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NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. NV-14-1358-KuDJu

)

MARK J. ESCOTO, ) Bk. No. 13-10096

)

Debtor. ) Adv. No. 13-01058

______________________________)

)

)

ROBERT G. HILLSMAN, )

)

Appellant, )

)

v. ) MEMORANDUM*

)

MARK J. ESCOTO, )

)

Appellee. )

______________________________)

Argued and Submitted on March 19, 2015

at Las Vegas, Nevada

Filed – May 15, 2015

Appeal from the United States Bankruptcy Court

for the District of Nevada

Honorable Mike K. Nakagawa, Bankruptcy Judge, Presiding

 

Appearances: Candace Carlyon of the Carlyon Law Group, PLLC

argued for appellant Robert G. Hillsman; Samuel A.

Schwartz of The Schwartz Law Firm argued for

appellee Mark J. Escoto.

 

Before: KURTZ, DUNN and JURY, Bankruptcy Judges.

FILED

MAY 15 2015

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

* 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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INTRODUCTION

The plaintiff, Dr. Robert Hillsman, commenced a

non-dischargeability action against the defendant, Dr. Mark J.

Escoto, in Escoto’s chapter 71 bankruptcy case. Hillsman alleged

that Escoto fraudulently concealed a material fact and thereby

induced Hillsman to extend the term of an existing loan. Citing

Stevens v. Nw. Nat’l Ins. Co. (In re Siriani), 967 F.2d 302 (9th

Cir. 1992), the court found that, while Escoto committed the

alleged fraudulent act, Hillsman failed to demonstrate that his

damages were a proximate result of Escoto’s concealment.

On appeal, Hillsman contends that the bankruptcy court erred

in its proximate cause analysis. First, Hillsman submits that the

court applied an incorrect legal standard by requiring him to

show that collection remedies existed at the time he agreed to

extend the loan and that the value of those remedies dissipated

during the extension. Further, Hillsman challenges the bankruptcy

court’s finding that he failed to satisfy te proximate cause

standard articulated by the court.

The bankruptcy court did not consider whether all of the

elements for nondischargeability under § 523(a)(2)(A) existed at

the time Escoto’s debt to Hillsman first became due. At that

time, Escoto effectively may have obtained an extension of credit

by failing to disclose a material fact. Accordingly, we VACATE

and REMAND, so the bankruptcy court can make additional or

1 Unless specified otherwise, all chapter and section

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

all "Rule" references are to the Federal Rules of Bankruptcy

Procedure, Rules 1001-9037.

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amended findings as of that time. 

FACTS

In July of 2005, Escoto sued the contractor and certain

subcontractors that built his home. He alleged injury to his

property and family resulting from mold caused by negligent

construction. While his lawsuit was pending, Escoto asked

Hillsman, a friend and patient, for a loan to fund the

litigation. 

In March of 2008, Hillsman lent Escoto $200,000. The debt is

evidenced by a demand promissory note bearing interest at the

rate of seven percent (7%) per annum, and providing for interest

only payments during the term of the note. The note was due on

demand, on settlement of Escoto’s state court litigation, or on

March 11, 2011. Finally, the note referenced Escoto granting

security interests in his dental practice, office building, and

other personal property but Hillsman never took steps to perfect

the security interests.

In July of 2008, Escoto settled with all defendants in the

construction defect litigation except for the plumbing

subcontractor. This $350,000 settlement was approved by the state

court overseeing the litigation. In October of 2009, Escoto

settled with the remaining defendant for an additional $350,000.

The state court approved that settlement in November of 2009.

Despite numerous and extended interactions between the friends,

Escoto did not tell Hillsman about either settlement. According

to the pretrial order that was entered in this adversary

proceeding, Escoto’s debt to Hillsman was secured by the

settlement proceeds. 

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During the summer of 2009, Escoto divorced Shirley Ann

Escoto. Ms. Escoto testified that the state court set aside the

decree because Escoto made fraudulent representations during the

case. Ms. Escoto also testified that some time after the entry of

the divorce decree, Escoto withdrew $370,000 from their joint

bank account. Hillsman failed to produce additional information

regarding the source, disposition and whereabouts of these funds.

