loan 18") - 2008. 

Ultimately, once the real estate market began its rapid

decline in 2008-2009, Debtor defaulted on some of the loans. 

After 2009, the FDIC became the receiver of the Bank.

C. FDIC's nondischargeability action

Debtor filed a chapter 7 bankruptcy case on December 31,

2009. The FDIC filed its nondischargeability complaint on July 2,

2012, seeking relief under § 523(a)(2)(A) and (a)(2)(B). The FDIC

contended that Debtor had materially misrepresented his assets,

income, net worth and liabilities in loan applications, personal

financial statements ("PFS") and other documents submitted by him

or on his behalf from his CPA, Warren Thefeld, on which the Bank

relied for each of the loans and/or modifications. Alternatively,

the FDIC contended that Debtor intentionally misled the Bank by

failing to disclose his true financial numbers and did so with the

intent to deceive and induce the Bank to make loans or extend

credit to Debtor on existing loans. 

1. The cross-motions for summary judgment

The parties later filed cross-motions for summary judgment. 

The FDIC sought summary judgment or partial adjudication on its 

§ 523(a)(2)(B) claim ("MSJ"); Debtor sought summary judgment on

both of the FDIC's claims, contending that it could not establish

either reasonable or justifiable reliance ("Cross MSJ"). 

a. The FDIC's motion 

In the FDIC's initial brief in support of its MSJ, and to a

greater extent in its supplemental brief (“FDIC’s Supplemental

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Brief”),4 the FDIC alleged material misrepresentations and/or

omissions by Debtor in connection with each of the loans and

modifications; it set forth the evidence it believed supported

nondischargeability of each particular loan or modification and

stated whether such evidence was disputed or undisputed by Debtor.

i. General allegations

As to all of the loans and modifications, the FDIC alleged:

(1) Debtor had continually misrepresented the value of Tammy

at $25 million.

(2) In 2004, upon Thefeld's advice, Debtor set up a tax

shelter via an Employee Stock Ownership Plan ("ESOP"), which 

allowed him to defer until retirement taxes on $25 million worth

of income from Premier, ALB and his law practice. For the ESOP,

an accrual of $25 million was recorded on Tammy's books and 2004

tax return. In essence, Debtor could collect the accrued

$25 million in management fees from Tammy and not pay income tax

because it had already been "paid" (deferred until retirement) in

2004. Approximately $12 million of the $25 million accrual was

attributed to Debtor's income from Premier and his law practice;

the other $13 million was attributed to Debtor's income from ALB.

(3) The $25 million accrual had no reasonable basis in

accounting and created the fiction of overstated assets of both

Tammy and ALB. By the end of 2008, only approximately

$7.5 million of the $12 million related to Premier was collected. 

Thus, according to the FDIC, the accrual was overstated by 40%. 

4 This supplemental brief contains a chart of material facts

and supporting facts and evidence and admissions as to whether a

material fact was disputed or undisputed by Bacino.

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At no time from 2004-2008 did Debtor ever disclose to the Bank

that the Premier collections making up the value of Tammy were

overvalued and that its value trended downward significantly from

2004-2008.

(4) The FDIC argued that Debtor had also inflated Tammy's

value by not disclosing the Premier investigation and Workers

Compensation Appellate Board (“WCAB”) stay.

(5) The Bank had relied on Debtor's continued representation

that Premier maintained accounts receivable totaling $300 million

of which Tammy would realize an estimated $12 million in fees,

when Debtor was aware as early as 2003 or 2004 that Premier's

anticipated receivables were in jeopardy as being uncollectible

due to its illegal activity and he never disclosed any of this

information in writing to the Bank.

(6) Debtor had not disclosed that he knew as early as 2005

that a waiver of the Premier receivables could be a condition of a

plea agreement.

(7) Debtor failed to inform the Bank in writing about the

WCAB stay and the negative effect it had on Tammy's ability to

collect the $300 million in Premier receivables.

(8) For each loan or modification, only Debtor knew about

the investigation and the WCAB Stay, which were not readily

discoverable by the Bank.

(9) Debtor understated his liabilities for each loan or

modification by omitting ALB's $13 million loan from Tammy, costs

of construction and, in some instances, the debt on his yacht. No

loan application or PFS reflected the $13 million liability of

ALB, which was never paid back. Tammy's valuation of $25 million

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on the loan applications was based in part on ALB's loan

receivable in favor of Tammy. Debtor applying the indebtedness of

ALB to Tammy increased the value of Tammy's assets. However, by

not balancing the asset with the corresponding liability, Debtor

improperly inflated his net worth by $13 million.

(10) Debtor repeatedly omitted the costs of construction,

which were listed on Debtor's tax returns for the years 2005 and

2006.

(11) Debtor consistently listed his yacht as having a value

between $2.5 and $3.5 million, often without taking into account

the $2.1 million owed against it. At deposition, Debtor could not

explain why the yacht debt was not disclosed in some of the loan

applications and PFSs.

(12) The Bank conformed with its standard practices in

evaluating Debtor's credit worthiness by performing an

underwriting analysis, credit check and property appraisal and by

requesting tax returns, balance sheets, profit & loss statements,

bank statements and information from Thefeld, Debtor's CPA, to

explain the complex financial structure of Debtor's entities.

ii. Evidence supporting each loan or modification 

In addition to the general paraphrased allegations noted

above, the FDIC provided evidence to support nondischargeability

of the eighteen transactions individually, which consisted of the

following:

Loans funded in 2004 - Loan 1, Loan 2, Loan 3. The Bank

funded these three loans on November 3, 2004, in the amounts of

$4,184,500, $1,850,000 and $1,850,000 respectively. Because the

Bank funded these loans together, the FDIC's evidence in support

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of its claim was essentially the same. Debtor admitted

inaccuracies existed in the loan applications submitted to the

Bank, and his expert, Walter Schiller, opined that the financial

information Debtor provided to the Bank contained "glaring errors

from the very first loan."

In the applications submitted for these loans, dated

October 31, 2004, Debtor represented his monthly income as $57,512

or approximately $690,000 per year. The FDIC contended this

statement was a misrepresentation because Debtor's 2004 income tax

return showed an annual income of only $270,000. 

Debtor also represented that his net worth was $49,908,015,

reflecting total assets of $56,440,038 minus total liabilities of

$6,532,023. The $49 million net worth figure included $32 million

in "Net worth of business(es) owned." Before these loans were

funded, the Bank requested verification "to support [Debtor's]

stated $32.0 million business net worth figure, which is in

addition to his 100% real estate interests shown on his real

estate schedule." In response, Thefeld provided the Bank with a

Tammy Statement of Income for 2003 in which management fees were

identified as $30,027,345.64. Thefeld also provided the Bank with

a 2003 Tammy Balance Sheet identifying total assets of

$30,027,299.80, which included an accounts receivable of

$29,696,239.02. To substantiate Tammy's value for 2004, Thefeld

provided the Bank with a Tammy Profit & Loss Statement from

January through August 2004 identifying income of $7,483,215.62 in

management fees. At deposition, Thefeld testified that Tammy was

worth $29 million in 2004, which included the accrued $25 million

receivable based on anticipated income from ALB and the management

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fees from collecting the Premier receivables. 

In addition, Debtor prepared for the Bank a memorandum,

entitled "Tammy, Inc. receivables through Premier Medical" (the

"Tammy Memorandum"), wherein he represented that "[t]he

$305 million in accounts receivable may be collected at 50%, which

would mean that my share would be 35% of $150 million. . . . This

year, Tammy can expect to collect $150 million times 20%

(collection rate) times 35%, which is my share or 10 million. 

This amount is a bit more then [sic] past years, as my share was

around 8 million."

Based on the expert opinion of Robert Wallace, the FDIC

contended Debtor's identified net worth constituted a

misrepresentation as it was based on the overstated value of

Tammy, resulting from the accrual of unrealized management fees.

Of the $25 million accrued for 2004, which made up the majority of

Debtor's stated business net worth of $32 million, only

$7.5 million was actually collected between 2004 and 2008. The

FDIC further contended Debtor was engaging in "double accounting"

of the same asset wherein the same money was represented as

(1) monthly base income from Tammy and his law practice and (2) a

Tammy asset of $25 million. 

The FDIC contended that Debtor had also misrepresented his

liabilities by identifying one of the Roxbury lots with a value of

$8 million and a debt of $552,000. Debtor admitted this was an

error; the debt was actually $5.5 million. 

The FDIC also contended that the Bank's reliance on Debtor's

representations of income, assets and net worth was evidenced in

the Underwriting Analysis for each of the three loans, which

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stated: "Mr. Bacino is a self-employed attorney and real estate

investor, with an est. $49.9 million net worth and earnings in

excess of $706,000 per year." The Bank's reliance on Debtor's net

worth was also demonstrated by the Bank's Credit Memorandums

generated for Loan 2 and Loan 3, which stated: "Net worth —

$38,521,892 . . . Strengths: Strong Guarantor Net Worth." 

Loans funded in 2005 — Loans 4 & 5. Loan 4 was a

modification of Loan 2, wherein Debtor received an additional

$1,440,000; Loan 5 was a modification of Loan 3, wherein Debtor

received an additional $390,000. These loans were funded on

August 12, 2005. In addition to Debtor's submitted loan

applications, Thefeld had also submitted to the Bank a letter

dated August 11, 2005 (the "August 2005 Letter"), which discussed

Debtor's and Tammy's income. It stated: "My firm is the

accountant for Greg Bacino. . . . His adjusted gross income on

his 1040 for 2004 will be approximately $3,300,000. In addition,

approximately $25,000,000 of additional income was earned and will

be reported as income by his ESOP pension plan."

