in re: jesus edgar montano, 9th cir. bap (2013)

7/25/2019 In re: Jesus Edgar Montano, 9th Cir. BAP (2013)

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UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

I n r e: ) BAP No. NC- 12- 1579- PaDJ u)

J ESUS EDGAR MONTANO, ) Bk. No. 10- 71788)

Debt or . ) Adv. No. 11- 04008___________________________________)

))

HERI TAGE PACI FI C FI NANCI AL, LLC, ))

Appel l ant , ))

v. ) O P I N I O N)J ESUS EDGAR MONTANO, )

)Appel l ee. )

___________________________________)

Ar gued and Submi t t ed on Sept ember 20, 2013at San Fr anci sco, Cal i f or ni a

Fi l ed - November 1, 2013

Appeal f r om t he Uni t ed St at es Bankrupt cy Cour tf or t he Nor t her n Di st r i ct of Cal i f or ni a

Hon. Wi l l i am J . Laf f er t y, U. S. Bankr upt cy J udge, Pr esi di ng

Appear ances: Br ad A. Mokr i ar gued f or appel l ant Her i t age Paci f i cFi nanci al , LLC; Tessa Meyer s Sant i ago ar gued f orappel l ee J esus Edgar Mont ano.

Bef ore: PAPPAS, DUNN and J URY, Bankr upt cy J udges.

FILEDNOV 01 2013

SUSAN M. SPRAUL, CU.S. BKCY. APP. PANOF THE NINTH CIRCU


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1 Unl ess ot her wi se i ndi cat ed, al l chapt er , sect i on and r ul er ef er ences ar e t o t he Bankrupt cy Code, 11 U. S. C. 101- 1532, andt o the Feder al Rul es of Bankrupt cy Pr ocedur e, Rul es 1001- 9037.Ci vi l Rul e r ef er ences ar e t o t he Feder al Rul es of Ci vi l Pr ocedur e1- 86.

2 For br evi t y, we abbr evi at e Cal . Code Ci v. Pr oc. as CCCP.

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PAPPAS, Bankr upt cy J udge:

Cr edi t or Her i t age Paci f i c Fi nanci al , LLC ( Her i t age) appeal s

t he deci si ons of t he bankrupt cy cour t : ( 1) gr ant i ng a summar y

j udgment di smi ssi ng Her i t age s 523(a) ( 2) compl ai nt agai nst

chapt er 71 debt or J esus Edgar Mont ano ( Mont ano) because

enf or cement of i t s cl ai m was bar r ed by Cal . Code Ci v. Pr oc. 726

( f ) and ( g) ; 2 and ( 2) af t er i ni t i al l y denyi ng t he mot i on, on

r econsi derat i on, gr ant i ng Mont ano s r equest f or an awar d of

at t orneys f ees and cost s. We AFFI RM.

FACTS

Mont ano i s a nat i ve of El Sal vador , wi t h l i mi t ed spoken

Engl i sh l anguage ski l l s, and no abi l i t y t o r ead or wr i t e Engl i sh.

I n November 2006, Mont ano pur chased a house i n Oakl and, Cal i f orni a

( t he Proper t y) . To obt ai n f i nanci ng, he cont act ed a mor t gage

br oker who, accor di ng t o Mont ano, col l ect ed hi s f i nanci al

i nf or mat i on i n a conver sat i on over t he phone and t hen l at er

i ncor por at ed i t i nt o a Uni ver sal Resi dent i al Loan Appl i cat i on

( For m 1003) ( t he URLA) . The r ecor d i s not cl ear when t hi s

t el ephone conver sat i on t ook pl ace, or how WMC Mor t gage Corporat i on

( WMC) , t he event ual l ender , was cont act ed. However , t he r ecor d

shows t hat WMC was asked by t he broker t o consi der Mont ano s

appl i cat i on f or a pr i mar y l oan of $348, 750, and a second l oan of


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$89, 990, t o pur chase t he Pr oper t y.

Mont ano s l oan r equest s wer e appr oved by WMC. On November

22, 2006, Mont ano appear ed bef ore a notary t o compl ete t he

paper wor k f or t he l oan appl i cat i ons. At t hat t i me, he si gned t he

URLA, t he not es f or t he two l oans, and separ at e deeds of t r ust

secur i ng each l oan. Si gni f i cant l y, Mont ano i ni t i al ed each page of

t he URLA, except f or t he page whi ch cont ai ned speci f i c i nf or mat i on

r egar di ng t he i ncome he pur port edl y recei ved f r om wages and sel f -

empl oyment .

The par t i es agr ee t hat t he URLA cont ai ned i ncor r ect

i nf ormat i on about Mont ano s i ncome. The URLA st at ed t hat Mont anor ecei ved a t otal of $8, 090 per mont h, $3, 500 of whi ch were wages

he ear ned wor ki ng as an aut o det ai l er at a l ocal deal er shi p, and

t he remai nder as i ncome generated f r omhi s supposed busi ness,

Mont ano Movi ng Ser vi ces. Al t hough Mont ano was i n f act empl oyed at

t he aut o deal er shi p at t he t i me of appl yi ng f or t he l oans t o

pur chase t he Propert y, Mont ano mai nt ai ns t hat he was never sel f -

empl oyed, nor t hat he recei ved any i ncome f r om Mont ano Movi ng

Ser vi ces.

Ther e ar e ot her documents t hat Her i t age asser t s wer e

cont ai ned i n Mont ano s l oan appl i cat i on mat er i al s submi t t ed t o

WMC: ( 1) separ at e l et t er s of r ef er ence f r om J oel Rendon, Mar t a

Madr i z and Vant u Tran, each st at i ng t hat t hey were happy wi t h t he

movi ng ser vi ces supposedl y pr ovi ded by Mont ano; ( 2) copi es of t wo

Cr ai gsl i st i nt er net adver t i sement s f or Mont ano Movi ng Ser vi ces;

and ( 3) a l et t er f r om Guadal upe Per ez, on t he l et t er head of Per ez

I ncome Tax, i ndi cat i ng t hat she had pr ovi ded account i ng servi ces

f or Mont ano and Mont ano Movi ng Servi ces f or t he pr evi ous t hr ee


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3 Ther e i s ver y l i t t l e i nf or mat i on i n t he r ecor d concer ni ngt he cl osi ng of t he l oan t r ansact i ons. WMC r ef er s t o i t s December4, 2006 act i ons as set t l ement of t he l oan. We assume t hat t hef unds wer e di sbur sed on or af t er t hi s set t l ement .

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year s. Mont ano al l eges that t hese document s wer e al l f or ger i es

cr eat ed wi t hout hi s knowl edge by J oel Rendon, an empl oyee of t he

l oan br oker .

The Mont ano l oan appl i cat i on f i l e al so cont ai ned WMC s

pref undi ng audi t f orms si gned by J onat han Cobb on November 30,

2006. One such f or m r el at es t o Mont ano s sel f - empl oyment ; i t

i ndi cat es t hat Cobb spoke wi t h t ax pr epar er . He ver i f i ed t hat he

has f i l ed schedul e C t ax i nf o f or t he bor r ower f or t he l ast 3

year s. The second f or m r el at es t o empl oyment ver i f i cat i on. Cobb

supposedl y spoke wi t h t he human r esour ces manager f or t he aut o

deal er shi p and ver i f i ed t hat Mont ano was empl oyed t her e. Ther e i s

no i ndi cat i on on ei t her f or m t hat t he i ncome amount s shown i n t he

l oan appl i cat i on wer e ver i f i ed t o be accur at e.

WMC appr oved bot h of Mont ano s l oans on December 4, 2006. 3

Mont ano resi ded at t he Pr oper t y pur chased wi t h the l oans f or

seven mont hs, unt i l about J une 2007. Af t er maki ng onl y f i ve

payment s on t he l oans, he def aul t ed on t he pr i mary l oan and, on

J ul y 17, 2007, WMC f i l ed a not i ce of def aul t t o f or ecl ose t hef i r st pr i or i t y deed of t r ust . A t r ust ee s sal e occur r ed, and t he

Proper t y was sol d on Oct ober 22, 2007. The now- unsecured second

l oan note was pur chased by Her i t age on J anuary 20, 2009.

Her i t age al l eges t hat , onl y af t er pur chasi ng t he second l oan

note, i t di scover ed t hat Mont ano had mi sr epr esent ed hi s i ncome on

t he URLA. Her i t age f i l ed a compl ai nt i n Al ameda Count y Super i or

Cour t i n Apr i l 2010, al l egi ng that Mont ano obt ai ned t he second


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4 The Honorabl e Denni s Mont al i pr esi ded at t he hear i ng onMarch 25, 2011, and r ul ed on t he mot i on. The adver sar ypr oceedi ng was subsequent l y assi gned t o t he Honor abl e Wi l l i amLaf f er t y, who ent er ed t he or der s at i ssue i n t hi s appeal .

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l oan by f r aud.

Mont ano f i l ed a chapt er 7bankrupt cy pet i t i on on Oct ober 13,

2010. Hi s schedul e F l i st s a debt f or $89, 990. 00 owed t o Her i t age

f or t he second mort gage l oan.

Her i t age commenced t he adver sar y pr oceedi ng gi vi ng r i se t o

t hi s appeal on J anuar y 9, 2011. I n i t s compl ai nt , Her i t age asked

t he bankrupt cy cour t t o det er mi ne t hat i t s $89, 990. 00 cl ai m

agai nst Mont ano based upon t he second l oan not e was except ed f r om

di schar ge f or f r aud under 523( a) ( 2) ( A) and ( B) . Accor di ng t o

Her i t age, Mont ano knew t hat t he URLA and suppor t i ng document at i on

he submi t t ed t o WMC t o obt ai n t he l oans wer e mat er i al l y f al se.Mont ano s i ni t i al r esponse to t he compl ai nt was a mot i on t o

di smi ss under Ci vi l Rul e 12( b) ( 5) and ( 6) , f i l ed on Febr uar y 17,

2011, and amended on Febr uar y 25, 2011. I n t he mot i on, Mont ano

chal l enged Her i t age s r i ght t o r el i ef because t he compl ai nt f ai l ed

t o est abl i sh Her i t age s stat us as a credi t or . Fur t her , Mont ano

ar gued t hat Her i t age had not pl ed suf f i ci ent f act s t o suppor t an

except i on t o di schar ge under ei t her 523( a) ( 2) ( A) or ( B) . Al so

on Febr uary 25, 2011, Mont ano f i l ed a cross- compl ai nt agai nst

Her i t age seeki ng t o r ecover hi s at t or neys f ees and cost s i ncur r ed

i n t he adver sary pr oceedi ng under 523( d) .

