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FILED

JUL 11 2014

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. CC-13-1382-PaKuBl

) CC-13-1503-PaKuBl

STEVE BARLAAM, ) (Cross Appeals)

) CC-13-1500-PaKuBl

Debtor. ) (Related Appeal)

___________________________________)

) Bankr. No. 11-13387-GM 

STEVE BARLAAM, )

) Adv. Proc. 11-01402-GM

Appellant/Cross-Appellee,)

)

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

)

FINANCIAL SERVICES VEHICLE TRUST, )

BY AND THROUGH ITS SERVICER, BMW )

FINANCIAL SERVICES NA, LLC, )

)

Appellee/Cross-Appellant.)

___________________________________)

)

FINANCIAL SERVICES VEHICLE TRUST, )

BY AND THROUGH ITS SERVICER, BMW )

FINANCIAL SERVICES NA, LLC, )

)

Appellant, )

)

v. )

)

STEVE BARLAAM, )

)

Appellee, )

__________________________________ )

Argued and Submitted on June 26, 2014,

at Pasadena, California

Filed - July 11, 2014

Appeal from the United States Bankruptcy Court

for the Central District of California

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 8013-1.

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Honorable Geraldine Mund, Bankruptcy Judge, Presiding

 

Appearances: Deborah Young of Ayayo Law Offices argued for Steve

Barlaam; Rebecca A. Caley of Caley & Associates

argued for Financial Services Vehicle Trust.

 

Before: PAPPAS, KURTZ and BLUMENSTIEL,2 Bankruptcy Judges.

In BAP No. CC-11-1382, chapter 73 debtor Steve Barlaam

(“Barlaam”) appeals the judgment (“Judgment”) of the bankruptcy

court declaring that his debts to Financial Services Vehicle

Trust, by and through its servicer, BMW Financial Services NA, LLC

(“BMW FS”) are excepted from discharge under § 523(a)(2)(B). In

BAP No. CC-11-1503, BMW FS cross-appeals that portion of the

Judgment denying its request for an award of attorney’s fees and

costs. In BAP No. 11-1500, BMW FS appeals the order (“Order”) of

the bankruptcy court denying its Motion to Amend the Judgment to

Include Attorney’s Fees. 

We AFFIRM that part of the Judgment declaring that Barlaam’s

debts to BMW FS are excepted from discharge. However, we REVERSE

the bankruptcy court’s Judgment and Order denying BMW FS’ request

for attorney’s fees and costs.4

2 Hon. Hannah L. Blumenstiel, U.S. Bankruptcy Judge for the

Northern District of California, sitting by designation.

3 Unless otherwise indicated, 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.

4 While there are three appeals, under the circumstances, we

have elected to dispose of the issues and appeals in this single

Memorandum.

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FACTS

Background

Barlaam had a penchant for high-priced automobiles. Between

2004 and 2010, he leased or purchased nine luxury cars and, with

the exception of the two involved in this appeal, paid in full or

satisfied the lease payment terms for all of them. As was his

practice, Barlaam was assisted in his acquisition of the

automobiles involved here by his personal assistant, Dan Ruderman

(“Ruderman”). When Barlaam wanted a new vehicle, he instructed

Ruderman to research cars and dealerships and, if he found a

likely candidate, negotiate a deal for Barlaam. Again, with the

exception of the two cars in these appeals, Ruderman took any

required credit applications from the dealer to Barlaam, who

delivered the completed applications to the dealers.

The 2009 Rolls Royce Phantom Sapphire (the “Rolls Royce”)

One of the debts implicated in these appeals arises from 

Barlaam’s lease of a 2009 Rolls Royce Phantom Sapphire (the “Rolls

Royce”). Barlaam had previously leased three vehicles from Tim

O’Hara (“O’Hara”), general manager of O’Gara Coach Company

(“O’Gara”). Acting on Barlaam’s instructions, Ruderman requested

that O’Hara locate a special edition Rolls Royce for Barlaam. 

When O’Hara found such a car, Ruderman went to the O’Gara

dealership and obtained from O’Hara the “sticker” concerning the

Rolls Royce, and the basic figures for a possible lease. After

reviewing this information, Barlaam instructed Ruderman to return

to O’Gara and negotiate the terms for a lease of the Rolls Royce,

which included a trade-in of one of the Ferraris he was leasing. 

Ruderman returned to O’Gara on December 27, 2008, and negotiated a

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lease of the Rolls Royce.

That same day, a credit application for Barlaam was

electronically submitted by O’Gara to BMW FS and entered into the

BMW FS “APPRO” software system. One of the key disputes in this

appeal is who provided the information that was sent by O’Gara to

BMW FS via the APPRO system, and who filled out the information on

the written application that was given to O’Gara, which Barlaam

had signed. The information submitted to APPRO was, in some

respects, incorrect, including a variance on Barlaam’s social

security number. Even so, the APPRO system identified Barlaam as

a prior customer. Three days later, after two credit analysts at

BMW FS reviewed the credit application information, BMW FS

notified O’Gara that it had approved Barlaam’s application to

lease the Rolls Royce. 

Barlaam personally went to the O’Gara dealership and signed

the lease and other required documents, including the credit

application. It is disputed whether, and to what extent, Barlaam

examined the credit application before signing it. The bankruptcy

court would later determine that the credit application contained

material errors, including an incorrect statement of Barlaam’s

annual gross income, which the application showed to be $720,000. 

The Rolls Royce lease that Barlaam executed required him to

make an initial payment of $15,000, together with forty-eight

monthly payments of $6,193.26. After completing the paperwork,

Barlaam took possession of the Rolls Royce; O’Gara then assigned

the lease to BMW FS. After making seventeen timely monthly

payments, Barlaam defaulted in June 2010. At some point, Barlaam

surrendered the Rolls Royce, which was sold by BMW FS at a dealer

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auction for $246,000.