The Escotos are now divorced.

The promissory note evidencing Escoto’s debt to Hillsman had

a maturity date of March 11, 2011. Before that date, Escoto

failed to make several interest payments required by the note. In

March of 2011, Escoto requested an extension of the loan term.

Unaware of the two settlements, Hillsman agreed to the request,

and the parties executed an agreement extending the repayment

period for one year but otherwise leaving the terms of the demand

promissory note unchanged. Escoto’s delinquency under the terms

of the note continued. In August of 2012, the two friends met and

Escoto reaffirmed his commitment to repay the note but once again

did not disclose the settlements. 

On January 4, 2013, approximately five months after their

encounter, Escoto filed a chapter 7 petition. After receiving

notice of the petition, Hillsman contacted an attorney and

finally learned that Escoto had settled the construction defect

litigation four years earlier.

Eight days before he filed his bankruptcy petition, Escoto

submitted a financial statement in connection with his divorce

proceeding. The information contained in that statement

conflicted with the information Escoto subsequently provided in

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his bankruptcy statements and schedules. In his divorce

proceeding, he stated his monthly income was $6,583. On his

bankruptcy Schedule I and Form B22A, he stated his monthly income

was $19,623.57. At trial, Escoto conceded that he had provided

conflicting information in the two pending cases but explained

that he had used different professionals to prepare the

documents. 

During the discovery process, Hillsman’s counsel deposed

Escoto on three separate occasions. At these depositions, Escoto

testified inconsistently. For example, he initially disclosed

only one settlement. Only after Hillsman’s counsel obtained proof

of a second settlement did Escoto concede the existence of two

distinct $350,000 settlements. Escoto’s inconsistencies endured

at trial where, among other things, he testified for the first

time that he could identify a specific date on which he informed

Hillsman about the settlements. Additionally, his trial testimony

appeared to conflict with his deposition testimony about the

amount of his income in 2012.

At the conclusion of trial, the trial court found that

Hillsman did not learn of the settlements until after Escoto

filed his chapter 7 petition, that settlement of the litigation

was a maturity event requiring repayment of the debt, that Escoto

had a duty to disclose the two settlements to Hillsman, and that

Escoto’s failure to do so amounted to a fraudulent concealment on

which Hillsman justifiably relied when agreeing to extend the

maturity date of the loan. Citing Escoto’s extensive lack of

candor that spanned several years and multiple forums, the trial

court found that he was not a credible witness. The court further

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found that Hillsman had proved all elements necessary to

establish the debt as nondischargeable with the exception of

proximate cause. Specifically, the bankruptcy court ruled that

Hillsman failed to demonstrate that he possessed valuable

collection remedies on the date of the extension and that those

remedies lost value during the renewal period. 

In coming to this conclusion, the bankruptcy court examined

the value of the potential remedies available to Hillsman at the

time he agreed to the extension. Noting that there was no equity

in the pledged properties, even if Hillsman had perfected his

liens, the bankruptcy court discounted Hillsman’s remedies as a

secured creditor. As an unsecured creditor, Hillsman could pursue

informal collection remedies such as telephone calls and

correspondence but the bankruptcy court found little value in

these activities. The court then considered Hillsman’s ability to

obtain a judgment and found that he failed (1) to identify assets

available to satisfy a judgment that Escoto could not exempt

under state law; and (2) to demonstrate how the value of his

status as a judgment creditor declined over the extension period.

Finally, the bankruptcy court contemplated Hillsman’s equitable

remedies in the form of a constructive trust created to recognize

Hillsman’s interest in the settlement proceeds. The court found

such equitable remedies unavailable as the record indicated that

Escoto had disposed of the proceeds prior to the extension date.

The bankruptcy court entered judgment in favor of Escoto on

July 3, 2014. Hillsman timely filed his notice of appeal on

July 15, 2014.

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JURISDICTION

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

§§ 1334 and 157(b)(2)(I). This Panel has jurisdiction under

28 U.S.C. § 158.

ISSUES

1. Did the bankruptcy court err by requiring Hillsman to show

that valuable collection remedies existed at the time of the

loan extension and that those remedies lost value during the

extended repayment period?