A hear i ng on Mont ano s di smi ssal mot i on was conduct ed on

Mar ch 25, 2011. Af t er hear i ng f r om t he par t i es, t he bankrupt cy

cour t 4 deni ed Mont ano s mot i on t o di smi ss , r ul i ng, among other

t hi ngs, t hat Her i t age had pl ed suf f i ci ent f act s t o st at e a cl ai m


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5 The bankrupt cy cour t di d not addr ess Her i t age s cl ai munder 523( a) ( 2) ( B) . Thi s i s cur i ous si nce Her i t age s theor y i st hat Mont ano obt ai ned t he l oan t hr ough use of a f r audul ent l oanappl i cat i on and suppor t i ng wr i t t en mat er i al s concer ni ng hi sf i nanci al condi t i on, a cl ai m gover ned excl usi vel y by

523( a) ( 2) ( B) . By i t s ter ms, 523( a) ( 2) ( A) excl udes ast at ement r espect i ng t he debt or s or an i nsi der s f i nanci alcondi t i on. By cont r ast , 523( a) ( 2) ( B) ( i i ) expl i ci t l y r equi r essuch a wr i t t en st at ement . Tal l ant v. Kauf man ( I n r e Tal l ant ) , 218B. R. 58, 69 ( 9t h Ci r . BAP 1998) .

At or al ar gument bef or e t he Panel , Her i t age cl ar i f i ed t hat i thas abandoned i t s cl ai m under 523( a) ( 2) ( A) and pr oceeded i n t hebankrupt cy cour t and t hi s appeal sol el y under 523( a) ( 2) ( B) .

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under 523( a) ( 2) ( A) pl ausi bl e on i t s f ace. 5 Al t hough Mont ano s

cr oss- cl ai m seeki ng r ecover y of at t or neys f ees under 523( d) was

not addr essed at t hat hear i ng, t he cour t made ext ensi ve comment s

r egar di ng t he chal l enges Her i t age woul d f ace i n est abl i shi ng t hat

i t had subst ant i al j ust i f i cat i on f or pr osecut i ng t he adver sar y

pr oceedi ng agai nst Mont ano:

The or i gi nal l ender has t o show or you f or Her i t age havet o show t hat t he or i gi nal l ender j ust i f i abl y r el i ed i nt hi s case, not what some expert says some hypothet i call ender woul d nor mal l y do. . . . How ar e you goi ng t opr ove i t [ ?] And I m not hear i ng a ver y good answer . .. . But I al so woul d l i ke t o be pr act i cal t oo and notwast e t i me i f at t he end of t he day you si mpl y don thave a case t o pr ove. . . . I f we st ar t wi t h t he f act

t hat t he or i gi nal l ender i s def unct and whoever made adeci si on at t he or i gi nal l ender i s nowher e to be f ound.But t he l aw of t he [ Boyaj i an] case makes i t abundant l ycl ear t hat you [have] got t o show who made t he rel i anceand who was def r auded. Not your cl i ent . So I don tknow how you are goi ng t o pr ove i t .

Hr g Tr . 7: 98: 9, Mar ch 25, 2011.

Af t er consi der abl e spar r i ng i n di scover y di sput es, Mont ano

f i l ed a mot i on f or summary j udgment on Febr uary 21, 2012.

Mont ano s mot i on was f ounded on hi s argument s t hat : ( 1)

enf or cement of Her i t age s cl ai m was bar r ed by the st at ut e of

l i mi t at i ons; ( 2) t he cl ai m was bar r ed by Cal i f or ni a s one- act i on


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r ul e; ( 3) t he cl ai m was bar r ed by Cal i f or ni a s ant i - def i ci ency

st at ut es; ( 4) t he cl ai m shoul d be di smi ssed because Her i t age had

not est abl i shed t hat i t was t he r eal par t y i n i nt er est ; ( 5)

Her i t age was not pr oper l y ass i gned t he cl ai m; and ( 6) Her i t age

coul d not est abl i sh t hat any f r aud occur r ed.

Her i t age r esponded t o t he summar y j udgment mot i on on Mar ch 1

and 7, 2012. I n addi t i on t o some pr ocedur al argument s regardi ng

t i mel i ness of Mont ano s mot i on under t he l ocal r ul es, Her i t age

count er ed Mont ano s argument s, cont endi ng t hat : ( 1) i t s cl ai m was

not t i me- bar r ed because the st at ut e of l i mi t at i ons di d not begi n

t o r un unt i l t he f or ecl osur e occur r ed; ( 2) nei t her t he one- act i onr ul e nor t he ant i - def i ci ency st at ut es appl y t o a cl ai m agai nst a

bor r ower f or f r aud; ( 3) CCCP 726( a) does not appl y t o sol d- out

j uni or l i enhol der s; ( 4) Her i t age i s t he val i d hol der of t he not e

on t he second mor t gage l oan; and ( 5) WMC had compl i ed wi t h

i ndust r y st andar ds f or det er mi ni ng Mont ano s cr edi t wor t hi ness i n

r el yi ng on t he URLA and suppor t i ng document s. At t ached t o

Her i t age s r esponse was a decl arat i on of Mark G. Scheuerman,

of f er ed as an exper t wi t ness, who st at ed t hat , i n hi s opi ni on, WMC

abi ded by t he gener al st andar ds of pr act i ces and cust oms i n t he

l endi ng i ndust r y i n det er mi ni ng a bor r ower s cr edi t wor t hi ness at

t he t i me of t he l oans. Al so at t ached was a decl ar at i on of Di ane

Tayl or t hat had been prepar ed f or an unr el at ed st at e cour t case,

i dent i f yi ng her as assi st ant secr et ar y of WMC Mor t gage, LLC, t he

successor t o WMC. Tayl or decl ared t hat WMC r el i ed on t he

i nf or mat i on pr ovi ded by an appl i cant - bor r ower i n hi s/ her l oan

appl i cat i on t hr ough al l st ages of t he under wr i t i ng pr ocess.

Lengt hy hear i ngs on t he summary j udgment mot i on t ook pl ace on


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Apr i l 11 and 23, 2012. As shown i n t he t r anscr i pt s, al l i ssues

r ai sed by t he par t i es wer e addr essed by counsel , and t he

bankrupt cy cour t act i vel y engaged i n di scussi ons wi t h t hem. At

t he concl usi on of t he hear i ngs, t he cour t expl ai ned t he r easons

f or i t s deci s i on:

I am convi nced t hat [ CCCP ] 726( f ) and ( g) appl y t ot hi s si t uat i on and on t hat basi s I m goi ng t o gr ant t hemot i on f or summar y j udgment . . . . On t hi s set off act s, I m concl udi ng t hat t hi s was owner - occupi edpr oper t y and I m al so concl udi ng t hat t he amount of t hedebt f al l s wi t hi n t he pr ohi bi t i on [ of 726( g) ] . I maware of t he ar gument t hat perhaps t he Legi sl atur e meantsomethi ng el se i n t erms of what t he aggr egat e debt woul dbe, but t hat i s not what t he st at ut e says. I t ssomethi ng that easi l y coul d have been expr essed as such

and easi l y, f r ankl y, coul d have been cor r ect edt her eaf t er but i t hasn t been. So I m deal i ng wi t h t hest at ut e as I bel i eve i t t o be. . . . I am not accept i ngt he pr oposi t i on t hat [ ] 726( f ) and ( g) si mpl y par al l elsome ot her doct r i ne of al l owi ng f r aud cl ai ms agai nstbor r ower s. I see not hi ng i n t he way t he st at ut e i sdr af t ed or t he wor ds of t he [ Legi sl at i ve Hi st or y] t oi ndi cat e t hat . . . . I m det er mi ni ng t hat summar yj udgment i s appropr i at e on t he grounds of t heappl i cabi l i t y of secti ons 726( f ) and ( g) i n t hi s case.I t hi nk many ot her ar gument s wer e made are of somei nt er est , and obvi ousl y a l ot of t i me and ef f or t wenti nt o t hose ar gument s. But because t hi s di sposes of t hemat t er , I m goi ng t o l eave i t at t hat .

Hr g Tr . 107: 18108: 22, Apr i l 23, 2012. I n r esponse t o a quer y by

Mont ano s counsel not i ng t hat we had moved f or f ees under [ ]

523( d) and t hat t he debt r emai ns di scharged, i t was a consumer

debt , and the compl ai nt was br ought wi t hout a reasonabl e basi s i n

l aw, t he bankrupt cy cour t r esponded, I m denyi ng t hat . I t hi nk

t hose ar e cl ose quest i ons. I m denyi ng t hat . Hr g Tr . 109: 4- 9,

Apr i l 23, 2012.

On J une 5, 2012, t he bankr upt cy cour t ent ered an Or der on

Def endant s Mot i on f or Summar y J udgment ( t he Summar y J udgment

Or der ) , gr ant i ng t he mot i on on t he basi s t hat t he [ Her i t age]


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cl ai m i s bar r ed by Cal i f or ni a Code [ of Ci vi l Pr ocedur e ] 726( f )

and ( g) f or t he r easons or al l y st at ed on t he r ecor d.

On J une 19, 2012, Mont ano f i l ed a mot i on f or r econsi der at i on.

I n i t , Mont ano ar gued t hat i t was l egal er r or f or t he bankrupt cy

cour t t o deny hi s 523( d) mot i on f or an awar d of at t or neys f ees

and cost s wi t hout maki ng appr opr i at e f i ndi ngs, especi al l y wher e

Her i t age coul d not show subst ant i al j ust i f i cat i on f or pr osecut i ng

t he adver sary pr oceedi ng. Her i t age r esponded t o t hi s mot i on on

J ul y 18, 2012, ar gui ng t hat Mont ano was mer el y r eargui ng i ssues

t hat were pr evi ousl y rai sed i n t he summary j udgment pr oceedi ngs.

Her i t age f ur t her asser t ed t hat i t s compl ai nt agai nst Mont ano wassubst ant i al l y j ust i f i ed by t he f act s and t he l aw.

At an i ni t i al hear i ng on t he mot i on f or r econsi der at i on on

August 1, 2012, t he bankrupt cy cour t di r ect ed t he par t i es t o

submi t addi t i onal br i ef i ng on whet her Her i t age s act i on agai nst

Mont ano was subst ant i al l y j ust i f i ed at al l st ages of t he case. At

t he cont i nued hear i ng on Sept ember 5, 2012, af t er hear i ng more

ar gument f r om counsel , t he bankrupt cy cour t not ed that i t had

di sposed of summary j udgment by r ul i ng on onl y one gr ound: t hat

CCCP 726( f ) and ( g) bar r ed Her i t age f r om asser t i ng i t s f r aud

cl ai m agai nst Mont ano. Whi l e t he cour t acknowl edged t hat i t had

not r eached Mont ano s other argument s r egardi ng st andi ng,

assi gnabi l i t y of t he not e, Mont ano s l ack of i nt ent t o decei ve, or

Her i t age s r el i ance on t he l oan appl i cat i on i ncome i nf or mat i on,

t he cour t concl uded t hat ,

t he r i ght anal ysi s f or [ ] 523( d) i s t o go back and seei f t her e wer e f act s and l aw on [ Her i t age s] si de, event hough I di dn t r each t hem i n di sposi ng of t he summar yj udgment mot i on. I t hi nk once I have a r equest under[ ] 523( d) , t hat s what I m supposed t o do, and f r ankl y


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i s what I di dn t do at t he end of t he hear i ng because Iwas f ocusi ng on what I di d deci de.