The BMW 750i

Barlaam reserved use of the Rolls Royce for “special”

occasions. In his view, he needed an “everyday” car, one with

good headrest support; Barlaam found that BMW cars were

comfortable. Barlaam had no prior contact with BMW dealers, and

assigned Ruderman to seek out a dealership, a car, and a deal.

Ruderman went to the Steve Thomas BMW dealership to discuss a

potential lease of a BMW 750i (the “750i”). Neither Ruderman nor

Barlaam had prior dealings with Steve Thomas BMW. The dealership

manager provided him with the lease numbers for the 750i. 

Ruderman phoned Barlaam, who agreed to the deal.

Steve Thomas BMW submitted an electronic credit application

for the proposed Barlaam lease to BMW FS on April 19, 2010. In

it, Barlaam’s gross annual income was listed as $520,000. After

analysis via the APPRO software by a credit analyst, BMW FS

approved the lease application the same day. 

Barlaam went to Steve Thomas BMW and signed all of the

required documents for the transaction, including the credit

application and lease. Again, it is disputed whether and to what

extent Barlaam examined the credit application before he signed

it. The lease Barlaam signed provided that Barlaam would pay

$2,861.36 at signing, and then make thirty-six monthly payments of

$1,618.00. After completing the paperwork, Barlaam took

possession of the 750i. Steve Thomas BMW assigned the lease to

BMW FS. 

After making eleven timely lease payments on the 750i,

Barlaam defaulted in March 2011. The 750i was later sold at

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dealer auction for $79,500.

The Bankruptcy and Adversary Proceeding

Barlaam filed a petition for relief under chapter 7 on

March 18, 2011. The bankruptcy court granted BMW FS’s unopposed

motion for relief from stay to repossess and sell the Rolls Royce

and 750i, which it did.

On June 3, 2011, BMW FS filed a complaint against Barlaam

seeking an exception to discharge under § 523(a)(2)(B) for the

remaining amounts due on Barlaam’s leases of the Rolls Royce and

750i after application of the sales proceeds. BMW FS alleged that

the two credit applications Barlaam signed and submitted to lease

the vehicles contained materially false representations as to his

financial condition; that he submitted them with the intent not to

pay his obligations; and that BMW FS reasonably relied on the

false credit applications in extending credit to Barlaam in the

leases. In addition to the discharge exception, BMW FS also

sought a money judgment against Barlaam equal to the unpaid amount

due on the leases, together with an award of attorney’s fees and

costs. 

Barlaam, appearing initially pro se in the adversary

proceeding, answered the complaint with a general denial. Barlaam

filed a motion to dismiss the complaint, arguing that BMW FS’s

reliance on the credit applications could not have been

reasonable, as required by § 523(a)(2)(B)(iii), because he did not

personally supply the allegedly false information contained in the

credit applications. The bankruptcy court treated this as a

motion for summary judgment and BMW FS submitted its own summary

judgment motion, arguing that there were no disputed issues of

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fact as to each of the elements for exception to discharge under

§ 523(a)(2)(B). 

The bankruptcy court conducted a hearing on the competing

summary judgment motions and then entered a Memorandum of Opinion

Regarding Plaintiff and Defendant Motions for Summary Judgment

(“SJ Memorandum”). The court concluded that, of the seven

required elements for an exception to discharge under

§ 523(a)(2)(B), BMW FS had established the materiality of the

representations in the credit applications, Barlaam’s knowledge of

their falsity, Barlaam’s intent to deceive BMW FS, and that BMW FS

had suffered damages proximately caused by Barlaam’s

misrepresentations. However, the bankruptcy court determined that

the undisputed facts did not support the other three required

elements for a BMW FS discharge exception, and that a trial would

be required to examine whether Barlaam actually made the

misrepresentations, whether BMW FS actually and reasonably relied

on the misrepresentations, and the amount of damages to BMW FS.

A two-day trial followed, at which the court heard testimony

from Barlaam, Ruderman, and Kenneth Cioli, a national credit

manager for BMW FS. The court entered a Memorandum of Opinion

Regarding Judgment for Plaintiff After Trial on July 31, 2013 (the

“Trial Memorandum”). The court found that Barlaam and Ruderman

were, generally, not credible, and that the testimony of Cioli was

credible. In addition to restating its conclusions about the

facts established in the SJ Memorandum, the court made several

additional critical fact findings and legal conclusions:

– “Barlaam was aware of the falsity of his income as filled

out on the credit applications he signed before delivery of the

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cars was made. The Court finds that he reviewed the credit

applications and knew of the inaccuracies and accepted these as

true statements through the act of signing them.” Trial

Memorandum at 17.

– “BMW FS did rely on the information provided on the credit

applications and only authorized the dealership to hand over the

keys to the car[s] once Barlaam had signed the required

documents.” Trial Memorandum at 19.

– “This Court has already found that the process by which

BMW FS makes its credit decisions is reasonable and that to rely

on Defendant’s statements without further independent inquiry is

also reasonable.” Trial Memorandum at 19.

– “The damages incurred by Plaintiff through both leases

total $118,470.85.” Trial Memorandum at 23.

– “The attorney’s fees clause [in the leases]. . . is simply

not broad enough to cover fraud in the inducement. . . . 

Plaintiff’s request for attorney’s fees is denied.” Trial

Memorandum at 25.

Based upon these findings and conclusions, the bankruptcy

court entered the Judgment, awarding $118,924.22 in damages to

BMW FS, and determining that the award was excepted from discharge

under § 523(a)(2)(B). The Judgment denied BMW FS’ request for an

award of attorney’s fees and costs.

Barlaam filed a timely appeal of the Judgment on August 9,

2013. 