2. If the bankruptcy court applied the correct legal standard,

did it err in finding that Hillsman failed to sufficiently

demonstrate that such remedies existed and that those

remedies lost value during the extension?

3. Did the bankruptcy court err by using the wrong time line in

its proximate cause analysis? Specifically, should the court

have considered an extension of credit to occur upon

settlement of the construction defect litigation rather than

confining its analysis to the later extension agreement?

STANDARDS OF REVIEW

In appeals of non-dischargeability rulings, we review the

bankruptcy court’s 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), aff’d, 407 Fed. Appx. 176

(9th Cir. 2010).

A bankruptcy court’s findings regarding proximate cause

under § 523(a)(2)(A) may be reversed only if clearly erroneous.

Britton v. Price (In re Britton), 950 F.2d 602, 604 (9th Cir.

1991). We do not consider a finding of fact clearly erroneous

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unless the finding is “illogical, implausible, or without support

in the record.” Retz v. Samson (In re Retz), 606 F.3d 1189, 1196

(9th Cir. 2010).

DISCUSSION

A. The bankruptcy court applied the correct legal standard for

determining proximate cause.

Section 523(a)(2)(A) operates to except a debt from

discharge when “an extension, a renewal, or a refinancing” of an

existing obligation is obtained by “false pretenses, a false

representation, or actual fraud, other than a statement

respecting the debtor’s or an insider’s financial condition.” In

order to prevent the discharge of a particular debt under

§ 523(a)(2)(A), a creditor must prove:

(1) misrepresentation, fraudulent omission2 or deceptive

conduct by the debtor;

(2) knowledge of the falsity or deceptiveness of his

statement or conduct;

2 When, as here, the fraud consists of a fraudulent omission

or concealment, the creditor must show that the omission was

material. See Apte v. Japra (In re Apte), 96 F.3d 1319, 1323-24

(9th Cir. 1996). If materiality is established, then the court

typically may presume that the creditor justifiably relied on the

omission. Tallant v. Kaufman (In re Tallant), 218 B.R. 58, 68

(9th Cir. BAP 1998)(citing In re Apte, 96 F.3d at 1323).

Materiality also frees the creditor from proving some aspects of

causation - that he or she would have acted differently but for

the fraudulent omission. In re Apte, 96 F.3d at 1323. But nothing

in In re Apte or In re Tallant suggests that proof of materiality

renders it unnecessary for the creditor to prove whether and to

what extent he or she incurred damages as a result of the fraud.

Nor are we persuaded that these decisions should be interpreted

in such a broad fashion as to entirely displace the causation and

damages elements ordinarily required for a judgment of

non-dischargeability.

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(3) an intent to deceive;

(4) justifiable reliance by the creditor on the debtor’s

statement or conduct;

(5) damage to the creditor proximately caused by its

reliance on the debtor’s statement or conduct. In re Weinberg,

410 B.R. at 35 (citing Turtle Rock Meadows Homeowners Ass’n v.

Slyman (In re Slyman), 234 F.3d 1080, 1085 (9th Cir. 2000)); see

also Eugene Parks Law Corp. Defined Benefit Pension Plan v. Kirsh

(In re Kirsh), 973 F.2d 1454, 1457 (9th Cir. 1992). The creditor

must prove each element by a preponderance of the evidence.

Grogan v. Garner, 498 U.S. 279, 284 (1991).

Focusing on the final element, the Ninth Circuit has

clarified the nature of proximate cause in a renewal context. To

prove causation on a § 523(a)(2)(A) claim based on an extension,

a renewal, or a refinance, a creditor must show “that it had

valuable collection remedies at the time it agreed to renew, and

that such remedies lost value during the renewal period.”