Hr g Tr . 41: 29, Sept ember 5, 2012.

Af t er next hear i ng ar gument s f r om counsel r egar di ng

Her i t age s posi t i on at each st age of t he l i t i gat i on r egar di ng t he

el ement s of f r aud, t he bankr upt cy cour t f ocused on one necessary

el ement of Her i t age s f r aud cl ai m, r el i ance, and quest i oned

whet her Her i t age had met i t s bur den of showi ng t hat WMC had

act ual l y rel i ed on t he i ncome r epr esent at i ons i n t he l oan

appl i cat i on mat er i al s submi t t ed by Mont ano. The cour t t hen

r emi nded Her i t age of t he cour t s ear l i er admoni t i on at t he hear i ngon t he di smi ssal mot i on t hat Her i t age woul d f ace a si gni f i cant

hur dl e t o est abl i sh act ual r el i ance by a def unct l ender .

Her i t age had submi t t ed t hr ee decl ar at i ons t o suppor t i t s

posi t i on that WMC had act ual l y r el i ed on t he mi sr epr esent at i ons

al l egedl y made by Mont ano i n appr ovi ng t he l oans, i n whi ch: Mr .

Gant er , Her i t age s i n- house counsel , descr i bed hi s i nvest i gat i on

of Mont ano s al l eged st atement s; Mr . Scheuerman, an expert

wi t ness, opi ned t hat WMC met i ndust r y st andards f or determi ni ng

credi t wor t hi ness; and Ms. Tayl or , an assi st ant secret ar y i n t he

successor busi ness t o WMC, st ated t hat WMC r el i ed on t he i ncome

asser t i ons i n t he l oan appl i cat i on at al l st ages of t he l oan

pr ocess.

The bankrupt cy cour t r ej ect ed Her i t age s showi ng. I t not ed

t hat t he Gant er decl arat i on si mpl y di d not addr ess whether WMC

r el i ed on t he URLA and t hat , addi t i onal l y, Mont ano had poi nt ed out

sever al i nconsi st enci es i n Gant er s st at ement s. The Scheuer man

decl ar at i on, accor di ng t o t he cour t , hel ps me deci de whet her


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286 I n i t s or der on Def endant s Mot i on f or At t or ney s Fees and

Cost s, t he bankr upt cy cour t awarded Mont ano $69, 782. 19 i nat t or ney s f ees and $1, 085. 12 i n cost s. Her i t age has notchal l enged t he amount awarded i n t hi s appeal .

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somet hi ng meet s an i ndust r y st andar d or not . So he s not t al ki ng

about act ual r el i ance [ by WMC] . Hr g Tr . 43: 5- 6, Sept ember 5,

2012.

The bankrupt cy cour t expressed bef uddl ement r egar di ng t he

Tayl or decl ar at i on: I coul dn t t el l who she was f r om t he

decl ar at i on, f r ankl y. I coul dn t t el l how she d have any

knowl edge of t he i ssue. She di dn t i dent i f y . . . t he per son who

l ooked at [ t he URLA] , and what she sai d was so compl etel y

concl usor y. I d. at 43: 8- 13. The cour t concl uded:

I am gr ant i ng t he mot i on f or r econsi der at i on t o t heext ent t hat i t put i nt o i ssue t he el ement s under [ ]

523( a) ( 2) ( B) t hat wer e set f or t h i n t he mot i on f orsummar y j udgment . Those di r ect l y i ncl uded t he r el i anceel ement . The pr edi cat e f or any r el i ance el ement i s t hatt her e was act ual r el i ance by a per son, and I m f i ndi ngt hat t hat si mpl y was not demonst r at ed, and i t s not acredi bi l i t y i ssue. The decl ar at i ons si mpl y di dn t go t ot he subj ect i n any meani ngf ul way.

I d. at 45: 3- 11.

An or der gr ant i ng t he mot i on f or r econsi der at i on, and

awardi ng at t orneys f ees and cost s under 523( d) t o Mont ano, was

ent ered on Sept ember 27, 2012 ( t he Reconsi derat i on Or der) . 6

Fol l owi ng ent r y of a f i nal j udgment i n t he adver sary pr oceedi ng on

Oct ober 22, 2012, Her i t age f i l ed a t i mel y appeal r egar di ng bot h

t he Summar y J udgment Or der and Reconsi der at i on Or der , on November

2, 2012.

JURISDICTION

The bankrupt cy cour t had j ur i sdi ct i on under 28 U. S. C. 1334

and 157( b) ( 2) ( A) and ( I ) . We have j ur i sdi ct i on under 28 U. S. C.

158.


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ISSUES

Whether t he bankr upt cy cour t err ed i n gr ant i ng Mont ano s

mot i on f or summary j udgment agai nst Her i t age because CCCP 726

bar r ed enf or cement of Her i t age s cl ai m agai nst Mont ano.

Whet her t he bankrupt cy cour t abused i t s di scr et i on i n

r econsi der i ng i t s ear l i er or der denyi ng an awar d of at t or neys f ees

and cost s t o Mont ano and t hen gr ant i ng t hat award under 523( d) .

STANDARDS OF REVIEW

We revi ew de novo the bankrupt cy cour t s gr ant of summary

j udgment . SNTL Cor p. v. Ct r . I ns. Co. ( I n r e SNTL Cor p. ) , 571

F. 3d 826, 834 ( 9t h Ci r . 2009) . The bankrupt cy cour t si nt er pr et at i on of st at e l aw i s al so r evi ewed de novo. Lahot i v.

Ver i check, 636 F. 3d 501, 505 ( 9t h Ci r . 2011) .

We r evi ew deci si ons r egar di ng r el i ef f r om j udgment under

Rul es 9024 and 9023, whi ch i ncor por at e Ci vi l Rul es 60( b) ( 1) and

59( e) , f or abuse of di scr et i on. Bat eman v. U. S. Post al Ser v. , 231

F. 3d 1220, 1223 ( 9t h Ci r . 2000) ; Mor r i s v. Per al t a ( I n r e

Per al t a) , 317 B. R. 381, 385 ( 9t h Ci r . BAP 2004) .

A bankrupt cy cour t s or der awar di ng at t or neys f ees and cost s

under 523( d) i s revi ewed f or abuse of di scr et i on. Fi r st Car d v.

Hunt ( I n r e Hunt ) , 238 F. 3d 1098, 1101 ( 9t h Ci r . 2001) ( adopt i ng

t he BAP s st andar d of r evi ew of 523( d) announced i n Fi r st Car d

v. Car ol an ( I n r e Car ol an) , 204 B. R. 980, 984 ( 9t h Ci r . BAP

1996) ) . Under t hi s st andar d of r evi ew, we f i r st det er mi ne de

novo whet her t he [ bankrupt cy] cour t i dent i f i ed t he cor r ect l egal

r ul e t o appl y t o t he r el i ef r equest ed. Uni t ed St at es v. Hi nkson,

585 F. 3d 1247, 1262 ( 9t h Ci r . 2009) ( en banc) . And i f t he

bankr upt cy cour t i dent i f i ed t he cor r ect l egal r ul e, we t hen


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det er mi ne under t he cl ear l y er r oneous st andar d whet her i t s f act ual

f i ndi ngs and i t s appl i cat i on of t he f act s t o t he r el evant l aw

wer e: ( 1) i l l ogi cal , ( 2) i mpl ausi bl e, or ( 3) wi t hout suppor t i n

i nf er ences that may be dr awn f r om t he f act s i n t he r ecor d. I d.

( i nt er nal quot at i on mar ks omi t t ed) .

DISCUSSION

I.

The bankruptcy court did not err in granting Montanosmotion for summary judgment against Heritage becauseCCCP 726 barred enforcement of Heritages claimagainst Montano.

I n t he bankrupt cy cour t , Her i t age sought a 523( a) ( 2) ( B)except i on t o Mont ano s di schar ge because, Her i t age al l eged, t he

l oan appl i cat i on and other mater i al s Mont ano submi t t ed t o WMC t o

obt ai n t he second mor t gage l oan cont ai ned f r audul ent i nf or mat i on.

The bankr upt cy cour t grant ed summar y j udgment t o Mont ano, and

di smi ssed Her i t age s except i on t o di schar ge cl ai m, a r ul i ng

Her i t age chal l enges i n t hi s appeal . Thi s di schar ge except i on

pr ovi des:

523. Except i ons t o di schar ge

( a) A di schar ge under sect i on 727 . . . of t hi s t i t l edoes not di schar ge an i ndi vi dual debt or f r om any debt. . .

( 2) f or money, pr oper t y, ser vi ces, or an ext ensi on,r enewal , or r ef i nanci ng of credi t , t o t he ext entobt ai ned, by . . .

( B) use of a st at ement i n wr i t i ng

( i ) t hat i s mat er i al l y f al se; ( i i ) respect i ng t he debt or s or ani nsi der s f i nanci al condi t i on;

( i i i ) on whi ch t he credi t or t o whom t hedebt or i s l i abl e f or such money,pr oper t y, ser vi ces, or credi tr easonabl y r el i ed; and


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7 Of cour se, Her i t age di d not l oan any money t o Mont ano; i t scl ai m agai nst hi m st ems f r om i t s acqui si t i on of t he second not ef r om t he or i gi nal l ender , WMC, af t er t he f or ecl osur e of t hepr i mar y l oan mor t gage. Ni nt h Ci r cui t case l aw est abl i shes thatHer i t age may st and i n t he shoes of WMC and may pursue an except i ont o di schar ge under such ci r cumst ances, but onl y i f i t canest abl i sh t hat Mont ano, wi t h t he i nt ent t o decei ve, used amat er i al l y f al se wr i t t en st at ement t o obt ai n t he l oan f r om WMC,and t hat WMC r easonabl y r el i ed upon t hat st atement . Boyaj i an v.New Fal l s Cor p. ( I n r e Boyaj i an) , 564 F. 3d 1088, 1093 ( 9t h Ci r .2009) ( af f i r mi ng t he BAP s r easoni ng i n New Fal l s Cor p. v.Boyaj i an ( I n r e Boyaj i an) , 367 B. R. 138, 148 ( 9t h Ci r . BAP 2007) ) .

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( i v) t hat t he debt or caused t o be made orpubl i shed wi t h i nt ent t o decei ve[ . ] 7

Summar y j udgment may be gr anted i f t he movant shows t hat

t her e i s no genui ne i ssue as t o any mat er i al f act and t hat t he

movant i s ent i t l ed t o j udgment as a mat t er of l aw. Ci vi l Rul e

56( a) , i ncor por at ed by Rul e 7056; Bar boza v. New For m, I nc. ( I n r e

Bar boza) , 545 F. 3d 702, 707 ( 9t h Ci r . 2008) . Wher e onl y a

quest i on of l aw i s at i ssue, summar y j udgment i s proper .

Asunci on v. U. S. I mmi gr at i on & Nat ur al i zat i on Ser v. , 427 F. 2d.

523, 524 ( 9t h Ci r . 1970) .