In the applications for these loans dated June 15, 2005,

Debtor represented his monthly income was $600,000, or $7.2

million per year. The FDIC contended this was a misrepresentation

because Debtor testified that he did not recall making $600,000

per month in 2006 and Thefeld, who did Debtor's taxes,

corroborated that Debtor did not personally earn that much money.

Thefeld estimated that Debtor's income could have been no greater

than $300,000 per month. Further, contended the FDIC, Debtor had

improperly "double counted" the Tammy asset because any income

from Tammy and his law practice had already been identified as

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part of the $25 million accrual and could not be considered

"income" in the subsequent years when actually collected. 

As for his alleged net worth misrepresentations, in the

application for Loan 4, Debtor represented total assets of

$65,895,349, including $32 million in "Net worth of business(es)

owned" and $32,300,000 in "Real estate owned." In the application

for Loan 5, dated the same date, Debtor represented total assets

of $71,175,318, including $32 million in "Net worth of

business(es) owned" and $35 million in real estate. Besides the

$5.2 million discrepancy in the asset figure between the two

applications, Wallace opined that Debtor had also misrepresented

his net worth due to his overstated value of Tammy and his double

accounting of that asset. The FDIC contended that Debtor had also

misrepresented his liabilities. Neither loan application

identified any debts, which Debtor could not explain. 

The FDIC argued the Bank relied on Debtor's representations

of income, assets and net worth as demonstrated by the

Underwriting Analysis for each loan, which stated: "He has a net

worth in excess of $2.9 million which consists of approximately

$35 million in real estate owned, $32 million in net worth of

business and $1.25 million in personal property." The Bank's

reliance on Debtor's stated net worth figure of $71 million, which

reflects the lack of any debts, was also demonstrated by the

Credit Memorandum generated for each loan, which stated: "Bacino

Net Worth $71,175,318 & Liquidity $2,925,318. Recommend file for

approval." Based on the expert opinion of Thomas Tarter, the FDIC

contended it was reasonable and customary for the Bank to rely on

Thefeld's August 2005 Letter in extending additional credit to

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Debtor because of Thefeld's status as a CPA. 

Loans funded in 2006 — Loan 6. The Bank funded Loan 6 for

$8,075,000 on February 15, 2006. In connection with this loan,

Thefeld authored a letter dated February 6, 2006 (the "February 6,

2006 Letter") to Jim Fardeen of Merrill Lynch, which was

ultimately submitted to the Bank. It stated: "The following is a

brief summary of the income tax structure of Greg's Entities

. . . . [Premier's] [a]ccounts receivable are in excess of

$300,000,000 and are considered collectible by Greg. . . . The

cash net income in 2004 was over $5,000,000. Greg has estimated

that his future Premier collections from January 2006 forward will

total $12,000,000-15,000,000. . . . The estimated income for the

law firm for 2005 is $900,000." 

In the application submitted for Loan 6 dated February 8,

2006, Debtor represented his monthly income was $600,000. The

FDIC contended this was a misrepresentation because Debtor's 2006

personal income tax return reflected that his salary and wages

were $0. 

Debtor represented his net worth of $64,835,604, reflecting

total assets of $86,435,773 minus liabilities of $21,600,169. 

Debtor represented his assets included $32 million in "Net worth

of business(es) owned" and $33,750,000 in real estate. As with

prior loans, Wallace opined that Debtor had misrepresented his net

worth due to his overstated value of Tammy and his double

accounting of that asset. Debtor had also failed to list various

debts of ALB and Barioni. 

The FDIC contended that the Bank's reliance on Debtor's

representations of income, assets and net worth was evidenced in

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the Underwriting Analysis: "Mr. Bacino has a stated net worth of

$64,835,604. This is comprised mainly of equity originating from

his business (approx. $32 million) and his real estate investments

(approx. $22 million). . . . Strengths: Guarantor's net worth." 

Tarter opined that it was reasonable and customary for the Bank to

rely on Thefeld's February 6, 2006 Letter in extending credit to

Debtor for Loan 6. The FDIC argued that it was also reasonable

for the Bank to rely on the updated financials for Tammy: the

2005 Tammy Balance Sheet showed accounts receivable of

$25,840,521; and the Tammy 2005 Profit & Loss Statement listed

management fees of $2,075,263. 

Loan 7. The Bank funded Loan 7 on March 10, 2006, for

$3 million. On February 22, 2006, Debtor authored a letter for

the Bank discussing his and Tammy's income (the "February 22, 2006

Letter"). Debtor represented that "Tammy, Inc. has accrued and

paid tax on $25 million in income. Even though Tammy is entitled

to accrue $25 million, the pension amount will be regulated by

existing pension laws. In excess of $12 million has already been

run through Tammy's qualified ESOP and been invested into ALB

Properties." 

In Debtor's PFS dated November 15, 2005, Debtor represented

total income of $7.4 million, which consisted of $900,000 from his

law practice, $4 million from ALB and $2.5 million from Tammy. 

The FDIC contended these figures misrepresented Debtor's income.

Schiller opined that Debtor's stated total income, which was the

same amount he represented in every PFS, was not substantiated by

any document. Thefeld, who did Debtor's tax returns, suspected

Debtor was not making $900,000 annually and admitted that Debtor's

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income from Tammy and his law practice was substantially reduced

from 2005-2008, but was never reflected in any PFS. The FDIC also

disputed Debtor's asserted $2.5 million income for Tammy; Tammy's

2006 tax return showed an income of only $652,000. The FDIC

contended this reported $2.5 million income was also an improper

"double counting," when the Tammy asset was already part of the

$25 million accrual. Finally, the FDIC disputed Debtor's asserted

$4 million income for ALB; ALB made no money in 2006.

In the loan application Debtor submitted for Loan 7 dated

March 9, 2006, Debtor represented a $600,000 monthly income. This

statement, however, argued the FDIC, contradicted Debtor's 2006

income tax return, which showed his income as $0. 

In the November 15, 2005 PFS, Debtor represented total assets

of $124,691,730, including $84,050,000 in owned real estate,

$5.5 million in his law practice, $25 million in Tammy and

$2.5 million in his yacht. In the March 9, 2006 loan application,

Debtor represented total assets of $96,778,117, including

$1,020,509 in "Net worth of business(es) owned," $33,750,000 in

real estate and $11 million in vested interest in his retirement

fund (the ESOP). The FDIC contended that Debtor had engaged in

"triple accounting" of the Tammy asset wherein the same money was

represented as (1) $600,000 monthly based income, (2) an

$11 million vested retirement plan, and (3) Tammy equity of

$32-33 million. Debtor admitted at deposition that this appeared

to be true. 

The FDIC argued the Bank's reliance on Debtor's

representations of income, assets and net worth was demonstrated

by the Underwriting Analysis: "Overall credit summary: Total

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Assets: $96,778,117; Total Liabilities: $22,760,452; Net Worth: 

$74,017,665. . . . Mr. Bacino's net worth is $74,017,665. This

is comprised mainly of equity originating from his various

business ventures (approx. $47.5 million). . . . Mr. Bacino's

financial statements also reflect $11 million in retirement

reserves[.] . . . The borrower high debt ratios are partially

offset by the borrower's sizable expected income from accounts

receivable held in his qualified ESOP's. The receivables are

estimated to be around $16.6 million over the next few years." 

The FDIC contended the Bank's reliance on Debtor's net worth was

also demonstrated by the Credit Memorandum generated for Loan 7: 

"Mr. Bacino has a stated Net Worth of $74,077,162. . . . 

Strengths: The borrower has strong Net Worth, Repeat Borrower,

Guarantor has consistent Strong Net Income. . . . Based on the

financial strength of the borrower and guarantor, approval is

recommended."

Additionally, the FDIC argued that in funding Loan 7 it was

reasonable for the Bank to rely on (1) the Tammy Memorandum, (2) a

recent February 2006 Tammy Balance Sheet, which listed accounts

receivable as $25,840,521 and contained the same double accounting

error, (3) an updated 2005 Tammy Profit & Loss Statement, which

stated management fees of $2,705,263, but failed to disclose this

"income" was an asset and technically not income because it was

already taxed in 2004, (4) the February 6, 2006 Letter wherein

Thefeld represented accounts receivable were in excess of

$300 million and considered collectible by Debtor and that future

Premier collections would total $12-15 million, and (5) Debtor's

February 22, 2006 Letter. 

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Loan 8. The Bank funded Loan 8 on June 29, 2006, in the

amount of $2,015,000. For reasons unexplained, two loan

applications both dated June 21, 2006, were submitted for this

loan. In the first loan application, Debtor represented his

personal monthly income was $600,000. As noted with prior loan

applications, the FDIC contended this was a misrepresentation as

Debtor never made $600,000 per month between the years 2004 and

2008 and his 2006 tax return showed his salary and wages as $0.

Further, any income claimed to be derived from Tammy was an

improper double accounting.

The FDIC contended that Debtor had also misrepresented his

net worth. In the first loan application Debtor represented total

assets of $71,848,587, including $32 million in "Net worth of

business(es) owned," $5.5 million in real estate and $31,730,000

in "other assets," which included the Imperial property valued at

$26,280,000. In the second loan application, Debtor represented

total assets of $116,855,820, which reflects a difference of over

$45 million from the first application. During Debtor’s

deposition taken on October 13, 2010, and as confirmed in the

FDIC’s Supplemental Brief, Doc. No. 362, Fact 379, Debtor doubted

the figures presented in the second loan application were

accurate.

Debtor represented his total liabilities in the first

application as $5,071,917 and in the second as $12,946,674. 

Regardless of the figure, the FDIC contended he understated his

liabilities based on the general allegations as to all of the

transactions noted above. Debtor had also failed to disclose

various debts of ALB and Barioni. 

