In re: Birger Greg Bacino

FILED DEC 31 2015 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT [2] 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. SC-14-1150-KiKuJu ) 6 BIRGER GREG BACINO, ) Bk. No. 09-20080-LT ) 7 Debtor. ) Adv. No. 10-90315-LT ) 8 ) ) 9 BIRGER GREG BACINO, ) ) 10 Appellant, ) ) 11 v. ) M E M O R A N D U M1 ) 12 FEDERAL DEPOSIT INSURANCE ) CORPORATION, as Receiver for ) 13 La Jolla Bank FSB, ) ) 14 Appellee. ) ______________________________) [15] Argued and Submitted on January 22, 2015, 16 at Pasadena, California 17 Filed - December 31, 2015 18 Appeal from the United States Bankruptcy Court for the Southern District of California [19] Honorable Laura S. Taylor, Chief Bankruptcy Judge, Presiding [20] 21 Appearances: John L. Smaha, Esq. of Smaha Law Group argued for appellant Birger Greg Bacino; Duncan N. Stevens, 22 Esq. argued for appellee Federal Deposit Insurance Corporation. [23] 24 Before: KIRSCHER, KURTZ and JURY, Bankruptcy Judges. [1] This disposition is not appropriate for publication. 27 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 28 Cir. BAP Rule 8024-1. 1 Debtor Birger G. Bacino2 appeals a judgment after trial 2 determining that his debt to the Federal Deposit Insurance Company 3 as Receiver for La Jolla Bank FSB (“the Bank”), was excepted from 4 discharge under § 523(a)(2)(A)3 and (a)(2)(B). Debtor also 5 appeals a prior ruling granting in part the FDIC's motion for 6 summary judgment and denying his cross-motion for summary 7 judgment. We AFFIRM. 8 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY 9 A. Background of Debtor's entities 10 Debtor successfully practiced law as a personal injury 11 attorney, holding licenses to practice law in Texas (surrendered 12 in 2006), California (surrendered in 2006) and the District of 13 Columbia (suspended in 2010). Debtor also operated two real 14 estate development entities: ALB Properties, Inc. of which he was 15 100% owner, and Barioni Lakes Estates, LLC, in which he held a 90% 16 interest. These entities acquired residential lots in different 17 stages of development including properties known as the Roxbury 18 and the Imperial projects. 19 In 2002, Debtor also acquired an interest in a healthcare 20 management conglomerate of several companies collectively called 21 Premier. Prior to 2004, Premier was the largest provider of 22 workers' compensation related healthcare services in the state of [23] 24 2 On September 28, 2015, Appellant’s attorney notified the BAP that appellant died on August 7, 2015. Although the 25 notification suggests that no state probate or other death proceeding will occur, the Panel issues this memorandum on the 26 merits of the appeal, without considering issues of mootness. 27 3 Unless specified otherwise, all chapter, code and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532 , and 28 the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. -2- 1 California. Premier did not provide medical services directly, 2 but facilitated patient care, billing, collection and 3 therapeutical, translation and clinic support for doctors. Debtor 4 also held a 100% interest in a company called Tammy, Inc. Tammy 5 provided medical management services to Premier and provided legal 6 management services to Debtor's law practice. 7 From 2003 through 2010, Premier and Debtor defended criminal 8 and civil litigation by several governmental entities. In late 9 2004, sweeping changes were proposed in California’s workers' 10 compensation law. Premier decided to cease obtaining new lien 11 claims secured by workers’ compensation reimbursements and to 12 focus on collecting its existing lien claims, which totaled 13 approximately $400 million, and to defend against litigation 14 related to those claims. In 2010, Debtor finally resolved the 15 criminal claims against Premier by negotiating a plea agreement, 16 wherein he waived all rights to the collection of Premier's 17 receivables. 18 During the relevant time period, Debtor's ownership in 19 Premier, Tammy and his law practice comprised his personal income 20 and net worth. The management fees he anticipated Tammy would 21 generate from collecting on Premier's receivables represented a 22 significant portion of his represented 2004-2008 net worth, which 23 he believed to be in excess of $300 million. 24 B. The loans with the Bank 25 In 2004, an independent loan broker introduced Debtor to 26 David Yoder, a loan officer and director of loan origination with 27 the Bank. Yoder recommended to the Bank's loan committee that 28 Debtor, who Yoder considered a highly desirable borrower, be given -3- 1 three loans to fund the Roxbury project, which Yoder considered a 2 favorable long-term investment. Yoder admitted the Bank actively 3 recruited Debtor and his projects as a long-term customer for the 4 Bank. 5 Between 2004-2008 Debtor, either individually or as the 6 principal of ALB or Barioni, obtained eight loans from the Bank to 7 fund the development projects and also entered into ten 8 modifications and/or maturity date extensions of the existing 9 loans. The loans and modifications totaled approximately $39 10 million; Debtor served either as a borrower or guarantor. The 11 subject eighteen loans and modifications are as follows: 12 • Loan 21130 ("Loan 1") - 2004 13 • Loan 21197 ("Loan 2") - 2004 14 • Loan 20001 ("Loan 3") - 2004 15 • Modification of Loan 2 (21197) ("Loan 4") - 2005 16 • Modification of Loan 3 (21001) ("Loan 5") - 2005 17 • Loan 22090 ("Loan 6") - 2006 18 • Loan 00033 (also known as 22225) ("Loan 7") - 2006 19 • Loan 22354 ("Loan 8") - 2006 20 • First modification of Loan 6 (22090) ("Loan 9") - 2006 21 • First modification of Loan 1 (21130) ("Loan 10") - 2006 22 • Loan 00066 ("Loan 11") - 2006 23 • First modification of Loan 11 (00066) ("Loan 12") - 2007 24 • Modification of Loan 7 (00033) ("Loan 13") - 2007 25 • Loan 23203 ("Loan 14") - 2007 26 • Modification of Loan 8 (22354) ("Loan 15") - 2008 27 • Second modification of Loan 6 (00033) ("Loan 16") - 2008 28 • Second modification of Loan 11 (00066) ("Loan 17") - 2008 -4- 1 • Second modification of Loan 1 (21130) ("Loan 18") - 2008. 2 Ultimately, once the real estate market began its rapid 3 decline in 2008-2009, Debtor defaulted on some of the loans. 4 After 2009, the FDIC became the receiver of the Bank. 5 C. FDIC's nondischargeability action 6 Debtor filed a chapter 7 bankruptcy case on December 31, 7 2009. The FDIC filed its nondischargeability complaint on July 2, 8 2012, seeking relief under § 523(a)(2)(A) and (a)(2)(B). The FDIC 9 contended that Debtor had materially misrepresented his assets, 10 income, net worth and liabilities in loan applications, personal 11 financial statements ("PFS") and other documents submitted by him 12 or on his behalf from his CPA, Warren Thefeld, on which the Bank 13 relied for each of the loans and/or modifications. Alternatively, 14 the FDIC contended that Debtor intentionally misled the Bank by 15 failing to disclose his true financial numbers and did so with the 16 intent to deceive and induce the Bank to make loans or extend 17 credit to Debtor on existing loans. 18 1. The cross-motions for summary judgment 19 The parties later filed cross-motions for summary judgment. 20 The FDIC sought summary judgment or partial adjudication on its 21 § 523(a)(2)(B) claim ("MSJ"); Debtor sought summary judgment on 22 both of the FDIC's claims, contending that it could not establish 23 either reasonable or justifiable reliance ("Cross MSJ"). 24 a. The FDIC's motion 25 In the FDIC's initial brief in support of its MSJ, and to a 26 greater extent in its supplemental brief (“FDIC’s Supplemental [28] -5- 1 Brief”),4 the FDIC alleged material misrepresentations and/or 2 omissions by Debtor in connection with each of the loans and 3 modifications; it set forth the evidence it believed supported 4 nondischargeability of each particular loan or modification and 5 stated whether such evidence was disputed or undisputed by Debtor. 6 i. General allegations 7 As to all of the loans and modifications, the FDIC alleged: 8 (1) Debtor had continually misrepresented the value of Tammy 9 at $25 million. 10 (2) In 2004, upon Thefeld's advice, Debtor set up a tax 11 shelter via an Employee Stock Ownership Plan ("ESOP"), which 12 allowed him to defer until retirement taxes on $25 million worth 13 of income from Premier, ALB and his law practice. For the ESOP, 14 an accrual of $25 million was recorded on Tammy's books and 2004 15 tax return. In essence, Debtor could collect the accrued 16 $25 million in management fees from Tammy and not pay income tax 17 because it had already been "paid" (deferred until retirement) in 18 2004. Approximately $12 million of the $25 million accrual was 19 attributed to Debtor's income from Premier and his law practice; 20 the other $13 million was attributed to Debtor's income from ALB. 21 (3) The $25 million accrual had no reasonable basis in 22 accounting and created the fiction of overstated assets of both 23 Tammy and ALB. By the end of 2008, only approximately 24 $7.5 million of the $12 million related to Premier was collected. 25 Thus, according to the FDIC, the accrual was overstated by 40%. [26] 27 4 This supplemental brief contains a chart of material facts and supporting facts and evidence and admissions as to whether a 28 material fact was disputed or undisputed by Bacino. -6- 1 At no time from 2004-2008 did Debtor ever disclose to the Bank 2 that the Premier collections making up the value of Tammy were 3 overvalued and that its value trended downward significantly from 4 2004-2008. 5 (4) The FDIC argued that Debtor had also inflated Tammy's 6 value by not disclosing the Premier investigation and Workers 7 Compensation Appellate Board (“WCAB”) stay. 8 (5) The Bank had relied on Debtor's continued representation 9 that Premier maintained accounts receivable totaling $300 million 10 of which Tammy would realize an estimated $12 million in fees, 11 when Debtor was aware as early as 2003 or 2004 that Premier's 12 anticipated receivables were in jeopardy as being uncollectible 13 due to its illegal activity and he never disclosed any of this 14 information in writing to the Bank. 15 (6) Debtor had not disclosed that he knew as early as 2005 16 that a waiver of the Premier receivables could be a condition of a 17 plea agreement. 18 (7) Debtor failed to inform the Bank in writing about the 19 WCAB stay and the negative effect it had on Tammy's ability to 20 collect the $300 million in Premier receivables. 21 (8) For each loan or modification, only Debtor knew about 22 the investigation and the WCAB Stay, which were not readily 23 discoverable by the Bank. 24 (9) Debtor understated his liabilities for each loan or 25 modification by omitting ALB's $13 million loan from Tammy, costs 26 of construction and, in some instances, the debt on his yacht. No 27 loan application or PFS reflected the $13 million liability of 28 ALB, which was never paid back. Tammy's valuation of $25 million -7- 1 on the loan applications was based in part on ALB's loan 2 receivable in favor of Tammy. Debtor applying the indebtedness of 3 ALB to Tammy increased the value of Tammy's assets. However, by 4 not balancing the asset with the corresponding liability, Debtor 5 improperly inflated his net worth by $13 million. 6 (10) Debtor repeatedly omitted the costs of construction, 7 which were listed on Debtor's tax returns for the years 2005 and 8 2006. 9 (11) Debtor consistently listed his yacht as having a value 10 between $2.5 and $3.5 million, often without taking into account 11 the $2.1 million owed against it. At deposition, Debtor could not 12 explain why the yacht debt was not disclosed in some of the loan 13 applications and PFSs. 14 (12) The Bank conformed with its standard practices in 15 evaluating Debtor's credit worthiness by performing an 16 underwriting analysis, credit check and property appraisal and by 17 requesting tax returns, balance sheets, profit & loss statements, 18 bank statements and information from Thefeld, Debtor's CPA, to 19 explain the complex financial structure of Debtor's entities. 