1 UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF CALIFORNIA

2 FRESNO DIVISION

3

4 In re ) Case No. 21-10753--B-7 ) 5 GUSTAVO DEL TORO, ) ) 6 Debtor. ) ) 7 ) ) 8 PRODUCERS LIVESTOCK MARKETING ) ASSOCIATION, ) Adv. Proc. No. 21-1027-B 9 ) Plaintiff, ) 10 ) v. ) 11 )

GUSTAVO DEL TORO, )

12 ) Defendant. ) 13 ) ) 14

15

16 MEMORANDUM DECISION

17 —————————————————————————————

18 Michael J. Gomez and Garrick Warrington, FRANDZEL, ROBINS BLOOM & CSATO, L.C., Los Angeles, CA, for Producers Livestock 19 Marketing Association, Plaintiff.

20 Henry D. Nunez, Fresno, CA, for GUSTAVO DEL TORO, Debtor.

21 —————————————————————————————

22 RENÉ LASTRETO II, Bankruptcy Judge: 23 24 INTRODUCTION 25 The Bankruptcy Code excepts from discharge debts for 26 extensions, renewals, or refinancing of credit to the extent the 27 debt is obtained by a materially false written statement 28 respecting a debtor’s financial condition. 11 U.S.C. 1 § 523(a)(2)(B).1 To be excepted from discharge, the creditor must 0F 2 have reasonably relied upon the written statements and the 3 debtor must have intentionally deceived the creditor. The lender 4 here relied upon an unsigned personal financial statement that 5 was adopted by the debtor in renewing an existing loan and 6 extending further credit. When the renewal and new credit came 7 due, the balance was unpaid. The lender then obtained a state 8 court judgment for the balance of the debt. 9 Finding all the elements necessary to except the debt from 10 discharge, the court here rules the state court judgment is 11 nondischargeable under § 523(a)(2)(B). 12 13 I 14 A. 15 Debtor Gustavo Del Toro (“Del Toro”) operated Del Toro 16 Dairy in Merced, California until he filed this Chapter 7 17 bankruptcy case in March 2021. 18 Producers Livestock Marketing Association (“Producers”) is 19 a Utah Agricultural Cooperative. Part of its market strategy is 20 to enter into “Grazing/Feeding Agreements” with dairymen and 21 other livestock ranches. Under these agreements, Producers 22 places livestock with the “feeders.” The feeders care for and 23 utilize the livestock. The agreements last one year. During that 24 time, Producers will remove and sell any non-essential 25 livestock. At the end of the year, if the proceeds from the