BMW FS filed a motion under Rule 9023, which incorporates

Civil Rule 59(e), to amend the Judgment on August 13, 2013,

arguing that, under the terms of both leases, it was entitled to

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recover its attorney’s fees and costs. Barlaam opposed the

motion, asserting that the plain language of the leases did not

allow for an award of attorney’s fees in what was essentially an

action for fraud. In a Memorandum of Opinion Denying Plaintiff’s

Motion to Amend (the “Reconsideration Memorandum”), the court

reaffirmed its conclusion in the Trial Memorandum that the

attorney’s fee provision in the leases referred only to

“collection” of amounts due under contract, not tort claims, and

again denied BMW FS’s request for attorney’s fees. An order

denying the BMW FS motion was entered on October 1, 2013 (the

“Reconsideration Order”).

BMW filed a timely appeal of the Reconsideration Order and a

timely cross-appeal of the portion of the Judgment denying its

request for attorney’s fees.

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. 

ISSUES

Whether the bankruptcy court erred in determining that

Barlaam’s debts to BMW FS were excepted from discharge under

§ 523(a)(2)(B).

Whether the bankruptcy court abused its discretion in denying

BMW FS’s request for attorney’s fees.

STANDARDS OF REVIEW

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). 

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We review the bankruptcy court’s decision to award or deny

attorney’s fees for abuse of discretion, but any elements of

statutory interpretation which figure in the bankruptcy court’s

decision are reviewable de novo. Evon v. Law Offices of Sidney

Mickell, 688 F.3d 1015, 1032 (9th Cir. 2012). Under the abuse of

discretion standard, we "affirm unless the [bankruptcy] court

applied the wrong legal standard or its findings were illogical,

implausible or without support in the record." Gonzalez v. City

of Maywood, 729 F.3d 1196, 1201-02 (9th Cir. 2013). 

The bankruptcy court’s interpretation of contract terms is

reviewed de novo. United States v. 300 Units of Rentable Hous.,

668 F.3d 1119, 1122 (9th Cir. 2012).

DISCUSSION

I.

The bankruptcy court did not err in deciding that Barlaam’s debts

to BMW FS were excepted from discharge under § 523(a)(2)(B).

A debt resulting from a creditor’s reasonable reliance on a

debtor’s written false representation concerning his or her

financial condition may be excepted from discharge under

§ 523(a)(2)(B), which 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 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[.]

The Ninth Circuit has enumerated the necessary elements for a

§ 523(a)(2)(B) discharge exception, requiring that there be a

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writing that contains: "(1) a representation of fact by the

debtor, (2) that was material, (3) that the debtor knew at the

time to be false, (4) that the debtor made with the intention of

deceiving the creditor, (5) upon which the creditor relied,

(6) that the creditor's reliance was reasonable, [and] (7) that

damage proximately resulted from the representation." Candland v.

Ins. Co. of N. Am. (In re Candland), 90 F.3d 1466, 1469 (9th Cir.

1996) (quoting Siriani v. Nw. Nat’l Ins. Co. (In re Siriani),

967 F.2d 302, 304 (9th Cir. 1992)). The creditor seeking an

exception must prove these elements by a preponderance of the

evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S. Ct. 654,

112 L. Ed. 2d 755 (1991).

The bankruptcy court addressed and made appropriate findings

on each of these seven criteria in the SJ Memorandum and Trial

Memorandum. As discussed below, we find no error in the court’s

decision that Barlaam’s debt to BMW FS is excepted from discharge

under § 523(a)(2)(B).

A. There must be a statement in writing by the Debtor

containing a false representation of fact.

At the heart of this appeal are two credit applications

executed by Barlaam, one in 2008 in seeking lease financing for

the Rolls Royce, the other in 2010 to support the lease financing

for the 750i. The credit applications each contain information

about Barlaam’s allegedly then-current annual income. A credit

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). Cashco Fin.

Servs. v. McGee (In re Cashco), 359 B.R. 764, 768 (9th Cir. BAP

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2006); Bayer Emples. Credit Union v. Sapp (In re Sapp), 364 B.R.

618, 627 (Bankr. N.D. W.Va. 2007) (holding that it is axiomatic

that a signed credit application is a writing considered under

§ 523(a)(2)(B)(ii)).

Barlaam testified that he signed the credit application for

the Rolls Royce at the O’Gara dealership on December 30, 2008. He

acknowledged in that testimony that the line on the application

directly above his signature states, in part, “This information in

the application is true and correct to the best of my knowledge.” 

Trial Tr. 81:24-25. Barlaam also testified that he signed the

credit application for the 750i at Steve Thomas BMW on April 23,

2010. The two credit applications are identical in form, and the

750i application likewise contained the same assurance by Barlaam

that the information in the application was true and correct.

On the Rolls Royce application, submitted in 2008, Barlaam’s

gross annual income was listed at $720,000. On the 750i

application, submitted in 2010, Barlaam’s gross annual income was

listed at $520,000. However, the evidence presented to the

bankruptcy court in connection with the summary judgment motions 

and at trial showed that Barlaam’s income at those times was much,

much lower. For example, Barlaam’s federal income tax return for

2008 was submitted to the bankruptcy court in connection with the

summary judgment motions, and it reported Barlaam had adjusted

gross income of just $8,852 for that year. Barlaam had testified

at his § 341(a) meeting of creditors in the bankruptcy case under

penalty of perjury that he earned about $100,000 in 2008. And

Barlaam testified at trial, confirming the amounts reported on his

2008 tax return and in his comments at the § 341(a) meeting. 

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The disparity between income reported on the 750i credit

application, $520,000, and the documents submitted by BMW FS in

the summary judgment proceedings was also striking. Barlaam’s

income on his 2010 federal return was a negative ($54,312). 