20 ii. Evidence supporting each loan or modification 21 In addition to the general paraphrased allegations noted 22 above, the FDIC provided evidence to support nondischargeability 23 of the eighteen transactions individually, which consisted of the 24 following: 25 Loans funded in 2004 - Loan 1, Loan 2, Loan 3. The Bank 26 funded these three loans on November 3, 2004, in the amounts of 27 $4,184,500, $1,850,000 and $1,850,000 respectively. Because the 28 Bank funded these loans together, the FDIC's evidence in support -8- 1 of its claim was essentially the same. Debtor admitted 2 inaccuracies existed in the loan applications submitted to the 3 Bank, and his expert, Walter Schiller, opined that the financial 4 information Debtor provided to the Bank contained "glaring errors 5 from the very first loan." 6 In the applications submitted for these loans, dated 7 October 31, 2004, Debtor represented his monthly income as $57,512 8 or approximately $690,000 per year. The FDIC contended this 9 statement was a misrepresentation because Debtor's 2004 income tax 10 return showed an annual income of only $270,000. 11 Debtor also represented that his net worth was $49,908,015, 12 reflecting total assets of $56,440,038 minus total liabilities of 13 $6,532,023. The $49 million net worth figure included $32 million 14 in "Net worth of business(es) owned." Before these loans were 15 funded, the Bank requested verification "to support [Debtor's] 16 stated $32.0 million business net worth figure, which is in 17 addition to his 100% real estate interests shown on his real 18 estate schedule." In response, Thefeld provided the Bank with a 19 Tammy Statement of Income for 2003 in which management fees were 20 identified as $30,027,345.64. Thefeld also provided the Bank with 21 a 2003 Tammy Balance Sheet identifying total assets of 22 $30,027,299.80, which included an accounts receivable of 23 $29,696,239.02. To substantiate Tammy's value for 2004, Thefeld 24 provided the Bank with a Tammy Profit & Loss Statement from 25 January through August 2004 identifying income of $7,483,215.62 in 26 management fees. At deposition, Thefeld testified that Tammy was 27 worth $29 million in 2004, which included the accrued $25 million 28 receivable based on anticipated income from ALB and the management -9- 1 fees from collecting the Premier receivables. 2 In addition, Debtor prepared for the Bank a memorandum, 3 entitled "Tammy, Inc. receivables through Premier Medical" (the 4 "Tammy Memorandum"), wherein he represented that "[t]he 5 $305 million in accounts receivable may be collected at 50%, which 6 would mean that my share would be 35% of $150 million. . . . This 7 year, Tammy can expect to collect $150 million times 20% 8 (collection rate) times 35%, which is my share or 10 million. 9 This amount is a bit more then [sic] past years, as my share was 10 around 8 million." 11 Based on the expert opinion of Robert Wallace, the FDIC 12 contended Debtor's identified net worth constituted a 13 misrepresentation as it was based on the overstated value of 14 Tammy, resulting from the accrual of unrealized management fees. 15 Of the $25 million accrued for 2004, which made up the majority of 16 Debtor's stated business net worth of $32 million, only 17 $7.5 million was actually collected between 2004 and 2008. The 18 FDIC further contended Debtor was engaging in "double accounting" 19 of the same asset wherein the same money was represented as 20 (1) monthly base income from Tammy and his law practice and (2) a 21 Tammy asset of $25 million. 22 The FDIC contended that Debtor had also misrepresented his 23 liabilities by identifying one of the Roxbury lots with a value of 24 $8 million and a debt of $552,000. Debtor admitted this was an 25 error; the debt was actually $5.5 million. 26 The FDIC also contended that the Bank's reliance on Debtor's 27 representations of income, assets and net worth was evidenced in 28 the Underwriting Analysis for each of the three loans, which -10- 1 stated: "Mr. Bacino is a self-employed attorney and real estate 2 investor, with an est. $49.9 million net worth and earnings in 3 excess of $706,000 per year." The Bank's reliance on Debtor's net 4 worth was also demonstrated by the Bank's Credit Memorandums 5 generated for Loan 2 and Loan 3, which stated: "Net worth — 6 $38,521,892 . . . Strengths: Strong Guarantor Net Worth." 7 Loans funded in 2005 — Loans 4 & 5. Loan 4 was a 8 modification of Loan 2, wherein Debtor received an additional 9 $1,440,000; Loan 5 was a modification of Loan 3, wherein Debtor 10 received an additional $390,000. These loans were funded on 11 August 12, 2005. In addition to Debtor's submitted loan 12 applications, Thefeld had also submitted to the Bank a letter 13 dated August 11, 2005 (the "August 2005 Letter"), which discussed 14 Debtor's and Tammy's income. It stated: "My firm is the 15 accountant for Greg Bacino. . . . His adjusted gross income on 16 his 1040 for 2004 will be approximately $3,300,000. In addition, 17 approximately $25,000,000 of additional income was earned and will 18 be reported as income by his ESOP pension plan." 19 In the applications for these loans dated June 15, 2005, 20 Debtor represented his monthly income was $600,000, or $7.2 21 million per year. The FDIC contended this was a misrepresentation 22 because Debtor testified that he did not recall making $600,000 23 per month in 2006 and Thefeld, who did Debtor's taxes, 24 corroborated that Debtor did not personally earn that much money. 25 Thefeld estimated that Debtor's income could have been no greater 26 than $300,000 per month. Further, contended the FDIC, Debtor had 27 improperly "double counted" the Tammy asset because any income 28 from Tammy and his law practice had already been identified as -11- 1 part of the $25 million accrual and could not be considered 2 "income" in the subsequent years when actually collected. 3 As for his alleged net worth misrepresentations, in the 4 application for Loan 4, Debtor represented total assets of 5 $65,895,349, including $32 million in "Net worth of business(es) 6 owned" and $32,300,000 in "Real estate owned." In the application 7 for Loan 5, dated the same date, Debtor represented total assets 8 of $71,175,318, including $32 million in "Net worth of 9 business(es) owned" and $35 million in real estate. Besides the 10 $5.2 million discrepancy in the asset figure between the two 11 applications, Wallace opined that Debtor had also misrepresented 12 his net worth due to his overstated value of Tammy and his double 13 accounting of that asset. The FDIC contended that Debtor had also 14 misrepresented his liabilities. Neither loan application 15 identified any debts, which Debtor could not explain. 16 The FDIC argued the Bank relied on Debtor's representations 17 of income, assets and net worth as demonstrated by the 18 Underwriting Analysis for each loan, which stated: "He has a net 19 worth in excess of $2.9 million which consists of approximately 20 $35 million in real estate owned, $32 million in net worth of 21 business and $1.25 million in personal property." The Bank's 22 reliance on Debtor's stated net worth figure of $71 million, which 23 reflects the lack of any debts, was also demonstrated by the 24 Credit Memorandum generated for each loan, which stated: "Bacino 25 Net Worth $71,175,318 & Liquidity $2,925,318. Recommend file for 26 approval." Based on the expert opinion of Thomas Tarter, the FDIC 27 contended it was reasonable and customary for the Bank to rely on 28 Thefeld's August 2005 Letter in extending additional credit to -12- 1 Debtor because of Thefeld's status as a CPA. 2 Loans funded in 2006 — Loan 6. The Bank funded Loan 6 for 3 $8,075,000 on February 15, 2006. In connection with this loan, 4 Thefeld authored a letter dated February 6, 2006 (the "February 6, 5 2006 Letter") to Jim Fardeen of Merrill Lynch, which was 6 ultimately submitted to the Bank. It stated: "The following is a 7 brief summary of the income tax structure of Greg's Entities 8 . . . . [Premier's] [a]ccounts receivable are in excess of 9 $300,000,000 and are considered collectible by Greg. . . . The 10 cash net income in 2004 was over $5,000,000. Greg has estimated 11 that his future Premier collections from January 2006 forward will 12 total $12,000,000-15,000,000. . . . The estimated income for the 13 law firm for 2005 is $900,000." 14 In the application submitted for Loan 6 dated February 8, 15 2006, Debtor represented his monthly income was $600,000. The 16 FDIC contended this was a misrepresentation because Debtor's 2006 17 personal income tax return reflected that his salary and wages 18 were $0. 19 Debtor represented his net worth of $64,835,604, reflecting 20 total assets of $86,435,773 minus liabilities of $21,600,169. 21 Debtor represented his assets included $32 million in "Net worth 22 of business(es) owned" and $33,750,000 in real estate. As with 23 prior loans, Wallace opined that Debtor had misrepresented his net 24 worth due to his overstated value of Tammy and his double 25 accounting of that asset. Debtor had also failed to list various 26 debts of ALB and Barioni. 27 The FDIC contended that the Bank's reliance on Debtor's 28 representations of income, assets and net worth was evidenced in -13- 1 the Underwriting Analysis: "Mr. Bacino has a stated net worth of 2 $64,835,604. This is comprised mainly of equity originating from 3 his business (approx. $32 million) and his real estate investments 4 (approx. $22 million). . . . Strengths: Guarantor's net worth." 5 Tarter opined that it was reasonable and customary for the Bank to 6 rely on Thefeld's February 6, 2006 Letter in extending credit to 7 Debtor for Loan 6. The FDIC argued that it was also reasonable 8 for the Bank to rely on the updated financials for Tammy: the 9 2005 Tammy Balance Sheet showed accounts receivable of 10 $25,840,521; and the Tammy 2005 Profit & Loss Statement listed 11 management fees of $2,075,263. 12 Loan 7. The Bank funded Loan 7 on March 10, 2006, for 13 $3 million. On February 22, 2006, Debtor authored a letter for 14 the Bank discussing his and Tammy's income (the "February 22, 2006 15 Letter"). Debtor represented that "Tammy, Inc. has accrued and 16 paid tax on $25 million in income. Even though Tammy is entitled 17 to accrue $25 million, the pension amount will be regulated by 18 existing pension laws. In excess of $12 million has already been 19 run through Tammy's qualified ESOP and been invested into ALB 20 Properties." 21 In Debtor's PFS dated November 15, 2005, Debtor represented 22 total income of $7.4 million, which consisted of $900,000 from his 23 law practice, $4 million from ALB and $2.5 million from Tammy. 24 The FDIC contended these figures misrepresented Debtor's income. 25 Schiller opined that Debtor's stated total income, which was the 26 same amount he represented in every PFS, was not substantiated by 27 any document. Thefeld, who did Debtor's tax returns, suspected 28 Debtor was not making $900,000 annually and admitted that Debtor's -14- 1 income from Tammy and his law practice was substantially reduced 2 from 2005-2008, but was never reflected in any PFS. The FDIC also 3 disputed Debtor's asserted $2.5 million income for Tammy; Tammy's 4 2006 tax return showed an income of only $652,000. The FDIC 5 contended this reported $2.5 million income was also an improper 6 "double counting," when the Tammy asset was already part of the 7 $25 million accrual. Finally, the FDIC disputed Debtor's asserted 8 $4 million income for ALB; ALB made no money in 2006. 9 In the loan application Debtor submitted for Loan 7 dated 10 March 9, 2006, Debtor represented a $600,000 monthly income. This 11 statement, however, argued the FDIC, contradicted Debtor's 2006 12 income tax return, which showed his income as $0. 