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The FDIC contended that the Bank's reliance on Debtor's

representations of income, assets and net worth was evidenced in

the Credit Memorandum, which stated: "Net Worth: His stated net

worth is in excess of $66.77 million. This consists of $32.0

million in net worth of business owned . . . . "Mitigating

factors supporting approval of the loan, include guarantor's net

worth in excess of $66.77 million and guarantors' real estate

investing experience." As with Loan 7, the FDIC argued that in

funding Loan 8 it was reasonable for the Bank to rely on

misrepresentations made in the Tammy Memorandum, the February 2006

Tammy Balance Sheet, the 2005 Tammy Profit & Loss Statement,

Thefeld's February 6, 2006 Letter and Debtor's February 22, 2006

Letter. 

Loan 9. Loan 9 was the first modification of Loan 6, wherein

Debtor received an additional $2,513,400. It was funded on or

around August 1, 2006. It appears from the record provided in

support of the FDIC's MSJ that Debtor did not submit a loan

application or a PFS for this loan. Nonetheless, the FDIC claimed

that based on statements made by the Bank in the related Credit

Memorandum, the Bank relied on Debtor's misrepresentations of

income, assets and net worth. In that Memorandum, the Bank stated

Debtor's net worth was "in excess of $36.1 million." "Strengths: 

Net Worth is in excess of $36.1 million," and "Weakness: 

Mr. Bacino's 2003 Federal Income Tax Returns reflect income loss -

Offset with Net-Worth in excess of $36 million." The documents

the FDIC claimed supported the Bank's reliance for funding Loan 9

included (1) the Tammy Memorandum, (2) an updated July 2006 Tammy

Balance Sheet, which showed receivables of $25,840,521, (3) the

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2005 Tammy Profit & Loss Statement, (4) Thefeld's February 6, 2006

Letter, and (5) Debtor's February 22, 2006 Letter.

Loan 10. Loan 10 was the first modification of Loan 1,

wherein Debtor received an additional $1 million. It was funded

on August 11, 2006. It also appears that Debtor did not submit a

loan application for this loan. Although the FDIC's MSJ

referenced Exhibit 109 as the loan application, Exhibit 109 was

the loan application for Loan 7 funded in March 2006. The FDIC

did contend, however, that for this loan the Bank relied on

Debtor's misrepresentations regarding his income, liabilities and

net worth in his PFS from November 15, 2005. Because Loan 7 was

also supported in part by this same PFS, the FDIC presented

essentially the same evidence to support its claim for

nondischargeability for Loan 10.

The FDIC contended the Bank's reliance on Debtor's

representations of income, assets and net worth was evidenced by

its statement made in the Underwriting Analysis for this loan,

which is identical to what was stated in the Underwriting Analysis

for the original loan funded in November 2004: "Mr. Bacino is a

self-employed attorney and real estate investor, with an est.

$49.9 million net worth and earnings in excess of $706,000 per

year." The other documents the FDIC claimed supported the Bank's

reliance for funding Loan 10 included (1) the Tammy Memorandum,

(2) the July 2006 Tammy Balance Sheet, (3) the 2005 Tammy Profit &

Loss Statement, (4) Thefeld's February 6, 2006 Letter, and

(5) Debtor's February 22, 2006 Letter.

Loan 11. Loan 11 was funded on December 20, 2006, for

$1 million. Again, two loan applications were submitted for this

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loan. In the first loan application dated November 20, 2006,

Debtor represented his monthly income was $57,512, including

$36,787 of "partnership income." The second application dated

December 13, 2006, indicated that Debtor's monthly income was

$616,666, including $208,333 from Tammy. Besides the discrepancy

in monthly income between the two applications, the FDIC argued

that Debtor had misrepresented his income because his 2006 tax

return identified his salary and wages as $0.

Debtor's recent PFS dated November 10, 2006, reflected his

total income as $7.4 million, which consisted of $900,000 from his

law practice, $4 million from ALB and $2.5 million from Tammy. 

The FDIC contended these figures were also misrepresentations of

Debtor's income for the same reasons it stated in Loan 7. 

As for his assets, the first loan application stated total

assets of $56,440,038, including $23,500,000 in real estate and

$32 million in "Net worth of business(es) owned." The second loan

application represented total assets of $123,201,232. Thus, a

$66 million discrepancy in assets existed between the two

applications dated just weeks apart. 

The FDIC contended the Bank's reliance on Debtor's

representations of income, assets and net worth was evidenced by

the Credit Memorandum, which stated that the loan's weaknesses

were "mitigated by the guarantor's real estate experience, PIQ

locations and guarantor's net worth in excess of $82.28 million."

The FDIC further contended it was reasonable for the Bank to also

rely on (1) the Tammy Memorandum, (2) the February 2006 Tammy

Balance Sheet, which showed receivables of $25,840,521, (3) an

updated 2006 Tammy Profit & Loss Statement, which listed

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management fees of $2,345,842.63, but still contained the same

double accounting error, (4) Thefeld's February 6, 2006 Letter,

and (5) Debtor's February 22, 2006 Letter.

Loans funded in 2007 — Loan 12. Loan 12 was the first

modification of Loan 11, wherein Debtor received an additional

$1,224,500. It was funded on March 1, 2007. In the submitted PFS

dated February 14, 2007, Debtor represented total income of

$7.4 million, which consisted of $900,000 from his law practice,

$4 million from ALB and $2.5 million from Tammy. Schiller opined

that Debtor's represented income of $7.4 million was not

substantiated by any document and neither was the purported

$2.5 million income from Tammy. The FDIC contended the Tammy

income was a misrepresentation because the 2007 Tammy tax return

showed an income of $619,000. The FDIC contended Debtor also

misrepresented the $4 million ALB income; the 2007 ALB tax return

showed an income of –$2,966,734. Schiller opined that nowhere did

Debtor ever report $4 million in income from ALB to the IRS. 

In the loan application dated February 14, 2007, Debtor

represented his personal monthly income as $616,666, including

$208,000 from Tammy. The FDIC contended this was a

misrepresentation of Debtor's income because his 2007 tax return

showed his salary and wages as $0. As for Tammy income, Debtor

had admitted at deposition that he did not know of any income of

$208,000 per month, even if the application had been considering

collection of the Premier receivable, which was not the amount

collected in 2007. The FDIC contended that Debtor's

representation of "rental income" for $333,333 was also incorrect;

Debtor testified he had no rental income. Debtor's employee,

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Anne Berens, testified that many of these numbers were simply

carried over from prior years. 

In the February 14, 2007 PFS, Debtor represented assets

totaling $124,867,868, including real estate at $90,050,000, law

practice at $5.5 million, Tammy at $25 million and the yacht at

$2.5 million. In the loan application, Debtor represented assets

totaling $123,337,295, including $4,050,000 in real estate,

$86 million in "Bus. Re Owned" and $25 million in Tammy. As with

prior loans, Wallace opined that Debtor had misrepresented his net

worth due to his overstated value of Tammy and his double

accounting of that asset. 

The FDIC contended the Bank's reliance on Debtor's

representations of income, assets and net worth was demonstrated

by the Credit Memorandum: "Stated Net Worth: $67.517MM which is

largely made up of partnership and real estate equity interest. 

. . . Strength: High Net Worth of Guarantor." The FDIC further

contended it was reasonable for the Bank to also rely on (1) the

Tammy Memorandum, (2) the February 2006 Tammy Balance Sheet,

(3) the 2006 Tammy Profit & Loss Statement, (4) Thefeld's

February 6, 2006 Letter, and (5) Debtor's February 22, 2006

Letter. 

Loan 13. Loan 13 was a modification of Loan 7, wherein

Debtor received an additional $3 million. It was funded on

May 10, 2007. As additional collateral, Debtor pledged 350 shares

of Premier stock, valued at $6 million. On May 4, 2007, Thefeld

had authored another letter to the Bank on Debtor's behalf, which

provided updated information regarding the receivables (the

"May 4, 2007 Letter"). Thefeld represented that the $25 million

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accrual had been decreased by collections, of which Tammy was

estimated to still receive $19.1 million. 

As with Loan 12, Debtor had submitted for Loan 13 the PFS

dated February 14, 2007, which the FDIC contended contained the

same misrepresentation of his monthly income, assets and

liabilities. In the loan application dated May 9, 2007, Debtor

represented his personal monthly income was $616,666. The FDIC

contended this was also a misrepresentation of Debtor's income

because his 2007 tax return showed his salary and wages as $0. 

The FDIC contended the Bank's reliance on Debtor's

representations of income, assets and net worth was evidenced by

the Underwriting Analysis, which discussed the receivables details

in Thefeld's May 4, 2007 Letter, noted Debtor's net worth of

"$85,619,103," and stated that one of the strengths for Loan 13

was the "Strong Net Worth of Borrower." The FDIC further

contended it was reasonable for the Bank to also rely on (1) the

Tammy Memorandum, (2) the February 2006 Tammy Balance Sheet,

(3) the 2006 Tammy Profit & Loss Statement, (4) Thefeld's

February 6, 2006 Letter, (5) Debtor's February 22, 2006 Letter,

and (6) Thefeld's May 4, 2007 Letter.

Loan 14. The Bank funded Loan 14 for $2.54 million on

December 31, 2007. Loan 14 was paid in full by a title insurance

company, but the FDIC sought nondischargeability of any litigation

fees that might be incurred in a future adverse ruling.

In a recent PFS dated December 18, 2007, Debtor represented

his total income was $7.4 million, which consisted of $900,000

from his law practice, $4 million from ALB and $2.5 million from

Tammy. The FDIC presented the same evidence for why these income

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figures were misrepresentations as it did for Loan 12. 