In re Siriani, 967 F.2d at 306. See also Cho Hung Bank v. Kim

(In re Kim), 163 B.R. 157, 161 (9th Cir. BAP 1994), aff’d,

62 F.3d 1511 (9th Cir. 1995).

The debtors in Siriani borrowed $1.2 million to purchase an

apartment building in connection with their involvement in a

limited partnership. As part of the loan agreement, the lender

required a financial guaranty bond. Northwestern Insurance

Company agreed to issue a bond so long as the debtors indemnified

it for any claims the lender made against the bond. Unable to

repay the loan within the original term, the debtors sought an

extension and a renewal of the bond with Northwestern. To obtain

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the renewal, the debtors submitted financial documents which

understated their personal obligations. The debtors defaulted on

the loan and failed to comply with the terms of the indemnity

agreement after the lender collected from Northwestern. A short

time later, another creditor filed an involuntary petition

against the debtors and Northwestern initiated a

non-dischargeability action.

The bankruptcy court ruled against Northwestern for a

failure to demonstrate that its loss arose from the fraudulently

obtained renewal. While the creditor had shown that “it possessed

valuable collection rights at the time it contemplated the

renewal, and that those rights became worthless during the

renewal period,” the bankruptcy court ruled that Northwestern had

failed to show proximate cause as it presented no evidence “that

it would have exercised those rights with sufficient alacrity to

avoid preference problems.” Id. The parties appealed and the

Bankruptcy Appellate Panel reversed.

Affirming the reversal, the Ninth Circuit agreed with the

bankruptcy court to the extent that proximate cause required

Northwestern to show “that it had valuable collection remedies at

the time of the renewal, and that such remedies lost value during

the renewal period.” Id. However, the court declined to impose a

“creditor’s diligence” requirement forcing a creditor to show

“that it would have exercised its collection remedies in a

sufficiently timely fashion to collect the debt.” Id. The court

reasoned that such a requirement would impose too great a burden

on defrauded creditors and would force bankruptcy courts “to

divine what might have happened.” Id.

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To comply with Siriani and demonstrate that the extension

proximately caused his loss, Hillsman needed to show: (1) that he

possessed valuable collection remedies at the time the loan term

was extended; and (2) a depreciation in the value of those

remedies during the extended repayment period. See In re Kim,

163 B.R. at 161. While Hillsman observes that § 523(a)(2)(A) does

not contain the specific standard articulated in Siriani, neither

the bankruptcy court nor this Panel may disregard Siriani.

Accordingly, we find that the bankruptcy court did not commit

reversible error by applying the proximate cause standard

specified in Siriani.

B. The bankruptcy court’s finding that Hillsman failed to

establish proximate cause with respect to the extension

agreement is not clearly erroneous.

At the outset, the Panel notes that, “[t]he bankruptcy

court’s finding of proximate cause is reviewed for clear error,

‘even though the finding may depend to some extent upon law.’”

In re Siriani, 967 F.2d at 304 (quoting Rubin v. West

(In re Rubin), 875 F.2d 755, 758 (9th Cir. 1989)).

Hillsman contends that if the bankruptcy court correctly

applied Siriani's proximate cause standard, it erred because

Hillsman presented evidence sufficient to overcome the burden

imposed by Siriani with respect to the period of time the

extension agreement was in effect. To support his position,

Hillsman points to assets and funds potentially in Escoto’s

possession at various points in time. These include $370,000

withdrawn from a bank account, approximately $160,000 of income

Escoto claimed in 2011, Escoto’s monthly earnings of $19,623.57

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in 2012, income from Escoto’s businesses, and a Land Rover that

Escoto eventually sold for $23,500. While Hillsman’s evidence

shows that Escoto received a substantial amount of money over an

extended period of time, this evidence alone does not satisfy

Siriani.

Identifying funds to which Escoto may have had access is

insufficient. Siriani requires a creditor to demonstrate the

existence of valuable collection remedies at a specific point in

time. By simply pointing to evidence of certain funds, Hillsman

did not necessarily place these funds in Escoto’s possession at

the time the extension agreement was entered into or during the

extension period. For instance, Ms. Escoto testified that Escoto

withdrew $370,000 from the couple’s joint bank account on an

unidentified date. Even if the Panel assumes her testimony is

true, Hillsman provided no evidence that Escoto possessed these

funds at any time relevant to the extension agreement.