13 In the November 15, 2005 PFS, Debtor represented total assets 14 of $124,691,730, including $84,050,000 in owned real estate, 15 $5.5 million in his law practice, $25 million in Tammy and 16 $2.5 million in his yacht. In the March 9, 2006 loan application, 17 Debtor represented total assets of $96,778,117, including 18 $1,020,509 in "Net worth of business(es) owned," $33,750,000 in 19 real estate and $11 million in vested interest in his retirement 20 fund (the ESOP). The FDIC contended that Debtor had engaged in 21 "triple accounting" of the Tammy asset wherein the same money was 22 represented as (1) $600,000 monthly based income, (2) an 23 $11 million vested retirement plan, and (3) Tammy equity of 24 $32-33 million. Debtor admitted at deposition that this appeared 25 to be true. 26 The FDIC argued the Bank's reliance on Debtor's 27 representations of income, assets and net worth was demonstrated 28 by the Underwriting Analysis: "Overall credit summary: Total -15- 1 Assets: $96,778,117; Total Liabilities: $22,760,452; Net Worth: 2 $74,017,665. . . . Mr. Bacino's net worth is $74,017,665. This 3 is comprised mainly of equity originating from his various 4 business ventures (approx. $47.5 million). . . . Mr. Bacino's 5 financial statements also reflect $11 million in retirement 6 reserves[.] . . . The borrower high debt ratios are partially 7 offset by the borrower's sizable expected income from accounts 8 receivable held in his qualified ESOP's. The receivables are 9 estimated to be around $16.6 million over the next few years." 10 The FDIC contended the Bank's reliance on Debtor's net worth was 11 also demonstrated by the Credit Memorandum generated for Loan 7: 12 "Mr. Bacino has a stated Net Worth of $74,077,162. . . . 13 Strengths: The borrower has strong Net Worth, Repeat Borrower, 14 Guarantor has consistent Strong Net Income. . . . Based on the 15 financial strength of the borrower and guarantor, approval is 16 recommended." 17 Additionally, the FDIC argued that in funding Loan 7 it was 18 reasonable for the Bank to rely on (1) the Tammy Memorandum, (2) a 19 recent February 2006 Tammy Balance Sheet, which listed accounts 20 receivable as $25,840,521 and contained the same double accounting 21 error, (3) an updated 2005 Tammy Profit & Loss Statement, which 22 stated management fees of $2,705,263, but failed to disclose this 23 "income" was an asset and technically not income because it was 24 already taxed in 2004, (4) the February 6, 2006 Letter wherein 25 Thefeld represented accounts receivable were in excess of 26 $300 million and considered collectible by Debtor and that future 27 Premier collections would total $12-15 million, and (5) Debtor's 28 February 22, 2006 Letter. -16- 1 Loan 8. The Bank funded Loan 8 on June 29, 2006, in the 2 amount of $2,015,000. For reasons unexplained, two loan 3 applications both dated June 21, 2006, were submitted for this 4 loan. In the first loan application, Debtor represented his 5 personal monthly income was $600,000. As noted with prior loan 6 applications, the FDIC contended this was a misrepresentation as 7 Debtor never made $600,000 per month between the years 2004 and 8 2008 and his 2006 tax return showed his salary and wages as $0. 9 Further, any income claimed to be derived from Tammy was an 10 improper double accounting. 11 The FDIC contended that Debtor had also misrepresented his 12 net worth. In the first loan application Debtor represented total 13 assets of $71,848,587, including $32 million in "Net worth of 14 business(es) owned," $5.5 million in real estate and $31,730,000 15 in "other assets," which included the Imperial property valued at 16 $26,280,000. In the second loan application, Debtor represented 17 total assets of $116,855,820, which reflects a difference of over 18 $45 million from the first application. During Debtor’s 19 deposition taken on October 13, 2010, and as confirmed in the 20 FDIC’s Supplemental Brief, Doc. No. 362, Fact 379, Debtor doubted 21 the figures presented in the second loan application were 22 accurate. 23 Debtor represented his total liabilities in the first 24 application as $5,071,917 and in the second as $12,946,674. 25 Regardless of the figure, the FDIC contended he understated his 26 liabilities based on the general allegations as to all of the 27 transactions noted above. Debtor had also failed to disclose 28 various debts of ALB and Barioni. -17- 1 The FDIC contended that the Bank's reliance on Debtor's 2 representations of income, assets and net worth was evidenced in 3 the Credit Memorandum, which stated: "Net Worth: His stated net 4 worth is in excess of $66.77 million. This consists of $32.0 5 million in net worth of business owned . . . . "Mitigating 6 factors supporting approval of the loan, include guarantor's net 7 worth in excess of $66.77 million and guarantors' real estate 8 investing experience." As with Loan 7, the FDIC argued that in 9 funding Loan 8 it was reasonable for the Bank to rely on 10 misrepresentations made in the Tammy Memorandum, the February 2006 11 Tammy Balance Sheet, the 2005 Tammy Profit & Loss Statement, 12 Thefeld's February 6, 2006 Letter and Debtor's February 22, 2006 13 Letter. 14 Loan 9. Loan 9 was the first modification of Loan 6, wherein 15 Debtor received an additional $2,513,400. It was funded on or 16 around August 1, 2006. It appears from the record provided in 17 support of the FDIC's MSJ that Debtor did not submit a loan 18 application or a PFS for this loan. Nonetheless, the FDIC claimed 19 that based on statements made by the Bank in the related Credit 20 Memorandum, the Bank relied on Debtor's misrepresentations of 21 income, assets and net worth. In that Memorandum, the Bank stated 22 Debtor's net worth was "in excess of $36.1 million." "Strengths: 23 Net Worth is in excess of $36.1 million," and "Weakness: 24 Mr. Bacino's 2003 Federal Income Tax Returns reflect income loss - 25 Offset with Net-Worth in excess of $36 million." The documents 26 the FDIC claimed supported the Bank's reliance for funding Loan 9 27 included (1) the Tammy Memorandum, (2) an updated July 2006 Tammy 28 Balance Sheet, which showed receivables of $25,840,521, (3) the -18- 1 2005 Tammy Profit & Loss Statement, (4) Thefeld's February 6, 2006 2 Letter, and (5) Debtor's February 22, 2006 Letter. 3 Loan 10. Loan 10 was the first modification of Loan 1, 4 wherein Debtor received an additional $1 million. It was funded 5 on August 11, 2006. It also appears that Debtor did not submit a 6 loan application for this loan. Although the FDIC's MSJ 7 referenced Exhibit 109 as the loan application, Exhibit 109 was 8 the loan application for Loan 7 funded in March 2006. The FDIC 9 did contend, however, that for this loan the Bank relied on 10 Debtor's misrepresentations regarding his income, liabilities and 11 net worth in his PFS from November 15, 2005. Because Loan 7 was 12 also supported in part by this same PFS, the FDIC presented 13 essentially the same evidence to support its claim for 14 nondischargeability for Loan 10. 15 The FDIC contended the Bank's reliance on Debtor's 16 representations of income, assets and net worth was evidenced by 17 its statement made in the Underwriting Analysis for this loan, 18 which is identical to what was stated in the Underwriting Analysis 19 for the original loan funded in November 2004: "Mr. Bacino is a 20 self-employed attorney and real estate investor, with an est. 21 $49.9 million net worth and earnings in excess of $706,000 per 22 year." The other documents the FDIC claimed supported the Bank's 23 reliance for funding Loan 10 included (1) the Tammy Memorandum, 24 (2) the July 2006 Tammy Balance Sheet, (3) the 2005 Tammy Profit & 25 Loss Statement, (4) Thefeld's February 6, 2006 Letter, and 26 (5) Debtor's February 22, 2006 Letter. 27 Loan 11. Loan 11 was funded on December 20, 2006, for 28 $1 million. Again, two loan applications were submitted for this -19- 1 loan. In the first loan application dated November 20, 2006, 2 Debtor represented his monthly income was $57,512, including 3 $36,787 of "partnership income." The second application dated 4 December 13, 2006, indicated that Debtor's monthly income was 5 $616,666, including $208,333 from Tammy. Besides the discrepancy 6 in monthly income between the two applications, the FDIC argued 7 that Debtor had misrepresented his income because his 2006 tax 8 return identified his salary and wages as $0. 9 Debtor's recent PFS dated November 10, 2006, reflected his 10 total income as $7.4 million, which consisted of $900,000 from his 11 law practice, $4 million from ALB and $2.5 million from Tammy. 12 The FDIC contended these figures were also misrepresentations of 13 Debtor's income for the same reasons it stated in Loan 7. 14 As for his assets, the first loan application stated total 15 assets of $56,440,038, including $23,500,000 in real estate and 16 $32 million in "Net worth of business(es) owned." The second loan 17 application represented total assets of $123,201,232. Thus, a 18 $66 million discrepancy in assets existed between the two 19 applications dated just weeks apart. 20 The FDIC contended the Bank's reliance on Debtor's 21 representations of income, assets and net worth was evidenced by 22 the Credit Memorandum, which stated that the loan's weaknesses 23 were "mitigated by the guarantor's real estate experience, PIQ 24 locations and guarantor's net worth in excess of $82.28 million." 25 The FDIC further contended it was reasonable for the Bank to also 26 rely on (1) the Tammy Memorandum, (2) the February 2006 Tammy 27 Balance Sheet, which showed receivables of $25,840,521, (3) an 28 updated 2006 Tammy Profit & Loss Statement, which listed -20- 1 management fees of $2,345,842.63, but still contained the same 2 double accounting error, (4) Thefeld's February 6, 2006 Letter, 3 and (5) Debtor's February 22, 2006 Letter. 4 Loans funded in 2007 — Loan 12. Loan 12 was the first 5 modification of Loan 11, wherein Debtor received an additional 6 $1,224,500. It was funded on March 1, 2007. In the submitted PFS 7 dated February 14, 2007, Debtor represented total income of 8 $7.4 million, which consisted of $900,000 from his law practice, 9 $4 million from ALB and $2.5 million from Tammy. Schiller opined 10 that Debtor's represented income of $7.4 million was not 11 substantiated by any document and neither was the purported 12 $2.5 million income from Tammy. The FDIC contended the Tammy 13 income was a misrepresentation because the 2007 Tammy tax return 14 showed an income of $619,000. The FDIC contended Debtor also 15 misrepresented the $4 million ALB income; the 2007 ALB tax return 16 showed an income of –$2,966,734. Schiller opined that nowhere did 17 Debtor ever report $4 million in income from ALB to the IRS. 18 In the loan application dated February 14, 2007, Debtor 19 represented his personal monthly income as $616,666, including 20 $208,000 from Tammy. The FDIC contended this was a 21 misrepresentation of Debtor's income because his 2007 tax return 22 showed his salary and wages as $0. As for Tammy income, Debtor 23 had admitted at deposition that he did not know of any income of 24 $208,000 per month, even if the application had been considering 25 collection of the Premier receivable, which was not the amount 26 collected in 2007. The FDIC contended that Debtor's 27 representation of "rental income" for $333,333 was also incorrect; 28 Debtor testified he had no rental income. Debtor's employee, -21- 1 Anne Berens, testified that many of these numbers were simply 2 carried over from prior years. 3 In the February 14, 2007 PFS, Debtor represented assets 4 totaling $124,867,868, including real estate at $90,050,000, law 5 practice at $5.5 million, Tammy at $25 million and the yacht at 6 $2.5 million. In the loan application, Debtor represented assets 7 totaling $123,337,295, including $4,050,000 in real estate, 8 $86 million in "Bus. Re Owned" and $25 million in Tammy. As with 9 prior loans, Wallace opined that Debtor had misrepresented his net 10 worth due to his overstated value of Tammy and his double 11 accounting of that asset. 