Barlaam’s Statement of Financial Affairs filed in his bankruptcy

case stated his income for 2010 was only $13,800.

At best, then, based upon this evidence, there was a serious

question of fact as to the amount of Barlaam’s income in 2008 and

2010. And based on the evidence in the record, the bankruptcy

court was justified in finding that the income information in the

credit applications was false. In other words, the two credit

applications were writings about Barlaam’s financial condition

within the meaning of § 523(a)(2)(B) and they contained false

information. Barlaam does not dispute this. 

What has been heatedly contested, however, was the source of

the income information contained in the credit applications. Both

Barlaam and Ruderman testified that neither of them provided the

information used in the credit applications and, instead, that for

both the Rolls Royce and 750i credit applications, it was the

dealers that provided the information sent to BMW FS.

The only testimony heard by the bankruptcy court concerning

the source of the information on the credit applications came from

Barlaam and Ruderman; there was no testimony or declarations from

the dealers. Indeed, Ruderman speculated in his testimony that

the Rolls Royce dealer, in the midst of the 2008 recession with

few sales, was so desperate to make a sale that O’Hara might have

made up information submitted in the credit application to BMW FS. 

But the bankruptcy court discounted this speculation, concluding

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instead that the Rolls Royce dealer “had every reason to believe

Barlaam would qualify.” The record amply supports this finding. 

Indeed, Barlaam had paid over $300,000 for the 2005 Rolls Royce

purchased through O’Gara and, as far as the dealer knew, Barlaam

had an unblemished credit history. 

In addition, Ruderman’s credibility was cast into doubt

concerning his comments that the Steve Thomas BMW manager who sold

Barlaam the 750i told him that he would submit the credit

information electronically from information already existing in

the system. The bankruptcy court, however, had testimony from Ken

Cioli, national credit manager for BMW FS, attesting that a local

BMW dealer would not have access to BMW FS’s financial databases

and, because there was no prior business relationship between

Barlaam and Steve Thomas BMW, there would be no information in

their computer files about him. Moreover, Cioli pointed out, in

the unlikely event that Steve Thomas BMW somehow got access to the

BMW FS databases, it would have found that Barlaam had reported

his income in 2008 to be $720,000, and the dealer would not likely

have plucked the $520,000 income out of thin air.

The bankruptcy court also found that Barlaam lacked

credibility concerning numerous issues and, in particular, in

connection with his repeated assertions that he never read the

information on the credit applications before he signed them. 

Indeed, Barlaam’s position is inconsistent with his other

testimony:

BMW FS COUNSEL: When you came in on both occasions for

the [Rolls Royce} Phantom and for the [750i] BMW, you

didn’t read any of the documents? You just signed them?

. . .

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BARLAAM: Ask again the question, because you’re

confusing me.

BMW FS COUNSEL: You just signed and didn’t read any of

the documents. You just signed them.

BARLAAM: No, I glanced over to see what I was signing. 

I didn’t review every single word.

Trial Tr. 91:13-18, July 8, 2013. Based upon this testimony, the

bankruptcy court explained:

While Barlaam repetitively asserts that he did not even

turn over the credit application, he also stated that he

scanned the documents before signing them. Each credit

application is only a single page, no small print, and

includes just a few numbers. Because he scanned it, he

could not possibly have missed the errors.

Trial Memorandum at 14.

We discuss below the evidence concerning Barlaam’s intent to

deceive. But for purposes of this element of the § 523(a)(2)(B)

exception, we conclude that the bankruptcy court did not clearly

err in determining that Barlaam made written [mis]representations

of fact concerning his financial condition. In re Candland,

90 F.3d at 1466 (instructing that whether there was a

misrepresentation is a question of fact for the bankruptcy court

reviewed on appeal for clear error.). 

B. The misrepresentation must be material.

To constitute a material misrepresentation under

§ 523(a)(2)(B), the debtor’s statement must be substantially

inaccurate, and of the type that would affect the creditor's

decision making process: 

To except a debt from discharge, the creditor must show

not only that the statements are inaccurate, but also

that they contain important and substantial

untruths. . . . Material misrepresentations for this

statutory section are substantial inaccuracies of the

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type which would generally affect a lender’s or

guarantor’s decision. . . . 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 re Candland, 90 F.3d at 1470 (citing First Interstate Bank of

Nev. (In re Greene), 96 B.R. 279, 283 (9th Cir. BAP 1989));

Tallant v. Kaufman (In re Tallant), 218 B.R. 58, 71 (9th Cir. BAP

1998) ("'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."). 

In the bankruptcy court’s SJ Memorandum, it found the

misrepresentation of Barlaam’s income on the two credit

applications to be material:

The misrepresentations of $100,000s of Defendant’s

income are precisely the type of misrepresentations

cited by Candland that would affect a lender’s decision

to lend. They were material both (1) in the sense that

income is one of the most (if not the most) important

facts in the application and (ii) the amount of the

income misstatement.

SJ Memorandum at 11.

The bankruptcy court’s finding on materiality is supported by

evidence in the record of the summary judgment proceedings. The

team leaders of the two credit analyst groups at BMW FS that

approved the Barlaam applications submitted declarations that

included the following comments:

Had [BMW FS] known that [Barlaam's] income was either

zero or $13,800, [BMW FS] would never have approved the

application on behalf of [Barlaam] as there would have

been no income stream to support the lease, much less

support all his other credit obligations and living

expenses.

Declaration of Donald Skeen [Team Leader of the BMW FS credit

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analyst team that approved the Rolls Royce lease] at 6, July 3,

2012.

Had [BMW FS] known that [Barlaam’s] income was either

zero or $100,000, [BMW FS] would never have approved the

application on behalf of [Barlaam] as there would have

been no income stream to support the lease, much less

support all his other credit obligations and living

expenses.

