In rе Jesus Edgar MONTANO, Debtor. Heritage Pacific Financial, LLC, Appellant, v. Jesus Edgar Montano, Appellee.
BAP No. NC-12-1579-PaDJu
Bankruptcy No. 10-71788
Adversary No. 11-04008
United States Bankruptcy Appellate Panel of the Ninth Circuit.
Argued and Submitted on Sept. 20, 2013. Decided Nov. 1, 2013.
501 B.R. 96
Before: PAPPAS, DUNN and JURY, Bankruptcy Judges.
Id. The record reflects that in February, 2013, the bankruptcy court entered its Notice, and the Notice states that the meeting of creditors was scheduled for March 21, 2013, and May 20, 2013 was the “Deadline to Objection to Debtor‘s Discharge or to Challenge Dischargeability of Certain Debts.” The Notice was served on Mr. Chae in February, 2013. The bankruptcy court properly found that Mr. Chae had notice of the deadline for filing an adversary proceeding. There is no record of a request by Mr. Chae, prior to the May 20, 2013 deadline, to extend the deadline to file his fraud action.
In addition, the bankruptcy court was correct when it denied the relief requested by Mr. Chae because the stay was not in effect at the time when the bankruptcy court entered the orders from which Mr. Chae appeals. The Debtor obtained a discharge prior to the date when the bankruptcy court held its rescheduled hearing and entered the orders. See
For the same reason that there was no reason to grant Mr. Chae‘s request for stay relief, there was also no reason for the bankruptcy court to abstain and remand the case to the state court. As the bankruptcy court noted, there were no remaining causes of action by Mr. Chae because all of them were discharged. In addition, there was nothing to abstain from hearing or to remand because Mr. Chae never removed his state court action to the bankruptcy court, and there was no action pending in the bankruptcy court asking for the relief Mr. Chae sought in his state court action.
CONCLUSION
For the reasons stated, we affirm.
OPINION
PAPPAS, Bankruptcy Judge.
Creditor Heritage Pacific Financial, LLC (“Heritage“) appeals the decisions of the bankruptcy court: (1) granting a summary judgment dismissing Heritage‘s
Montano is a native of El Salvador, with limited spoken English language skills, and no ability to read or write English. In November 2006, Montano purchased a house in Oakland, California (the “Property“). To obtain financing, he contacted a mortgage broker who, according to Montano, collected his financial information in a conversation over the phone and then later incorporated it into a Universal Residential Loan Application (Form 1003) (the “URLA“). The record is not clear when this telephone conversation took place, or how WMC Mortgage Corporation (“WMC“), the eventual lender, was contacted. However, the record shows that WMC was asked by the broker to consider Montano‘s application for a primary loan of $348,750, and a second loan of $89,990, to purchase the Property.
Montano‘s loan requests were approved by WMC. On November 22, 2006, Montano appeared before a notary to complete the paperwork for the loan applications. At that time, he signed the URLA, the notes for the two loans, and separate deeds of trust securing each loan. Significantly, Montano initialed each page of the URLA, except for the page which contained specific information regarding the income he purportedly received from wages and self-employment.
The parties agree that the URLA contained incorrect information about Montano‘s income. The URLA stated that Montano received a total of $8,090 per month, $3,500 of which were wages he earned working as an auto detailer at a local dealership, and the remainder as income generated from his supposed business, Montano Moving Services. Although Montano was in fact employed at the auto dealership at the time of applying for the loans to purchase the Property, Montano maintains that he was never self-employed, nor that he received any income from Montano Moving Services.
There are other documents that Heritage asserts were contained in Montano‘s loan application materials submitted to WMC: (1) separate letters of reference from Joel Rendon, Marta Madriz and Van-tu Tran, each stating that they were happy with the moving services supposedly provided by Montano; (2) copies of two Craigslist internet advertisements for Montano Moving Services; and (3) a letter from Guadalupe Perez, on the letterhead of “Perez Income Tax,” indicating that she had provided accounting services for Montano and Montano Moving Services for the previous three years. Montano alleges that these documents were all forgeries created without his knowledge by Joel Rendon, an employee of the loan broker.