12 The FDIC contended the Bank's reliance on Debtor's 13 representations of income, assets and net worth was demonstrated 14 by the Credit Memorandum: "Stated Net Worth: $67.517MM which is 15 largely made up of partnership and real estate equity interest. 16 . . . Strength: High Net Worth of Guarantor." The FDIC further 17 contended it was reasonable for the Bank to also rely on (1) the 18 Tammy Memorandum, (2) the February 2006 Tammy Balance Sheet, 19 (3) the 2006 Tammy Profit & Loss Statement, (4) Thefeld's 20 February 6, 2006 Letter, and (5) Debtor's February 22, 2006 21 Letter. 22 Loan 13. Loan 13 was a modification of Loan 7, wherein 23 Debtor received an additional $3 million. It was funded on 24 May 10, 2007. As additional collateral, Debtor pledged 350 shares 25 of Premier stock, valued at $6 million. On May 4, 2007, Thefeld 26 had authored another letter to the Bank on Debtor's behalf, which 27 provided updated information regarding the receivables (the 28 "May 4, 2007 Letter"). Thefeld represented that the $25 million -22- 1 accrual had been decreased by collections, of which Tammy was 2 estimated to still receive $19.1 million. 3 As with Loan 12, Debtor had submitted for Loan 13 the PFS 4 dated February 14, 2007, which the FDIC contended contained the 5 same misrepresentation of his monthly income, assets and 6 liabilities. In the loan application dated May 9, 2007, Debtor 7 represented his personal monthly income was $616,666. The FDIC 8 contended this was also a misrepresentation of Debtor's income 9 because his 2007 tax return showed his salary and wages as $0. 10 The FDIC contended the Bank's reliance on Debtor's 11 representations of income, assets and net worth was evidenced by 12 the Underwriting Analysis, which discussed the receivables details 13 in Thefeld's May 4, 2007 Letter, noted Debtor's net worth of 14 "$85,619,103," and stated that one of the strengths for Loan 13 15 was the "Strong Net Worth of Borrower." The FDIC further 16 contended it was reasonable for the Bank to also rely on (1) the 17 Tammy Memorandum, (2) the February 2006 Tammy Balance Sheet, 18 (3) the 2006 Tammy Profit & Loss Statement, (4) Thefeld's 19 February 6, 2006 Letter, (5) Debtor's February 22, 2006 Letter, 20 and (6) Thefeld's May 4, 2007 Letter. 21 Loan 14. The Bank funded Loan 14 for $2.54 million on 22 December 31, 2007. Loan 14 was paid in full by a title insurance 23 company, but the FDIC sought nondischargeability of any litigation 24 fees that might be incurred in a future adverse ruling. 25 In a recent PFS dated December 18, 2007, Debtor represented 26 his total income was $7.4 million, which consisted of $900,000 27 from his law practice, $4 million from ALB and $2.5 million from 28 Tammy. The FDIC presented the same evidence for why these income -23- 1 figures were misrepresentations as it did for Loan 12. 2 In the loan application dated December 28, 2007, Debtor 3 represented his total monthly income as $121,083, which equates to 4 $1,452,996 million annually. The FDIC contended this was another 5 misrepresentation of Debtor's income because his 2007 tax return 6 identified his salary and wages of $0. 7 The FDIC also pointed to inconsistencies regarding Debtor's 8 net worth in the PFS dated December 18, 2007, and the loan 9 application dated December 28, 2007. The PFS stated that assets 10 totaled $141,497,000, including real estate at $117,497,000, law 11 practice at $5.5 million, Tammy at $15 million and the yacht at 12 $3.5 million. The loan application stated assets totaling 13 $96,648,115, including "$0" in real estate, $5.5 million in "Net 14 worth of business(es) owned," $72,631,295 in "Net LLC Equity," 15 $15 million in Tammy and $3.5 million in the yacht. As with prior 16 loans, the FDIC contended Debtor had misrepresented his net worth 17 based on Wallace's opinion that Debtor had overstated the value of 18 Tammy and double accounted for that asset. The FDIC contended 19 that Debtor had also misrepresented his liabilities by stating in 20 the PFS they totaled $57,065,705, but stating in the loan 21 application they totaled only $6,140,409. 22 The FDIC contended that the Bank's reliance on Debtor's 23 representations of income, assets and net worth was demonstrated 24 by the Underwriting Analysis, which stated that Debtor had "a 25 stated net worth of $90.5 million. This is comprised largely of 26 $72.6 million in net partnership and LLC real estate equity[.]" 27 . . . "Sources of Repayment: Guarantor/Borrower's other real 28 estate, LLC income and/or liquidation of a portion of -24- 1 $90.5 million net worth." The FDIC further contended it was 2 reasonable for the Bank to also rely on (1) the Tammy Memorandum, 3 (2) the February 2006 Tammy Balance Sheet, (3) the 2006 Tammy 4 Profit & Loss Statement, (4) Thefeld's February 6, 2006 Letter, 5 (5) Debtor's February 22, 2006 Letter and (6) Thefeld's May 4, 6 2007 Letter. 7 Loans funded in 2008 - Loan 15. Loan 15 was an assumption of 8 Loan 8 from one of Debtor's entities to another. No new funds 9 were advanced in this transaction occurring on January 7, 2008. 10 Loan 16. Loan 16 was a second modification of Loan 6. It 11 was funded on April 11, 2008, wherein Debtor received an 12 additional $1.6 million. 13 In the submitted PFS dated April 10, 2008, Debtor represented 14 total income of $7.4 million, which consisted of $900,000 from his 15 law practice, $4 million from ALB and $2.5 million from Tammy. 16 The FDIC contended the Tammy income was a misrepresentation 17 because the 2008 Tammy tax return showed an income of $102,713. 18 Thefeld had also confirmed that Debtor's law firm income in 2008 19 was $170,542, not the $900,000 represented in the PFS. The FDIC 20 contended Debtor also misrepresented the $4 million ALB income; 21 the 2008 ALB tax return showed an income of –$13 million. 22 In the loan application dated April 10, 2008, Debtor 23 represented his personal monthly income was $121,083, including 24 $40,078 listed as "other" without explanation. The FDIC contended 25 this statement was an additional misrepresentation in Debtor's 26 income because Debtor's 2008 tax return identified his total 27 income as –$2,361,183. 28 The FDIC also noted the inconsistencies regarding Debtor's -25- 1 net worth in the PFS and loan application, both dated April 10, 2 2008. In the PFS, Debtor represented total assets of 3 $141,347,000, including $5.5 million for his law practice, 4 $15 million for Tammy and $3.5 million for the yacht. The loan 5 application stated Debtor's assets totaled $94,437,323, including 6 "$0" in real estate, $5.5 million in "Net worth of business(es) 7 owned," $70,631,295 in "Net LLC Equity," $15 million in Tammy and 8 $3.5 million in the yacht. Debtor claimed his net worth was 9 $82,821,399, based on his liabilities of $11,615,924. A 10 Borrower/Guarantor Analysis created by the Bank for Loan 16 11 reflects Debtor's net worth was $82,821,399. The FDIC contended 12 that Debtor also misrepresented his liabilities, which he stated 13 in the PFS totaled $59,265,705, but stated in the loan application 14 they totaled $11,615,924. 15 The FDIC contended the Bank's reliance on Debtor's 16 representations of income, assets and net worth was evidenced in 17 the Underwriting Analysis, which indicated the "Strong Net Worth 18 of Borrower.” The FDIC further contended it was reasonable for 19 the Bank to also rely on (1) the Tammy Memorandum, (2) the 20 February 2006 Tammy Balance Sheet, (3) an updated 2007 Tammy 21 Profit & Loss Statement, which listed management fees of 22 $1,578,679.18, but still contained the same double accounting 23 error, and (4) Thefeld's May 4, 2007 Letter. 24 Loan 17. Loan 17 was a second modification of Loan 11, 25 wherein Debtor received an additional $1.2 million. It was funded 26 on September 19, 2008. 27 In the PFS dated May 12, 2008, Debtor represented his total 28 income was $7.4 million, which consisted of $900,000 from his law -26- 1 practice, $4 million from ALB and $2.5 million from Tammy. The 2 FDIC presented the same evidence for why these income figures were 3 misrepresentations as it did for Loans 12 and 14. 4 In the loan application dated September 18, 2008, Debtor 5 represented his personal monthly income was $616,666, which 6 included $333,333 in rental income Debtor admitted did not exist. 7 See FDIC’s Supplemental Brief, Doc. No. 362, Facts 684-687. The 8 FDIC contended this was a misrepresentation of Debtor's income 9 because his 2008 tax return showed his total income was 10 –$2,361,183. 11 The FDIC also noted significant inconsistencies regarding 12 Debtor's net worth in the PFS dated May 12, 2008, and the loan 13 application dated September 18, 2008. The PFS stated assets 14 totaling $141,347,000, including real estate owned at 15 $117,497,000, his law practice at $5.5 million, Tammy at 16 $15 million and the yacht at $3.5 million. The loan application 17 stated assets totaling $77,286,040, including "$0" in real estate, 18 $5.5 million in "Net worth of business(es) owned," $53,248,205 in 19 "Net LLC Equity," $15 million in Tammy and $3.5 million in the 20 yacht. 21 The FDIC contended that the Bank’s reliance on Debtor's 22 representations of income, assets and net worth was evidenced in 23 the Underwriting Analysis for Loan 17: "The guarantor's Net Worth 24 is $67.517 MM made up largely from partnership interest and real 25 estate equity." The Bank's reliance was also evidenced in the 26 generated Credit Memorandum, which referenced Debtor's stated 27 $67.517 million net worth and stated that the "High Net Worth of 28 Guarantor" was a strength for the loan and something that overcame -27- 1 its weaknesses. The FDIC further contended it was reasonable for 2 the Bank to also rely on (1) the Tammy Memorandum, (2) the 3 February 2006 Tammy Balance Sheet, (3) the 2007 Tammy Profit & 4 Loss Statement and (4) Thefeld's May 4, 2007 Letter. 5 Loan 18. Loan 18 was the second modification of Loan 1. 6 However, this transaction on July 1, 2008, was only a maturity 7 date extension of Loan 1 and no additional funds were advanced. 8 At any rate, it appears that Debtor did not submit a loan 9 application or a PFS in connection with this transaction. The 10 Tarter report also shows the absence of these documents. 11 Nonetheless, the FDIC claimed that based on statements made in the 12 Bank's related Underwriting Analysis, Credit Memorandum and 13 Borrower/Guarantor Analysis, the Bank relied on Debtor's 14 representations of income, assets and net worth to issue the 15 extension. The Underwriting Analysis stated: "The guarantor's 16 Net Worth is $67.5MM made up largely from partnership interest and 17 real estate equity." The Borrower/Guarantor Analysis referenced 18 the $67.5 million net worth figure and stated that "Greg Bacino 19 reports stated income of $75,000/month in legal fees, $208,333 20 monthly average in net income from Tammy, Inc., and a monthly 21 average of $333,333 in ALB Properties, LLC net real estate 22 income." Finally, in the Credit Memorandum, the Bank referenced 23 Debtor's net worth of $67.5 million and stated that a strength for 24 the extension was the "High Net Worth of Guarantor." 25 b. Debtor's Cross MSJ 26 In short, Debtor argued the FDIC had failed to show: (1) he 27 made any misrepresentations to the Bank with the intent to 28 deceive; (2) that the Bank justifiably relied on any material -28- 1 representation within the context of § 523(a)(2)(A); (3) that the 2 Bank reasonably relied on any written statements provided by 3 Debtor; or (4) that any discernable damages were caused by his 4 alleged representations. Debtor's Cross MSJ was supported by 5 92 exhibits and the declarations of Debtor, Yoder and his expert 6 Schiller. 