In re: Birger Greg Bacino ( 2015 )


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  •                                                             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     1                         NOT FOR PUBLICATION           SUSAN M. SPRAUL, CLERK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.
    25
    26
              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
    27
    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 loan-
    10   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
    24
              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.
    21
    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.
    21
    22
    23
    24
    25
    26
    27
    28
    
                                         -56-
    

Document Info

DocketNumber: SC-14-1150-KiKuJu

Filed Date: 12/31/2015

Precedential Status: Non-Precedential

Modified Date: 12/31/2015

Authorities (25)

In Re Sabban , 600 F.3d 1219 ( 2010 )

Affiliated Ute Citizens of Utah v. United States , 406 U.S. 128 ( 1972 )

In Re Ilko , 651 F.3d 1049 ( 2011 )

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

In Re Retz , 606 F.3d 1189 ( 2010 )

Celotex Corporation v. Myrtle Nell Catrett, Administratrix ... , 477 U.S. 317 ( 1986 )

In Re Richard W. Candland, Debtor. Richard W. Candland v. ... , 90 F.3d 1466 ( 1996 )

In Re Bashir Y. Anastas, Debtor. Bashir Y. Anastas v. ... , 94 F.3d 1280 ( 1996 )

In the Matter of Robert Oneal Bogstad, Debtor-Appellant , 779 F.2d 370 ( 1985 )

in-re-bruce-l-siriani-mark-w-stevens-philip-j-andrews-debtors-bruce-l , 967 F.2d 302 ( 1992 )

In Re Amjad I. Eashai, Debtor. Citibank (South Dakota), N.A.... , 87 F.3d 1082 ( 1996 )

In Re: Sateesh Apte, Debtor. Sateesh Apte v. Romesh Japra, ... , 96 F.3d 1319 ( 1996 )

In Re David Louis Cohn, Debtor. Insurance Company of North ... , 54 F.3d 1108 ( 1995 )

Bankr. L. Rep. P 74,355 in Re Robert Britton, Debtor. ... , 950 F.2d 602 ( 1991 )

In Re Greene , 96 B.R. 279 ( 1989 )

In Re Seth E. Sicroff, Debtor, Stephen C. Jett v. Seth E. ... , 401 F.3d 1101 ( 2005 )

In Re Weinberg , 410 B.R. 19 ( 2009 )

Bullock v. BankChampaign, N. A. , 133 S. Ct. 1754 ( 2013 )

In Re Arm , 175 B.R. 349 ( 1994 )

In Re Oh , 278 B.R. 844 ( 2002 )

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