In the loan application dated December 28, 2007, Debtor

represented his total monthly income as $121,083, which equates to

$1,452,996 million annually. The FDIC contended this was another

misrepresentation of Debtor's income because his 2007 tax return

identified his salary and wages of $0. 

The FDIC also pointed to inconsistencies regarding Debtor's

net worth in the PFS dated December 18, 2007, and the loan

application dated December 28, 2007. The PFS stated that assets

totaled $141,497,000, including real estate at $117,497,000, law

practice at $5.5 million, Tammy at $15 million and the yacht at

$3.5 million. The loan application stated assets totaling

$96,648,115, including "$0" in real estate, $5.5 million in "Net

worth of business(es) owned," $72,631,295 in "Net LLC Equity,"

$15 million in Tammy and $3.5 million in the yacht. As with prior

loans, the FDIC contended Debtor had misrepresented his net worth

based on Wallace's opinion that Debtor had overstated the value of

Tammy and double accounted for that asset. The FDIC contended

that Debtor had also misrepresented his liabilities by stating in

the PFS they totaled $57,065,705, but stating in the loan

application they totaled only $6,140,409.

The FDIC contended that the Bank's reliance on Debtor's

representations of income, assets and net worth was demonstrated

by the Underwriting Analysis, which stated that Debtor had "a

stated net worth of $90.5 million. This is comprised largely of

$72.6 million in net partnership and LLC real estate equity[.]" 

. . . "Sources of Repayment: Guarantor/Borrower's other real

estate, LLC income and/or liquidation of a portion of

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$90.5 million net worth." The FDIC further contended it was

reasonable for the Bank to also rely on (1) the Tammy Memorandum,

(2) the February 2006 Tammy Balance Sheet, (3) the 2006 Tammy

Profit & Loss Statement, (4) Thefeld's February 6, 2006 Letter,

(5) Debtor's February 22, 2006 Letter and (6) Thefeld's May 4,

2007 Letter. 

Loans funded in 2008 - Loan 15. Loan 15 was an assumption of

Loan 8 from one of Debtor's entities to another. No new funds

were advanced in this transaction occurring on January 7, 2008. 

Loan 16. Loan 16 was a second modification of Loan 6. It

was funded on April 11, 2008, wherein Debtor received an

additional $1.6 million.

 In the submitted PFS dated April 10, 2008, Debtor represented 

total income of $7.4 million, which consisted of $900,000 from his

law practice, $4 million from ALB and $2.5 million from Tammy. 

The FDIC contended the Tammy income was a misrepresentation

because the 2008 Tammy tax return showed an income of $102,713. 

Thefeld had also confirmed that Debtor's law firm income in 2008

was $170,542, not the $900,000 represented in the PFS. The FDIC

contended Debtor also misrepresented the $4 million ALB income;

the 2008 ALB tax return showed an income of –$13 million. 

In the loan application dated April 10, 2008, Debtor

represented his personal monthly income was $121,083, including

$40,078 listed as "other" without explanation. The FDIC contended

this statement was an additional misrepresentation in Debtor's

income because Debtor's 2008 tax return identified his total

income as –$2,361,183.

The FDIC also noted the inconsistencies regarding Debtor's

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net worth in the PFS and loan application, both dated April 10,

2008. In the PFS, Debtor represented total assets of

$141,347,000, including $5.5 million for his law practice,

$15 million for Tammy and $3.5 million for the yacht. The loan

application stated Debtor's assets totaled $94,437,323, including

"$0" in real estate, $5.5 million in "Net worth of business(es)

owned," $70,631,295 in "Net LLC Equity," $15 million in Tammy and

$3.5 million in the yacht. Debtor claimed his net worth was

$82,821,399, based on his liabilities of $11,615,924. A

Borrower/Guarantor Analysis created by the Bank for Loan 16

reflects Debtor's net worth was $82,821,399. The FDIC contended

that Debtor also misrepresented his liabilities, which he stated

in the PFS totaled $59,265,705, but stated in the loan application

they totaled $11,615,924. 

The FDIC contended the Bank's reliance on Debtor's 

representations of income, assets and net worth was evidenced in

the Underwriting Analysis, which indicated the "Strong Net Worth

of Borrower.” The FDIC further contended it was reasonable for

the Bank to also rely on (1) the Tammy Memorandum, (2) the

February 2006 Tammy Balance Sheet, (3) an updated 2007 Tammy

Profit & Loss Statement, which listed management fees of

$1,578,679.18, but still contained the same double accounting

error, and (4) Thefeld's May 4, 2007 Letter. 

Loan 17. Loan 17 was a second modification of Loan 11,

wherein Debtor received an additional $1.2 million. It was funded

on September 19, 2008.

In the PFS dated May 12, 2008, Debtor represented his total

income was $7.4 million, which consisted of $900,000 from his law

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practice, $4 million from ALB and $2.5 million from Tammy. The

FDIC presented the same evidence for why these income figures were

misrepresentations as it did for Loans 12 and 14. 

In the loan application dated September 18, 2008, Debtor

represented his personal monthly income was $616,666, which

included $333,333 in rental income Debtor admitted did not exist. 

See FDIC’s Supplemental Brief, Doc. No. 362, Facts 684-687. The

FDIC contended this was a misrepresentation of Debtor's income

because his 2008 tax return showed his total income was

–$2,361,183.

The FDIC also noted significant inconsistencies regarding

Debtor's net worth in the PFS dated May 12, 2008, and the loan

application dated September 18, 2008. The PFS stated assets

totaling $141,347,000, including real estate owned at

$117,497,000, his law practice at $5.5 million, Tammy at

$15 million and the yacht at $3.5 million. The loan application

stated assets totaling $77,286,040, including "$0" in real estate,

$5.5 million in "Net worth of business(es) owned," $53,248,205 in

"Net LLC Equity," $15 million in Tammy and $3.5 million in the

yacht. 

The FDIC contended that the Bank’s reliance on Debtor's

representations of income, assets and net worth was evidenced in

the Underwriting Analysis for Loan 17: "The guarantor's Net Worth

is $67.517 MM made up largely from partnership interest and real

estate equity." The Bank's reliance was also evidenced in the

generated Credit Memorandum, which referenced Debtor's stated

$67.517 million net worth and stated that the "High Net Worth of

Guarantor" was a strength for the loan and something that overcame

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its weaknesses. The FDIC further contended it was reasonable for

the Bank to also rely on (1) the Tammy Memorandum, (2) the

February 2006 Tammy Balance Sheet, (3) the 2007 Tammy Profit &

Loss Statement and (4) Thefeld's May 4, 2007 Letter.

Loan 18. Loan 18 was the second modification of Loan 1. 

However, this transaction on July 1, 2008, was only a maturity

date extension of Loan 1 and no additional funds were advanced. 

At any rate, it appears that Debtor did not submit a loan

application or a PFS in connection with this transaction. The

Tarter report also shows the absence of these documents. 

Nonetheless, the FDIC claimed that based on statements made in the

Bank's related Underwriting Analysis, Credit Memorandum and

Borrower/Guarantor Analysis, the Bank relied on Debtor's

representations of income, assets and net worth to issue the

extension. The Underwriting Analysis stated: "The guarantor's

Net Worth is $67.5MM made up largely from partnership interest and

real estate equity." The Borrower/Guarantor Analysis referenced

the $67.5 million net worth figure and stated that "Greg Bacino

reports stated income of $75,000/month in legal fees, $208,333

monthly average in net income from Tammy, Inc., and a monthly

average of $333,333 in ALB Properties, LLC net real estate

income." Finally, in the Credit Memorandum, the Bank referenced

Debtor's net worth of $67.5 million and stated that a strength for

the extension was the "High Net Worth of Guarantor." 

b. Debtor's Cross MSJ

In short, Debtor argued the FDIC had failed to show: (1) he

made any misrepresentations to the Bank with the intent to

deceive; (2) that the Bank justifiably relied on any material

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representation within the context of § 523(a)(2)(A); (3) that the

Bank reasonably relied on any written statements provided by

Debtor; or (4) that any discernable damages were caused by his

alleged representations. Debtor's Cross MSJ was supported by

92 exhibits and the declarations of Debtor, Yoder and his expert

Schiller. 

As part of Debtor's defense that the Bank could not have

reasonably relied on his written representations, Schiller opined

that the loan applications and PFSs Debtor submitted to the Bank

contained "glaring" errors, at least 250 of them, which should

have sent up red flags in the Bank's underwriting department that

further investigations and inquiry were needed. Debtor also

alleged that the Bank, not he, created some of the loan

applications. Yoder declared that the Bank's underwriting and

loan processing departments were "relatively weak," that the

"individuals did not seem to understand large loans, project

depth, the need of bonds, or complexity in the development process

in general." Yoder also believed the Bank's underwriting staff

"were not properly trained in sophisticated scenarios to review

batch financials and comparisons."

In reviewing each of the transactions, Schiller opined that

the Bank failed to meet the standard of care in issuing the

various loans and modifications or extensions. Specifically,

Schiller opined that the Bank's files were cumulative, so the

errors and omissions in the first loans "tainted" subsequent loan

files. Therefore, for the Bank to solely rely on subsequent loan

files and ignore prior loan files was commercially unreasonable

and a breach of the standard of care. Schiller also opined that

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the Bank erred by relying solely on what he called "company

prepared" material, the least reliable type of underwriting

information, particularly when loaning approximately $50 million. 

Instead, the Bank should have required audited and certified

material. In sum, Schiller opined that due to the Bank's zeal to

compete in the hot real estate market, it "basically overlooked

submitted financial information with glaring discrepancies and

inconsistencies that they never should have accepted without

further extensive evaluation."