The Montano loan application file also contained WMC‘s prefunding audit forms signed by Jonathan Cobb on November 30, 2006. One such form relates to Montano‘s self-employment; it indicates that Cobb “spoke with tax preparer. He verified that he has filed schedule C tax info for the borrower for the last 3 years.” The second form relates to employment verification. Cobb supposedly spoke with the human resources manager for the auto dealership and verified that Montano was
WMC approved both of Montano‘s loans on December 4, 2006.3
Montano resided at the Property purchased with the loans for seven months, until about June 2007. After making only five payments on the loans, he defaulted on the primary loan and, on July 17, 2007, WMC filed a notice of default to foreclose the first priority deed of trust. A trustee‘s sale occurred, and thе Property was sold on October 22, 2007. The now-unsecured second loan note was purchased by Heritage on January 20, 2009.
Heritage alleges that, only after purchasing the second loan note, it discovered that Montano had misrepresented his income on the URLA. Heritage filed a complaint in Alameda County Superior Court in April 2010, alleging that Montano obtained the second loan by fraud.
Montano filed a chapter 7 bankruptcy petition on October 13, 2010. His schedule F lists a debt for $89,990.00 owed to Heritage for the second mortgage loan.
Heritage commenced the adversary proceeding giving rise to this appeal on January 9, 2011. In its complaint, Heritage asked the bankruptcy court to determine that its $89,990.00 claim against Montano based upon the second loan note was excepted from discharge for fraud under
Montano‘s initial response to the complaint was a motion to dismiss under Civil Rule 12(b)(5) and (6), filed on February 17, 2011, and amended on February 25, 2011. In the motion, Montano challenged Heritage‘s right to relief because the complaint failed to establish Heritage‘s status as а creditor. Further, Montano argued that Heritage had not pled sufficient facts to support an exception to discharge under either
A hearing on Montano‘s dismissal motion was conducted on March 25, 2011. After hearing from the parties, the bankruptcy court4 denied Montano‘s motion to dismiss, ruling, among other things, that Heritage had pled sufficient facts to state a claim under
The original lender has to show or you for Heritage have to show that the original lender justifiably relied in this case, not what some expert says some hypothetical lender would normally do.... How are you going to prove it [?] And I‘m not hearing a very good answer.... But I also would like to be practical too and not waste time if at the end of the day you simply don‘t have a case to prove.... If we start with the fact that the original lender is defunct and whoever madе a decision at the original lender is nowhere to be found. But the law of the [Boyajian] case makes it abundantly clear that you [have] got to show who made the reliance and who was defrauded. Not your client. So I don‘t know how you are going to prove it.
Hr‘g Tr. 7:9–8:9, March 25, 2011.
After considerable sparring in discovery disputes, Montano filed a motion for summary judgment on February 21, 2012. Montano‘s motion was founded on his arguments that: (1) enforcement of Heritage‘s claim was barred by the statute of limitations; (2) the claim was barred by California‘s one-action rule; (3) the claim was barred by California‘s anti-deficiency statutes; (4) the claim should be dismissed because Heritage had not established that it was the real party in interest; (5) Heritage was not properly assigned the claim; and (6) Heritage could not establish that any fraud occurred.
Heritage responded to the summary judgment motion on March 1 and 7, 2012. In addition to some procedural arguments regarding timeliness of Montano‘s motion under the local rules, Heritage countered Montano‘s arguments, contending that: (1) its claim was not time-barred because the statute of limitations did not begin to run until the foreclosure occurred; (2) neither the one-action rule nor the anti-deficiency statutes apply to a claim against a bоrrower for fraud; (3)
Lengthy hearings on the summary judgment motion took place on April 11 and 23, 2012. As shown in the transcripts, all issues raised by the parties were addressed by counsel, and the bankruptcy court actively engaged in discussions with them. At the conclusion of the hearings, the court explained the reasons for its decision:
I am convinced that [CCCP §§] 726(f) and (g) apply to this situation and on that basis I‘m going to grant the motion for summary judgment.... On this set of facts, I‘m concluding that this was owner-occupied property and I‘m also concluding that the amount of the debt
falls within the prohibition [of § 726(g)]. I‘m aware of the argument that perhaps the Legislature meant something else in terms of what the aggregate debt would be, but that is not what the statute says. It‘s something that easily could have been expressed as such and easily, frankly, could have been corrected thereafter but it hasn‘t been. So I‘m dealing with the statute as I believe it to be.... I am not accepting the proposition that [§] 726(f) and (g) simply parallel some other doctrine of allowing fraud claims against borrowers. I see nothing in the way the statute is drafted or the words of the [Legislative History] to indicate that.... I‘m determining that summary judgment is appropriate on the grounds of the applicability of sections 726(f) and (g) in this case. I think many other arguments were made are of some interest, and obviously a lot of time and effort went into those arguments. But because this disposes of the matter, I‘m going to leave it at that.