26 1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. References to the record in this 27 Memorandum are: “JPO” for Joint Pre-Trial Order, Doc. #53; “PX” for Plaintiff Exhibit; “DX” for Defendant Exhibit; “TT1” for Trial Transcript Day 1, 28 1 sales exceed the total dollar value of the livestock placed with 2 the feeder (including certain handling charges), the feeder 3 receives those proceeds. On the other hand, if there is a 4 deficit, the feeder must remit the deficit to Producers. 5 In late November 2015, Producers and Del Toro entered into 6 a feeding/grazing contract. Producers placed approximately 120 7 head of livestock with Del Toro valued at approximately 8 $200,000.00. PX1. 9 In early 2017, Producers’ and Del Toro’s relationship 10 changed. By then, Del Toro owed about $181,000.00 to Producers. 11 In February 2017, Del Toro signed a promissory note agreeing to 12 pay Producers $181,035.75 in full by December 1, 2017. PX2. 13 Del Toro also signed a security agreement. PX5. Under the 14 agreement, Del Toro pledged virtually all personal property 15 assets including livestock, machinery, and farm equipment. JPO. 16 Del Toro also agreed that there would be no encumbrances or 17 sales of those assets except in the ordinary course of Del 18 Toro’s business. Id. 19 Del Toro did not make the payment when the promissory note 20 matured in December 2017. In mid-February 2018, Matt Beechinor, 21 the branch manager of Producers’ Madera office went to Del 22 Toro’s Dairy to meet with Del Toro. Producers was then 23 considering renewing the obligation and needed updated 24 information to evaluate whether it would renew the obligation. 25 PX45. Beechinor brought to the meeting the 2017 personal 26 financial statement that Del Toro previously gave Producers, as 27 well as a blank financial statement form. Id. Beechinor met with 28 Del Toro and read the financial statement line by line while Del 1 Toro provided Beechinor with the information to complete the 2 statement. Id. Beechinor also went through the 2017 financial 3 statement and asked Del Toro whether the numbers or amounts had 4 changed at all, and if so, what those new figures were. Id. As 5 Del Toro provided that information, Beechinor wrote the 6 information on the blank financial statement. Id. Then, 7 Beechinor showed Del Toro the completed form and asked him to 8 read and review it so he could verify it was correct. Id. Del 9 Toro took the form, reviewed it, said it was correct, and then 10 handed it back to Beechinor. Beechinor told Del Toro he would 11 “type up” the financial statement and then have him sign it when 12 any renewal documents were sent to Del Toro if a renewal was 13 approved.2 1F 14 After going over the financial statement with Del Toro, 15 Beechinor then performed an inspection of the dairy, including a 16 cow count, measurement of silage piles, a hay count, equipment 17 inspection, and a verification of the feed and livestock. Id. 18 Beechinor prepared a typewritten financial statement. PX34. 19 The financial statement and a renewal promissory note for 20 $160,000.00 was prepared and sent to Del Toro. PX3. In April 21 2018, before the renewal promissory note was signed, Del Toro 22 purchased 33 dairy cows from A&M Livestock for the sum of 23 $34,389.00. DXA. Producers advanced the funds for that purchase. 24 Id.3 2F

25 2 The handwritten financial statement has apparently been lost. Producers did not provide the handwritten financial statement at trial. 26 3 There is substantial dispute whether Del Toro was advised by Beechinor that he had adequate credit with Producers to purchase these cows from A&M 27 Livestock. Del Toro claims Beechinor told him he had sufficient funds to purchase additional dairy cows. DXA. Producers disputes that Beechinor so 28 1 The February 2018 financial statement reflected some 2 liabilities including $20,000.00 in monthly payables and a 3 $35,000.00 note payable to Nebraska State Bank for the purchase 4 of cows. PX34. The financial statement also reflected purchase 5 money security interests for a Mercedes vehicle and a 125 6 tractor. Id. 7 Based upon the 2018 financial statement and Del Toro’s 8 representations concerning his financial condition, Producers’ 9 president, Rick O’Brien, testified that Producers agreed to 10 renew Del Toro’s obligation. PX47. Once more based upon the 2018 11 financial statement and Del Toro’s representations concerning 12 his financial condition, Producers agreed to advance him another 13 $34,389.00 so Del Toro could get more cows. Id. 14 At the end of May 2018, Del Toro sent a text to Beechinor 15 that indicated he left the paperwork—referring to the renewal 16 promissory note and the amendment to the promissory note—for 17 Beechinor and asked him to pick up the documents. PX45. Del Toro 18 signed the renewal note and the amendment. PX3, PX4. The renewal 19 note was payable March 2019. PX3.4 The amendment to promissory 3F 20 note increased the renewal note amount from $160,000.00 to 21 $194,389.00. PX4. 22 When the February 2018 financial statement, March 2018 23 renewal promissory note, and April 2018 amendment to promissory 24 note were presented to Del Toro, he signed the promissory note 25