Her e, t he bankrupt cy cour t det er mi ned that , as a mat t er ofl aw, enf orcement of Her i t age s cl ai m agai nst Mont ano was bar r ed

under appl i cabl e st at e l aw, CCCP 726( f ) and ( g) . The cour t

announced i t s deci si on on summary j udgment at t he hear i ng on

Sept ember 5, 2012:

On t hi s set of f act s, I m concl udi ng t hat t hi s wasowner - occupi ed pr oper t y and I m al so concl udi ng t hat t heamount of t he debt f al l s wi t hi n t he pr ohi bi t i on [ of CCCP 726( g) ] . I t s $89, 000 some- odd wor t h of debt . I maware of t he ar gument t hat perhaps t he Legi sl atur e meantsomethi ng el se i n t erms of what t he aggr egat e debt woul dbe, but t hat i s not what t he st at ut e says. I t ssomethi ng t hat r eal l y coul d have been expr essed as suchand easi l y, f r ankl y, coul d have been cor r ect edt her eaf t er , but i t hasn t been. So I m deal i ng wi t h t he


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stat ut e as I bel i eve i t t o be. . . . I m det er mi ni ngt hat summary j udgment i s appr opr i ate on the gr ounds oft he appl i cabi l i t y of Sect i ons 726( f ) and ( g) i n t hi scase.

Hr g Tr . 107: 19108: 21, Sept ember 5, 2012.

We agr ee wi t h t he bankr upt cy cour t t hat t he st at e st at ut or y

pr ovi si ons ar e di sposi t i ve of t he i ssues on appeal and, t her ef or e,

we af f i r m t he bankrupt cy cour t s deci si on t o gr ant summar y

j udgment di smi ssi ng Her i t age s except i on t o di schar ge cl ai m.

I n const r ui ng t he st at e st at ut es i n t hi s case, we ar e mi ndf ul

of t he i nst r uct i ons of t he Cal i f or ni a Supr eme Cour t t hat we ar e t o

l ook t o t he st at ut es pl ai n meani ng. Bonnel l v. Medi cal Bd. , 82P. 3d 740, 743 ( Cal . 2003) . When i nt er pr et i ng a st at ut e, we must

di scover t he i nt ent of t he l egi sl at ur e t o gi ve ef f ect t o i t s

pur pose, bei ng car ef ul t o gi ve t he st at ut e s wor ds t hei r pl ai n,

commonsense meani ng. Kavanaugh v. W. Sonoma Cnt y. Uni on Hi gh

School , 62 P. 3d 54, 59 ( Cal . 2003) . I f t he l anguage of t he

st at ut e i s not ambi guous, t he pl ai n meani ng cont r ol s and r esort t o

ext r i nsi c sour ces t o det er mi ne t he Legi sl at ur e s i nt ent i s

unnecessary. I d. When t he st atut ory l anguage i s unambi guous, we

pr esume t he Legi sl atur e meant what i t sai d and t he pl ai n meani ng

of t he st at ut e gover ns. Di amond Mul t i medi a Sys. , I nc. v. Super .

Ct . , 968 P. 2d 539, 546 ( Cal . 1999) .

The par t i es t o t hi s appeal have not ar gued t hat CCCP 726( f )

and ( g) ar eambi guous. I nst ead, t hey seem t o agr ee t hat t he

st at ut or y l anguage shoul d be vi ewed as par t s of an i nt er connect ed

ser i es of l aws l ayi ng out t he r ul es f or col l ect i on of def i ci enci es

r esul t i ng f r om mor t gage and t r ust deed f or ecl osur e sal es, and t he

except i ons t o t hose r ul es. I n t hi s respect , t he par t i es ar e


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cor r ect no l aws shoul d be consi der ed i n i sol at i on. Rat her , we

must i nt er pr et t he st at ut e[ s] as a whol e, so as t o make sense of

t he ent i r e st at ut or y scheme. Car r i sal es v. Dep t of Cor r ect i ons,

988 P. 2d 1083, 1085 ( Cal . 1999) . However , t he pr ocess i s somewhat

chal l engi ng i n t hi s cont ext , gi ven t he maze of el abor at e and

i nt er r el at ed f or ecl osur e and ant i def i ci ency st at ut es i n Cal i f or ni a

r el at i ng t o t he enf or cement of obl i gat i ons secur ed by i nt er est s i n

r eal pr oper t y. Al l i ance Mor t g. Co. v. Rot hwel l , 900 P. 2d 601, 611

( Cal . 1995) ; Met r opol i t an Li f e I ns. Co. v. Sunnymede Shoppi ng Ct r .

( I n r e Sunnymede Shoppi ng Ct r . ) , 178 B. R. 809, 815 ( 9t h Ci r . BAP

1995) ( descr i bi ng t he maze of st at ut or y pr ot ect i ons andpr ocedur es under Cal i f or ni a l aw whi ch pr ot ect debt or s by

r est r i ct i ng t he secur ed cr edi t or s r emedi es f or debt s secur ed by

mor t gages or deeds of t r ust i n r eal pr oper t y. ) . We exami ne t hi s

st atut ory f r amework bel ow.

Our anal ysi s begi ns by acknowl edgi ng t hat , i n Cal i f or ni a, a

l ender s pr i mar y, and somet i mes onl y, r emedy to col l ect a l oan

secur ed by a mor t gage i s t o f or ecl ose:

[CCCP] 726. Form of action . . . ( a) There can be butone f or m of act i on f or t he r ecover y of any debt or t heenf orcement of any r i ght secured by mort gage upon r ealpr oper t y or an est at e f or year s t her ei n, whi ch act i onshal l be i n accor dance wi t h t he pr ovi si ons of t hi schapt er .

Al l i ance Mor t g. Co. , 900 P. 2d at 611 ( onl y f or m of act i on f or

r ecover y of any debt or enf orcement of any r i ght s secur ed by a

mor t gage or deed of t r ust i s act i on f or f or ecl osur e) ; Bank of

Cal . , N. A. v. Leone, 37 Cal . App. 3d 444, 447 ( Cal . Ct . App. 1974)

( For t he pur poses of [ CCCP 726( a) ] , a deed of t r ust i s t r eat ed

as a mort gage. ) .


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8 ( b) The decr ee f or t he f or ecl osure of a mor t gage or deedof t r ust secur ed by real pr oper t y or est at e f or year s t her ei nshal l decl ar e the amount of t he i ndebt edness or r i ght so secur edand, unl ess j udgment f or any def i ci ency t here may be bet ween t hesal e pr i ce and t he amount due wi t h cost s i s wai ved by t he j udgmentcr edi t or or a def i ci ency j udgment i s pr ohi bi t ed by Sect i on 580b,shal l det er mi ne t he per sonal l i abi l i t y of any def endant f or t hepayment of t he debt secured by t he mort gage or deed of t r ust andshal l name the def endant s agai nst whom a def i ci ency j udgment maybe or der ed f ol l owi ng t he pr oceedi ngs pr escr i bed i n t hi s sect i on. . . . CCCP 726( b) .

9 Whenever a money j udgment i s sought f or t he bal ance due

upon an obl i gat i on f or t he payment of whi ch a deed of t r ust ormor t gage wi t h power of sal e upon real pr oper t y or any i nt er estt her ei n was gi ven as secur i t y, f ol l owi ng t he exer ci se of t he powerof sal e i n such deed of t r ust or mor t gage, t he pl ai nt i f f shal l setf or t h i n hi s or her compl ai nt t he ent i r e amount of t hei ndebt edness whi ch was secur ed by t he deed of t r ust or mort gage att he t i me of sal e, t he amount f or whi ch t he real pr oper t y ori nt er est t her ei n was sol d and t he f ai r mar ket val ue t her eof at t hedat e of sal e and t he dat e of t hat sal e. . . . CCCP 580a.

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Of cour se, a f or ecl osur e may not net t he l ender suf f i ci ent

sal e pr oceeds t o sat i sf y t he l ender s cl ai m i n f ul l .

Acknowl edgi ng t hat r eal i t y, CCCP 726( b) 8 gener al l y pr eserves t he

l ender s r i ght t o pur sue a personal j udgment agai nst t he bor r ower

f or any def i ci ency, unl ess t hat r i ght has been wai ved by the

cr edi t or , or a def i ci ency j udgment i s pr ohi bi t ed by CCCP 580b.

CCCP 580a9 pr escri bes t he r ul es f or a def i ci ency act i on.

But , as not ed i n CCCP 726( b) , CCCP 580b pl ai nl y pr ohi bi t s a

l ender s r i ght t o r ecover a def i ci ency j udgment f or cer t ai n t ypes

of i ndebt edness. I n per t i nent par t , t hat st at ut e pr ovi des:

[CCCP] 580b. Contract for sale; deed of trust ormortgage; credit transaction; chattel mortgage;deficiency judgments prohibited

( a) No def i ci ency j udgment shal l l i e i n any event f ort he f ol l owi ng: . . . ( 3) Under a deed of t r ust ormor t gage on a dwel l i ng f or not mor e than f our f ami l i esgi ven t o a l ender t o secur e repayment of a l oan whi chwas i n f act used t o pay al l or par t of t he pur chasepr i ce of t hat dwel l i ng, occupi ed ent i r el y or i n par t by


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10 Oper at i ng i n t andem, CCCP 726(a) and CCCP 580b ar ecol l ecti vel y r ef er r ed t o as Cal i f or ni a s ant i def i ci encyst at ut es. Ther e i s some aut hor i t y f or t he pr oposi t i on t hat CCCP 726( a) does not appl y t o sol d- out j uni or l i enor s. Rosel eaf

Cor p. v. Chi er i ghi no, 387 P. 2d 97, 100 ( Cal . 1963) ; see al so CJ ACor p. v. Tr ans- Act i on Fi n. Cor p. , 86 Cal . App. 4t h 664, 665 ( Cal .Ct . App. 2001) ( an except i on t o t he one act i on r ul e has beenr ecogni zed i n t hose cases wher e t he secur i t y has been l ost t hr oughno f aul t of t he cr edi t or ) . I n t hi s appeal , Mont ano concedes t hatCCCP 726(a) may not appl y t o Her i t age. We concl ude,never t hel ess, t hat CCCP 580b does appl y to al l debt s ar i si ngf r om pur chase money l oans, except , as di scussed bel ow, debt si nduced by f r aud as pr ovi ded i n CCCP 726( f ) and ( g) .

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t he pur chaser . 10

See al so Rosel eaf , 378 P. 2d at 98 ( a cr edi t or s r i ght t o j udgment

agai nst debt or f or a def i ci ency may be l i mi t ed or bar r ed by

sect i on . . . 580b) ; Gr ammercy I nv. Tr . v. Lakemont Homes Nev. ,

I nc. , 198 Cal . App. 4t h 903, 911 ( Cal . Ct . App. 2011) ( wai ver by

cr edi t or al l owed under CCCP 726( b) ) ; Pr est i ge Lt d. P shi p v. E.

Bay Car Wash Par t ner s ( I n r e Pr est i ge Lt d. P shi p) , 234 F. 3d 1108,

1117 ( 9t h Ci r . 2000) ( hol di ng t hat CCCP 580b pr ecl udes

def i ci ency j udgment s on pur chase money notes) .