A second defect with Hillsman’s argument is that placing

assets or funds in Escoto’s possession at the relevant time does

not end the proximate cause analysis. In addition to identifying

the existence of remedies, Siriani requires a creditor to show a

reduction in the value of such remedies during a specific period

of time. Assuming Escoto possessed funds or available assets at

the requisite point in time, Hillsman did not present any

evidence that these funds or assets were dissipated during the

extension period. As an example of this defect, Hillsman points

out that Escoto sold a Land Rover he may have possessed at the

time of the extension. However, the record shows that the sale of

the Land Rover occurred approximately one year after the

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expiration of the extension. Hillsman does not explain how this

translated into the loss of a valuable remedy during the

extension period.

The bankruptcy court recognized such deficiencies in the

record before it. After examining his status as a secured

creditor, an unsecured creditor, and a judgment creditor, the

bankruptcy court found that Hillsman had neither demonstrated the

existence of valuable collection remedies available when the

extension agreement was entered into or how such remedies lost

value during the extension period.

We cannot hold that the bankruptcy court committed

clear error simply because it declined to draw certain inferences

from an inconclusive record. Rather than speculating about the

nature and extent of assets and any associated collection

remedies available when the extension agreement was negotiated,

the bankruptcy court made a factual determination based on the

record before it: “Hillsman has failed to meet his burden of

proof under Section 523(a)(2)(A).” Our review of the record does

not reveal any factual findings on this issue that are

“illogical, implausible, or without support in the record.”

In re Retz, 606 F.3d at 1196. Consequently, we cannot conclude

that the bankruptcy court committed clear error regarding this

issue.

C. The bankruptcy court erred by limiting its proximate cause

analysis to the date of the extension agreement.

Hillsman’s final argument calls into question the timing of

Escoto’s fraudulent conduct as determined by the bankruptcy

court. According to Hillsman, Escoto’s failure to disclose the

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settlements fraudulently induced Hillsman to effectively forbear

from immediately demanding repayment of the loan and that this

forebearance amounted to an extension of credit. Because the

forbearance predates the extension agreement, Hillsman submits

that the bankruptcy court should have applied the proximate cause

analysis beginning on the date of settlement, rather than

focusing solely on the date Hillsman voluntarily agreed to extend

the loan. Hillsman posits that such an analysis would have

satisfied the Siriani requirements since Escoto’s fraudulent

omissions and depletion of the settlement proceeds allegedly

denied Hillsman the opportunity to collect from those monies. 

In examining Hillsman’s argument, it is important to keep in

mind what occurred at trial. In a joint pretrial memorandum,

Hillsman informed the bankruptcy court that he would proceed only

under his § 523(a)(2)(A) claim for Escoto’s fraudulent omission

in relation to the settlement. Hillsman did not pursue a claim

for Escoto’s conversion of the settlement proceeds nor did

Hillsman allege fraud in relation to the original loan

transaction. At trial, although he alleged fraud upon

consummation of the settlements, the main thrust of Hillsman’s

argument focused on Escoto’s concealment in relation to the

extension agreement. At the conclusion of trial, the bankruptcy

court rendered a memorandum decision finding that Escoto’s

concealment amounted to fraud and induced Hillsman to grant the

extension. Nevertheless, the court ruled against Hillsman for his

failure to demonstrate that he had lost valuable collection

remedies existing at the time he agreed to extend the repayment

term. Importantly, the memorandum decision does not address the

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contention that Escoto effectively obtained an extension of

credit earlier – at the time he first failed to disclose the

settlement(s).

In the parties’ joint pretrial memorandum, Hillsman cited

Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351

(1995), in support of the notion that Escoto’s fraudulent

nondisclosure amounted to an extension and, thus, rendered the

debt nondischargeable.

In Field v. Mans, the Fields sold real property to a

corporation wholly owned by Mans. A second mortgage containing a

due on sale clause secured a portion of the purchase price along

with Mans’ personal guarantee. Shortly after the transaction,

Mans caused his corporation to transfer the property to a newly

formed partnership. Within a few days of this second transfer,

Mans’ attorney wrote to the Fields requesting a waiver of the due

on sale clause in a manner suggesting that the second transfer

had not yet occurred. The Fields offered to waive the clause in

exchange for $10,000. Mans responded in a second letter refusing

the offer but again failing to disclose the transfer. The

discussion ceased, and Mans never disclosed the transfer. The

Fields finally learned of the transfer upon Mans’ filing of a

bankruptcy petition. They reacted by filing a complaint alleging

that Mans’ misdirection fraudulently induced them to forbear from

exercising their rights under the due on sale clause and that

their forbearance amounted to an extension of credit. The Fields

further asserted that, because of this, Mans’ personal obligation

was non-dischargeable under § 523(a)(2)(A).