7 As part of Debtor's defense that the Bank could not have 8 reasonably relied on his written representations, Schiller opined 9 that the loan applications and PFSs Debtor submitted to the Bank 10 contained "glaring" errors, at least 250 of them, which should 11 have sent up red flags in the Bank's underwriting department that 12 further investigations and inquiry were needed. Debtor also 13 alleged that the Bank, not he, created some of the loan 14 applications. Yoder declared that the Bank's underwriting and 15 loan processing departments were "relatively weak," that the 16 "individuals did not seem to understand large loans, project 17 depth, the need of bonds, or complexity in the development process 18 in general." Yoder also believed the Bank's underwriting staff 19 "were not properly trained in sophisticated scenarios to review 20 batch financials and comparisons." 21 In reviewing each of the transactions, Schiller opined that 22 the Bank failed to meet the standard of care in issuing the 23 various loans and modifications or extensions. Specifically, 24 Schiller opined that the Bank's files were cumulative, so the 25 errors and omissions in the first loans "tainted" subsequent loan 26 files. Therefore, for the Bank to solely rely on subsequent loan 27 files and ignore prior loan files was commercially unreasonable 28 and a breach of the standard of care. Schiller also opined that -29- 1 the Bank erred by relying solely on what he called "company 2 prepared" material, the least reliable type of underwriting 3 information, particularly when loaning approximately $50 million. 4 Instead, the Bank should have required audited and certified 5 material. In sum, Schiller opined that due to the Bank's zeal to 6 compete in the hot real estate market, it "basically overlooked 7 submitted financial information with glaring discrepancies and 8 inconsistencies that they never should have accepted without 9 further extensive evaluation." 10 As for the Bank's claim under § 523(a)(2)(A), Debtor 11 contended that to support the first element of representation, the 12 representation had to be one of "an existing or past fact." 13 Debtor contended that at the time the loans and modifications were 14 executed, he made no representation of an existing or past fact, 15 only "opinions" as to values. And, in any event, these opinions 16 all related to his "financial condition," which was not actionable 17 under § 523(a)(2)(A). Further, the Bank could not show 18 justifiable reliance on any omissions by Debtor in his written 19 statements. 20 The crux of Debtor's opposition to the FDIC's MSJ was that it 21 lacked any affidavits or declarations of material facts from Bank 22 personnel affirming: (1) what the Bank relied upon; (2) what the 23 Bank's purported "standard practices" were; and (3) whether any 24 efforts were made to verify the financial information Debtor 25 provided, especially when clearly inconsistent information was 26 within the loan files. 27 2. The ruling on the cross-motions for summary judgment 28 The bankruptcy court held a hearing on the MSJ and Cross MSJ -30- 1 on January 31, 2013. The court agreed with Debtor's counsel that 2 for purposes of summary judgment, it would have to review each 3 loan or modification on a loan-by-loan basis and the evidence that 4 purported to support nondischargeability of each loan or 5 modification. 6 In its order entered on March 11, 2014, and in substantial 7 conformance with its tentative ruling issued just prior to the 8 hearing, the bankruptcy court granted the FDIC partial summary 9 judgment as to its § 523(a)(2)(B) claim and denied Debtor's Cross 10 MSJ in its entirety ("MSJ Order"). The court found that, absent 11 evidence to the contrary from Debtor, the Bank had provided Debtor 12 with money or an extension of credit based on a written 13 representation of fact as to Debtor's financial condition or that 14 of his insider for all transactions, except Loan 15 which was an 15 assumption and Loan 18 which was an extension of time. Thus, the 16 first element for a claim under § 523(a)(2)(B) was met as to the 17 sixteen other transactions and summary judgment was appropriate. 18 The court also granted summary judgment to the FDIC as to the 19 material falsity of Debtor's representations. In his defense to 20 reasonable reliance, Debtor had conceded the numerous inaccuracies 21 in his written financial information relating to the loans and 22 modifications. Further, the court found that the transactions 23 involved loans supported by Debtor's guaranty, and that Debtor's 24 (and his insiders') financial information was necessarily required 25 and material to the transactions as a result. Thus, the second 26 element for a claim under § 523(a)(2)(B) was met as to all 27 transactions. 28 The court also granted summary judgment to the FDIC as to -31- 1 actual reliance for all transactions. The court found that the 2 documents Debtor provided were typical for any loan, and Debtor 3 did not dispute that the Bank relied on them. Yoder's declaration 4 failed to suggest that any of the particular documents submitted 5 were not necessarily relied upon by the Bank to some extent in its 6 decision to lend. Further, Debtor in his responses to the FDIC’s 7 statements of uncontroverted facts prepared in support of the 8 FDIC’s MSJ failed to dispute statements establishing actual 9 reliance by the Bank. See FDIC’s Supplemental Brief, Doc. 10 No. 362. Thus, the fourth element for a claim under 11 § 523(a)(2)(B) was met as to all transactions. 12 Finally, the court found that the Bank's reliance was 13 reasonable as to the initial loans — Loan 1, Loan 2 and Loan 3. 14 Neither Debtor nor Schiller addressed why Loan 1 would have raised 15 red flags such that the Bank could not reasonably assume the 16 information presented by, or on behalf of, Debtor was accurate. 17 Schiller did not even discuss Loan 1; Debtor did not directly 18 discuss it. As for Loan 2 and Loan 3, the court found that 19 Schiller's declaration contained only minimal assertions; it 20 concluded that the "scintilla" of evidence he raised was not 21 sufficient to create a triable issue as to whether reasonable 22 reliance existed for these three loans. Thus, Debtor had not 23 sufficiently rebutted the FDIC's evidence. Therefore, the fifth 24 element for a claim under § 523(a)(2)(B) was met as to Loan 1, 25 Loan 2 and Loan 3, but triable issues of material fact existed as 26 to the Bank's reasonable reliance on Loans 4 through 18. 27 The court denied summary judgment as to Debtor's actual 28 intent on all transactions, but noted that state of mind could be -32- 1 established by recklessness. Here, Debtor's own evidence showed 2 he delegated responsibility for preparation and presentation of 3 his financial information and made little, if any, effort to 4 ensure the Bank received accurate financial information. The 5 court opined that Debtor's conduct could support a recklessness 6 finding, but it was not going to grant summary judgment on that 7 issue. 8 The court also denied summary judgment as to damages. In 9 short, it believed that a trial was necessary to determine whether 10 reasonable reliance existed in connection with the transactions 11 where it had not already found otherwise. Further, the FDIC still 12 had to prove proximate cause. Thus, damages, if any, were not yet 13 determinable. 14 3. The trial on the FDIC's nondischargeability action 15 With summary judgment having been granted in part to the 16 FDIC, the remaining issues of intent, reasonable reliance, 17 causation and damages for its claim under § 523(a)(2)(B) were 18 tried, as well as all issues for its claim under § 523(a)(2)(A). 19 Trial briefs were filed both before and after the trial. The 20 trial took fourteen days, twelve witnesses testified and 21 approximately 1000 exhibits were entered into evidence. 22 The bankruptcy court entered a written decision on 23 February 28, 2014. It found in favor of the FDIC as to the 24 remaining elements for its claim under § 523(a)(2)(B) and as to 25 all elements for its claim under § 523(a)(2)(A). A judgment was 26 entered on March 17, 2014, determining that the Bank's debt of 27 $14,724,003.80 was nondischargeable under both § 523(a)(2)(A) and 28 (a)(2)(B). Debtor timely appealed the judgment on March 31, 2014. -33- 1 II. JURISDICTION 2 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 3 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158 . 4 III. ISSUES 5 1. Did the bankruptcy court err in denying Debtor summary 6 judgment? 7 2. Did the bankruptcy court err in determining that the debts to 8 the Bank were excepted from discharge under § 523(a)(2)(B)? 9 3. Did the bankruptcy court err in determining that the debts to 10 the Bank were excepted from discharge under § 523(a)(2)(A)? 11 IV. STANDARDS OF REVIEW 12 We review summary judgment determinations de novo. See 13 Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119 , 1125 14 (9th Cir. 2014). "Summary judgment is proper if the pleadings, 15 depositions, answers to interrogatories, and admissions on file, 16 together with the affidavits, if any, show that there is no 17 genuine issue as to any material fact and that the moving party is 18 entitled to a judgment as a matter of law." Celotex Corp. v. 19 Catrett, 477 U.S. 317, 322 (1986)(internal quotation marks 20 omitted). Under this standard, the moving party is entitled to 21 summary judgment if the nonmoving party "after adequate time for 22 discovery . . . fails to make a showing sufficient to establish 23 the existence of an element essential to that party's case, and on 24 which that party will bear the burden of proof at trial." Id.; 25 see also Ilko v. Cal. State Bd. of Equalization (In re Ilko), [26] 651 F.3d 1049, 1052 (9th Cir. 2011)(applying Celotex summary 27 judgment standard to bankruptcy adversary proceeding). As 28 explained in Celotex, all other facts are immaterial when the -34- 1 nonmoving party fails to submit sufficient proof of an essential 2 element of its case. Id. at 323. 3 In reviewing a bankruptcy court's determination of an 4 exception to discharge, we review its findings of fact for clear 5 error and its conclusions of law de novo. Oney v. Weinberg 6 (In re Weinberg), 410 B.R. 19, 28 (9th Cir. BAP 2009). For 7 purposes of § 523(a)(2), a debtor's intent, materiality, whether 8 the creditor relied upon the debtor's false statements and 9 proximate cause are all questions of fact we review under the 10 clearly erroneous standard. Candland v. Ins. Co. of N. Am. 11 (In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996). A factual 12 finding is clearly erroneous if it is illogical, implausible or 13 without support in the record. Retz v. Samson (In re Retz), [14] 606 F.3d 1189, 1196 (9th Cir. 2010). We give great deference to 15 the bankruptcy court's findings when they are based on its 16 determinations as to the credibility of witnesses. Id. 17 "We may affirm 'on any ground supported by the record, 18 regardless of whether the [bankruptcy] court relied upon, 19 rejected, or even considered that ground.'" Fresno Motors, LLC v. 20 Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014) 21 (citation omitted). 22 V. DISCUSSION 23 When determining whether a debt is excepted from discharge, a 24 bankruptcy court must construe the evidence against the creditor 25 and in favor of the debtor. Mele v. Mele (In re Mele), 501 B.R. 26 357, 363 (9th Cir. BAP 2013). A creditor objecting to 27 dischargeability of its claim bears the burden of proving, by a 28 preponderance of the evidence, that the particular debt falls -35- 1 within one of the exceptions to discharge enumerated under 2 § 523(a). Grogan v. Garner, 498 U.S. 279, 286-291 (1991). 