Hr‘g Tr. 107:18–108:22, April 23, 2012. In response to a query by Montano‘s counsel noting that “we had moved for fees under [§] 523(d) and that the debt remains discharged, it was a consumer debt, and the comрlaint was brought without a reasonable basis in law,” the bankruptcy court responded, “I‘m denying that. I think those are close questions. I‘m denying that.” Hr‘g Tr. 109:4-9, April 23, 2012.
On June 5, 2012, the bankruptcy court entered an Order on Defendant‘s Motion for Summary Judgment (the “Summary Judgment Order“), granting the motion “on the basis that the [Heritage] claim is barred by California Code [of Civil Procedure §] 726(f) and (g) for the reasons orally stated on the record.”
On June 19, 2012, Montano filed a motion for reconsideration. In it, Montano argued that it was legal error for the bankruptcy court to deny his
At an initial hearing on the motion for reconsideration on August 1, 2012, the bankruptcy court directed the parties to submit additional briefing on whether Heritage‘s action against Montano was substantially justified at all stages of the case. At the continued hearing on September 5, 2012, after hearing more argument from counsel, the bankruptcy court noted that it had disposed of summary judgment by ruling on only one ground: that
the right analysis for [§] 523(d) is to go back and see if there were facts and law on [Heritage‘s] side, even though I didn‘t reach them in disposing of the summary judgment motion. I think once I have a request under [§] 523(d), that‘s what I‘m supposed to do, and frankly is what I didn‘t do at the end of the hearing because I was focusing on what I did decide.
Hr‘g Tr. 41:2-9, September 5, 2012.
After next hearing arguments from counsel regarding Heritage‘s position at
Heritage had submitted three declarations to support its position that WMC had actually relied on the misrepresentations allegedly made by Montano in approving the loans, in which: Mr. Ganter, Heritage‘s in-house counsel, described his investigation of Montano‘s alleged statements; Mr. Scheuerman, an expert witness, opined that WMC met industry standards for determining creditworthiness; and Ms. Taylor, an assistant secretary in the successor business to WMC, stated that WMC relied on the income assertions in the loan application at all stages of the loan process.
The bankruptcy court rejected Heritage‘s showing. It noted that the Ganter declaration simply did not address whether WMC relied on the URLA and that, additionally, Montano had pointed out several inconsistencies in Ganter‘s statements. The Scheuerman declaration, according to the court, “helps me decide whether something meets an industry standard or not. So he‘s not talking about actual reliance [by WMC].” Hr‘g Tr. 43:5-6, September 5, 2012.
The bankruptcy court expressed befuddlement regarding the Taylor declaration: “I couldn‘t tell who she was from thе declaration, frankly. I couldn‘t tell how she‘d have any knowledge of the issue. She didn‘t identify ... the person who looked at [the URLA], and what she said was so completely conclusory.” Id. at 43:8–13. The court concluded:
I am granting the motion for reconsideration to the extent that it put into issue the elements under [§] 523(a)(2)(B) that were set forth in the motion for summary judgment. Those directly included the reliance element. The predicate for any reliance element is that there was actual reliance by a person, and I‘m finding that that simply was not demonstrated, and its not a credibility issue. The declarations simply didn‘t go to the subject in any meaningful way.
Id. at 45:3–11.
An order granting the motion for reconsideration, and awarding attorneys fees and costs under
JURISDICTION
The bankruptcy court had jurisdiction under
ISSUES
Whether the bankruptcy court erred in granting Montano‘s motion for summary judgment against Heritage because
STANDARDS OF REVIEW
We review de novo the bankruptcy court‘s grant of summary judgment. SNTL Corp. v. Ctr. Ins. Co. (In re SNTL Corp.), 571 F.3d 826, 834 (9th Cir.2009). The bankruptcy court‘s interpretation of state law is also reviewed de novo. Lahoti v. Vericheck, 636 F.3d 501, 505 (9th Cir. 2011).