Whi l e the one- act i on r ul e pr ovi des t hat a l ender secur ed by a

mor t gage must f or ecl ose t o col l ect i t s debt , and CCCP 726( b)and 580b pr escr i be rul es and pr ohi bi t i ons r egar di ng t he recover y

of a def i ci ency j udgment by a l ender af t er f or ecl osur e, CCCP 726

al so cont ai ns an i mpor t ant except i on t o i t s oper at i on:

( f ) Not wi t hst andi ng t hi s sect i on or any ot her pr ovi si onof l aw t o t he cont r ar y, any per son aut hor i zed by thi sst ate t o make or ar r ange l oans secur ed by r eal pr oper t yor any successor i n i nt er est t her et o, t hat or i gi nat es,acqui r es, or pur chases, i n whol e or i n par t , any l oansecur ed di r ect l y or col l at er al l y, i n whol e or i n par t ,by a mort gage or deed of t r ust on r eal pr opert y or anest at e f or year s t her ei n, may br i ng an act i on f orr ecovery of damages, i ncl udi ng exempl ary damages not t oexceed 50 percent of t he act ual damages, agai nst abor r ower where t he act i on i s based on f r aud underSect i on 1572 of t he Ci vi l Code and t he f r audul ent


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conduct by t he bor r ower i nduced t he or i gi nal l ender t omake t hat l oan.

Fi nal l y, even t hough under CCCP 726( f ) t he one- act i on r ul e

does not bar a cr edi t or s act i on t o r ecover damages based on t he

f r audul ent conduct of t he bor r ower t hat i nduced t he or i gi nal

l ender t o make a l oan, t hat except i on i s i t sel f subj ect t o an

except i on:

[CCCP] 726(g).

( g) Subdi vi si on ( f ) does not appl y t o l oans secur ed bysi ngl e- f ami l y, owner - occupi ed r esi dent i al r eal pr oper t y,when t he pr oper t y i s act ual l y occupi ed by t he bor r oweras r epr esent ed t o t he l ender i n or der t o obt ai n t he l oan

and t he l oan i s f or an amount of one hundr ed f i f t yt housand dol l ar s ( $150, 000) or l ess, as adj ust edannual l y, commenci ng on J anuar y 1, 1987, t o t he ConsumerPr i ce I ndex as publ i shed by t he Uni t ed St ates Depart mentof Labor .

I n sum, t hen, i n Cal i f or ni a, under CCCP 726( f ) , even t hough

a l ender may pur sue a borr ower f or f r aud i n t he i nducement of a

l oan wi t hout r egar d t o t he one- act i on r ul e i n CCCP 726( a) and

t he ant i def i ci ency l i mi t s i n CCCP 580b, CCCP 726( g) makes

cl ear t hat , wi t h r espect t o a cer t ai n t ype of l oan ( i . e. ,

t hose

secur ed by owner - occupi ed r esi dent i al r eal pr oper t y, when

act ual l y occupi ed by the bor r ower , wher e t he l oan i s f or

$150, 000 or l ess) , t he l ender may not pur sue t he borr ower f or

f r aud.

CCCP 726( g) appl i es i n t hi s case. I t i s undi sput ed her e

t hat t wo separat e l oans wer e made by WMC t o Mont ano, bot h of whi ch

were secur ed by deeds of t r ust , whi ch Mont ano used t o pay t he

pur chase pr i ce f or hi s acqui si t i on of t he Pr oper t y. Thus, at

l east at t he t i me of l oan or i gi nat i on, t he deeds of t r ust gr ant ed


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11 A pur chase money t r ansact i on occur s when [ t ] he sumr epr esent ed by t he note and t r ust deed was a necessary part of t hepur chase pr i ce. St ockt on Sav. & Loan Bank v. Massanet , 114 P. 2d592, 600 ( Cal . 1941) .

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by Mont ano t o WMC wer e pur chase money mor t gages. 11 I t al so seems

cl ear t hat enf orcement of t he WMC second l oan, upon whi ch

Mont ano s l i abi l i t y t o Her i t age i s based, was subj ect t o t he one-

act i on r ul e, and t o t he ant i def i ci ency st at ut es. However ,

Her i t age ar gues, f or sever al r easons, t hat i t s cl ai m agai nst

Mont ano i s not r est r i ct ed by t hese st at ut es.

Her i t age not es t hat i t s cl ai m agai nst Mont ano seeks an

except i on t o di schar ge t o col l ect on a sol d- out j uni or l i en. I t

cont ends t hat CCCP 726( b) woul d not appl y t o i t s act i on. But

Cal i f or ni a case l aw est abl i shes t hat t he def i ci ency act i on bar

al l owed under CCCP 726( b) , and subj ect t o CCCP 580b, appl i es t o hol ders of pur chase money second mort gage

l oans. Kur t z v. Cal vo, 75 Cal . App. 4t h 191, 194 ( Cal . Ct . App.

1999) ( Sect i on 580b pr ohi bi t s a def i ci ency j udgment af t er a

j udi ci al or nonj udi ci al f or ecl osur e under a t r ust deed secur i ng a

pur chase money l oan. For pur poses of sect i on 580b, a def i ci ency

j udgment i ncl udes a j udgment i n an act i on on t he not e by a

sol d- out j uni or l i enhol der . ) ( Ci t at i ons omi t t ed. )

Her i t age r el i es upon sever al cases i t bel i eves are at odds

wi t h Cal vo. For exampl e, i n Cadl er ock v. Lobel , 206 Cal . App. 4t h

1531, 1541 ( Cal . Ct . App. 2012) , t he cour t r ul ed t hat an assi gnee

of a j uni or l oan, who was subsequent l y sol d out by t he seni or

l i enhol der s nonj udi ci al f or ecl osur e sal e, can pur sue t he bor r ower

f or a money j udgment i n t he amount of t he debt owed. However ,

Cadl er ock made i t s r ul i ng because that case di d not i nvol ve


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pur chase money l oans and, t hus, CCCP 580b di d not appl y:

Sect i on 580b i s i nappl i cabl e t o t he i nst ant case becauset he l oans at i ssue were not used as pur chase money.Sect i on 580b pr ohi bi t s al l def i ci ency j udgment s i nspeci f i ed r eal pr oper t y t r ansact i ons i nvol vi ng t hepr ovi si on of pur chase money, r egar dl ess of whet her t hecredi t or conduct s a j udi ci al or nonj udi ci al f or ecl osur e.( See I n r e Mar r i age of Or opal l o ( 1998) 68 Cal . App. 4t h997, 1003, 80 Cal . Rpt r . 2d 669. ) .

I d. at n. 2.

I n anot her case ci t ed by Her i t age, Nat l Ent er s. , I nc. v.

Woods, 94 Cal . App. 4t h 1217, 1226 ( Cal . Ct . App. 2001) , t he cour t

hel d t hat t he one- act i on r ul e i n CCCP 726( a) di d not appl y t o a

sol d- out j uni or l i enhol der . But agai n i n a f oot not e, t he Woodscour t acknowl edged t hat CCCP 580b woul d be appl i cabl e i f Woods

wer e a pur chase money mor t gage case:

Nor i s sect i on 580b appl i cabl e her e. I t bar s anydef i ci ency j udgment af t er f or ecl osur e wher e t he debt i ssecured by a pur chase money mor t gage, whi ch i s not ati ssue her e.

I d. at 1226 n. 5.

I n Bank of Am. Nat l Tr . & Sav. Ass n v. Gr aves, 51 Cal .

App. 4t h 607 ( Cal . Ct . App. 1996) , t he cour t exami ned t he cl ai m of

a cr edi t or who of f er ed a bor r ower a l i ne of cr edi t secur ed by a

second t r ust deed on t he pr oper t y. The money was not used t o

pur chase t he pr oper t y. I d. at 610. The cour t expl i ci t l y r ul ed

t hat t he debt i n quest i on was t he under l yi ng nonpur chase money

not e. I d. at 617 ( emphasi s added) .

The par t i es al so di sagr ee whet her , f or pur poses of

CCCP 580b, a pur chase money l oan l oses t hat st atus af t er a

f or ecl osur e. Cl ear l y, i t does not . DMC I nc. v. Downey Sav. &

Loan Assn. , 99 Cal . App. 4t h 190, 196 ( Cal . Ct . App. 2002) ( The


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12 CCCP 726( f ) i nt er nal l y r ef er ences Cal . Ci v. Code 1572f or i t s def i ni t i on of f r aud: Act ual f r aud, wi t hi n t he meani ng oft hi s Chapt er , consi st s i n any of t he f ol l owi ng act s, commi t t ed bya par t y to t he cont r act , or wi t h hi s conni vance, wi t h i nt ent t odecei ve anot her par t y t her et o, or t o i nduce hi m t o ent er i nt o t hecont r act : 1. The suggest i on, as a f act , of t hat whi ch i s nott r ue, by one who does not bel i eve i t t o be t r ue[ . ]

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f act s and ci r cumst ances t hat exi st at t he t i me t he debt i s cr eat ed

det er mi ne t he char act er of t he obl i gat i on as a pur chase- money

mor t gage. ) . I n t he f i nal anal ysi s, Her i t age has not pr ovi ded us

wi t h any accept abl e aut hor i t y f or i t s ar gument t hat col l ect i on of

Mont ano s debt i s not bar r ed by t he ant i def i ci ency st at ut e, CCCP

580b.

Of cour se, t he gr avamen of t hi s appeal i s Her i t age s

cont ent i on t hat CCCP 726( f ) , pr eser vi ng a l ender s r i ght t o

pur sue a bor r ower f or damages i f f r aud was empl oyed t o i nduce t he

l oan, const i t ut es an except i on t o t he ant i def i ci ency st at ut es, and

al l ows i t t o enf or ce i t s cl ai m agai nst Mont ano. We agr ee t hat ,f ai r l y read, CCCP 726( f ) cr eat es an except i on t o t he gener al

r ul e pr ohi bi t i ng def i ci ency act i ons under CCCP 726( b) and makes

580b appl i cabl e t o pur chase money l oans. I n other words, when a

l oan or i gi nator makes a l oan secur ed by a mort gage or deed of

t r ust on r eal est at e based upon t he f r audul ent 12 conduct of t he

borr ower t o i nduce t he l ender t o make t he l oan, t he l ender may sue

t he bor r ower t o r ecover i t s damages. But t her e i s an except i on t o

t hi s except i on, CCCP 726( g) .

The bankrupt cy cour t concl uded t hat , consi st ent wi t h CCCP

726( g) , t hi s was owner - occupi ed pr oper t y and I m al so

concl udi ng t hat t he amount of t he debt f al l s wi t hi n t he

pr ohi bi t i on [ of CCCP 726( g) ] . I t s $89, 000 some- odd wor t h of


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debt . Hr g Tr . 107: 1921, Sept ember 5, 2012. I n par t i cul ar , t he

cour t f ound, based upon t he undi sput ed f act s i n t he summary

j udgment r ecor d t he par t i es had submi t t ed, t hat Mont ano had

occupi ed the pr oper t y:

THE COURT: I woul d be i ncl i ned t o f i nd no t r i abl e i ssuewi t h r espect t o occupancy. And I t hi nk i t what I ml ooki ng at i s occupancy on t he day t he l oan i s made.That s t he way I m r eadi ng [ CCCP ] 726. Assumi ng i tappl i es at al l .