3 Debtor contends the bankruptcy court erred by "lumping" the 4 loans and modifications together and not trying the case on a 5 loan-by-loan basis. Debtor contends he was denied due process 6 because each of the eighteen separate transactions were not tried 7 as separate debts. Debtor fails to point out in the record where 8 he made this due process objection. Further, in reviewing the 9 trial transcripts, it is clear the court tried the case on a loan10 by-loan basis. In fact, Debtor's counsel complained at the end of 11 trial day 7 that the FDIC was taking far too much time with 12 testimony on each of the transactions individually. In response 13 to his complaint, both the FDIC and the court reminded Debtor's 14 counsel that he was the one arguing in favor of that very approach 15 at summary judgment. Nonetheless, we agree that the bankruptcy 16 court took a "global" approach in its decision. As we discuss in 17 more detail below, this caused it to err as to at least two of the 18 loans. 19 A. The bankruptcy court erred in determining that Loan 9 and Loan 10 were excepted from discharge under § 523(a)(2)(B), 20 but correctly determined that the other transactions were excepted from discharge under § 523(a)(2)(B). [21] 22 To prevail on an exception to discharge claim under 23 § 523(a)(2)(B),5 the creditor must show: (1) it provided debtor [5] 25 Section 523(a)(2)(B) provides: 26 (a) A discharge under . . . this title does not discharge an individual debtor from any debt . . . (2) for money, 27 property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . (B) use of a 28 (continued...) -36- 1 with money, property, services or credit based on a written 2 representation of fact by the debtor as to the debtor's financial 3 condition; (2) the representation was materially false; (3) the 4 debtor knew the representation was false when made; (4) the debtor 5 made the representation with the intention of deceiving the 6 creditor; (5) the creditor relied on the representation; (6) the 7 creditor's reliance was reasonable; and (7) damage proximately 8 resulted from the representation. See In re Candland, 90 F.3d at 9 1469; Siriani v. Nw. Nat’l Ins. Co. (In re Siriani), 967 F.2d 302 , 10 304 (9th Cir. 1992); Gertsch v. Johnson & Johnson (In re Gertsch), [11] 237 B.R. 160, 167 (9th Cir. BAP 1999) (adopting the elements 12 required under the companion section 523(a)(2)(A), with the 13 additional and obvious requirement that the alleged fraud stem 14 from a false statement in writing). 15 1. There must be a statement in writing respecting the debtor's or insider's financial condition that contains 16 a false representation of fact. 17 The bankruptcy court determined on summary judgment that, 18 absent contrary evidence from Debtor, the Bank had provided Debtor 19 with money or an extension of credit based on a written 20 representation of fact as to his or his insider's financial 21 condition for all transactions, except for Loans 15 and 18. The 22 court reiterated this finding again in its written decision after 23 trial, but it is not clear whether it intended to still exclude [24] 25 5 (...continued) statement in writing – (i) that is materially false; 26 (ii) respecting the debtor’s or an insider’s financial condition; (iii) on which the creditor to whom the debtor is 27 liable for such money, property, services, or credit reasonably relied; and (iv) that the debtor caused to be made 28 or published with intent to deceive[.] -37- 1 these loans. Debtor does not raise this issue on appeal. 2 However, we conclude that Loan 9 and Loan 10, both of which were 3 modifications of loans to ALB, were not supported by a "written 4 representation of fact" as to Debtor's "financial condition," and 5 Debtor should have been granted summary judgment with respect to 6 these two loans under § 523(a)(2)(B). 7 A loan application containing information about an 8 applicant’s income constitutes a statement in writing respecting 9 the applicant's financial condition for purposes of 10 § 523(a)(2)(B). See Cashco Fin. Servs. v. McGee (In re McGee), [11] 359 B.R. 764, 768 (9th Cir. BAP 2006). The same would be true for 12 a personal financial statement. The Panel examined the meaning of 13 the term "financial condition" as it is used in § 523(a)(2)(B) in 14 Barnes v. Belice (In re Belice), 461 B.R. 564, 578 (9th Cir. BAP 15 2011), and held that it must be interpreted narrowly: 16 Statements that present a picture of a debtor's overall financial health include those analogous to balance 17 sheets, income statements, statements of changes in overall financial position, or income and debt statements 18 that present the debtor or insider's net worth, overall financial health, or equation of assets and liabilities 19 . . . . What is important is not the formality of the statement, but the information contained within it — 20 information as to the debtor's or insider's overall net worth or overall income flow. [22] Id. at 578 . In other words, the writing must be a complete or 23 comprehensive statement regarding a debtor's income and expenses. [24] Id. at 579 . 25 No loan application or PFS was submitted for Loan 9. This is 26 clear from the FDIC's MSJ and the Tarter and Wallace reports. 27 Wallace did not discuss this loan at all; Tarter's report shows 28 that no application or PFS were submitted for it. The record also -38- 1 indicates that Debtor did not submit a loan application for 2 Loan 10, which is also reflected in the MSJ. Tarter and Wallace 3 failed to address this loan at all in their reports. Although the 4 FDIC's MSJ referenced a PFS it claims was submitted with Loan 10, 5 it cited to the wrong document. 6 The other documents the FDIC claimed supported the Bank's 7 reliance for funding both loans included (1) the Tammy Memorandum, 8 (2) a July 2006 Tammy Balance Sheet, (3) the 2005 Tammy Profit & 9 Loss Statement, (4) Thefeld's February 6, 2006 Letter, and 10 (5) Debtor's February 22, 2006 Letter. The Tammy Memorandum 11 discusses only Debtor's potential income he would derive from 12 Tammy. The July 2006 Tammy Balance Sheet again shows only the 13 financial health of Tammy, not Debtor's overall financial health. 14 Plus, these loans were to ALB, not Tammy. The same is true with 15 the 2005 Tammy Profit & Loss Statement. The February 6, 2006 16 Letter seems more akin to a statement of Debtor's net worth or 17 overall financial health, but the focus is still primarily on his 18 income only; it did not discuss any of his liabilities. Finally, 19 the February 22, 2006 Letter discusses briefly the Tammy accrual, 20 the ESOP and what properties ALB owns and is developing and 21 estimated sales figures. 22 While each of these alleged misrepresentations reflect some 23 aspect of Debtor's income and the profitability of his entities, 24 "they do not either separately or when taken together reflect his 25 overall cash flow situation, his overall income and expenses, or 26 the relative values and amounts of his assets and liabilities." 27 In re Belice, 461 B.R. at 579 . Accordingly, without a "written 28 representation of fact" as to Debtor's financial condition with -39- 1 respect to Loan 9 and Loan 10, the bankruptcy court erred in 2 denying summary judgment to Debtor for these loans under 3 § 523(a)(2)(B). However, they may still be nondischargeable under 4 § 523(a)(2)(A). 5 As for the remaining loans (with the exception of Loan 15 and 6 Loan 18), the bankruptcy court did not err in finding that the 7 Bank provided Debtor with money or an extension of credit based on 8 a written representation of fact as to Debtor's or an insider's 9 financial condition. Debtor submitted loan applications and/or 10 PFSs with each of the remaining loans, and Debtor does not dispute 11 that each contained significant falsity. 12 2. The misrepresentation must be material. 13 A materially false statement is one which "paints a 14 substantially untruthful picture of a financial condition by 15 misrepresenting information of the type which would normally 16 effect [sic] the decision to grant credit." First Interstate Bank 17 of Nev. v. Greene (In re Greene), 96 B.R. 279, 283 (9th Cir. BAP 18 1989)(citations omitted). "'Material falsity' in a financial 19 statement can be premised upon the inclusion of false information 20 or upon the omission of information about a debtor's financial 21 condition." Id. See also N. Park Credit v. Harmer 22 (In re Harmer), 61 B.R. 1, 5 (Bankr. D. Utah 1984)(a "long line of 23 cases" has held that in a financial statement, the "omission, 24 concealment, or understatement of any of the debtor's liabilities 25 constitutes a 'materially false' statement.")(citing cases). "A 26 statement can be materially false if it includes information which 27 is 'substantially inaccurate' and is of the type that would affect 28 the creditor's decision making process." In re Greene, 96 B.R. at -40- 1 283 (citations omitted). See In re Candland, 90 F.3d at 1470 2 (adopting Greene standard for "material falsity" and holding that 3 "significant misrepresentations of financial condition — of the 4 order of several hundred thousand dollars — are of the type which 5 would generally affect a lender's or guarantor's decision"). 6 In its summary judgment ruling, the bankruptcy court found in 7 favor of the FDIC on this element as to all of the transactions. 8 After trial, relying on Candland, it again found in favor of the 9 FDIC, determining the inaccuracies in the loan applications and 10 PFSs were material and of the type the Bank actually relied upon 11 in making the decision to advance the loans. In addition, the 12 court found that Debtor's omitted information — his resignation 13 from two state bars in 2006, the Premier investigation and the 14 WCAB Stay — was of the type that would be material to the Bank, 15 because it reflected on Debtor's character, which Tarter opined 16 was one of the "5 C's" for obtaining credit. This finding is 17 consistent with Greene, as material falsity can also be 18 established by omissions of information about a debtor's financial 19 condition. 20 Debtor contends the bankruptcy court applied an improper 21 standard for material falsity under § 523(a)(2)(B) at summary 22 judgment and after trial. He argues, essentially, that we ignore 23 controlling case law and adopt the standard set forth in Matter of 24 Bogstad, 779 F.2d 370, 375-376 (7th Cir. 1985). In Bogstad, the 25 Seventh Circuit held that for a statement to be materially false 26 for purposes of § 523(a)(2)(B), the test is whether the lender 27 would have made the loan had he known of the debtor's true 28 financial condition. That is not the standard in the Ninth -41- 1 Circuit. In fact, the Candland court expressly rejected Bogstad 2 and adopted this Panel's standard for material falsity set forth 3 in Greene. Candland, 90 F.3d at 1470 . 4 More concerning is that Debtor's counsel agreed with the 5 bankruptcy court during the summary judgment hearing that the 6 standard it applied for material falsity was the correct one: 7 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 8 would be interested in, and that they relied on those numbers, I don't have any problem with that concept. [9] . . . . [10] THE COURT: I'm saying pretty much for all loans, I think 11 there are misstatements of a type that a bank would rely on. [12] MR. SMAHA: I would agree with that -- [13] THE COURT: All transactions. [14] MR. SMAHA: I believe that would be a true statement, and 15 we would probably -- we would admit to that. 16 . . . . 17 MR. SMAHA: But yes, we agree that they relied on all the documents that were provided by Mr. Bacino. [18] 19 Hr’g Tr. (Jan. 31, 2013) 31:14-17, 32:10-16, 34:22-23. Thus, it 20 would appear Debtor has waived any argument on this issue. In any 21 event, we conclude the bankruptcy court applied the correct 22 standard for material falsity. 23 3. Debtor knew the misrepresentation at the time to be false and the debtor made it with the intention of 24 deceiving the creditor. 