We review decisions regarding relief from judgment under Rules 9024 and 9023, which incorporate Civil Rules 60(b)(1) and 59(e), for abuse of discretion. Bateman v. U.S. Postal Serv., 231 F.3d 1220, 1223 (9th Cir.2000); Morris v. Peralta (In re Peralta), 317 B.R. 381, 385 (9th Cir. BAP 2004).
A bankruptcy court‘s order awarding attorneys fees and costs under
DISCUSSION
I.
The bankruptcy court did not err in granting Montano‘s motion for summary judgment against Heritage because
In the bankruptcy court, Heritage sought a
§ 523. Exceptions to discharge (a) A discharge under section 727 ... of this title dоes not discharge an individual debtor from any debt
...
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by
...
(B) use of a statement in writing—
(i) that is materially false;
(ii) respecting the debtor‘s or an insider‘s financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to
deceive[.]7
Summary judgment may be granted “if the movant shows that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Civil Rule 56(a), incorporated by Rule 7056; Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702, 707 (9th Cir. 2008). Where only a question of law is at issue, summary judgment is proper. Asuncion v. U.S. Immigration & Naturalization Serv., 427 F.2d 523, 524 (9th Cir. 1970).
Here, the bankruptcy court determined that, as a matter of law, enforcement of Heritage‘s claim against Montano was barred under applicable state law,
On this set of facts, I‘m concluding that this was owner-occupied property and I‘m also concluding that the amount of the debt falls within the prohibition [of
CCCP § 726(g) ]. It‘s $89,000 some-odd worth of debt. I‘m aware of the argument that perhaps the Legislature meant something else in terms of what the aggregate debt would be, but that is not what the statute says. It‘s something that rеally could have been expressed as such and easily, frankly, could have been corrected thereafter, but it hasn‘t been. So I‘m dealing with the statute as I believe it to be.... I‘m determining that summary judgment is appropriate on the grounds of the applicability of Sections 726(f) and (g) in this case.
Hr‘g Tr. 107:19–108:21, September 5, 2012.
We agree with the bankruptcy court that the state statutory provisions are dispositive of the issues on appeal and, therefore, we affirm the bankruptcy court‘s decision to grant summary judgment dismissing Heritage‘s exception to discharge claim.
In construing the state statutes in this case, we are mindful of the instructions of the California Supreme Court that we are to look to the statutes’ plain meaning. Bonnell v. Medical Bd., 31 Cal.4th 1255, 8 Cal.Rptr.3d 532, 82 P.3d 740, 743 (2003). When interpreting a statute, we must discover the intent of the legislature to give effect to its purpose, being careful to give the statute‘s words their “plain, commonsense meaning.” Kavanaugh v. W. Sonoma Cnty. Union High School, 29 Cal.4th 911, 129 Cal.Rptr.2d 811, 62 P.3d 54, 59 (2003). If the language of the statute is not ambiguous, the plain meaning controls and resort to extrinsic sources to determine the Legislature‘s intent is unnecessary. Id. When the statutory language is unambiguous, “we presume the Legislature meant what it said and the plain meaning of the statute governs.” Diamond Multimedia Sys., Inc. v. Super. Ct., 19 Cal.4th 1036, 80 Cal.Rptr.2d 828, 968 P.2d 539, 546 (1999).
The parties to this appeal have not argued that
Our analysis begins by acknowledging that, in California, a lender‘s primary, and
CCCP § 726. Form of action ... (a) There can be but one form of action for the rеcovery of any debt or the enforcement of any right secured by mortgage upon real property or an estate for years therein, which action shall be in accordance with the provisions of this chapter.