HERI TAGE COUNSEL: Wel l , t her e i s addi t i onal i nf or mat i ont hat we do have t hat hasn t been pr esent ed . . . t hatdef endant di d not act ual l y resi de i n t he pr oper t y.

THE COURT: Wel l , you r el i ed on t he deposi t i on, r i ght ?

HERI TAGE COUNSEL: Yes, t hat was par t of t he evi dence.Ther e s been mor e . . .

THE COURT: What was . . . t he r est of i t ?

HERI TAGE COUNSEL: Ther e s been mor e t hat s come t ol i ght . We di d a f ur t her i nvest i gat i on.

THE COURT: Wel l , i s t hat bef or e me t oday?

HERI TAGE COUNSEL: No.

THE COURT: Okay.

HERI TAGE COUNSEL: I woul d l i ke t o make t he r ecor d r i ghtnow.

THE COURT: Wel l , l et s see i f t hey r e okay wi t h t hat .Ms. Sant i ago [ address i ng MONTANO COUNSEL] , we r e aboutt o get a suppl ement al

MONTANO COUNSEL: No, your Honor .

THE COURT: Al l r i ght . Okay. . . . I m goi ng t o hol d yout o the r ecor d I have t oday.

Hr g Tr . 66: 2267: 23, Apr i l 19, 2012.

We agr ee wi t h t he bankrupt cy cour t s concl usi on i n t hi s

r egar d. The onl y evi dence bef or e t he bankrupt cy cour t on

occupancy was t he deposi t i on of Mont ano, i n whi ch he t est i f i ed

t hat he occupi ed t he Pr oper t y f r om t he day of t he l oan appr oval s.


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That t her e may have been ot her evi dence avai l abl e t o Her i t age t hat

had not been submi t t ed i s no basi s t o deny Mont ano s mot i on f or

summar y j udgment .

The bankrupt cy cour t s ot her i mpor t ant concl usi on was t hat

t he amount of t he l oan t o Mont ano that Her i t age sought t o enf orce,

$89, 000, f el l wi t hi n t he dol l ar l i mi t at i ons i n 726( g) :

I m awar e of t he ar gument t hat per haps t he Legi sl at ur emeant somethi ng el se i n t erms of what t he aggr egate debtshoul d be, but t hat s not what t he st at ut e says. I t ssomet hi ng t hat coul d have been expr essed as such andeasi l y, f r ankl y, coul d have been cor r ect ed t her eaf t er ,but i t hasn t been. So I m deal i ng wi t h t he st at ut e asI bel i eve i t t o be.

Hr g Tr . 107: 23108: 3.We al so agr ee wi t h t he bankrupt cy cour t t hat , r egar di ng t he

$150, 000 cap, 726( g) i s pl ai n on i t s f ace. Under t he pl ai n

meani ng r ul e, a cour t must assume that when passi ng a st atut e, t he

Legi sl at ur e i s awar e of exi st i ng r el at ed l aws. Vi ei r a Ent er s. ,

I nc. v. Ci t y of E. Pal o Al t o, 208 Cal . App. 4t h 584, 604 ( Cal . Ct .

App. 2012) . Whi l e CCCP 726 has been amended f our t i mes si nce

i t s enact ment i n 1987, nei t her t he amount , nor method of

cal cul at i ng t he cap, was ever amended. To t he ext ent Her i t age

ar gues t hat pol i cy consi der at i ons mandat e t hat t he bankrupt cy

cour t shoul d have adj ust ed t he cap t o aggr egate l oans made t o a

bor r ower by one l ender i n appl yi ng 726( g) , i t asks t oo much. I t

i s f or t he Legi sl at ur e, not t he cour t s, t o amend st at ut es f or

pol i cy consi der at i ons. Cassel l v. Super . Ct . , 244 P. 3d 1080, 1094

( Cal . 2011) .

Her i t age of f er s anot her r eason why i t s f r aud act i on agai nst

Mont ano i s not bar r ed by 726( g) . I t asser t s, wi t h no ci t at i on

t o aut hor i t y or r easoned argument , t hat CCCP 726( g) merel y


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13 I n suppor t of i t s specul at i on on t he i nt ent i ons of t heCal i f or ni a l egi sl at ur e, Her i t age pr ovi ded t he Panel wi t h al most300 pages of t he l egi sl at i ve mat er i al s concer ni ng 726( f ) and( g) . But t hese mat er i al s ar e al most ent i r el y t he r epor t s ofi nt er est gr oups and l obbyi st s, al l aut hor ed by non- l egi sl at or s.

None cont ai n t he st at ement s of i ndi vi dual l egi sl at or s or of t hegover nor . The Cal i f or ni a cour t s have observed t hat commi t t eer epor t s and l egi sl at i ve counsel di gest s ar e not as usef ul i nunder st andi ng t he i nt ent of t he l egi sl at ur e as t he l anguage of t hest at ut e i t sel f . Hal ber t s Lumber , I nc. v. Lucky St or es, I nc. ,6 Cal . App. 4t h 1233, 1238 ( Cal . Ct . App. 1992) . We decl i ne t or el y upon t hi s sor t of i nf or mat i on t o cr eat e an ambi gui t y i n ast at ut e wher e none exi st s.

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l i mi t s t he abi l i t y of l oan or i gi nat or s t o r ecover exempl ar y

damages pr ovi ded f or i n subdi vi si on ( f ) . Thi s ar gument l acks

mer i t . Of cour se, CCCP 726( g) makes no r ef er ence t o puni t i ve

damages or , i ndeed, t o any ki nd of damages; by i t s t er ms i t bar s

any appl i cat i on of CCCP 726( f ) where the l oan meet s t wo

r equi r ement s: where an owner / borr ower occupi es t he pr opert y, and

t he l oan amount i s l ess than $150, 000. Her i t age s ar gument t hat

t he Cal i f or ni a l egi sl at ur e s sol e concer n i n adopt i ng 726( f ) was

t o l i mi t awar ds of puni t i ve damages i s specul at i on. I n any case,

by t he pl ai n, unambi guous t erms of CCCP 726( g) , CCCP 726( f )

does not appl y t o t he f act s i n t hi s appeal .13

Fi nal l y, Her i t age r epeat edl y ar gues t hat t he Cal i f or ni a

l egi sl at ur e coul d not possi bl y have i nt ended t o carve out an

except i on t hat woul d endor se t he f r audul ent behavi or of bor r ower s

f or smal l er l oans. Once agai n, Her i t age s posi t i on r est s on

specul at i on about l egi sl at i ve i nt ent . Mor eover , we di sagr ee wi t h

Her i t age s suggest i on t hat i t woul d be absur d f or t he Cal i f or ni a

Legi sl at ur e t o over l ook pot ent i al bor r ower f r aud r egar di ng l oans

t o owner - occupi er s f or l ess t han $150, 000 as a means of r equi r i ng

l ender s t o exer ci se speci al di l i gence i n maki ng such l oans. A


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st at ut e s pl ai n meani ng i s absur d onl y i f i t i s so gr oss as t o

shock t he gener al moral or common sense. Barnhar t v. Si gmon Coal

Co. , I nc. , 534 U. S. 438, 450 ( 2002) ; Uni t ed St at es v. Font ai ne,

697 F. 3d 221, 228 ( 3d Ci r . 2012) ( An i nt er pr et at i on i s absur d

when i t def i es r at i onal i t y or r ender s t he st at ut e nonsensi cal and

super f l uous. ) ( ci t at i ons omi t t ed) . Her e, t hat Cal i f or ni a woul d

best ow pr ot ect i on agai nst per sonal l i abi l i t y f or a cer t ai n cl ass

of bor r owers f or home l oans of modest amount s under l i mi t ed

ci r cumst ances does not shock t he gener al moral or common sense,

nor does i t def y r at i onal i t y, nor i s i t nonsensi cal and

super f l uous.We concl ude t hat t he bankrupt cy cour t di d not er r i n gr ant i ng

Mont ano s mot i on f or summary j udgment agai nst Her i t age because,

operat i ng t ogether , CCCP 726 and 580b bar r ed enf orcement of

Her i t age s cl ai m agai nst Mont ano.

II.

The bankruptcy court did not abuse its discretion inreconsidering its prior order and awarding attorneys

fees and costs to Montano under 523(d).

A. The bankruptcy court did not abuse its discretion ingranting Montanos motion for reconsideration.

I n t hei r br i ef s, Her i t age and Mont ano bot h suggest t hat

Mont ano s mot i on f or r econsi derat i on was f ounded upon t he

pr ovi si ons of Rul e 9024, whi ch i ncor por at es Ci vi l Rul e 60( b) ( 1) .

We di sagr ee. Because Mont ano s mot i on f or r econsi derat i on was

f i l ed wi t hi n f our t een days af t er ent r y of t he Summar y J udgment

Or der , t he mot i on shoul d be t r eat ed as one to al t er or amend t he

Summary J udgment Or der under Rul e 9023, whi ch i ncorpor at esCi vi l

Rul e 59( e) . Fadel v. DCB Uni t ed LLC ( I n r e Fadel ) , 492 B. R. 1, 18


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14 We di scount Her i t age s ar gument t hat i n t hi s cont extr econsi der at i on i s an ext r aor di nar y remedy, t o be used spar i ngl yi n t he i nt er est s of f i nal i t y and t he conser vat i on of j udi ci alr esour ces . . . , ci t i ng Car r ol l v. Nakt ani , 342 F. 3d 934, 945( 9t h Ci r . 2000) . The Car r ol l cour t was quot i ng a t r eat i se on

gener al pr i nci pl es appl i ed t o Ci vi l Rul es 59( e) and 60. 12 MOORE SFEDERAL PRACTI CE 59. 30[ 4] ( 3d. ed. 2000) . I mmedi at el y f ol l owi ngt he quot at i on f r om Moor e s, however , t he Car r ol l cour t cont i nuedwi t h t he comment , a mot i on f or r econsi derat i on shoul d not begr ant ed, absent hi ghl y unusual ci r cumst ances, unl ess t he di st r i ctcour t . . . commi t t ed cl ear er r or [ . ] The Car r ol l cour t s opi ni on,t her ef or e, woul d suppor t t he bankrupt cy cour t s deci si on tocor r ect i t s own cl ear er r or of l aw.

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( 9t h Ci r . BAP 2013) ( ci t i ng Am. I r onwor ks & Er ect or s, I nc. v. N.

Am. Const r . Cor p. , 248 F. 3d 892, 898- 99 ( 9t h Ci r . 2001) ) . The

st andar d f or gr ant i ng r el i ef under t hat r ul e r equi r es t he movant

t o show ( a) newl y di scover ed evi dence, ( b) t he cour t commi t t ed

cl ear er r or or made an i ni t i al deci si on t hat was mani f est l y

unj ust , or ( c) an i nt er veni ng change i n cont r ol l i ng l aw. Duar t e

v. Bar dal es, 526 F. 3d 563, 567 ( 9t h Ci r . 2008) .