advised Del Toro. But there is no dispute that Producers did advance the 26 $34,389.00 so Del Toro could acquire additional cows. PX47. 4 The February 2017 security agreement that Del Toro signed defined 27 “indebtedness” as including any obligations owed Producers “whether now existing or hereafter arising, whether or not evidenced by any note . . .” 28 1 and the amendment to the promissory note. He did not sign the 2 typewritten personal financial statement. At the same time, Del 3 Toro owed significant debt that was not included in the 4 financial statement.5 That debt included approximately 4F 5 $187,000.00 owed Harry Habib Cattle Company, $13,777.00 to 6 Darrold Brummel, $9,970.00 to Foster’s Pump, $39,569.00 to 7 Lester Moss, and $59,114.00 to Caterpillar Financial Services.6 5F 8 Id.; PX10. 9 On May 22, 2018, Western Milling, LLC, a feed supplier to 10 dairies, filed a California Dairy Cattle supply lien against Del 11 Toro. JPO. Beginning two months earlier, Del Toro began to 12 receive notices form Pacific Gold Milk Producers, the 13 cooperative that purchased Del Toro’s milk, that his milk did 14 not meet their quality standards. Id. Pacific Gold terminated 15 their contract with Del Toro in January 2019. Id. These facts 16 were not disclosed to Producers. Also undisclosed was a debt to 17 Lester Moss and that payment to Moss was arranged through an 18 assignment of Del Toro’s milk check in March 2017. 19 Del Toro did not satisfy the renewed promissory note or 20 amendment to promissory note when due on March 1, 2019. Around 21 that time, Beechinor received information that a significant 22 number of cows were missing from Del Toro’s dairy. Beechinor 23 visited the dairy and found the cows were gone. PX45. 24 During the period from May 2018 to March 2019, several 25 significant events occurred affecting the value of Del Toro’s 26

5 There also no evidence that Del Toro ever advised Producers of the 27 additional debt. 6 There may have been significant other debt owed at the time of the 28 1 dairy operation, including the disappearance of between 169-279 2 cows that were worth between $135,198.34 and $223,197.21; 3 seizure of 50 cows by Harry Habib worth approximately 4 $40,000.00; and payment of $154,838.00 in milk check proceeds to 5 other creditors, such as Hultgren Dairy who sold cows to Del 6 Toro in June 2018. JPO. Producers was unaware of these events 7 until after the 2018 renewal note and amendment were due. 8 9 B. 10 On March 11, 2019, Producers filed an action against Del 11 Toro in the Merced County Superior Court. In its complaint, 12 Producers alleged that Del Toro breached the renewed promissory 13 note and the amendment. PX6. It also sought recovery of its 14 personal property collateral and claimed Del Toro converted 15 Producers’ collateral. In addition to foreclosure of the 16 security interest, Producers sought $175,814.14 plus interest, 17 attorneys’ fees, and costs. Id. 18 Del Toro did not respond to the complaint. On May 28, 2019, 19 Producers obtained a default judgment against Del Toro in the 20 sum of $193,804.54, including principal in the amount of 21 $175,801.14, pre-judgment accrued interest in the amount of 22 $13,973.35, attorneys’ fees in the amount of $3,448.15, and 23 costs in the amount of $581.90, totaling $193,804.54. PX7. The 24 judgment further provides it would continue to accrue pre- 25 judgment interest until entered, and then accrue interest at the 26 post-judgment rate of 10% per annum. Producers was awarded its 27 attorneys’ fees and given a judgment for claim and delivery as 28 to its collateral. Id. Since then, Producers submitted two 1 Memoranda of Costs to the state court reflecting attorneys’ fees 2 and costs it incurred post-judgment. PX8, PX9. As of the 3 petition date, Producers claims it is owed $253,718.58.7 6F 4 5 C. 6 Del Toro filed this bankruptcy case on March 29, 2021. See, 7 Case No. 21-10753-B-7 (Bankr. E.D. Cal.). Producers timely filed 8 a complaint to determine dischargeability of debt. Compl., 9 Doc. #1. Producers asserts claims against Del Toro under 11 10 U.S.C. § 523(a)(2)(A) (non-fraudulent transfer), (a)(2)(A) 11 (fraudulent transfer), (a)(2)(B), and (a)(6) (conversion) for 12 missing collateral, largely consisting of cattle and for being 13 induced to renew credit by false financial information 14 represented by Del Toro. 15 The first phase of the case was limited to the claims under 16 11 U.S.C. § 523(a)(2)(A) (non-fraudulent transfer), (a)(2)(B), 17 and (a)(6) (conversion). In this phase, Producers seeks a 18 judgment that Del Toro’s debt to Producers is nondischargeable 19 in the full amount of Producers’ state court default judgement 20 as well as post-judgment interest and costs.8 Producers seeks 7F 21 treble damages and its attorneys’ fees pursuant to Cal. Pen. 22