Alliance Mortg. Co., 44 Cal.Rptr.2d 352, 900 P.2d at 611 (only form of action for recovery of any debt or enforcement of any rights secured by a mortgage or deed of trust is action for foreclosure); Bank of Cal., N.A. v. Leone, 37 Cal.App.3d 444, 447, 112 Cal.Rptr. 394 (1974) (“For the purposes of [
Of course, a foreclosure may not net the lender sufficient sale proceeds to satisfy the lender‘s claim in full. Acknowledging that reality,
CCCP § 580b. Contract for sale; deed of trust or mortgage; credit transaction; chattel mortgage; deficiency judgments prohibited (a) No deficiency judgment shall lie in any event for the following: ... (3) Under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling, occupied entirely or in part by the purchaser.10
See also Roseleaf, 27 Cal.Rptr. 873, 378 P.2d at 98 (“a creditor‘s right to judgment against debtor for a deficiency may be limited or barred by section 580b“); Gramercy Inv. Tr. v. Lakemont Homes Nev., Inc., 198 Cal.App.4th 903, 911, 130 Cal.Rptr.3d 496 (Cal.Ct.App.2011) (waiver by creditor allowed under
While the one-action rule provides that a lender secured by a mortgage must foreclose to collect its debt, and
(f) Notwithstanding this section or any other provision of law to the contrary, any person authorized by this state to make or arrange loans secured by real property or any successor in interest thereto, that originates, acquires, or purchases, in whole or in part, any loan secured directly or collaterally, in whole or in part, by a mortgage or deed of trust on real property or an estate for years therein, may bring an action for recovery of damages, including exemplary damages not to exceed 50 percent of the actual damages, against a borrower where the action is based on fraud under Section 1572 of the Civil Code and the fraudulent conduct by the borrower induced the original lender to make that loan.
Finally, even though under
CCCP § 726(g) .(g) Subdivision (f) does not apply to loans secured by single-family, owner-occupied residential real property, when the property is actually occupied by the borrower as represented to the lender in order to obtain the loan and the loan is for an amount of one hundred fifty thousand dollars ($150,000) or less, as adjusted annually, commencing on January 1, 1987, to the Consumer Price Index as published by the United States Department of Labor.
In sum, then, in California, under
Heritage notes that its claim against Montano seeks an exception to discharge to collect on a “sold-out” junior lien. It contends that
Heritage relies upon several cases it believes are at odds with Calvo. For example, in Cadlerock v. Lobel, 206 Cal.App.4th 1531, 1541, 143 Cal.Rptr.3d 96 (Cal.Ct.App.2012), the court ruled that an assignee of a junior loan, who was subsequently “sold out” by the senior lienholder‘s nonjudicial foreclosure sale, can pursue the borrower for a money judgment in the amount of the debt owed. However, Cadlerock made its ruling because that case did not involve purchase money loans and, thus,
Section 580b is inapplicable to the instant case because the loans at issue were not used as purchase money. Section 580b “prohibits all deficiency judgments” in specified real property transactions involving the provision of purchase money, regardless of whether the creditor conducts a judicial or nonjudicial foreclosure. (See In re Marriage of Oropallo, 68 Cal.App.4th 997, 1003, 80 Cal.Rptr.2d 669 (1998).).
Id. at n. 2.
In another case cited by Heritage, Nat‘l Enters., Inc. v. Woods, 94 Cal.App.4th 1217, 1226, 115 Cal.Rptr.2d 37 (Cal.Ct.App.2001), the court held that the one-action rule in
Nor is section 580b applicable here. It bars any deficiency judgment after foreclosure where the debt is secured by a purchase money mortgage, which is not at issue here.
Id. at 1226 n. 5, 115 Cal.Rptr.2d 37.
In Bank of Am. Nat‘l Tr. & Sav. Ass‘n v. Graves, 51 Cal.App.4th 607, 59 Cal.Rptr.2d 288 (Cal.Ct.App.1996), the court examined the claim of a creditor who offered a borrower a line of credit sеcured by a second trust deed on the property. The money was not used to purchase the property. Id. at 610, 59 Cal.Rptr.2d 288. The court explicitly ruled that the debt in question was the “underlying nonpurchase money note.” Id. at 617, 59 Cal.Rptr.2d 288 (emphasis added).
The parties also disagree whether, for purposes of
Of course, the gravamen of this appeal is Heritage‘s contention that
The bankruptcy court concluded that, consistent with
THE COURT: I would be inclined to find no triable issue with respect to occupancy. And I think it—what I‘m looking at is occupancy on the day the loan is made. That‘s the way I‘m reading [
CCCP §] 726 . Assuming it applies at all.HERITAGE COUNSEL: Well, there is additional information that we do have that hasn‘t been presented ... that defendant did not actually reside in the property.
THE COURT: Well, you relied on the deposition, right?
HERITAGE COUNSEL: Yes, that was part of the evidence. There‘s been more ...
THE COURT: What was ... the rest of it?
HERITAGE COUNSEL: There‘s been more that‘s come to light. We did a further investigation.