Declaration of Jason Bozarth [Team Leader of the analyst team that

approved the 705i lease] at 7, July 3, 2012.

The bankruptcy court’s finding on materiality was further

supported at trial by the testimony of Cioli: 

BMW FS COUNSEL: And had Mr. Barlaam’s annual income

actually been $13,800 for the month, would that have

been something you would approve the deal on? $13,800 a

year? . . .

[CIOLI]: No. That dollar amount per year wouldn’t

support — it wouldn’t support one of the Rolls Royce

payments.

Trial Tr. 160:3-14, July 9, 2013. 

Here, the bankruptcy court did not clearly err in finding

that the misrepresentations concerning Barlaam’s income on the two

credit applications were material. In re Nelson, 561 F.2d 1342,

1347 (9th Cir. 1977) (materiality is a question of fact reviewed

for clear error). 

C. The debtor knew the misrepresentation at the time to be

false and that the debtor made it with the intention of

deceiving the creditor.

Knowledge of the falsity of Barlaam’s representations of

income on his credit applications can be inferred from the

bankruptcy court’s analysis of the other discharge exception

factors discussed above. Because Barlaam admitted that he

“glanced over” the documents before signing them, in the words of

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the court, the bankruptcy court was entitled to find that he was

aware of the errors in the applications concerning his income. 

Indeed, both credit applications overstated his income by over a

half million dollars a year. The court concluded in its

SJ Memorandum that Barlaam had to have known that the income

statement was untrue. SJ Memorandum at 12. We find no error in

this finding.

But even if Barlaam had been completely truthful in insisting

that he signed the applications without reading them “word for

word,” considering the significance of these transactions, this

practice would still amount to the sort of gross recklessness from

which the bankruptcy court could impute Barlaam’s knowledge of

both the falsity of the statements and his intent to deceive

BMW FS. As another trial court, cited in this case by the

bankruptcy court, commented:

[A d]ebtor cannot simply sign a document that purports

to describe his own financial condition without reading

or questioning anyone as to its contents and then be

held blameless if the statement contains materially

false information. A creditor need not establish that

the debtor had actual knowledge of the falsity of the

representation in order to prevail under section

523(a)(2). He may satisfy this element of the required

showing by proving that the false statement “was either

knowingly made or made with sufficient recklessness as

to be fraudulent.”

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

C.D. Cal. 2002) (quoting Alside Supply Ctr. v. Aste (In re Aste),

129 B.R. 1012, 1017 (Bankr. D. Utah 1991)).5

Besides serving to impute the knowledge of falsity, a finding

5 The Oh and Alside Supply Cr. cases are the progeny of

Cent. Nat’l Bank & Trust Co. v. Liming (In re Liming), 797 F.2d

895, 897 (10th Cir. 1986) (“a statement need only be made with

reckless disregard for the truth . . . . under § 523(a)(2)(B)”).

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that a debtor acted with gross recklessness satisfies the element

of intentional deception in § 523(a)(2)(B)(iv). Knoxville

Teachers Credit Union v. Parkey, 790 F.2d 490, 492 (6th Cir.

1986); Se. Neb. Coop. Corp. v. Schnuelle (In re Schnuelle),

441 B.R. 616, 624 (8th Cir. BAP 2011) (“An intent to deceive can

also be established by a debtor's reckless indifference and

reckless disregard of accuracy of information on a financial

statement.”); Gertsch v. Johnson & Johnson Fin. Corp.

(In re Gertsch), 237 B.R. 160, 167-68 (9th Cir. BAP 1999) (courts

look to the totality of the circumstances, including a reckless

disregard for the truth, to determine whether debtors intended to

deceive). See also Texas American Bank, Tyler, N.A. v. Barron

(In re Barron), 126 B.R. 255, 260 (Bankr. E.D. Tex. 1991) (Proof

of intent to deceive does not require the demonstration that the

debtor acted with a malignant heart but only that the debtor's

actions demonstrate reckless indifference to the actual facts.). 

Since few debtors admit to a deceitful intent, all facts,

including circumstantial evidence, may be relied upon in making

the determination as to intent. Devers v. Bank of Sheridan

(In re Devers), 759 F.2d 751, 754 (9th Cir. 1985).

The bankruptcy court found that Barlaam’s intent to

misrepresent his income so as to deceive BMW FS can be inferred

from the totality of the circumstances, especially the gross

recklessness he displayed in signing the credit applications

allegedly without reviewing them. The bankruptcy court’s finding

on this point was not clearly erroneous. Runnion v. Pedrazzini

(In re Pedrazzini), 644 F.2d 756, 758 (9th Cir. 1981) (Knowledge

of the falsity or deceptiveness of a statement and intent to

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deceive are questions of fact.).

D. The creditor must reasonably rely on the

misrepresentation. 

There is ample evidence in the record to sustain the

bankruptcy court’s finding that BMW FS reasonably relied on

Barlaam’s representations about his income in approving the credit

applications. Barlaam disputes this finding, arguing that BMW FS

did not rely on his income statements but, instead, on a host of

other factors, such as Barlaam’s then-impeccable credit record. 

In support of Barlaam’s argument, he provided various training

documents used by BMW FS credit analysts, none of which discuss

“income” as a factor in making credit decisions.

The bankruptcy court acknowledged that, based on the

evidence, income was not the only criterion used by BMW FS in

approving a credit application. Trial Memorandum at 17. 

However, Cioli testified at trial that it was the first criterion. 