To t he ext ent t hat Mont ano sought r el i ef i n t he bankrupt cy

cour t under t he wr ong Rul e, i t was har ml ess er r or . I n i t s mot i on,

Mont ano argued t hat t he bankr upt cy cour t made an er r or of l aw.

Under bot h Ci vi l Rul es 59( e) and 60( b) ( 1) , r econsi der at i on of anor der i s appr opr i at e t o cor r ect a per cei ved er r or of l aw by the

t r i al cour t . 14 I n r e Fadel , 492 B. R at 18 ( Rul e 60( b) ( 1) ) ; see

al so Zi mmerman v. Ci t y of Oakl and, 255 F. 3d 734, 740 (9t h Ci r .

2004) ( appl yi ng 59( e) t o cor r ect a l egal er r or by t he cour t ) .

The l egal mi st ake made by t he bankrupt cy cour t i n or i gi nal l y

denyi ng Mont ano s r equest f or at t or neys f ees i s evi denced i n i t s

col l oquy wi t h Mont ano s counsel at t he summary j udgment hear i ng

r emi ndi ng t he cour t t hat [ Mont ano] had moved f or f ees under

[ ] 523( d) and t hat t he debt r emai ns di schar ged, i t was a consumer


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debt , and the compl ai nt was br ought wi t hout a reasonabl e basi s i n

l aw. The cour t r esponded, I m denyi ng t hat . I t hi nk t hose ar e

cl ose quest i ons. I m denyi ng t hat . Hr g Tr . 109: 4- 9. As

Her i t age i s wel l awar e, t hi s Panel has hel d t hat :

To suppor t a r equest f or at t or neys f ees under 523(d) ,a debt or i ni t i al l y needs t o pr ove: ( 1) t hat t he credi t orsought t o except a debt f r om di schar ge under 523( a) ,( 2) t hat t he subj ect debt was a consumer debt , and ( 3)t hat t he subj ect debt ul t i mat el y was di schar ged. St i nev. Fl ynn ( I n r e St i ne) , 254 B. R. 244, 249 ( 9t h Ci r . BAP2000) , [ af f d 19 Fed. Appx. 626 ( 9t h Ci r . 2001) ] . Oncet he debt or est abl i shes t hese el ement s, t he bur den shi f t st o t he credi t or t o pr ove t hat i t s act i ons wer esubstant i al l y j ust i f i ed. I d.

Her i t age Pac. Fi n. LLC v. Machuca ( I n r e Machuca) , 483 B. R. 726,734 ( 9t h Ci r . BAP 2012) . Her e, t he bankrupt cy cour t er r ed when i t

decl i ned to consi der Mont ano s 523( d) r equest f or an awar d of

at t orneys f ees and cost s, af t er Mont ano made a pr i ma f aci e showi ng

t o suppor t i t , and wi t hout r equi r i ng Her i t age t o sat i sf y i t s

bur den t o demonst r ate pr osecut i on of t he act i on agai nst Mont ano

was subst ant i al l y j ust i f i ed. The cour t appr opr i at el y acknowl edged

t hi s when i t st at ed:

I t hi nk t hat t he r i ght anal ysi s f or [ 523( d) ] i s f or met o go back and r evi ew t he f act or s and what i t i s you[ Her i t age] woul d have t o pr ove and see i f t her e wer ef act s and l aw on your si de, even t hough I di d not r eacht hem i n di sposi ng of t he summary j udgment mot i on. It hi nk once I have a r equest under [ 523( d) ] , t hat swhat I am supposed t o do, and f r ankl y i s what I di dn tdo at t he end of t he hear i ng. . . . But I ' m convi ncedt hat t he r i ght answer i s, I have t o go back f or[ 523( d) ] pur poses and l ook at t he br oad spect r um.

Hr g Tr . 41: 212, Sept ember 5, 2012.

Si mpl y put , a t r i al cour t s concessi on t hat i t er r ed i n an

ear l i er or der r equi r es t hat cour t t o set asi de t he or der and

r econsi der t he par t i es ar gument s. Duar t e, 526 F. 3d at 567


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15 Of cour se, Ci vi l Rul es 59 and 60 ar e not t he onl y t ool savai l abl e t o a t r i al cour t t o r econsi der i t s or der s. I npar t i cul ar , bankrupt cy cour t s as cour t s of equi t y [ have t he

power ] t o r econsi der , modi f y or vacat e t hei r pr evi ous or der s sol ong as no i nt er veni ng r i ght s have become vest ed i n r el i ance ont he or der s. Zur i ch Am. I ns. Co. v. I nt l Fi ber com, I nc. ( I n r eI nt l Fi ber com, I nc. ) , 503 F. 3d 933, 941 ( 9t h Ci r . 2007) . Whi l et he bankrupt cy cour t act ed pr oper l y her e under Ci vi l Rul e 59( e) ,i t was al so wi t hi n i t s di scret i onar y aut hor i t y t o r econsi der i t sor der wher e, i n l i ght of Mont ano s prompt r equest , no i nt er veni ngr i ght s ar ose i n r el i ance on t he or i gi nal or der .

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( hol di ng t hat once a cour t acknowl edged t hat t he basi s under l yi ng

i t s ori gi nal j udgment was wr ong, i t was err or not t o set asi de t he

j udgment . ) . The bankrupt cy cour t di d not abuse i t s di scr et i on i n

r econsi der i ng an or der t hat i t conceded was ent er ed i n er r or . 15

B. The bankruptcy court did not abuse its discretion ingranting Montanos request for attorneys fees and costsunder 523(d).

Sect i on 523( d) pr ovi des t hat :

I f a cr edi t or r equest s a det er mi nat i on ofdi schar geabi l i t y of a consumer debt under subsect i on( a) ( 2) of t hi s sect i on, and such debt i s di schar ged, t hecour t shal l gr ant j udgment i n f avor of t he debt or f ort he cost s of , and a r easonabl e at t or ney s f ee f or , t hepr oceedi ng i f t he cour t f i nds t hat t he posi t i on of t he

credi t or was not subst ant i al l y j ust i f i ed, except t hatt he cour t shal l not awar d such cost s and f ees i f speci alci r cumst ances woul d make t he award unj ust .

Under 523( d) s shi f t i ng bur den of pr oof , a debt or must

est abl i sh t hr ee el ement s: ( 1) t hat t he cr edi t or sought t o except

a debt f r om di schar ge under 523( a) , ( 2) t hat t he subj ect debt

was a consumer debt , and ( 3) t hat t he subj ect debt ul t i matel y was

di schar ged. I n r e St i ne, 254 B. R. at 249 ( af f i r med by t he Ni nt h

Ci r cui t at 19 Fed. Appx. 626) . I t i s not di sput ed t hat al l t hr ee

of t hese el ement s were shown by Mont ano. The bur den of proof t hen

shi f t ed t o Her i t age t o pr ove t hat i t s act i ons wer e subst ant i al l y


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16 Sect i on 523( d) al so al l ows a cr edi t or t o show speci alci r cumst ances t hat woul d make an award unj ust , even i f t hecredi t or coul d not pr ove subst ant i al j ust i f i cat i on. Her i t age hasnot pl ed any speci al ci r cumst ances i n t hi s appeal .

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j ust i f i ed. I n r e Machuca, 483 B. R. at 734. 16

The Panel has adopt ed t he subst ant i al j ust i f i cat i on

st andard empl oyed by cour t s i n wei ghi ng r equest s f or f ee awards

under t he Equal Access t o J ust i ce Act . I n r e Machuca, 483 B. R. at

733; I n r e Car ol an, 204 B. R. at 987. As expl ai ned i n Pi er ce v.

Underwood, 487 U. S. 552, 558 ( 1987) , a cr edi t or must show t hat i t s

cl ai m had a r easonabl e basi s bot h i n l aw and i n f act . I n r e

Car ol an, 204 B. R. at 987. Her e, t he bankrupt cy cour t hel d t hat

Her i t age comes up shor t i n t hat i t di d not show t hat WMC act ual l y

r el i ed upon t he wr i t t en r epr esent at i ons of Mont ano at t he t i me i t

appr oved hi s l oans, a cri t i cal el ement t o est abl i sh a cl ai m f orr el i ef under 523( a) ( 2) ( B) .

To ai d i t i n i t s r evi ew of Mont ano s 523( d) mot i on, at t he

hear i ng on August 1, 2012, t he bankrupt cy cour t i nst r uct ed t he

par t i es t o pr epar e suppl ement al br i ef i ng di scussi ng t he case l aw

on 523( d) and di scuss i ng what di d peopl e know and when di d t hey

know i t . Hr g Tr . 17: 1- 2, August 1, 2012. At t he hear i ng on

Sept ember 5, 2012, t he cour t hear d argument f r om counsel f or

Her i t age and Mont ano det ai l i ng t he hi st or y of t he di sput e bet ween

t he par t i es, t he cour se of t he adver sary pr oceedi ng, and

Her i t age s posi t i on at each st age of t he l i t i gat i on r egar di ng i t s

asser t i on, f i r st made i n i t s adver sar y compl ai nt , t hat Mont ano

pr ovi ded f r audul ent st at ement s i n t he l oan appl i cat i on on whi ch

WMC had r el i ed such t hat Mont ano s debt , now owed t o Her i t age,

shoul d be except ed f r om di schar ge pur suant t o 523( a) ( 2) ( B) .


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17 Her i t age agr eed wi t h t hi s appr oach, as r ef l ect ed i n t het r anscr i pt :

THE COURT: Let me ask whet her everybody agr ees t hatwhet her we r e t al ki ng about [ ] 523( a) ( 2) ( A) or ( B) , t her el i ance had t o be act ual . Ri ght ?

SANTI AGO( counsel f or Mont ano) : Yes.

THE COURT: Cor r ect ?

HUPE ( counsel f or Her i t age) : Yes.

Hr g Tr . 30: 19- 24, Sept ember 5, 2012.

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Hr g Tr . 1630, Sept ember 5, 2012.