23 7 This amount consists of principal of $175,814.14; pre-judgment interest of $13,973.35; $920.51 in additional pre-judgment interest; pre- 24 judgment attorneys’ fees of $3,448.15 and costs of $581.90; post-judgment enforcement costs of $28,062.75; additional costs of $933.00; and post- 25 judgment interest through the bankruptcy filing date at the rate of 10% per annum less a recovery of $7,107.7l. 8 The second phase is for claims under 11 U.S.C. § 523(a)(2)(A) 26 (fraudulent transfer) and (a)(6). In phase two, Producers seeks a judgment determining Del Toro’s debt to Producers is nondischargeable in the sum of 27 assigned milk check proceeds to other parties, the value of livestock seized by other creditors, the value of missing livestock, and Producers’ attorneys’ 28 1 Code § 496(c). 2 The case was tried over two days on December 8 and 9, 2022. 3 The parties post-trial submissions were due February 28, 2023. 4 The post-trial submissions were timely filed and the court has 5 considered the testimony of the witnesses and the post-trial 6 submissions. After careful consideration, the court can rule on 7 the first phase of the litigation. 8 9 10 The United States District Court, Eastern District of 11 California, has jurisdiction of this adversary proceeding under 12 28 U.S.C. § 1334(b) because this is a civil proceeding under 13 Title 11 of the United States Code. The District Court referred 14 this matter to this court pursuant to 28 U.S.C. § 157(a). This 15 is ”core” proceeding under 28 U.S.C. § 157(b)(2)(I). The parties 16 have each consented to this court’s entry of a final judgment. 17 JPO. 18 19 II 20 The parties emphasized nondischargeability under 11 U.S.C. 21 § 523(a)(2)(B) in their proof in the first phase of this 22 litigation. Section 523(a)(2)(B) bars discharge of debts arising 23 from a materially false statement respecting the debtor’s 24 financial condition if that statement is in writing. Lamar, 25 Archer & Cofrin, LLP. v. Appling, 138 S. Ct. 1752, 1759 (2018). 26 The court will focus the analysis on § 523(a)(2)(B). 27 As a general matter, when determining a debt is excepted 28 from discharge, a bankruptcy court must construe the evidence 1 against the creditor and in favor of the debtor. Mele v. Mele 2 (In re Mele), 501 B.R. 357, 363 (B.A.P. 9th Cir. 2013). A 3 creditor objecting to dischargeability of its claim bears the 4 burden of proving, by a preponderance of the evidence, that the 5 particular debt falls within one of the exceptions to discharge 6 enumerated under § 523(a). Grogan v. Garner, 498 U.S. 279, 286- 7 91, 111 S. Ct. 654, 659-61 (1991); In re Lansford, 822 F.2d 902, 8 904 (9th Cir. 1987) (“Burden is on the creditor to establish 9 that each statute’s prerequisite is met.”). For purposes of 10 § 523(a)(2), the debtor’s intent, materiality, whether the 11 creditor relied upon the debtor’s false statements, and 12 proximate cause are all questions of fact. Candland v. Ins. Co. 13 of N. Am. (In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996). 14 To prevail on an exception to discharge claim under 15 § 523(a)(2)(B), the creditor must show: (1) it provided debtor 16 with money, property, services, or credit based on a written 17 representation of fact by the debtor as to the debtor’s 18 financial condition; (2) the representation was materially 19 false; (3) the debtor knew the representation was false when 20 made; (4) the debtor made the representation with the intention 21 of deceiving the creditor; (5) the creditor relied on the 22 representation; (6) the creditor’s reliance was reasonable; and 23 (7) damage proximately resulted from the representation. Id. at 24 1469; In re Siriani, 967 F.2d 302, 304 (9th Cir. 1992). 25 The court will examine those elements. 26 /// 27 /// 28 /// 1 A. 2 Producers provided Del Toro with money, property, services, 3 or an extension, renewal, or refinancing of credit based on a 4 written representation respecting the debtor’s financial 5 condition. 6 A loan application containing information about an 7 applicant’s income constitutes a statement in writing respecting 8 the applicant’s financial condition for purposes of 9 § 523(a)(2)(B). See, Cashco Fin. Servs. v. McGee (In re McGee), 10 359 B.R. 764, 768 (B.A.P. 9th Cir. 2006). The same would be true 11 for a personal financial statement. A statement concerns the 12 debtor’s financial condition if it has a direct relation to or 13 impact on the debtor’s overall financial status. Lamar, Archer & 14 Cofrin, 138 S. Ct. at 1761. 15 Del Toro’s February 2018 personal financial statement was 16 intended to provide a complete report of his financial status. 17 It set forth current assets, current liabilities, intermediate 18 term assets and liabilities, as well as long term assets and 19 liabilities, and contained numerous schedules where the debtor 20 could explain the basis for the summary on the first page of the 21 financial statement. PX34. 