According to him, after the credit application information is

transmitted from the dealer to BMW FS’s APPRO computer system, the

APPRO program presents the “Big Picture” as the first screen seen

by the credit analyst. The Big Picture takes the income reported

and makes several calculations, including total debt to income,

and payment to income. If those calculations are not within the

acceptable parameters or “rules” for the particular amount of the

credit, it is unlikely that the loan will be approved. In

particular, Cioli explained that Barlaam’s debt to income, and

payment to income, calculations for lease transactions of this

size were excellent when the annual income figure used was

$720,000 or $520,000 per year, but that the deals would not be

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approved if the income reported on his bankruptcy schedules were

instead considered by BMW FS. In contrast, all of the evidence

submitted by Barlaam dealt with procedures that would take place

in analyzing his credit applications only after the Big Picture

had measured his income and made its calculations. 

A related argument posed by Barlaam was that the credit

applications were actually approved before he signed them, and

thus BMW FS did not actually “rely” on the written applications. 

However, the bankruptcy court disposed of this argument, again

based on Cioli’s testimony, because it found that the loan

approvals were all “contingent” upon receipt of the written

signature of the borrower on the credit applications. Cioli

testified that “[w]e have to have an original signature so that we

legally know that the customer signed and agreed to the

information on the application.” Trial Tr. 195:22-25. He also

indicated, without contradiction, that dealers are under

instructions not to release cars to lessees without a signed

credit application.

On this record, the bankruptcy court did not clearly err in

determining that BMW FS actually relied on the false

representations concerning Barlaam’s income in the credit

applications. But was it reasonable for BMW FS to do so?

Reasonable reliance under § 523(a)(2)(B) 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. Cashco Fin. Servs., Inc.

v. McGee (In re McGee), 359 B.R. 764, 774 (9th Cir. BAP 2006);

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In re Cacciatori, 465 B.R. at 555 (bankruptcy 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 is under no duty to

investigate in order for its reliance to be reasonable. 

In re Gertsch, 237 B.R. at 170 ("[A]lthough a creditor is not

entitled to rely upon an obviously false representation of the

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

representation with incredulity requiring verification."). 

Furthermore, a creditor's reliance may be reasonable if it adhered

to its normal business practices. Id. at 172.

In the bankruptcy court, Barlaam challenged whether it was

reasonable for BMW FS to accept his credit applications given the

numerous errors in them (e.g., an incorrect social security number

and phone number, and his claim to own a home “free and clear”

while the application also listed a mortgage payment). However,

Barlaam has not continued these challenges on appeal and only

challenges the actual reliance, as discussed above. Barlaam’s

arguments about the reasonableness of BMW FS’ reliance on the

credit applications are therefore waived. Cervantes v.

Countrywide Home Loans, Inc., 656 F.3d 1034, 1035 (9th Cir. 2011)

(arguments not raised in opening brief are waived). 

But even if these arguments were not waived, a creditor’s

reliance may be reasonable if it has a well-organized set of

business practices that it adheres to. In re Gertsch, 237 B.R. at

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170. In this appeal, there is no dispute that BMW FS’s handling

of the two credit applications was consistent with its normal

business practices. 

In sum, on this record, the bankruptcy court did not clearly

err in determining that BMW FS actually and reasonably relied on

the misrepresentations of Barlaam about his income in the credit

applications. In re Nelson, 561 F.2d at 1347 (determination of

reliance and reasonable reliance are questions of fact reviewed

for clear error). 

E. The creditor suffered damages proximately resulting from

the misrepresentation.

On appeal, Barlaam has not challenged the bankruptcy court’s

computation and determination that BMW FS was damaged in the

amount of $118,470.85 as a result of the misrepresentations of

Barlaam. 

F. The lease debts were excepted from discharge.

Based upon our review of the record, we conclude that the

bankruptcy court did not clearly err in the various fact findings

it made to support its decision that Barlaam’s debts to BMW FS

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

evidence is in some respects disputed, adequate proof was offered

by BMW FS to show that Barlaam submitted false information to

BMW FS about his annual income in the credit applications to

induce BMW FS to give him credit in connection with the Rolls

Royce and 750i leases. The bankruptcy court’s Judgment so holding

is AFFIRMED.

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II.

The bankruptcy court abused its discretion in 

declining to award attorney’s fees to BMW FS.6

BMW FS argues that the bankruptcy court should have awarded

it the attorney’s fees and costs it incurred in successfully

prosecuting the § 523(a)(2)(B) action against Barlaam. We agree.

There is no independent right to recover attorney's fees in

an adversary proceeding in a bankruptcy case. Heritage Ford v.

Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir. 1997). The

prevailing party may be awarded attorney's fees, however, if

attorney's fees would have been awarded under substantive state

law. Id. (citing In re Johnson, 756 F.2d 738, 741 (9th Cir.

1985)). Here, the applicable “substantive, nonbankruptcy law” is

California state law. S. Cal. Permanente Med. Grp. v. Ehrenberg

(In re Moses), 215 B.R. 27, 32 (9th Cir. BAP 1997). 

California law enforces parties’ agreements concerning

6 The bankruptcy court’s decision to deny BMW FS’s request

for an award of attorney’s fees and costs is the focus of both

BAP. No. CC-13-1503, BMW FS’s cross-appeal of the bankruptcy

court’s Judgment, and BAP No. CC-13-1500, BMW FS’ appeal of the

court’s order denying its motion to amend the Judgment. A

cross-appeal is proper when a party seeks to enlarge its

substantive rights or decrease its monetary liabilities. Lee v.

Burlington N. Santa Fe Ry. Co., 245 F.3d 1102, 1107 (9th Cir.

2001). The cross-appeal is a rule of practice, and the appellate

court has broad authority to make such dispositions as justice

requires. Mahach-Wilson v. Depee, 593 F.3d 1054, 1063 (9th Cir.

2010). On the other hand, an appeal of reconsideration of an

order under Civil Rule 59(e) is a disfavored practice, requiring

that the appellant show: (1) newly discovered evidence; (2) clear

error or manifest injustice; or (3) intervening change in

controlling law. Duarte v. Bardales, 526 F.3d 563, 567 (9th Cir.