25 The bankruptcy court did not find actual intent to deceive, 26 but did find that Debtor had acted with the requisite recklessness 27 to establish his intent under § 523(a)(2)(B), whether applying 28 either a "gross" recklessness standard or some lesser form. Mem. -42- 1 Decision (Feb. 28, 2014) 20-21. Specifically, the court found 2 that Debtor borrowed or guaranteed millions of dollars through the 3 use of documents that were highly inaccurate. They presented a 4 false sense of his personal net worth. Id. at 21. They failed to 5 disclose facts known to Debtor that created a significant risk to 6 him and to anyone relying on him for repayment. He delegated 7 responsibility for truthful disclosure to others who lacked the 8 information, opportunity or sophistication to provide an accurate 9 picture of his financial condition, and he did so repeatedly. 10 Although Debtor testified that he read the documents prior to the 11 closings of the various loans, the court found that no evidence 12 existed "that he corrected a single syllable." Id. 13 Debtor contends the bankruptcy court applied an incorrect 14 standard for intent. He contends that in light of Bullock, none 15 of the exceptions to discharge under § 523(a) can be satisfied 16 with a showing of "mere negligence." See Bullock v. 17 BankChampaign, N.A., 133 S.Ct. 1754 (2013). The bankruptcy court 18 did not make a finding of "mere negligence" or apply any such 19 standard, which is not the standard in this circuit at any rate. 20 In this circuit, reckless disregard for the truth of a 21 representation or reckless indifference to the debtor's actual 22 circumstances can support a finding of intent for purposes of 23 § 523(a)(2). See Anastas v. Am. Sav. Bank (In re Anastas), [24] 94 F.3d 1280, 1286 (9th Cir. 1996); In re Gertsch, 237 B.R. at 25 167-68 (applying the reckless standard to § 523(a)(2)(B)); Arm v. 26 A. Lindsay Morrison, M.D., Inc. (In re Arm), 175 B.R. 349 , 354 27 (9th Cir. BAP 1994). The bankruptcy court may consider 28 circumstantial evidence that tends to establish what the debtor -43- 1 must have actually known when taking the injury-producing action. 2 Jett v. Sicroff (In re Sicroff), 401 F.3d 1101, 1106 (9th Cir. 3 2005). 4 In Bullock, the Supreme Court held that the intent 5 requirement for a fiduciary's defalcation should be the same as 6 the other specifically enumerated acts found in § 523(a)(4) — 7 i.e., larceny and embezzlement. 133 S.Ct. at 1759 . An innocent 8 defalcation does not suffice. The fiduciary's conduct requires 9 intentional, improper conduct and "reckless conduct of the kind 10 that the criminal law often treats as the equivalent." Id. 11 Accordingly, where actual knowledge is lacking, intent can still 12 be shown for purposes of § 523(a)(4) if the "fiduciary 13 'consciously disregards' (or is willfully blind to) 'a substantial 14 and unjustifiable risk' that his conduct will turn out to violate 15 a fiduciary duty." Id. at 1759-60 (quoting Model Penal Code 16 § 2.02(c)). 17 We disagree that Bullock applies to § 523(a)(2)(B), or if it 18 does, that the standard set forth in Bullock has heightened the 19 standard of recklessness already applied in this circuit. In any 20 event, we perceive no clear error in the bankruptcy court's 21 finding that Debtor's actions here satisfy the standard of gross 22 recklessness. Debtor admitted delegating the responsibility for 23 preparing PFSs and loan applications to his employees, Berens and 24 Judy Brenning, who often signed for him, and relying heavily on 25 them for providing the correct information. Berens, who began 26 filling out the PFSs and loan applications in early 2007, 27 testified that generally she carried numbers over from prior 28 documents, with Debtor's knowledge, that she did not verify -44- 1 Debtor's income figures and that she believed it was Debtor's 2 responsibility to verify whether the numbers were true and 3 correct. Brenning admitted that in filling out the first PFS she 4 had "no idea what to do" and had to consult with Thefeld. 5 Brenning testified that she relied on Debtor or Thefeld for much 6 of the financial information contained in later PFSs and loan 7 applications; she had no knowledge of what the numbers were on her 8 own. 9 Debtor testified he also relied heavily on Thefeld for 10 correct information in the PFSs and loan applications. However, 11 Thefeld testified that other than assisting Brenning with some 12 information for the first loans, he never discussed with Debtor or 13 any of his staff financial information for PFSs or loan 14 applications. Although Debtor testified that he "glanced" at 15 every loan application at the Bank's Escondido office before 16 submitting them, he also testified that he did not think he needed 17 to review them because he had a "super team." Berens also 18 testified that it would not be unusual for Debtor to ask her to 19 sign his name to a PFS without him reviewing it. 20 Clearly, many of the facts contained in the PFSs and loan 21 applications were not accurate. And it appears Debtor did little 22 if anything to ensure that they contained accurate information 23 before signing or submitting them. Failure to review documents 24 containing false statements about a debtor's financial condition, 25 with the knowledge that those documents will be submitted to 26 obtain money or credit, supports a finding of reckless disregard. 27 Merchs. Bank of Cal. v. Oh (In re Oh), 278 B.R. 844, 858 (Bankr. 28 C.D. Cal. 2002). The bankruptcy court did not find Debtor’s -45- 1 testimony credible that he believed his staff could submit 2 accurate and complete information without his input. Mem. 3 Decision (Feb.28, 2014) 9:16-28. We must give this credibility 4 finding great deference. In re Retz, 606 F.3d at 1196 . 5 Accordingly, the bankruptcy court applied the correct standard for 6 intent; we conclude its finding against Debtor on that element was 7 not clearly erroneous. 8 4. Creditor must reasonably rely on the misrepresentation. 9 To meet the reliance standard under § 523(a)(2)(B), there 10 must be reasonable reliance. Reasonable reliance means reliance 11 that would have been reasonable to a hypothetical average person. 12 Heritage Pac. Fin., LLC v. Machuca (In re Machuca), 483 B.R. 726 , 13 736 (9th Cir. BAP 2012). Reasonable reliance is analyzed under a 14 "prudent person" test. In re McGee, 359 B.R. at 774 ; First Mut. 15 Sales Fin. v. Cacciatori (In re Cacciatori), 465 B.R. 545 , 555 16 (Bankr. C.D. Cal. 2012)(court must objectively assess the 17 circumstances to determine if creditor exercised degree of care 18 expected from a reasonably cautious person in the same business 19 transaction under similar circumstances). Reasonable reliance is 20 judged in light of the totality of the circumstances on a 21 case-by-case basis. In re Machuca, 483 B.R. at 736 . 22 A creditor's reliance may be reasonable if the creditor 23 adhered to its normal business practices. In re Gertsch, 237 B.R. 24 at 172 . The court may consider whether the lender's normal 25 practices align with industry standards, or if any "red flags" 26 exist that would alert a reasonably prudent lender to consider 27 whether the representations relied on were inaccurate. Nat'l City 28 Bank v. Hill (In re Hill), 2008 WL 2227359 , at *3 (Bankr. N.D. -46- 1 Cal. May 23, 2008)(citing Ins. Co. of N.A. v. Cohn (In re Cohn), [2] 54 F.3d 1108, 1117 (3d Cir. 1995)). A creditor cannot simply 3 ignore red flags that directly call into question the truth of the 4 statements on which the creditor claims to have relied. 5 In re Machuca, 483 B.R. 736 -37 (citing In re McGee, 359 B.R. at 6 775). Under such circumstances, the creditor must support 7 reasonable reliance with evidence explaining why it was reasonable 8 for it to rely on the statements notwithstanding the red flags. [9] Id. However, when the evidence shows materially false statements 10 were made by the debtor, little investigation is required by the 11 creditor to have reasonably relied on the debtor's representation. 12 In re Gertsch, 237 B.R. at 170 . 13 The bankruptcy court found that the Bank actually and 14 reasonably relied on the erroneous and incomplete information 15 provided by Debtor. Mem. Decision (Feb. 28, 2014) 21-24. Debtor 16 disputes this finding of fact, which we review for clear error. 17 In short, Debtor contends that because the Bank did its own income 18 analysis, it did not actually rely on the stated income numbers. 19 He further contends the Bank took no action on the discrepancies 20 that were actually noted by personnel. In other words, the 21 numerous "red flags" at issue precluded the Bank's reasonable 22 reliance on Debtor's misrepresentations. 23 The bankruptcy court agreed with Debtor that the Bank 24 apparently did discover some of his errors, such as those 25 identifiable from credit reports, and utilized its own information 26 in connection with the lending decisions. Mem. Decision (Feb. 28, 27 2014) 22. The court also agreed that had the discoverable errors 28 been the only ones out there, Debtor would have had a defense. -47- 1 However, they were not. Debtor failed to disclose a host of 2 transactions requiring disclosure that were not readily 3 discoverable by the Bank. These transactions included loans 4 between his various entities ($13 million ALB loan from Tammy) and 5 several private loans from Berens ($300,000), her brother 6 ($75,000), Fish ($6-8 million), and Jerry Hall, the father of the 7 Bank's president (amount unknown). Id. Debtor had also failed to 8 disclose that he was no longer licensed to practice law in Texas 9 and California. And, what the court found most troubling, Debtor 10 failed to disclose the serious challenges, ultimately leading to 11 criminal liability, that faced Premier. 12 The bankruptcy court rejected Debtor's defense that the Bank 13 did not rely on his net worth but rather on the development 14 projects. First, the Bank required a guaranty, which provided a 15 source of repayment if the projects did not generate sufficient 16 proceeds and which was consistent with its general practice and 17 industry standards. Further, the Underwriting Analyses and Credit 18 Memoranda consistently pointed to Debtor's net worth as support 19 for the loans. Due to Debtor's erroneous information, his net 20 worth and liquidity were not as represented in the documents he 21 signed. While the Bank discovered some of these errors and 22 reduced its estimate of net worth accordingly, the court found 23 that the Bank could not find all of them through any reasonable 24 means. The intercompany and private loans would not show up on a 25 credit report; the Premier issues were also undiscoverable with 26 any reasonable due diligence. 27 Finally, the bankruptcy court disagreed with Debtor's "red 28 flag" argument, supported by Schiller. The court found that the -48- 1 FDIC established through Tarter, and through factual testimony, 2 that the Bank could reasonably rely on Debtor's submissions, even 3 if it identified serious errors. The errors identified still 4 resulted in a conclusion that Debtor had significant net worth. 5 No alerts existed that led to the discovery of the many loans and 6 transactions that would never be disclosed by a balance sheet, or 7 the serious problems with Premier. The court also found 8 compelling that Debtor and his entities were repeat customers, and 9 that Debtor's legal training could reasonably lead the Bank to 10 conclude he was sophisticated and aware of his obligations for 11 full disclosure. 12 We see nothing illogical, implausible or without support in 13 the record as to the bankruptcy court's finding that the Bank 14 actually and reasonably relied on Debtor's misrepresentations. 15 The loan approval documents generated by the Bank clearly show its 16 actual reliance on Debtor's misrepresentations by its repeated 17 references to his significant, yet overstated, net worth. And, 18 contrary to Debtor's argument, his misrepresentations went far 19 beyond his income. With the exception of Loan 9 and Loan 10 (and 20 Loan 18), Debtor continually overstated his assets and understated 21 his liabilities on each loan application and PFS submitted to the 22 Bank. Further, as established by the FDIC's experts, the Bank 23 adhered to industry standards and took reasonable measures to 24 verify Debtor's representations. This adherence, along with the 25 Bank's inability to discover the omitted and significant 26 intercompany and private loans and Debtor's failure to disclose 27 the Premier problems, supports a finding of reasonable reliance. 