22 Del Toro argues he did not sign the final typed financial 23 statement, so he cannot be charged with presenting it to 24 Producers. This argument is unpersuasive. Factually, Del Toro 25 adopted the statement. TT-1 60:18-25. A financial statement can 26 be adopted by a debtor. See, Tallant v. Kaufman (In re Tallant), 27 218 B.R. 58, 69-70 (B.A.P. 9th Cir. 1996). Beechinor testified 28 that he went over the 2017 financial statement line by line and 1 asked Del Toro if there were any changes. After he completed the 2 handwritten financial statement, Beechinor went over it with Del 3 Toro who accepted it as accurate. Beechinor typed the financial 4 statement and submitted it to Producers in Utah. PX34. The 5 financial statement along with the renewed promissory note and 6 amendment to promissory note were sent to Del Toro, which was 7 Producers’ usual practice. PX45. 8 The fact that the original, handwritten financial statement 9 has been lost does not preclude proof of what was contained in 10 the statement adopted by Del Toro. Other evidence of the content 11 of a writing is admissible if the original is lost or destroyed, 12 and not by the proponent acting in bad faith. Fed. R. Evid. 13 1004(a). No evidence was presented suggesting Producers was 14 acting in bad faith in connection with the loss of the 15 handwritten financial statement. 16 In May 2018, Del Toro sent a text to Beechinor advising him 17 to pick up the loan documentation. Beechinor did so. TT1 162:5- 18 10. Del Toro adopted the information contained in the typed 19 financial statement and he used that statement to procure the 20 renewal, as well as the further credit extension to purchase new 21 cows. Beechinor’s memory of these events was consistent even 22 under cross-examination. On the other hand, Del Toro’s memory of 23 the events was not consistent. TT1 144:23-148:4; TT2 22:18-20. 24 Del Toro cites unpublished Kilbey v. Nawrocki (In re 25 Nawrocki), No. AZ-09-1221-PaDuJu, 2010 Bankr. LEXIS 3516 (B.A.P. 26 9th Cir. Mar. 3, 2010), to support his position that without a 27 statement in writing, there can be no claim that the debt is 28 nondischargeable under § 523(a)(2)(B). There, the issue was 1 whether attorneys’ fees should be awarded against the 2 unsuccessful creditor who asserted the claim. Id. at *8. Though 3 a written statement is a prerequisite to liability under 4 § 523(a)(2)(B), there is a written statement here: the February 5 19, 2018, personal financial statement. Id. at *16; PX34. It is 6 unsigned, but Del Toro adopted it. The uncontradicted testimony 7 is Producers relied upon it. Del Toro’s citation to Tallant also 8 does not assist him. The Bankruptcy Appellate Panel there found 9 preparation and adoption of an unsigned profit and loss 10 statement at the debtor’s direction was enough to constitute a 11 written statement. Beechinor here obtained the information from 12 the 2017 personal financial statement and from Del Toro, and 13 then reviewed the contents with him. Del Toro agreed the 14 information was accurate. That is no different than the written 15 statement prepared at the debtor’s direction and subsequently 16 adopted in Tallant. 17 The court finds that Producers has sufficiently proven that 18 Del Toro obtained the financial accommodations by a written 19 representation of his financial condition. 20 21 B. 22 The written representation of Del Toro’s financial 23 condition was materially false. 24 “A materially false statement is one which paints a 25 substantially untruthful picture of a financial condition by 26 misrepresenting information of the type which would normally 27 effect [sic] the decision to grant credit.” In re Greene, 96 28 B.R. 279, 283 (B.A.P. 9th Cir. 1989). Such material falsity can 1 be premised upon the inclusion of false information or upon the 2 omission of information about a debtor’s financial condition. 3 Id.; Tallant, 218 B.R. at 71. Significant misrepresentations of 4 financial condition—on the order of several hundred thousand 5 dollars—are of the type which would generally affect a lender’s 6 or guarantor’s decision. Candland, 90 F.3d at 1470. 7 Plaintiff’s expert, Robert Bennett, a former agricultural 8 loan officer with considerable experience in lending decisions 9 and special assets, concluded that the financial statement 10 adopted by Del Toro was materially misleading to Producers such 11 that Producers could not make a valid credit decision. PX44. 12 Nearly $310,000.00 of debt was undisclosed in February 2018 and 13 months later when the renewal note and amendment were signed. 14 Del Toro provided no updates as to the status of his 15 liabilities. That debt included a large, secured obligation owed 16 Harry Habib Cattle, an assignment of a portion of Del Toro’s 17 milk check to Lester Moss for nearly six years, and debts owed 18 to Darrold Brummel, Foster’s Pumps, and Caterpillar Financial 19 Services.9 Beechinor and O’Brien each testified that neither knew 8F 20 the extent of the debt until long after the note was renewed and 21 additional funds were advanced, and in some cases, more than a 22 year thereafter. PX45; PX47. 23 Del Toro does not challenge the materiality of the debt 24 omitted from the personal financial statement, nor does Del Toro 25 dispute that these large debts were owed. Indeed, his bankruptcy 26 schedules included much of that debt. PX13.