2008). Below, we reverse the decision of the bankruptcy court in

BAP No. CC-13-1503, the cross-appeal. As a result, we need not

reach the questions raised in BAP No. CC-13-1500, because the

relief BMW FS requests in that appeal is the same as that granted

on the cross-appeal, and BMW FS is otherwise not prejudiced.

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recovery of attorney's fees. Cal. Code Civ. Proc. § 1021

provides: 

Except as attorney's fees are specifically provided for

by statute, the measure and mode of compensation of

attorneys and counselors at law is left to the

agreement, express or implied, of the parties[.]

Section 1021 permits recovery of attorney's fees by agreement

between the parties in actions sounding in tort as well as

contract. Redwood Theaters, Inc. v. Davison (In re Davison),

289 B.R. 716, 724 (9th Cir. BAP 2003) (“CCP § 1021 does not limit

the recovery of attorney's fees to [contract] claims . . . .

[A]ttorney's fees may be recoverable under CCP § 1021 even though

they are not recoverable under CC § 1717[7] . . . . California

law permits recovery of attorney's fees by agreement, for tort as

well as contract actions.”).8

The decision by a bankruptcy court determining the

dischargability of a debt under § 523(a)(2)(B) resolves a tort

claim. In re Candland, 90 F.3d at 1470. Moreover, whether a

false statement injured a party requires the resolution of a tort

claim under California law. Intel. Corp. v. Hamidi, 30 Cal. 4th

7 Cal. Civ. Code § 1717 is limited to actions on a contract,

and is not implicated in this appeal.

8 Other provisions of California law relevant to the dispute

in this appeal are: (1) Cal. Code. Civ. Proc. § 1332(b), which

provides that “except as otherwise expressly provided by statute,

a prevailing party is entitled as a matter of right to recover

costs in any action or proceeding”; and (2) Cal. Civ. Code

§ 1033.5(a)(10), which provides that attorney fees are “allowable

as costs” when they are authorized by either contract, statute or

law.” These statutes evidence the intent of the California

legislature to provide an entitlement to attorney’s fees when the

conditions of the statutes are met. Santisas v. Gordon, 17 Cal.

4th 599, 619 (1998).

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1342, 1347 (2003). 

Under California case law, if the parties’ contract provides

for the recovery of attorney’s fees and costs, we are instructed

to examine the language of the agreement to determine whether an

award of attorney’s fees is warranted. In re Tobacco Cases I,

193 Cal. App. 4th 1591, 1601 (2011). Here, the lease agreements

signed by Barlaam for the Rolls Royce and the 750i both provide

that:

I [Barlaam] will be in default under this Lease if . . . 

* * * 

(g) Any information in my credit application or a guarantor’s

credit application is false or misleading.

Lease Agreements at ¶ 26(g). Within the same paragraph 26, the

Lease Agreements explain the consequences of a default by the

lessee, which includes:

If I am in default, you may do any or all of the

following: 

(e) require that I pay . . . . all fees and costs of

collections, including attorneys’ fees, court costs,

interest, and other related expenses for all losses you incur

in connection with my “default” of this Lease.” 

Id. at ¶ 26(e).

In reviewing paragraph 26 of the Lease Agreement, we note two

salient points: (1) paragraph 26 contains the only provision

providing for recovery of attorney’s fees and costs by BMW FS, and

it is the only provision listing the default conditions;

(2) paragraph 26 explicitly labels providing false or misleading

information on the credit application, a pre-contract formation

act of fraud in the inducement, a default. Thus, Barlaam’s

misconduct in providing false credit applications at the inception

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of the lease transactions was an event of default, which in turn

authorized BMW FS to recover “all fees and costs of collections,

including attorneys’ fees [and] court costs . . . BMW FS incur[s]

in connection with [Barlaam’s] default.” ¶ 26(e).

The bankruptcy court denied BMW FS’s request for an award of

attorney’s fees and costs, because:

The Court is not persuaded that paragraph 26 taken as a

whole provides for attorney’s fees in a state court

action for fraud in the inducement, or for any action in

contract. It does not have the broad sweep of the

attorney’s fees provisions that have been held to cover

fees in tort actions. Instead, the provision seems

limited to actions in contract. Attorney’s fees are

included within the general category of cost of

“collections,” which, under reasonable interpretation,

refers to collections of amounts due under the contract.

Memorandum of Opinion Denying Plaintiff’s Motion to Amend the

July 31, 2013 Judgment for Plaintiff’s After Trial to Include

Attorney’s Fees. The bankruptcy court based its analysis of the

attorney’s fee question on its reading of a recent unpublished BAP

decision, Sharma v. Salcido (In re Sharma), 2013 Bankr. LEXIS 2286

(9th Cir. BAP May 14, 2013). We determine, however, that Sharma

must be distinguished on its facts from the current appeal.

The Sharma case involved an award of attorney’s fees for

fraud in the inducement of a settlement agreement. The fee

provision provided:

[I]t is agreed by the parties that all attorneys' fees

and costs incurred as a result of or in connection to

the LAWSUIT, mediation, and settlement shall be borne by

the parties who incurred such attorneys' fees and costs.

Should suit be brought to enforce or interpret any part

of this Agreement, the "prevailing party" shall be

entitled to recover as an element of costs of suit and

not as damages, reasonable attorneys' fees fixed by the

Court. The "prevailing party" shall be the party

entitled to recover his/her/its costs of suit,

regardless of whether such suit proceeds to final

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judgment.