As for the Bank's claim under § 523(a)(2)(A), Debtor

contended that to support the first element of representation, the

representation had to be one of "an existing or past fact." 

Debtor contended that at the time the loans and modifications were

executed, he made no representation of an existing or past fact,

only "opinions" as to values. And, in any event, these opinions

all related to his "financial condition," which was not actionable

under § 523(a)(2)(A). Further, the Bank could not show

justifiable reliance on any omissions by Debtor in his written

statements. 

The crux of Debtor's opposition to the FDIC's MSJ was that it

lacked any affidavits or declarations of material facts from Bank

personnel affirming: (1) what the Bank relied upon; (2) what the

Bank's purported "standard practices" were; and (3) whether any

efforts were made to verify the financial information Debtor

provided, especially when clearly inconsistent information was

within the loan files. 

2. The ruling on the cross-motions for summary judgment

The bankruptcy court held a hearing on the MSJ and Cross MSJ

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on January 31, 2013. The court agreed with Debtor's counsel that

for purposes of summary judgment, it would have to review each

loan or modification on a loan-by-loan basis and the evidence that

purported to support nondischargeability of each loan or

modification.

In its order entered on March 11, 2014, and in substantial

conformance with its tentative ruling issued just prior to the

hearing, the bankruptcy court granted the FDIC partial summary

judgment as to its § 523(a)(2)(B) claim and denied Debtor's Cross

MSJ in its entirety ("MSJ Order"). The court found that, absent

evidence to the contrary from Debtor, the Bank had provided Debtor

with money or an extension of credit based on a written

representation of fact as to Debtor's financial condition or that

of his insider for all transactions, except Loan 15 which was an

assumption and Loan 18 which was an extension of time. Thus, the

first element for a claim under § 523(a)(2)(B) was met as to the

sixteen other transactions and summary judgment was appropriate. 

The court also granted summary judgment to the FDIC as to the

material falsity of Debtor's representations. In his defense to

reasonable reliance, Debtor had conceded the numerous inaccuracies

in his written financial information relating to the loans and

modifications. Further, the court found that the transactions

involved loans supported by Debtor's guaranty, and that Debtor's

(and his insiders') financial information was necessarily required

and material to the transactions as a result. Thus, the second

element for a claim under § 523(a)(2)(B) was met as to all

transactions. 

The court also granted summary judgment to the FDIC as to

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actual reliance for all transactions. The court found that the

documents Debtor provided were typical for any loan, and Debtor

did not dispute that the Bank relied on them. Yoder's declaration

failed to suggest that any of the particular documents submitted

were not necessarily relied upon by the Bank to some extent in its

decision to lend. Further, Debtor in his responses to the FDIC’s

statements of uncontroverted facts prepared in support of the

FDIC’s MSJ failed to dispute statements establishing actual

reliance by the Bank. See FDIC’s Supplemental Brief, Doc.

No. 362. Thus, the fourth element for a claim under

§ 523(a)(2)(B) was met as to all transactions. 

Finally, the court found that the Bank's reliance was

reasonable as to the initial loans — Loan 1, Loan 2 and Loan 3.

Neither Debtor nor Schiller addressed why Loan 1 would have raised

red flags such that the Bank could not reasonably assume the

information presented by, or on behalf of, Debtor was accurate. 

Schiller did not even discuss Loan 1; Debtor did not directly

discuss it. As for Loan 2 and Loan 3, the court found that

Schiller's declaration contained only minimal assertions; it

concluded that the "scintilla" of evidence he raised was not

sufficient to create a triable issue as to whether reasonable

reliance existed for these three loans. Thus, Debtor had not

sufficiently rebutted the FDIC's evidence. Therefore, the fifth

element for a claim under § 523(a)(2)(B) was met as to Loan 1,

Loan 2 and Loan 3, but triable issues of material fact existed as

to the Bank's reasonable reliance on Loans 4 through 18. 

The court denied summary judgment as to Debtor's actual

intent on all transactions, but noted that state of mind could be

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established by recklessness. Here, Debtor's own evidence showed

he delegated responsibility for preparation and presentation of

his financial information and made little, if any, effort to

ensure the Bank received accurate financial information. The

court opined that Debtor's conduct could support a recklessness

finding, but it was not going to grant summary judgment on that

issue.

The court also denied summary judgment as to damages. In

short, it believed that a trial was necessary to determine whether

reasonable reliance existed in connection with the transactions

where it had not already found otherwise. Further, the FDIC still

had to prove proximate cause. Thus, damages, if any, were not yet

determinable.

3. The trial on the FDIC's nondischargeability action

With summary judgment having been granted in part to the

FDIC, the remaining issues of intent, reasonable reliance,

causation and damages for its claim under § 523(a)(2)(B) were

tried, as well as all issues for its claim under § 523(a)(2)(A). 

Trial briefs were filed both before and after the trial. The

trial took fourteen days, twelve witnesses testified and

approximately 1000 exhibits were entered into evidence. 

The bankruptcy court entered a written decision on

February 28, 2014. It found in favor of the FDIC as to the

remaining elements for its claim under § 523(a)(2)(B) and as to

all elements for its claim under § 523(a)(2)(A). A judgment was

entered on March 17, 2014, determining that the Bank's debt of

$14,724,003.80 was nondischargeable under both § 523(a)(2)(A) and

(a)(2)(B). Debtor timely appealed the judgment on March 31, 2014.

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II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334

and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

III. ISSUES

1. Did the bankruptcy court err in denying Debtor summary 

judgment?

2. Did the bankruptcy court err in determining that the debts to 

the Bank were excepted from discharge under § 523(a)(2)(B)? 

3. Did the bankruptcy court err in determining that the debts to 

the Bank were excepted from discharge under § 523(a)(2)(A)? 

IV. STANDARDS OF REVIEW

We review summary judgment determinations de novo. See

Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125

(9th Cir. 2014). "Summary judgment is proper if the pleadings,

depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party is

entitled to a judgment as a matter of law." Celotex Corp. v.

Catrett, 477 U.S. 317, 322 (1986)(internal quotation marks

omitted). Under this standard, the moving party is entitled to

summary judgment if the nonmoving party "after adequate time for

discovery . . . fails to make a showing sufficient to establish

the existence of an element essential to that party's case, and on

which that party will bear the burden of proof at trial." Id.;

see also Ilko v. Cal. State Bd. of Equalization (In re Ilko),

651 F.3d 1049, 1052 (9th Cir. 2011)(applying Celotex summary

judgment standard to bankruptcy adversary proceeding). As

explained in Celotex, all other facts are immaterial when the

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nonmoving party fails to submit sufficient proof of an essential

element of its case. Id. at 323.

In reviewing a bankruptcy court's determination of an

exception to discharge, we review its findings of fact for clear

error and its conclusions of law de novo. Oney v. Weinberg

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

purposes of § 523(a)(2), a debtor's intent, materiality, whether

the creditor relied upon the debtor's false statements and

proximate cause are all questions of fact we review under the

clearly erroneous standard. Candland v. Ins. Co. of N. Am.

(In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996). A factual

finding 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 give great deference to

the bankruptcy court's findings when they are based on its

determinations as to the credibility of witnesses. Id. 

"We may affirm 'on any ground supported by the record,

regardless of whether the [bankruptcy] court relied upon,

rejected, or even considered that ground.'" Fresno Motors, LLC v.

Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014)

(citation omitted).

V. DISCUSSION

When determining whether a debt is excepted from discharge, a

bankruptcy court must construe the evidence against the creditor

and in favor of the debtor. Mele v. Mele (In re Mele), 501 B.R.

357, 363 (9th Cir. BAP 2013). A creditor objecting to

dischargeability of its claim bears the burden of proving, by a

preponderance of the evidence, that the particular debt falls

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within one of the exceptions to discharge enumerated under

§ 523(a). Grogan v. Garner, 498 U.S. 279, 286-291 (1991). 

Debtor contends the bankruptcy court erred by "lumping" the

loans and modifications together and not trying the case on a

loan-by-loan basis. Debtor contends he was denied due process

because each of the eighteen separate transactions were not tried

as separate debts. Debtor fails to point out in the record where

he made this due process objection. Further, in reviewing the

trial transcripts, it is clear the court tried the case on a loanby-loan basis. In fact, Debtor's counsel complained at the end of

trial day 7 that the FDIC was taking far too much time with

testimony on each of the transactions individually. In response

to his complaint, both the FDIC and the court reminded Debtor's

counsel that he was the one arguing in favor of that very approach

at summary judgment. Nonetheless, we agree that the bankruptcy

court took a "global" approach in its decision. As we discuss in

more detail below, this caused it to err as to at least two of the

loans. 

A. The bankruptcy court erred in determining that Loan 9 and

Loan 10 were excepted from discharge under § 523(a)(2)(B),

but correctly determined that the other transactions were

excepted from discharge under § 523(a)(2)(B).

To prevail on an exception to discharge claim under 

§ 523(a)(2)(B),5 the creditor must show: (1) it provided debtor

5 Section 523(a)(2)(B) provides:

(a) A discharge under . . . this title does not discharge an

individual debtor from any debt . . . (2) for money,

property, services, or an extension, renewal, or refinancing

of credit, to the extent obtained by . . . (B) use of a

(continued...)

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with money, property, services or credit based on a written

representation of fact by the debtor as to the debtor's financial

condition; (2) the representation was materially false; (3) the

debtor knew the representation was false when made; (4) the debtor

made the representation with the intention of deceiving the

creditor; (5) the creditor relied on the representation; (6) the

creditor's reliance was reasonable; and (7) damage proximately

resulted from the representation. See In re Candland, 90 F.3d at

1469; Siriani v. Nw. Nat’l Ins. Co. (In re Siriani), 967 F.2d 302,

304 (9th Cir. 1992); Gertsch v. Johnson & Johnson (In re Gertsch),

237 B.R. 160, 167 (9th Cir. BAP 1999) (adopting the elements

required under the companion section 523(a)(2)(A), with the

additional and obvious requirement that the alleged fraud stem

from a false statement in writing). 