27 9 Mr. Bennett also opined that more than $300,000.00 of additional debt may have existed, but it was unclear when some of that debt was actually 28 1 The court finds the omission of the debt from the personal 2 financial statement dated February 2018 is material in rendering 3 the statement materially false. 4 5 C. 6 Del Toro knew the financial statement was false. 7 Under § 523(a)(2)(B), fraudulent misrepresentation is 8 established by showing actual knowledge of falsity of the 9 statement or reckless disregard for its truth. Gertsch v. 10 Johnson & Johnson Fin. Corp. (In re Gertsch), 237 B.R. 160, 167 11 (B.A.P. 9th Cir. 1999). The bankruptcy court may consider 12 circumstantial evidence that tends to establish what the debtor 13 must have actually known when taking the injury producing 14 action. Jett v. Sicroff (In re Sicroff), 401 F.3d 1101, 1106 15 (9th Cir. 2005). Failure to review documents containing false 16 statements about a debtor’s financial condition with the 17 knowledge that those documents will be submitted to obtain money 18 or credit, supports a finding a reckless disregard. Merchs. Bank 19 of Cal. v. Chai Cho Oh (In re Oh), 278 B.R. 844, 858 (Bankr. 20 C.D. Cal. 2002). 21 When the February 2018 financial statement was prepared and 22 the note and amendment signed months later, Del Toro was deeply 23 in debt to Harry Habib. Further, at that time Del Toro’s 24 processors, Pacific Gold and Milk Producers, began questioning 25 the quality of the milk produced by Del Toro’s dairy.10 Bennett 9F 26 testified as to the extent of debts that were outstanding. 27 10 Eventually, the contract between Pacific Gold and Del Toro was 28 1 Del Toro never denied the existence of these debts. He just 2 insisted he never misrepresented his financial condition. Del 3 Toro said he was not asked about other debt in connection with 4 Beechinor’s preparation of the financial statement. TT1 159:22- 5 28. Beechinor’s testimony contradicts that. TT1 58:7-28, 159:22- 6 28. On the other hand, Del Toro claims he both did and did not 7 know what he was signing. TT1 148:18-24. The bankruptcy 8 schedules themselves prove Del Toro knew about the debt and the 9 debt was not included in the personal financial statement. Del 10 Toro admitted he discussed his Producer’s debt with Beechinor at 11 the face-to-face meeting in early 2018. DXA. 12 Given the extent of the debt and Del Toro’s lack of 13 credible testimony disputing his knowledge of the debt 14 outstanding when the personal financial statement was prepared 15 and note and amendment signed, the court finds Del Toro knew the 16 personal financial statement was false, or alternatively, he 17 failed to review the documents, which support a finding of 18 reckless disregard and establishes proof of this element. 19 20 D. 21 Del Toro made the false statements with the intention of 22 deceiving Producers. 23 In the Ninth Circuit, reckless disregard for the truth of a 24 representation or reckless indifference to the debtor’s actual 25 circumstances can support a finding of intent for purpose of 26 § 523(a)(2). See, Anastas v. Am. Sav. Bank (In re Anastas) 94 27 F.3d. 1280, 1286 (9th Cir. 1996); Gertsch, 237 B.R. at 167-168. 