The bankruptcy court found that, while the Fields may have

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relied on Mans’ misrepresentation in forbearing, their reliance

was not reasonable. Therefore, the court concluded that the debt

was dischargeable. The circuit court affirmed. See Field v. Mans,

36 F.3d 1089 (1st. Cir. 1994). Upon further appeal, the Supreme

Court granted certiorari and concluded that the applicable

standard to determine non-dischargeability under § 523(a)(2)(A)

is justifiable, rather than reasonable, reliance. Field v. Mans,

516 U.S. at 74-75. The Court remanded the matter to the

bankruptcy court for further proceedings.

On remand, Mans questioned whether the Fields’ forbearance

equated to an extension within the meaning of § 523(a)(2). See

Field v. Mans (In re Mans), 203 B.R. 355 (Bankr. D.N.H. 1996).

Upon a second appeal, the First Circuit held that a forbearance

from the exercise of a right to accelerate the maturity date of

an existing debt constitutes an extension of credit for the

statute’s purpose. Field v. Mans, 157 F.3d 35, 45-46 (1st Cir.

1998). While the court acknowledged that “the concealed sale was

not technically a new ‘agreement’ concerning the existing credit,

it triggered legal rights ... which markedly altered the credit

relationship between the parties.” Field v. Mans, 157 F.3d at 43.

Further, “by deceiving [the Fields] into continuing a credit

arrangement they now had the right to terminate, the fraud

related to what can properly be called ‘an extension of credit.’”

Id.

In arriving at its conclusion, the court examined the

policies behind discharge exceptions under § 523(a)(2) and stated

that such considerations “militate against a narrow and

hyper-technical parsing of the individual terms” contained in the

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statute. Field v. Mans, 157 F.3d at 44. Too narrow a reading, the

court reasoned, would result in situations where “one dishonest

debtor would receive a ‘new beginning’ while another, who engaged

in fraudulent conduct that was virtually identical, would not -

for reasons unrelated to the object of denying bankruptcy

protection to debtors whose debts were procured by fraud.” Id. In

essence, rigidly interpreting the term “extension” in a way that

renders dissimilar results in substantively similar situations

conflicts with the purpose of § 523(a)(2).

This Panel agrees with the First Circuit’s reasoning and

considers it appropriate to apply the First Circuit’s holding to 

the facts of this case. Escoto’s settlement of the construction

defect litigation triggered Hillsman’s right to immediate

repayment of Escoto’s debt. Escoto’s concealment deprived

Hillsman of the ability to exercise that right, and Escoto

thereby effectively procured a forbearance. The fact that Escoto

obtained the forbearance without Hillsman’s knowledge serves to

further illustrate the surreptitious nature of the fraud. Escoto

should not be permitted to benefit from an overly narrow

definition of the term “extension” that is disconnected from the

statute that informs its meaning. As the First Circuit stated in

Field v. Mans, “[i]t is no great leap to say that fraudulent

concealment and frustration of [Hillsman’s] acceleration right

was tantamount to an ‘extension’ ... of the existing credit.” Id.

Thus, the Panel concludes that Escoto’s concealment of the

settlement(s) resulted in an extension of credit for purposes of

§ 523(a)(2).

In light of our holding that Escoto effectively obtained an

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extension of credit when he failed to disclose the settlement and

thereby prevented Hillsman from immediately demanding repayment

in accordance with the terms of the note, on remand, the

bankruptcy court will need to focus on this earlier time period

and make additional or amended findings in order to determine

whether all of the § 523(a)(2)(A) elements were satisfied. We

express no opinion on what sort of findings the bankruptcy court

should make on remand.

CONCLUSION

For the reasons set forth above, we VACATE the bankruptcy

court’s judgment, and we REMAND for additional or amended

findings.

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