1. There must be a statement in writing respecting the

debtor's or insider's financial condition that contains

a false representation of fact.

The bankruptcy court determined on summary judgment that,

absent contrary evidence from Debtor, the Bank had provided Debtor

with money or an extension of credit based on a written

representation of fact as to his or his insider's financial

condition for all transactions, except for Loans 15 and 18. The

court reiterated this finding again in its written decision after

trial, but it is not clear whether it intended to still exclude

5(...continued)

statement in writing – (i) that is materially false;

(ii) respecting the debtor’s or an insider’s financial

condition; (iii) on which the creditor to whom the debtor is

liable for such money, property, services, or credit

reasonably relied; and (iv) that the debtor caused to be made

or published with intent to deceive[.]

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these loans. Debtor does not raise this issue on appeal. 

However, we conclude that Loan 9 and Loan 10, both of which were

modifications of loans to ALB, were not supported by a "written

representation of fact" as to Debtor's "financial condition," and

Debtor should have been granted summary judgment with respect to

these two loans under § 523(a)(2)(B). 

A loan application containing information about an

applicant’s income constitutes a statement in writing respecting

the applicant's financial condition for purposes of 

§ 523(a)(2)(B). See Cashco Fin. Servs. v. McGee (In re McGee),

359 B.R. 764, 768 (9th Cir. BAP 2006). The same would be true for

a personal financial statement. The Panel examined the meaning of

the term "financial condition" as it is used in § 523(a)(2)(B) in

Barnes v. Belice (In re Belice), 461 B.R. 564, 578 (9th Cir. BAP

2011), and held that it must be interpreted narrowly:

Statements that present a picture of a debtor's overall

financial health include those analogous to balance

sheets, income statements, statements of changes in

overall financial position, or income and debt statements

that present the debtor or insider's net worth, overall

financial health, or equation of assets and liabilities

. . . . What is important is not the formality of the

statement, but the information contained within it —

information as to the debtor's or insider's overall net

worth or overall income flow. 

Id. at 578. In other words, the writing must be a complete or

comprehensive statement regarding a debtor's income and expenses. 

Id. at 579.

No loan application or PFS was submitted for Loan 9. This is

clear from the FDIC's MSJ and the Tarter and Wallace reports. 

Wallace did not discuss this loan at all; Tarter's report shows

that no application or PFS were submitted for it. The record also

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indicates that Debtor did not submit a loan application for

Loan 10, which is also reflected in the MSJ. Tarter and Wallace

failed to address this loan at all in their reports. Although the

FDIC's MSJ referenced a PFS it claims was submitted with Loan 10,

it cited to the wrong document. 

The other documents the FDIC claimed supported the Bank's

reliance for funding both loans included (1) the Tammy Memorandum,

(2) a July 2006 Tammy Balance Sheet, (3) the 2005 Tammy Profit &

Loss Statement, (4) Thefeld's February 6, 2006 Letter, and

(5) Debtor's February 22, 2006 Letter. The Tammy Memorandum

discusses only Debtor's potential income he would derive from

Tammy. The July 2006 Tammy Balance Sheet again shows only the

financial health of Tammy, not Debtor's overall financial health. 

Plus, these loans were to ALB, not Tammy. The same is true with

the 2005 Tammy Profit & Loss Statement. The February 6, 2006

Letter seems more akin to a statement of Debtor's net worth or

overall financial health, but the focus is still primarily on his

income only; it did not discuss any of his liabilities. Finally,

the February 22, 2006 Letter discusses briefly the Tammy accrual,

the ESOP and what properties ALB owns and is developing and

estimated sales figures. 

While each of these alleged misrepresentations reflect some

aspect of Debtor's income and the profitability of his entities,

"they do not either separately or when taken together reflect his

overall cash flow situation, his overall income and expenses, or

the relative values and amounts of his assets and liabilities." 

In re Belice, 461 B.R. at 579. Accordingly, without a "written

representation of fact" as to Debtor's financial condition with

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respect to Loan 9 and Loan 10, the bankruptcy court erred in

denying summary judgment to Debtor for these loans under 

§ 523(a)(2)(B). However, they may still be nondischargeable under

§ 523(a)(2)(A). 

As for the remaining loans (with the exception of Loan 15 and

Loan 18), the bankruptcy court did not err in finding that the

Bank provided Debtor with money or an extension of credit based on

a written representation of fact as to Debtor's or an insider's

financial condition. Debtor submitted loan applications and/or

PFSs with each of the remaining loans, and Debtor does not dispute

that each contained significant falsity. 

2. The misrepresentation must be material.

A materially false statement is one which "paints a

substantially untruthful picture of a financial condition by

misrepresenting information of the type which would normally

effect [sic] the decision to grant credit." First Interstate Bank

of Nev. v. Greene (In re Greene), 96 B.R. 279, 283 (9th Cir. BAP

1989)(citations omitted). "'Material falsity' in a financial

statement can be premised upon the inclusion of false information

or upon the omission of information about a debtor's financial

condition." Id. See also N. Park Credit v. Harmer

(In re Harmer), 61 B.R. 1, 5 (Bankr. D. Utah 1984)(a "long line of

cases" has held that in a financial statement, the "omission,

concealment, or understatement of any of the debtor's liabilities

constitutes a 'materially false' statement.")(citing cases). "A

statement can be materially false if it includes information which

is 'substantially inaccurate' and is of the type that would affect

the creditor's decision making process." In re Greene, 96 B.R. at

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283 (citations omitted). See In re Candland, 90 F.3d at 1470

(adopting Greene standard for "material falsity" and holding that

"significant misrepresentations of financial condition — of the

order of several hundred thousand dollars — are of the type which

would generally affect a lender's or guarantor's decision"). 

In its summary judgment ruling, the bankruptcy court found in

favor of the FDIC on this element as to all of the transactions. 

After trial, relying on Candland, it again found in favor of the

FDIC, determining the inaccuracies in the loan applications and

PFSs were material and of the type the Bank actually relied upon

in making the decision to advance the loans. In addition, the

court found that Debtor's omitted information — his resignation

from two state bars in 2006, the Premier investigation and the

WCAB Stay — was of the type that would be material to the Bank,

because it reflected on Debtor's character, which Tarter opined

was one of the "5 C's" for obtaining credit. This finding is

consistent with Greene, as material falsity can also be

established by omissions of information about a debtor's financial

condition.

Debtor contends the bankruptcy court applied an improper

standard for material falsity under § 523(a)(2)(B) at summary

judgment and after trial. He argues, essentially, that we ignore

controlling case law and adopt the standard set forth in Matter of

Bogstad, 779 F.2d 370, 375-376 (7th Cir. 1985). In Bogstad, the

Seventh Circuit held that for a statement to be materially false

for purposes of § 523(a)(2)(B), the test is whether the lender

would have made the loan had he known of the debtor's true

financial condition. That is not the standard in the Ninth

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Circuit. In fact, the Candland court expressly rejected Bogstad

and adopted this Panel's standard for material falsity set forth

in Greene. Candland, 90 F.3d at 1470. 

More concerning is that Debtor's counsel agreed with the

bankruptcy court during the summary judgment hearing that the

standard it applied for material falsity was the correct one:

MR. SMAHA: So to the extent that we're saying yes, there

are numbers on here that would be of the type that a bank

would be interested in, and that they relied on those

numbers, I don't have any problem with that concept. 

. . . .

THE COURT: I'm saying pretty much for all loans, I think

there are misstatements of a type that a bank would rely

on.

MR. SMAHA: I would agree with that --

THE COURT: All transactions.

MR. SMAHA: I believe that would be a true statement, and

we would probably -- we would admit to that. 

. . . .

MR. SMAHA: But yes, we agree that they relied on all the

documents that were provided by Mr. Bacino. 

Hr’g Tr. (Jan. 31, 2013) 31:14-17, 32:10-16, 34:22-23. Thus, it

would appear Debtor has waived any argument on this issue. In any

event, we conclude the bankruptcy court applied the correct

standard for material falsity. 

3. Debtor knew the misrepresentation at the time to be

false and the debtor made it with the intention of

deceiving the creditor.

The bankruptcy court did not find actual intent to deceive,

but did find that Debtor had acted with the requisite recklessness

to establish his intent under § 523(a)(2)(B), whether applying

either a "gross" recklessness standard or some lesser form. Mem.

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Decision (Feb. 28, 2014) 20-21. Specifically, the court found

that Debtor borrowed or guaranteed millions of dollars through the

use of documents that were highly inaccurate. They presented a

false sense of his personal net worth. Id. at 21. They failed to

disclose facts known to Debtor that created a significant risk to

him and to anyone relying on him for repayment. He delegated

responsibility for truthful disclosure to others who lacked the

information, opportunity or sophistication to provide an accurate

picture of his financial condition, and he did so repeatedly. 

Although Debtor testified that he read the documents prior to the

closings of the various loans, the court found that no evidence

existed "that he corrected a single syllable." Id.

Debtor contends the bankruptcy court applied an incorrect

standard for intent. He contends that in light of Bullock, none

of the exceptions to discharge under § 523(a) can be satisfied

with a showing of "mere negligence." See Bullock v.

BankChampaign, N.A., 133 S.Ct. 1754 (2013). The bankruptcy court

did not make a finding of "mere negligence" or apply any such

standard, which is not the standard in this circuit at any rate. 