THE COURT: Well, is that before me today?
HERITAGE COUNSEL: No.
THE COURT: Okay.
HERITAGE COUNSEL: I would like to make the record right now.
THE COURT: Well, let‘s see if they‘re okay with that. Ms. Santiago [addressing MONTANO COUNSEL], we‘re about to get a supplemental—
MONTANO COUNSEL: No, your Honor.
THE COURT: All right. Okay.... I‘m going to hold you to the record I have today.
Hr‘g Tr. 66:22–67:23, April 19, 2012.
We agree with the bankruptcy court‘s conclusion in this regard. The only evidence before the bankruptcy court on occupancy was the deposition of Montano, in which he testified that he occupied the Property from the day of the loan approvals. That there may have been other evidence available to Heritage that had not been submitted is no basis to deny Montano‘s motion for summary judgment.
The bankruptcy court‘s other important conclusion was that the amount of the loan to Montano that Heritage sought to enforce, $89,000, fell within the dollar limitations in
I‘m aware of the argument that perhaps the Legislature meant something else in terms of what the aggregate debt should be, but that‘s not what the statute says. It‘s something that could have been expressed as such and easily, frankly, could have been corrected thereafter, but it hasn‘t been. So I‘m dealing with the statute as I believe it to be.
Hr‘g Tr. 107:23–108:3.
We also agree with the bankruptcy court that, regarding the $150,000 cap,
Heritage offers another reason why its fraud action against Montano is not barred by
Finally, Heritage repeatedly argues that the California legislature could not possibly have intended to “carve out” an exception that would endorse the fraudulent behavior of borrowers for smaller loans. Once again, Heritage‘s position rests оn speculation about legislative intent. Moreover, we disagree with Heritage‘s suggestion that it would be absurd for the California Legislature to overlook potential borrower fraud regarding loans to owner-occupiers for less than $150,000 as a means of requiring lenders to exercise special diligence in making such loans. A statute‘s plain meaning is absurd only if “it is so gross as to shock the general moral or common sense.” Barnhart v. Sigmon Coal Co., Inc., 534 U.S. 438, 450, 122 S.Ct. 941, 151 L.Ed.2d 908 (2002); United States v. Fontaine, 697 F.3d 221, 228 (3d Cir. 2012) (“An interpretation is absurd when it defies rationality or renders the statute nonsensical and superfluous.“) (citations omitted). Here, that California would bestow protection against personal liability for a certain class of borrowers for home loans of modest amounts under limited circumstances does not shock the general moral or common sense, nor does it defy rationality, nor is it nonsensical and superfluous.
We conclude that the bankruptcy court did not err in granting Montano‘s motion for summary judgment against Heritage because, operating together,
II.
The bankruptcy court did not abuse its discretion in reconsidering its prior order and awarding attorneys fees and costs to Montano under
A. The bankruptcy court did not abuse its discretion in granting Montano‘s motion for reconsideration.
In their briefs, Heritage and Montano both suggest that Montano‘s motion for reconsideration was founded upon the provisions of Rule 9024, which incorporates Civil Rule 60(b)(1). We disagree. Because Montano‘s motion for reconsideration was filed within fourteen days after entry of the Summary Judgment Order, the motion should be treated as one to alter or amend the Summary Judgment Order under Rule 9023, which incorporates Civil Rule 59(e). Fadel v. DCB United LLC (In re Fadel), 492 B.R. 1, 18 (9th Cir. BAP 2013) (citing Am. Ironworks & Erectors, Inc. v. N. Am. Constr. Corp., 248 F.3d 892, 898-99 (9th Cir.2001)). The standard for granting relief under that rule requires the movant to show (a) newly discovered evidence, (b) the court committed clear error or made an initial decision that was manifestly unjust, or (c) an intervening change in controlling law. Duarte v. Bardales, 526 F.3d 563, 567 (9th Cir. 2008).