Recal l , under 523( a) ( 2) ( B) ( i i i ) , a credi t or must pr ove

t hat t he cr edi t or r easonabl y rel i ed on any al l eged f al se wr i t t en

f i nanci al i nf or mat i on submi t t ed by t he debt or . Revi ewi ng t he

suppl ement al br i ef i ng and ar gument s of counsel made at t he hear i ng

on Sept ember 5, t he bankr upt cy cour t expr essed doubt concer ni ng

i t s abi l i t y, wi t hout a t r i al and at t endi ng cr edi bi l i t y

determi nat i ons, t o deci de whether Her i t age coul d show t hat Mont ano

made knowi ngl y f al se st at ement s i n t he l oan appl i cat i on wi t h t he

i nt ent t o decei ve WMC. Hr g Tr . 42: 4- 8. However , t he bankrupt cy

cour t det er mi ned that , as a mat t er of l aw, Her i t age had not shownt hat WMC r el i ed on Mont ano s wr i t t en st atement s about hi s

f i nanci al condi t i on. Hr g Tr . 45: 7- 10, Sept ember 5, 2012. I n

par t i cul ar , t he bankrupt cy cour t concl uded t hat bef or e Her i t age

coul d demonst r ate t hat WMC r easonabl y r el i ed on Mont ano s

al l egedl y f al se wr i t t en st at ement s, i t must f i r st est abl i sh i t had

act ual l y r el i ed on t hose repr esent at i ons. 17 Because Her i t age coul d

not pr ove act ual r el i ance by WMC, t he cour t deci ded, i t coul d not

est abl i sh t hat i t s pr osecut i on of t he act i on agai nst Mont ano was

subst ant i al l y j ust i f i ed f or pur poses of 523( d) . Her i t age


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chal l enges t he bankrupt cy cour t s concl usi on on appeal .

The Code conf i r ms t hat t he bankrupt cy cour t s l egal

concl usi on was cor r ect : 523( a) ( 2) ( B) ( i i i ) , by r equi r i ng a

cr edi t or t o r easonabl y rel y on a debt or s mi sr epr esent at i ons t o

qual i f y f or an except i on t o di schar ge, by necessi t y i mpl i es t hat

t he credi t or i n f act r el y on t he subj ect f al se st at ement s. The

case l aw i s al so cl ear t hat showi ng act ual r el i ance i s a

pr er equi si t e t o est abl i shi ng a credi t or s r easonabl e r el i ance i n

t hi s cont ext . Fi el d v. Mans, 516 U. S. 59, 68 ( 1995) ( Sect i on

523( a) ( 2) ( B) expr essl y requi r es not onl y reasonabl e rel i ance but

al so r el i ance i n i t sel f . . . . ) ; AT&T Uni ver sal Car d Ser vs. v.Mer cer ( I n r e Mer cer ) , 246 F. 3d 391, 413 ( 5t h Ci r . 2001) ( t he

act ual r el i ance st andar d r equi r es t hat t he cr edi t or pr ove t hat

i t , i n f act, r el i ed on r epr esent at i ons of t he debt or ) ; Dol l ar

Bank, F. S. B. v. Wagner ( I n r e Wagner) , 2009 Bankr . LEXI S 5540, at

*7 ( Bankr . W. D. Pa. 2009) ( Unl ess a cr edi t or act ual l y r el i es upon

a f al se st at ement , t he quest i on whet her a cr edi t or s r el i ance on a

f al se st atement was r easonabl e does not ar i se. Reasonabl e r el i ance

pr esupposes act ual r el i ance. ) .

I n maki ng i t s deci si on, t he bankrupt cy cour t r emi nded

Her i t age of t he comment s made by t he pr esi di ng bankr upt cy j udge at

t he hear i ng on Mont ano s mot i on t o di smi ss poi nt i ng out t hat ,

whi l e t he compl ai nt woul d sur vi ve t hat mot i on, Her i t age was l i kel y

f aci ng f or mi dabl e obst acl es i n pr ovi ng t hat WMC act ual l y r el i ed on

Mont ano s al l eged f al si t i es because WMC was now a def unct

or gani zat i on. I n r esponse t o t hese war ni ngs, counsel f or Her i t age

assured t he bankr upt cy j udge that i t woul d obt ai n competent

evi dence of r el i ance i n di scover y f r om Mont ano, f r om t he mor t gage


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br oker who al l egedl y creat ed t he f al se document s, and f r om f or mer

WMC agent s, even t hough WMC was no l onger i n busi ness. Hr g Tr .

5: 16- 18, Mar ch 25, 2011. Her i t age s assur ances t o t he bankrupt cy

cour t wer e appar ent l y i n r ecogni t i on t hat subst ant i al

j ust i f i cat i on f or t he pur sui t of di schar ge l i t i gat i on agai nst

consumer debt or s r equi r es a showi ng i t i s j ust i f i ed at al l st ages

of t he l i t i gat i on. Gonzal ez v. Free Speech Coal i t i on, 408 F. 3d

613, 620 ( 9t h Ci r . 2005) ( hol di ng t hat subst ant i al j ust i f i cat i on

cannot be det er mi ned f r om a l i t i gant s ul t i mat e posi t i on, but

r equi r es t he cour t t o exami ne i t s posi t i ons ear l i er i n t he

l i t i gat i on) ; I n r e Car ol an, 204 B. R. at 988 ( i nf or mat i on obt ai neddur i ng t he cour se of l i t i gat i on t hat shoul d di ssuade credi t or f r om

cont i nui ng l i t i gat i on shows l ack of subst ant i al j ust i f i cat i on) ;

AT&T Uni ver sal Car d Ser vs. v. Wi l l i ams ( I n r e Wi l l i ams) , 224 B. R.

523, 530 ( 2d Ci r . BAP 1998) ( We hol d t hat t he cr edi t or must be

subst ant i al l y j ust i f i ed at al l t i mes t hr ough t r i al t o be i nsul at ed

f r om payi ng at t or neys f ees under 523( d) . ) .

Despi t e i t s assur ances, Her i t age f ai l ed t o pr ovi de t he

bankr upt cy cour t competent evi dence f r omknowl edgeabl e peopl e

f or mer l y at WMC, or at al l , t hat WMC had act ual l y rel i ed on t he

cont ent s of t he URLA. Counsel f or Her i t age at t empt ed t o expl ai n

t hi s def i ci ency by i ndi cat i ng t hat , whi l e i t i nt ended t o of f er

good pr oof , and was pr epared t o depose f ormer of f i cers of WMC, i t

had r un out of t i me f or di scover y:

[ t he par t i es] had agr eed . . . t o t ake t he deposi t i on oft he per son most knowl edgeabl e wi t h r espect t o WMC. Adeposi t i on subpoena was sent out . I t was cal endar ed; i twas schedul ed, and I had oral l y agr eed wi t h opposi ngcounsel t hat t hi s deposi t i on woul d be movi ng f or war deven t hough i t was af t er t he di scover y cut of f dat e, andaf t er I ser ved t he deposi t i on, [ Mont ano] sai d no, we r e


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not goi ng t o do i t .

Hr g Tr . 36: 3- 10, Sept ember 5, 2012. Counsel f ur t her assured t he

bankrupt cy cour t t hat , My cl i ent has al ways been i n cont act wi t h

WMC r egar di ng t hi s l oan, f r om day one. Hr g Tr . 36: 17- 18,

Sept ember 5, 2012. Concerni ng Her i t age s reasons f or not

pr esent i ng di r ect evi dence of act ual r el i ance by WMC, t he

bankr upt cy cour t obser ved t hat Her i t age had not r equest ed an

extensi on of t he di scover y deadl i ne t o accommodat e deposi t i ons.

Hr g Tr . 38: 7- 9, Sept ember 5, 2012.

As not ed above, Her i t age submi t t ed onl y thr ee decl ar at i ons

f r om wi t nesses t o suppor t i t s def ense of t he 523( d) mot i on, al lof whi ch t he bankr upt cy cour t di scount ed because none, by di r ect

knowl edge of t he wi t nesses, est abl i shed whether WMC actual l y

r el i ed on t he Mont ano URLA. Speci f i cal l y, t he cour t not ed t hat

t he decl ar at i on of Mr . Gunt er , an associ at e of Her i t age s counsel ,

mer el y descr i bed t he pr ocedur es he empl oyed i n i nvest i gat i ng

Mont ano. I n t he decl arat i on of Mark G. Scheuerman, a pr oposed

exper t wi t ness, he opi ned t hat WMC abi ded by the general st andards

of pr act i ces and cust oms i n t he i ndust r y i n det er mi ni ng a

bor r ower s credi t wor t hi ness at t he t i me of t he l oans. The

decl ar ant of f er ed no di r ect evi dence t hat WMC f ol l owed t hese

pr act i ces i n deal i ng wi t h r espect t o t he Mont ano l oans. And t he

decl ar at i on of Di ane Tayl or , pr epar ed f or an unr el at ed st at e cour t

case, who i dent i f i ed her sel f as assi st ant secr et ar y of WMC

Mort gage, LLC, a successor t o WMC, whi l e st at i ng t hat WMC r el i ed

on t he i nf or mat i on pr ovi ded by an appl i cant - bor r ower i n hi s/ her

l oan appl i cat i on t hr ough al l st ages of t he under wr i t i ng pr ocess,

al so of f er ed no i nsi ght i nt o t he det ai l s of t he Mont ano


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t r ansact i on. The bankrupt cy cour t was car ef ul t o not e t hat i t was

not maki ng a credi bi l i t y det ermi nat i on as t o the st at ement s made

i n any of t he Her i t age decl ar at i ons, but si mpl y rul i ng t hat t he

cont ent s di d not show t hat WMC had actual l y r el i ed on t he URLA.

Hr g Tr . 43: 14- 15, Sept ember 5, 2012. Even assumi ng t he wi t ness

st at ement s are al l t r ue and cor r ect , we cannot f aul t t he

bankrupt cy cour t f or i t s unwi l l i ngness t o accept Her i t age s

posi t i on t hat i t was subst ant i al l y j ust i f i ed i n al l egi ng t hat WMC

actual l y rel i ed on t he i ncome st atement s i n t he Mont ano URLA.

Hr g Tr . 42: 2043: 13, Sept ember 5, 2012.

I n t he bankrupt cy cour t , and now i n t hi s appeal , Her i t agear gues t hat WMC obvi ousl y changed i t s posi t i on af t er r ecei vi ng t he

URLA, because i t made t he r equest ed l oans t o Mont ano. I t argues

t hat , because i t r equi r ed a wr i t t en l oan appl i cat i on as a

condi t i on of l endi ng t o Mont ano, and because i t t her eaf t er

ext ended cr edi t t o hi m, t he bankr upt cy cour t and t hi s Panel must

i nf er t hat WMC act ual l y r el i ed on t hose f al se st at ement s. They

ci t e t o a vener abl e Cal i f or ni a case f or a def i ni t i on of act ual

r el i ance:

Act ual r el i ance occur s when a mi sr epr esent at i on i s t hei mmedi at e cause of a pl ai nt i f f s conduct whi ch al t er shi s l egal r el at i ons and when absent such r epr esent at i on,he woul d not , i n al l r easonabl e pr obabi l i t y, haveent er ed i nt o t he cont r act or ot her t r ansact i on.

Engal l a v. Per manent e Med. Gr p. , I nc. , 938 P. 2d 903, 919 ( Cal .

1997) ( quot i ng Spi nks v. Cl ar k, 82 P. 45, 50 ( Cal . 1905) ) .

We f ear Her i t age has t aken t hi s quot at i on out of cont ext .

I mmedi at el y f ol l owi ng t hi s passage i n t he deci si on, t he cour t

acknowl edges a l i mi t at i on on i t s pr i or st at ement :

I t i s not . . . necessar y t hat r el i ance upon t he t r ut h


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in re: jesus edgar montano, 9th cir. bap (2013)

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