Heritage Pacific Financial, LLC v. Montano (In Re Montano), 501 B.R. 96

Heritage appeals two bankruptcy court rulings: (1) grant of summary judgment dismissing Heritage’s §523(a)(2) claim as barred by California CCP §§726(f)-(g); (2) after reconsideration, grant of Montano’s §523(d) award of attorney’s fees and costs.
Montano obtained two purchase-money loans secured by deeds of trust on owner-occupied Oakland property; foreclosure on the primary loan occurred and the property was sold; Heritage later purchased the second-note and asserted a fraud-based exception to discharge.
The loan package included allegedly false income information on Montano’s URLA and supporting documents; Heritage contends WMC relied on these representations to grant the loan.
California §726(f) allows an action for damages based on fraud to induce a loan, but §726(g) excludes certain owner-occupied, low-value purchase-money loans from such fraud actions; here the property was owner-occupied and the loan amount was within the §726(g) cap.
The bankruptcy court found the §726(f)-(g) scheme barred Heritage’s claims and granted summary judgment; Montano’s §523(d) fee request was later granted on reconsideration; the panel affirmed both rulings.
The underlying dispute involves whether California’s antideficiency provisions (726, 580b) and the fraud exception (726(f)) permit a sold-out junior lienholder to collect on a fraud-based claim, and whether the fee award under §523(d) was properly granted.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Does §726 bar Heritage’s §523(a)(2) claim?	Heritage contends §726(f) creates an exception to antideficiency bars for fraud, and §726(g) is not applicable to its case.	Montano contends §726(g) applies, restricting fraud-based collection for owner-occupied, purchase-money loans ≤$150,000, and thus bars Heritage.	Yes; §726(f) with §726(g) bars enforcement of Heritage’s claim.
Was the §523(d) fee award abuse of discretion on reconsideration?	Heritage argues the court erred in reconsidering and denying substantial justification for the suit.	Montano argues the court properly reconsidered and awarded fees where Heritage failed to show substantial justification.	No; the court did not abuse its discretion; fee award affirmed.

Field v. Mans, 516 U.S. 59 (1995) (requires actual reliance for §523(a)(2)(B))
Engalla v. Permanente Med. Grp., Inc., 938 P.2d 903 (Cal. 1997) (actual reliance essential for fraud in the inducement)
In re Stine, 254 B.R. 244 (9th Cir. BAP 2000) (settled standard for §523(d) relief; substantial justification burden)
In re Machuca, 483 B.R. 726 (9th Cir. BAP 2012) (adopts substantial justification standard for §523(d) fee awards)
In re Carolan, 204 B.R. 980 (9th Cir. BAP 1996) (substantial justification standard applies to §523(d))