The legal mistake made by the bankruptcy court in originally denying Montano‘s request for attorneys fees is evidenced in its colloquy with Montano‘s counsel at the summary judgment hearing reminding the court that “[Montano] had moved for fees under [§] 523(d) and that the debt remains discharged, it was a consumer debt, and the cоmplaint was brought without a reasonable basis in law.” The court responded, “I‘m denying that. I think those are close questions. I‘m denying that.” Hr‘g Tr. 109:4–9. As Heritage is well aware, this Panel has held that:
To support a request for attorneys’ fees under
§ 523(d) , a debtor initially needs to prove: (1) that the creditor sought to except a debt from discharge under§ 523(a) , (2) that the subject debt was a consumer debt, and (3) that the subject debt ultimately was discharged. Stine v. Flynn (In re Stine), 254 B.R. 244, 249 (9th Cir. BAP 2000), [aff‘d 19 Fed.Appx. 626 (9th Cir.2001)]. “Once the debtor establishes these elements, the burden shifts to the creditor to prove that its actions were substantially justified.” Id.
Heritage Pac. Fin. LLC v. Machuca (In re Machuca), 483 B.R. 726, 734 (9th Cir. BAP 2012). Here, the bankruptcy court erred when it declined to consider Montano‘s
I think that the right analysis for [§ 523(d)] is for me to go back and review the factors and what it is you [Heritage] would have to prove and see if there were facts and law on your side, even though I did not reach them in disposing of the summary judgment motion. I think once I have a request under [§ 523(d)], that‘s what I am supposed to do, and frankly is what I didn‘t do at the end of the hearing because I was focusing on whаt I did decide.
Hr‘g Tr. 41:2–12, September 5, 2012.
Simply put, a trial court‘s concession that it erred in an earlier order requires that court to set aside the order and reconsider the parties’ arguments. Duarte, 526 F.3d at 567 (holding that once a court “acknowledged that the basis underlying its original judgment was wrong, it was error not to set aside the judgment.“). The bankruptcy court did not
B. The bankruptcy court did not abuse its discretion in granting Montano‘s request for attorney‘s fees and costs under § 523(d) .
If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney‘s fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.
Under
The Panel has adopted the “substantial justification” standard employed by courts in weighing requests for fee awards under the Equal Access to Justice Act. In re Machuca, 483 B.R. at 733; In re Carolan, 204 B.R. at 987. As explained in Pierce v. Underwood, 487 U.S. 552, 558, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988), a creditor must show that its claim had a reasonable basis both in law and in fact. In re Carolan, 204 B.R. at 987. Here, the bankruptcy court held that Heritage comes up short in that it did not show that WMC actually relied upon the written representations of Montano at the time it approved his loans, a critical element to establish a claim for relief under
To aid it in its review of Montano‘s
Recall, under
The Code confirms that the bankruptcy court‘s legal conclusion was correct:
In making its decision, the bankruptcy court reminded Heritage of the comments made by the presiding bankruptcy judge at the hearing on Montano‘s motion to dismiss pointing out that, while the complaint would survive that motion, Heritage was likely facing formidable obstacles in proving that WMC actually relied on Montano‘s alleged falsities because WMC was now a defunct organization. In response to these warnings, counsel for Heritage assured the bankruptcy judge that it would obtain competent evidence of reliance in discovery from Montano, from the mortgage broker who allegedly created the false documents, and from former WMC agents, even though WMC was no longer in business. Hr‘g Tr. 5:16-18,
Despite its assurances, Heritage failed to provide the bankruptcy court competent evidence from knowledgeable people formerly at WMC, or at all, that WMC had actually relied on the contents of the URLA. Counsel for Heritage attempted to explain this deficiency by indicating that, while it intended to offer good proof, and was prepared to depose former officers of WMC, it had run out of time for discovery:
[the parties] had agreed ... to take the deposition of the person most knowledgeable with respect to WMC. A deposition subpoena was sent out. It was calendared; it was scheduled, and I had orally agreed with opposing counsel that this deposition would be moving forward even though it was after the discovery cutoff date, and after I served the deposition, [Montano] said no, we‘re not going to do it.
Hr‘g Tr. 36:3-10, September 5, 2012. Counsel further assured the bankruptcy court that, “My client has always been in contact with WMC regarding this loan, from day one.” Hr‘g Tr. 36:17-18, September 5, 2012. Concerning Heritage‘s reasons for not presenting direct evidence of actual reliance by WMC, the bankruptcy court observed that Heritage had not requested an extension of the discovery deadline to accommodate depositions. Hr‘g Tr. 38:7-9, September 5, 2012.