In re Sharma, 2013 Bankr. LEXIS at * 51. On its face, this

provision distinguishes between the ordinary costs of suit, to

which the Sharma bankruptcy court applied the American Rule

requiring parties to bear their own attorney fees, and any further

action “to enforce or interpret” the agreement, for which the

prevailing party would be entitled to attorney’s fees. The Sharma

panel determined that the first clause set the baseline and

general rule for application of attorney’s fees, and that fees

would only be recoverable in the restricted case of an action to

enforce or interpret the settlement agreement. Id. at *54. 

There was no reference to fraud in the inducement in the

Sharma agreement. Since there was no provision in the Sharma

agreement relating to fraud in the inducement, the contractual

provision for interpretation and enforcement of the agreement

would not apply to “events that occurred before contract

formation.” Id. The Sharma panel concluded that 

The attorney's fee provision in the Settlement Agreement

is limited to actions to "enforce or interpret any part

of this agreement." The plain language of the provision

is not broad enough to encompass a claim for fraud in

the inducement. See [Exxess Electronixx v. Heger Realty

Corp., 68 Cal. App. 4th 376, 380 (1998)]; Xuereb v.

Marcus & Milichap, 3 Cal. App. 4th 1338, 1342 (1992)]. 

Under California law, a tort claim does not "enforce" a

contract or operate to declare a party's rights under a

contract. Exxess Electronixx, 75 Cal. App. 4th at 1342.

Id. 

However, unlike the Sharma case, the Lease Agreements in the

current appeal include a specific “fraud in the inducement”

clause. As quoted above, paragraph 26 clearly provides that a

fraud in the inducement of the agreement (i.e., the lessee’s

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provision of false or misleading information) was a defined event

of default, and the occurrence of a default entitled the

prevailing party to recover attorney’s fees. Thus, the “plain

language” of that provision in the Lease Agreements is not only

“broad enough,” but in fact explicitly commands, that BMW FS be

able to recover its attorney’s fees. In our view, the bankruptcy

court’s reliance on Sharma was therefore misplaced.

The bankruptcy court then applied a restrictive

interpretation to what constitutes a “collection” action under the

Lease Agreements. Instead, we view “collections,” as used in the

leases, as referring to the phrase “expenses for all losses you

incur in connection with my ‘default’ of this Lease." In other

words, if there is a default based on the lessee’s provision of

false and misleading information in the credit application, the

attorney’s fees provision would apply.

This conclusion is consistent with California state court

case law interpreting attorney’s fee provisions. "If a

contractual attorney fee provision is phrased broadly enough . . .

it may support an award of attorney fees to the prevailing party

in an action alleging both contract and tort claims." Santisas v.

Goodwin, 17 Cal. 4th at 608. In Santisas, the California Supreme

Court addressed an attorney’s fees provision that provided: "In

the event legal action is instituted by the Broker(s), or any

party to this agreement, or arising out of the execution of this

agreement or the sale, or to collect commissions, the prevailing

party shall be entitled to receive from the other party a

reasonable attorney fee to be determined by the court in which

such action is brought." 17 Cal. 4th at 603. Based upon the

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plain language of the attorney’s fee provision, the California

Supreme Court stated this "provision embraces all claims, both

tort and breach of contract . . . because all are claims ‘arising

out of the execution of the agreement or the sale.'" Id. at 608

(emphasis added). 

Similarly, in Miske v. Bisno, the California Court of Appeals

examined an attorney’s fees provision found in a limited

partnership agreement as it applied to a fraud in the inducement

claim. 204 Cal. App. 4th 1249 (2012). The attorney’s fees

provision there provided: "If any dispute arises between the

Partners, whether or not resulting in litigation, the prevailing

party shall be entitled to recover from the other party all

reasonable costs, including, without limitation, reasonable

attorneys' fees." Id. at 1259. The court found that "the above

attorney fee provision is broad enough to cover the type of fraud

in the inducement claims brought against appellants." Id.

(emphasis added); see also Lerner v. Ward, 13 Cal. App. 4th 155,

159 (1993) (finding attorney’s fees appropriate in a tort action

based upon a clause in the contract which provided “in any action

or proceeding arising out of this agreement”); but see Redwood

Theaters, Inc. v. Davison (In re Davison), 289 B.R. 716, 724 (9th

Cir. BAP 2003) (applying California law and denying attorney’s

fees on a tort cause of action based upon a contract provision

that limited recovery of such fees to those “necessary to enforce

or to interpret the terms” of the contract); Exxess Electronixx v.

Heger Realty Corp., 64 Cal. App. 4th 698, 707-08 (1998) (denying

attorney’s fees on a tort cause of action under an attorney’s fees

provision that fees were recoverable that are “incurred to enforce

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the contract”). 

In this case, we conclude that the plain language of the

provisions of the Lease Agreements is broad enough to encompass a

claim by BMW FS against Barlaam for fraud in the inducement. In

fact, the contracts expressly contemplate such a tort claim as an

event of default, which in turn entitles BMW FS to recover its

fees and costs of collections for all losses it incurred in

connection with the default. Because it erred in its construction

of the Lease Agreements, we conclude that the bankruptcy court

abused its discretion in limiting recovery of attorney’s fees only

to those incurred in "collections" of amounts due under the

contract. Further, the bankruptcy court abused its discretion by

subjecting the terms of the parties’ contracts defining the scope

of actions in which attorney’s fees and costs could be recovered

to an overly narrow interpretation. We therefore REVERSE that

portion of the bankruptcy court’s Judgment denying attorney’s fees

and costs, and REMAND this action to the bankruptcy court for

further proceedings consistent with this decision.

CONCLUSION

We AFFIRM the Judgment of the bankruptcy court determining

that Barlaam’s debt to BMW FS is excepted from discharge under

§ 523(a)(2)(B). We REVERSE that part of the Judgment, and the

Order, denying an award of attorney’s fees and costs to BMW FS and

REMAND this action to the bankruptcy court for further proceedings

consistent with this decision.

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