In this circuit, reckless disregard for the truth of a

representation or reckless indifference to the debtor's actual

circumstances can support a finding of intent for purposes of 

§ 523(a)(2). See Anastas v. Am. Sav. Bank (In re Anastas),

94 F.3d 1280, 1286 (9th Cir. 1996); In re Gertsch, 237 B.R. at

167-68 (applying the reckless standard to § 523(a)(2)(B)); Arm v.

A. Lindsay Morrison, M.D., Inc. (In re Arm), 175 B.R. 349, 354

(9th Cir. BAP 1994). The bankruptcy court may consider

circumstantial evidence that tends to establish what the debtor

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must have actually known when taking the injury-producing action. 

Jett v. Sicroff (In re Sicroff), 401 F.3d 1101, 1106 (9th Cir.

2005).

In Bullock, the Supreme Court held that the intent

requirement for a fiduciary's defalcation should be the same as

the other specifically enumerated acts found in § 523(a)(4) —

i.e., larceny and embezzlement. 133 S.Ct. at 1759. An innocent

defalcation does not suffice. The fiduciary's conduct requires

intentional, improper conduct and "reckless conduct of the kind

that the criminal law often treats as the equivalent." Id. 

Accordingly, where actual knowledge is lacking, intent can still

be shown for purposes of § 523(a)(4) if the "fiduciary

'consciously disregards' (or is willfully blind to) 'a substantial

and unjustifiable risk' that his conduct will turn out to violate

a fiduciary duty." Id. at 1759-60 (quoting Model Penal Code

§ 2.02(c)). 

We disagree that Bullock applies to § 523(a)(2)(B), or if it

does, that the standard set forth in Bullock has heightened the

standard of recklessness already applied in this circuit. In any

event, we perceive no clear error in the bankruptcy court's

finding that Debtor's actions here satisfy the standard of gross

recklessness. Debtor admitted delegating the responsibility for

preparing PFSs and loan applications to his employees, Berens and

Judy Brenning, who often signed for him, and relying heavily on

them for providing the correct information. Berens, who began

filling out the PFSs and loan applications in early 2007,

testified that generally she carried numbers over from prior

documents, with Debtor's knowledge, that she did not verify

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Debtor's income figures and that she believed it was Debtor's

responsibility to verify whether the numbers were true and

correct. Brenning admitted that in filling out the first PFS she

had "no idea what to do" and had to consult with Thefeld. 

Brenning testified that she relied on Debtor or Thefeld for much

of the financial information contained in later PFSs and loan

applications; she had no knowledge of what the numbers were on her

own.

Debtor testified he also relied heavily on Thefeld for

correct information in the PFSs and loan applications. However,

Thefeld testified that other than assisting Brenning with some

information for the first loans, he never discussed with Debtor or

any of his staff financial information for PFSs or loan

applications. Although Debtor testified that he "glanced" at

every loan application at the Bank's Escondido office before

submitting them, he also testified that he did not think he needed

to review them because he had a "super team." Berens also

testified that it would not be unusual for Debtor to ask her to

sign his name to a PFS without him reviewing it.

Clearly, many of the facts contained in the PFSs and loan

applications were not accurate. And it appears Debtor did little

if anything to ensure that they contained accurate information

before signing or submitting them. Failure to review documents

containing false statements about a debtor's financial condition,

with the knowledge that those documents will be submitted to

obtain money or credit, supports a finding of reckless disregard. 

Merchs. Bank of Cal. v. Oh (In re Oh), 278 B.R. 844, 858 (Bankr.

C.D. Cal. 2002). The bankruptcy court did not find Debtor’s

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testimony credible that he believed his staff could submit

accurate and complete information without his input. Mem.

Decision (Feb.28, 2014) 9:16-28. We must give this credibility

finding great deference. In re Retz, 606 F.3d at 1196. 

Accordingly, the bankruptcy court applied the correct standard for

intent; we conclude its finding against Debtor on that element was

not clearly erroneous. 

4. Creditor must reasonably rely on the misrepresentation.

To meet the reliance standard under § 523(a)(2)(B), there

must be reasonable reliance. Reasonable reliance means reliance

that would have been reasonable to a hypothetical average person. 

Heritage Pac. Fin., LLC v. Machuca (In re Machuca), 483 B.R. 726,

736 (9th Cir. BAP 2012). Reasonable reliance is analyzed under a

"prudent person" test. In re McGee, 359 B.R. at 774; First Mut.

Sales Fin. v. Cacciatori (In re Cacciatori), 465 B.R. 545, 555

(Bankr. C.D. Cal. 2012)(court must objectively assess the

circumstances to determine if creditor exercised degree of care

expected from a reasonably cautious person in the same business

transaction under similar circumstances). Reasonable reliance is

judged in light of the totality of the circumstances on a

case-by-case basis. In re Machuca, 483 B.R. at 736. 

A creditor's reliance may be reasonable if the creditor

adhered to its normal business practices. In re Gertsch, 237 B.R.

at 172. The court may consider whether the lender's normal

practices align with industry standards, or if any "red flags"

exist that would alert a reasonably prudent lender to consider

whether the representations relied on were inaccurate. Nat'l City

Bank v. Hill (In re Hill), 2008 WL 2227359, at *3 (Bankr. N.D.

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Cal. May 23, 2008)(citing Ins. Co. of N.A. v. Cohn (In re Cohn),

54 F.3d 1108, 1117 (3d Cir. 1995)). A creditor cannot simply

ignore red flags that directly call into question the truth of the

statements on which the creditor claims to have relied. 

In re Machuca, 483 B.R. 736-37 (citing In re McGee, 359 B.R. at

775). Under such circumstances, the creditor must support

reasonable reliance with evidence explaining why it was reasonable

for it to rely on the statements notwithstanding the red flags. 

Id. However, when the evidence shows materially false statements

were made by the debtor, little investigation is required by the

creditor to have reasonably relied on the debtor's representation. 

In re Gertsch, 237 B.R. at 170. 

The bankruptcy court found that the Bank actually and

reasonably relied on the erroneous and incomplete information

provided by Debtor. Mem. Decision (Feb. 28, 2014) 21-24. Debtor

disputes this finding of fact, which we review for clear error. 

In short, Debtor contends that because the Bank did its own income

analysis, it did not actually rely on the stated income numbers. 

He further contends the Bank took no action on the discrepancies

that were actually noted by personnel. In other words, the

numerous "red flags" at issue precluded the Bank's reasonable

reliance on Debtor's misrepresentations. 

The bankruptcy court agreed with Debtor that the Bank

apparently did discover some of his errors, such as those

identifiable from credit reports, and utilized its own information

in connection with the lending decisions. Mem. Decision (Feb. 28,

2014) 22. The court also agreed that had the discoverable errors

been the only ones out there, Debtor would have had a defense. 

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However, they were not. Debtor failed to disclose a host of

transactions requiring disclosure that were not readily

discoverable by the Bank. These transactions included loans

between his various entities ($13 million ALB loan from Tammy) and

several private loans from Berens ($300,000), her brother

($75,000), Fish ($6-8 million), and Jerry Hall, the father of the

Bank's president (amount unknown). Id. Debtor had also failed to

disclose that he was no longer licensed to practice law in Texas

and California. And, what the court found most troubling, Debtor

failed to disclose the serious challenges, ultimately leading to

criminal liability, that faced Premier. 

The bankruptcy court rejected Debtor's defense that the Bank

did not rely on his net worth but rather on the development

projects. First, the Bank required a guaranty, which provided a

source of repayment if the projects did not generate sufficient

proceeds and which was consistent with its general practice and

industry standards. Further, the Underwriting Analyses and Credit

Memoranda consistently pointed to Debtor's net worth as support

for the loans. Due to Debtor's erroneous information, his net

worth and liquidity were not as represented in the documents he

signed. While the Bank discovered some of these errors and

reduced its estimate of net worth accordingly, the court found

that the Bank could not find all of them through any reasonable

means. The intercompany and private loans would not show up on a

credit report; the Premier issues were also undiscoverable with

any reasonable due diligence.

Finally, the bankruptcy court disagreed with Debtor's "red

flag" argument, supported by Schiller. The court found that the

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FDIC established through Tarter, and through factual testimony,

that the Bank could reasonably rely on Debtor's submissions, even

if it identified serious errors. The errors identified still

resulted in a conclusion that Debtor had significant net worth. 

No alerts existed that led to the discovery of the many loans and

transactions that would never be disclosed by a balance sheet, or

the serious problems with Premier. The court also found

compelling that Debtor and his entities were repeat customers, and

that Debtor's legal training could reasonably lead the Bank to

conclude he was sophisticated and aware of his obligations for

full disclosure. 

We see nothing illogical, implausible or without support in

the record as to the bankruptcy court's finding that the Bank

actually and reasonably relied on Debtor's misrepresentations. 

The loan approval documents generated by the Bank clearly show its

actual reliance on Debtor's misrepresentations by its repeated

references to his significant, yet overstated, net worth. And,

contrary to Debtor's argument, his misrepresentations went far

beyond his income. With the exception of Loan 9 and Loan 10 (and

Loan 18), Debtor continually overstated his assets and understated

his liabilities on each loan application and PFS submitted to the

Bank. Further, as established by the FDIC's experts, the Bank

adhered to industry standards and took reasonable measures to

verify Debtor's representations. This adherence, along with the

Bank's inability to discover the omitted and significant

intercompany and private loans and Debtor's failure to disclose

the Premier problems, supports a finding of reasonable reliance. 

Due to Debtor's many materially false statements, the Bank was

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only required to perform a minimal investigation, which it did. 

In re Gertsch, 237 B.R. at 170. 

5. Creditor suffered damages proximately resulting from the

debtor's misrepresentation.