As noted above, Heritage submitted only three declarations from witnesses to support its defense of the
In the bankruptcy court, and now in this appeal, Heritage argues that WMC obviously changed its position after receiving the URLA, because it made the requested loans to Montano. It argues that, because it required a written loan application as a condition of lending to Montano, and because it thereafter extended credit to him, the bankruptcy court and this Panel must infer that WMC actually relied on those false statements. They cite to a venerable California case for a definition of “actual reliance“:
Actual reliance occurs when a misrepresentation is the immediate cause of a plaintiff‘s conduct which alters his legal relations and when absent such representation, he would not, in all reasonable probability, have entered into the contract or other transaction.
Engalla v. Permanente Med. Grp., Inc., 15 Cal.4th 951, 64 Cal.Rptr.2d 843, 938 P.2d 903, 919 (1997) (quoting Spinks v. Clark, 147 Cal. 439, 82 P. 45, 50 (1905)).
We fear Heritage has taken this quotation out of context. Immediately following this passage in the decision, the court acknowledges a limitation on its prior statement:
It is not ... necessary that reliance upon the truth of the fraudulent misrepresentation be the sole or even the predominant or decisive factor in influencing [the creditor‘s] conduct.... It is enough that the representation has played a substantial part, and so has been a substantial factor, in influencing his decision.
Engalla, 64 Cal.Rptr.2d 843, 938 P.2d at 919 (citing RESTATEMENT 2D TORTS § 538 com. e). Fairly read, as it applies to this case, the California court instructs that the bankruptcy court need not infer from the fact that a creditor has changed its position (i.e., approved and made a loan) that it actually relied on a fraudulent misrepresentation. To sustain such an inference, an inquiry must be made concerning the extent to which the creditor considered the misrepresentation a substantial factor in influencing its decision (i.e., actual reliance or reliance in fact).
Summarizing its conclusion, the bankruptcy court explained:
I am granting the motion for reconsideration to the extent that it put into issue the elements under [§] 523(a)(2)(B) that were set forth in the motion for summary judgment. Those directly included the reliance element. The predicate for any reliance element is that there was actual reliance by a рerson, and I‘m finding that that simply was not demonstrated, and it‘s not a credibility issue. The declarations simply did not go to the subject in any meaningful way.
Hr‘g Tr. 45:2–11, September 5, 2012. Since the bankruptcy court concluded that Heritage had not proven actual reliance, an essential element to prove for an exception to discharge under
Finally, at oral argument before the Panel, Heritage argued that it did not have a fair opportunity to present its case on actual reliance and substantial justification. Specifically, Heritage argues that, after the bankruptcy court granted the motion for reconsideration, it should have been given the opportunity for a separate hearing on the
We do not think so. In addition, this position is inconsistent with Heritage‘s presentation at the hearing in the bankruptcy court on September 5, 2012, where Heritage‘s counsel stated that:
I went back and looked at the language, and it says substantial justification in law and fact, so I believe that we‘ve already satisfied the substantial justification in law based on the [§] 726 discussion and the ruling on the MSJ and the denial of [§] 523(d) on that ground alone. Now with respect to whether it‘s substantially justified in fact, I also believe that not only was that shown in the motion for summary judgment, even though it wasn‘t ruled on, but it‘s also been shown in ... the evidence and facts that we‘ve presented as well.
Hr‘g Tr. 13:23–14:8, September 5, 2012. In short, Heritage represented to the bankruptcy court that it was satisfied that it had established substantial justification on the previous motions and the evidence and facts they presented. We have examined the transcripts of the hearings of August 1 and September 5, 2012, where the reconsideration motion and
To the extent that Heritage‘s concern reflects a due process issue, the record is clear that Heritage had adequate notice throughout the proceedings that, if it could not establish the facts needed for an exception to discharge, Montano would request an award of fees if Heritage‘s arguments were not substantially justified at all stages of the proceedings. Indeed, the
But most importantly, and to the extent that Heritage argues here for fair or equitable treatment, we remind it that very early in this case, it was advised by the bankruptcy court that proving reliance would be difficult. At the hearing concerning the motion to dismiss months earlier, the bankruptcy judge‘s warnings to that effect were loud and clear. In response, Heritage assured the bankruptcy
We conclude that the bankruptcy court did not abuse its discretion in granting Montano‘s request for attorney‘s fees and costs under
CONCLUSION
The orders of the bankruptcy court granting Montano summary judgment and awarding him attorneys fees and costs are AFFIRMED.