28 Due to Debtor's many materially false statements, the Bank was -49- 1 only required to perform a minimal investigation, which it did. 2 In re Gertsch, 237 B.R. at 170 . 3 5. Creditor suffered damages proximately resulting from the debtor's misrepresentation. [4] 5 The bankruptcy court held that based on the totality of the 6 evidence, the FDIC had met its burden of proof that losses 7 sustained were the proximate result of Debtor's actions. The 8 court rejected Debtor's argument that the FDIC failed to introduce 9 testimony from a loan officer stating what the Bank would have 10 done had it known. No such testimony was required; Debtor failed 11 to offer this same type of testimony favorable to his cause when 12 the burden of proof shifted to him given the standard articulated 13 in Siriani and Candland. 14 In Siriani, the Ninth Circuit held that in the case of credit 15 renewals, "a creditor seeking nondischargeability under section 16 523(a)(2)(B) must show that it had valuable collection remedies at 17 the time it agreed to renew its commitment to the debtor, and that 18 those remedies later became worthless." 967 F.2d at 305 . Stated 19 another way, where credit renewals are involved, the creditor must 20 show some proximately-caused damage beyond the unpaid debt. The 21 bankruptcy court did not address this part of Siriani's holding. 22 Instead, it relied on Siriani's directive that bankruptcy courts 23 are not required "to divine what might have happened" with respect 24 to the creditor's diligence, or lack thereof, in exercising its 25 collection remedies. Id. at 306 . 26 Debtor contends the FDIC failed to make any showing of 27 proximately-caused damages beyond the unpaid debt and the 28 bankruptcy court improperly shifted the burden to him on this -50- 1 element. Siriani would appear to apply only to those transactions 2 that were renewals of credit — i.e., the ten loan modifications 3 and/or maturity date extensions — which Debtor seems to concede, 4 and not to the "new" money transactions. The FDIC contended that 5 the Bank had collection remedies based on the promissory notes, 6 collateral and abundance of caution liens filed for the various 7 loans. These collection remedies were extended each time a loan 8 was modified or extended. After the modifications and maturity 9 date extensions when Debtor defaulted and failed to make the 10 required payments, the Bank began foreclosure proceedings. 11 However, due to Debtor's bankruptcy filing, the FDIC as receiver 12 for the Bank was unable to collect all of the remaining 13 outstanding loans, unless the court determined the debts were 14 excepted from discharge, for which Debtor was also a guarantor. 15 We conclude that the FDIC made a sufficient evidentiary 16 showing of proximate cause for the loan modifications and/or 17 maturity date extensions. Therefore, any potential error by the 18 bankruptcy court was harmless, as the record supports a proximate 19 cause finding for the renewals that occurred in this case. 20 Debtor does not appear to challenge the bankruptcy court's 21 proximate cause finding as to the eight "new" money loans. To the 22 extent he does, we conclude the court's finding was not clearly 23 erroneous. For new money loans, proximate cause is established 24 when the falsehoods are material and involve significant amounts 25 of money. Candland, 90 F.3d at 1471 . Here, the falsehoods were 26 material and involved significant amounts of money, far greater 27 than the amount at issue in Candland. 28 Accordingly, except for Loan 9 and Loan 10, we conclude the -51- 1 bankruptcy court did not err in determining that amounts owed on 2 account of the loans are nondischargeable under § 523(a)(2)(B). 3 B. The bankruptcy court did not err in excepting Loan 9 and Loan 10 from discharge under § 523(a)(2)(A). [4] 5 For this claim, we address only Loan 9 and Loan 10, as we 6 have already concluded the bankruptcy court did not err in 7 determining the other loans were excepted from Debtor's discharge 8 under § 523(a)(2)(B). 9 Section 523(a)(2)(A) excepts from a debtor's discharge debts 10 resulting from "false pretenses, a false representation, or actual 11 fraud, other than a statement respecting the debtor's or 12 an insider’s financial condition." A creditor seeking to except a 13 debt from discharge based on fraud must establish each of five 14 elements: (1) misrepresentation, fraudulent omission or deceptive 15 conduct; (2) knowledge of the falsity or deceptiveness of such 16 representation(s) or omission(s); (3) an intent to deceive; 17 (4) justifiable reliance by the creditor on the subject 18 representation(s) or conduct; and (5) damage to the creditor 19 proximately caused by its reliance on such representation(s) or 20 conduct. Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219 , 1222 21 (9th Cir. 2010); In re Weinberg, 410 B.R. at 35 . By its terms, a 22 creditor will not be entitled to a claim under § 523(a)(2)(A) if 23 the debtor's fraudulent representations consist of "statement[s] 24 respecting the debtor's or an insider's financial condition." 25 Heritage Pac. Fin., LLC v. Edgar (In re Montano), 501 B.R. 96 , 102 26 n.5 (9th Cir. BAP 2012). 27 1. False representation made with intent to deceive 28 In addition to affirmative false representations not -52- 1 respecting a debtor's or insider's financial condition, a debtor's 2 silence or omission of a material fact can constitute a false 3 representation for purposes of § 523(a)(2)(A). Citibank (S.D.), 4 N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1089 (9th Cir. 1996). 5 However, in order to find liability for fraud based upon silence 6 or omission, there must be a duty to disclose. Id. 7 Loans 9 and 10 were funded in early August 2006. By this 8 time, Debtor was well aware of the WCAB Stay and the criminal 9 investigation pending against Premier and the negative impact 10 these two things had, or could have, on his income and ability to 11 repay the loans. The WCAB Stay was imposed in June 2004 and 12 precluded Tammy from collecting on approximately $70 million in 13 lien claims. Debtor never informed the Bank in writing about the 14 WCAB Stay. Although he claimed he told the Bank's president about 15 it, the bankruptcy court found that no evidence in the record 16 suggested this information went from the president to the Bank. 17 Even if this finding was erroneous, which we do not conclude, 18 Debtor admitted he knew as early as 2005 that a waiver of the 19 Premier receivables could be a condition of a plea agreement. 20 That meant he would not receive several millions of dollars in 21 income he repeatedly told the Bank he would. Debtor admitted he 22 never informed the Bank in writing or otherwise about the Premier 23 investigation or potential waiver. 24 Due to their business relationship, Debtor had a duty to 25 disclose the material information about Premier to the Bank when 26 applying for Loans 9 and 10. See In re Eashai, 87 F.3d at 1089 27 (citing to the Restatement (Second) of Torts § 551(1)(1976)). The 28 bankruptcy court's finding that he had a duty to do so was not -53- 1 clearly erroneous. Further, Yoder testified that the negative 2 impact on Premier receivables is something he and the Bank would 3 have wanted to know before making any loans, as it could have 4 affected Debtor's ability to handle his projects. Thus, Debtor's 5 failure to disclose the problems facing Premier was an omission of 6 a material fact. 7 As with § 523(a)(2)(B), intent to deceive under 8 § 523(a)(2)(A) can be shown by a debtor's reckless disregard for 9 the truth of a representation, or reckless indifference to the 10 debtor's actual circumstances. In re Anastas, 94 F.3d at 1286 . 11 The bankruptcy court found that Debtor had acted with the 12 requisite recklessness to establish his intent under 13 § 523(a)(2)(A), particularly with his failure to disclose 14 Premier's problems. This finding is not clearly erroneous. By 15 the time Loans 9 and 10 were funded, Debtor had actual knowledge 16 of the problems facing Premier and how it could negatively impact 17 his income. Withholding this material information about Premier 18 from the Bank establishes, at minimum, a reckless indifference to 19 the truth, if not actual intent to deceive. Thus, the FDIC 20 established Debtor's intent for purposes of § 523(a)(2)(A). 21 2. Damages as a result of reliance on the false representation [22] 23 For a claim under § 523(a)(2)(A), a creditor must also show 24 it was justified in relying on the debtor's false representations. 25 Field v. Mans, 516 U.S. 58 , 73-76 (1995); In re Eashai, 87 F.3d at 26 1090. Justifiable reliance is a subjective standard, which turns 27 on a person's knowledge under the particular circumstances. 28 In re Eashai, 87 F.3d at 1090 . -54- 1 As the bankruptcy court correctly noted, nondisclosure of a 2 material fact in the face of a duty to disclose can establish the 3 requisite reliance and causation for actual fraud under the Code. 4 Apte v. Romesh Japra, M.D., F.A.C.C., Inc. (In re Apte), 96 F.3d 5 1319, 1323 (9th Cir. 1996). The Supreme Court recognized in the 6 context of securities fraud the difficulty of proving the reliance 7 or causation elements in a case of fraudulent nondisclosure in 8 Affiliated Ute Citizens v. United States, 406 U.S. 128 , 153-54 9 (1972). In Apte, the Ninth Circuit extended the holding of 10 Affiliated Ute Citizens to the context of fraud cases under the 11 Code: 12 Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not 13 a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a 14 reasonable investor might have considered them important in the making of this decision. This obligation to 15 disclose and this withholding of a material fact establish the requisite element of causation in fact. [16] 17 In re Apte, 96 F.3d 1319, 1323 (quoting Affiliated Ute Citizens, [18] 406 U.S. at 153-54 ). 19 Debtor contends the Bank's reliance was not justified based 20 on the "entire forest of red flags when underwriting the 18 loans 21 and making its credit decision." This argument fails to address 22 the omissions in this case, particularly Debtor's failure to 23 disclose the detrimental information about Premier of which he was 24 aware. The bankruptcy court found the Bank had established 25 justifiable reliance due to the nature of the undisclosed 26 information. We perceive no clear error with this finding. 27 As to Loans 9 and 10, FDIC expert Tarter opined that the Bank 28 was justified in relying on Debtor's failure to disclose the -55- 1 Premier investigation, as it was not a fact the Bank could have 2 reasonably discovered. "[A] party to a business transaction has a 3 duty to disclose when the other party is ignorant of material 4 facts which he does not have an opportunity to discover." 5 In re Apte, 96 F.3d at 1324 . In addition, Yoder indicated that 6 the trouble with Premier was important information the Bank would 7 have considered when making the loans or modifications. Thus, the 8 Bank established justifiable reliance. 9 Finally, the creditor must establish that the claim sought to 10 be excepted from discharge arose from an injury proximately 11 resulting from its reliance on the debtor's misrepresentations. 12 Britton v. Price (In re Britton), 950 F.2d 602, 604 (9th Cir. 13 1991). Because Debtor failed to disclose the material information 14 regarding Premier, the Bank's proximate cause for Loans 9 and 10 15 was established. These loans were not repaid, and the Bank 16 suffered an actual loss as a result. Thus, Loans 9 and 10, which 17 totaled approximately $3.5 million, were properly excepted from 18 Debtor's discharge under § 523(a)(2)(A). 19 VI. CONCLUSION 20 For the foregoing reasons, we AFFIRM the judgment. [28] -56-