The bankruptcy court held that based on the totality of the

evidence, the FDIC had met its burden of proof that losses

sustained were the proximate result of Debtor's actions. The

court rejected Debtor's argument that the FDIC failed to introduce

testimony from a loan officer stating what the Bank would have

done had it known. No such testimony was required; Debtor failed

to offer this same type of testimony favorable to his cause when

the burden of proof shifted to him given the standard articulated

in Siriani and Candland.

In Siriani, the Ninth Circuit held that in the case of credit

renewals, "a creditor seeking nondischargeability under section

523(a)(2)(B) must show that it had valuable collection remedies at

the time it agreed to renew its commitment to the debtor, and that

those remedies later became worthless." 967 F.2d at 305. Stated

another way, where credit renewals are involved, the creditor must

show some proximately-caused damage beyond the unpaid debt. The

bankruptcy court did not address this part of Siriani's holding. 

Instead, it relied on Siriani's directive that bankruptcy courts

are not required "to divine what might have happened" with respect

to the creditor's diligence, or lack thereof, in exercising its

collection remedies. Id. at 306. 

Debtor contends the FDIC failed to make any showing of

proximately-caused damages beyond the unpaid debt and the

bankruptcy court improperly shifted the burden to him on this

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element. Siriani would appear to apply only to those transactions

that were renewals of credit — i.e., the ten loan modifications

and/or maturity date extensions — which Debtor seems to concede,

and not to the "new" money transactions. The FDIC contended that

the Bank had collection remedies based on the promissory notes,

collateral and abundance of caution liens filed for the various

loans. These collection remedies were extended each time a loan

was modified or extended. After the modifications and maturity

date extensions when Debtor defaulted and failed to make the

required payments, the Bank began foreclosure proceedings. 

However, due to Debtor's bankruptcy filing, the FDIC as receiver

for the Bank was unable to collect all of the remaining

outstanding loans, unless the court determined the debts were

excepted from discharge, for which Debtor was also a guarantor.

We conclude that the FDIC made a sufficient evidentiary

showing of proximate cause for the loan modifications and/or

maturity date extensions. Therefore, any potential error by the

bankruptcy court was harmless, as the record supports a proximate

cause finding for the renewals that occurred in this case. 

Debtor does not appear to challenge the bankruptcy court's

proximate cause finding as to the eight "new" money loans. To the

extent he does, we conclude the court's finding was not clearly

erroneous. For new money loans, proximate cause is established

when the falsehoods are material and involve significant amounts

of money. Candland, 90 F.3d at 1471. Here, the falsehoods were

material and involved significant amounts of money, far greater

than the amount at issue in Candland.

Accordingly, except for Loan 9 and Loan 10, we conclude the

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bankruptcy court did not err in determining that amounts owed on

account of the loans are nondischargeable under § 523(a)(2)(B). 

B. The bankruptcy court did not err in excepting Loan 9 and

Loan 10 from discharge under § 523(a)(2)(A).

For this claim, we address only Loan 9 and Loan 10, as we

have already concluded the bankruptcy court did not err in

determining the other loans were excepted from Debtor's discharge

under § 523(a)(2)(B). 

Section 523(a)(2)(A) excepts from a debtor's discharge debts

resulting from "false pretenses, a false representation, or actual

fraud, other than a statement respecting the debtor's or

an insider’s financial condition." A creditor seeking to except a

debt from discharge based on fraud must establish each of five

elements: (1) misrepresentation, fraudulent omission or deceptive

conduct; (2) knowledge of the falsity or deceptiveness of such

representation(s) or omission(s); (3) an intent to deceive;

(4) justifiable reliance by the creditor on the subject

representation(s) or conduct; and (5) damage to the creditor

proximately caused by its reliance on such representation(s) or

conduct. Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1222

(9th Cir. 2010); In re Weinberg, 410 B.R. at 35. By its terms, a

creditor will not be entitled to a claim under § 523(a)(2)(A) if

the debtor's fraudulent representations consist of "statement[s]

respecting the debtor's or an insider's financial condition." 

Heritage Pac. Fin., LLC v. Edgar (In re Montano), 501 B.R. 96, 102

n.5 (9th Cir. BAP 2012). 

1. False representation made with intent to deceive

In addition to affirmative false representations not

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respecting a debtor's or insider's financial condition, a debtor's

silence or omission of a material fact can constitute a false

representation for purposes of § 523(a)(2)(A). Citibank (S.D.),

N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1089 (9th Cir. 1996). 

However, in order to find liability for fraud based upon silence

or omission, there must be a duty to disclose. Id. 

Loans 9 and 10 were funded in early August 2006. By this

time, Debtor was well aware of the WCAB Stay and the criminal

investigation pending against Premier and the negative impact

these two things had, or could have, on his income and ability to

repay the loans. The WCAB Stay was imposed in June 2004 and

precluded Tammy from collecting on approximately $70 million in

lien claims. Debtor never informed the Bank in writing about the

WCAB Stay. Although he claimed he told the Bank's president about

it, the bankruptcy court found that no evidence in the record

suggested this information went from the president to the Bank. 

Even if this finding was erroneous, which we do not conclude,

Debtor admitted he knew as early as 2005 that a waiver of the

Premier receivables could be a condition of a plea agreement. 

That meant he would not receive several millions of dollars in

income he repeatedly told the Bank he would. Debtor admitted he

never informed the Bank in writing or otherwise about the Premier

investigation or potential waiver. 

Due to their business relationship, Debtor had a duty to

disclose the material information about Premier to the Bank when

applying for Loans 9 and 10. See In re Eashai, 87 F.3d at 1089

(citing to the Restatement (Second) of Torts § 551(1)(1976)). The

bankruptcy court's finding that he had a duty to do so was not

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clearly erroneous. Further, Yoder testified that the negative

impact on Premier receivables is something he and the Bank would

have wanted to know before making any loans, as it could have

affected Debtor's ability to handle his projects. Thus, Debtor's

failure to disclose the problems facing Premier was an omission of

a material fact. 

As with § 523(a)(2)(B), intent to deceive under 

§ 523(a)(2)(A) can be shown by a debtor's reckless disregard for

the truth of a representation, or reckless indifference to the

debtor's actual circumstances. In re Anastas, 94 F.3d at 1286. 

The bankruptcy court found that Debtor had acted with the

requisite recklessness to establish his intent under 

§ 523(a)(2)(A), particularly with his failure to disclose

Premier's problems. This finding is not clearly erroneous. By

the time Loans 9 and 10 were funded, Debtor had actual knowledge

of the problems facing Premier and how it could negatively impact

his income. Withholding this material information about Premier

from the Bank establishes, at minimum, a reckless indifference to

the truth, if not actual intent to deceive. Thus, the FDIC

established Debtor's intent for purposes of § 523(a)(2)(A).

2. Damages as a result of reliance on the false

representation 

For a claim under § 523(a)(2)(A), a creditor must also show

it was justified in relying on the debtor's false representations. 

Field v. Mans, 516 U.S. 58, 73-76 (1995); In re Eashai, 87 F.3d at

1090. Justifiable reliance is a subjective standard, which turns

on a person's knowledge under the particular circumstances. 

In re Eashai, 87 F.3d at 1090. 

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As the bankruptcy court correctly noted, nondisclosure of a

material fact in the face of a duty to disclose can establish the

requisite reliance and causation for actual fraud under the Code. 

Apte v. Romesh Japra, M.D., F.A.C.C., Inc. (In re Apte), 96 F.3d

1319, 1323 (9th Cir. 1996). The Supreme Court recognized in the

context of securities fraud the difficulty of proving the reliance

or causation elements in a case of fraudulent nondisclosure in 

Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54

(1972). In Apte, the Ninth Circuit extended the holding of

Affiliated Ute Citizens to the context of fraud cases under the

Code: 

Under the circumstances of this case, involving primarily

a failure to disclose, positive proof of reliance is not

a prerequisite to recovery. All that is necessary is

that the facts withheld be material in the sense that a

reasonable investor might have considered them important

in the making of this decision. This obligation to

disclose and this withholding of a material fact

establish the requisite element of causation in fact.

In re Apte, 96 F.3d 1319, 1323 (quoting Affiliated Ute Citizens,

406 U.S. at 153-54). 

Debtor contends the Bank's reliance was not justified based

on the "entire forest of red flags when underwriting the 18 loans

and making its credit decision." This argument fails to address

the omissions in this case, particularly Debtor's failure to

disclose the detrimental information about Premier of which he was

aware. The bankruptcy court found the Bank had established

justifiable reliance due to the nature of the undisclosed

information. We perceive no clear error with this finding. 

As to Loans 9 and 10, FDIC expert Tarter opined that the Bank

was justified in relying on Debtor's failure to disclose the

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Premier investigation, as it was not a fact the Bank could have

reasonably discovered. "[A] party to a business transaction has a

duty to disclose when the other party is ignorant of material

facts which he does not have an opportunity to discover." 

In re Apte, 96 F.3d at 1324. In addition, Yoder indicated that

the trouble with Premier was important information the Bank would

have considered when making the loans or modifications. Thus, the

Bank established justifiable reliance. 

Finally, the creditor must establish that the claim sought to

be excepted from discharge arose from an injury proximately

resulting from its reliance on the debtor's misrepresentations. 

Britton v. Price (In re Britton), 950 F.2d 602, 604 (9th Cir.

1991). Because Debtor failed to disclose the material information

regarding Premier, the Bank's proximate cause for Loans 9 and 10

was established. These loans were not repaid, and the Bank

suffered an actual loss as a result. Thus, Loans 9 and 10, which

totaled approximately $3.5 million, were properly excepted from

Debtor's discharge under § 523(a)(2)(A).

VI. CONCLUSION

For the foregoing reasons, we AFFIRM the judgment.

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