28 Intent to deceive can be inferred from the totality of the 1 circumstances including reckless disregard for the truth. Id. 2 Del Toro certainly knew in early 2018 that Producers was 3 considering renewing the $160,000.00 obligation carrying over 4 from 2017. Beechinor testified he discussed this with Del Toro. 5 In addition, Del Toro wanted to purchase additional cows. And 6 though it is disputed by Del Toro that a further loan extension 7 was necessary to purchase those cows, Del Toro does not dispute 8 he signed the amendment to the promissory note. That amendment 9 contained a recital that the loan was currently overdrawn by the 10 amount of $34,389.00 as a result of the purchase 33 head of 11 springer heifers. PX4. Del Toro acknowledged by signing the 12 amendment to the promissory note the recitals were true and 13 correct. Id. So, he knew not only that there was a loan 14 commitment overdue, but acknowledged he was overdrawn. There was 15 no dispute the personal financial statement was submitted to 16 Producers in connection with Del Toro’s request for not only a 17 renewal but additional funds. 18 Further, the 2017 security agreement established the extent 19 of the interest Producers was claiming in Del Toro’s property as 20 collateral. PX5. 21 Del Toro argues the 2017 security agreement could not be 22 relied upon by Producers because the security agreement 23 completely changed the relationship between Del Toro and 24 Produces, which existed since 2015. Del Toro claims he was not 25 aware of the provisions that the collateral had to be free and 26 clear of liens because he was not given a copy of the security 27 agreement after he signed it. This argument makes no sense. Del 28 Toro admitted he signed it and that it is binding on him. TT2 1 9:13-14; JPO. But he also made a statement in his trial 2 submissions where he somehow remembered a UCC-1 would be filed 3 as part of the security agreement. DXA. Del Toro himself 4 testified he met with a Producers’ representative in front of 5 the dairy and “we went over this stuff here and signed it off.” 6 TT2 10:3-7. “This stuff” must have been the 2017 security 7 agreement. Del Toro signing the security agreement establishes 8 he knew, or could easily know, its contents. 9 Del Toro next argues he already had the loan in place in 10 early 2018, so he did not falsely represent his financial 11 condition with the intention of deceiving anyone. He continues 12 he did not need to deceive anyone to get the loan. This is not a 13 credible argument. 14 First, he does not explain Producers’ extension of 15 additional credit in excess of $34,000.00 in early 2018, so Del 16 Toro could purchase additional cows. 17 Second, Del Toro’s testimony at trial is inconsistent 18 regarding when he saw or did not see the personal financial 19 statement. TT1 156:22-25, 157:7-9, :15-18. 20 Third, on the simple issue of whether it was either Messrs. 21 O’Brien or Beechinor who allegedly told Del Toro that he had 22 funds sufficient to purchase the cows, he continued to 23 equivocate. In his trial declaration, Del Toro said it was 24 Beechinor who allegedly told him there were funds available to 25 purchase cows. DXA. On redirect examination by his counsel, he 26 said it was O’Brien who told him he had the extra funds. Then on 27 cross-examination, he testified it was Beechinor, not O’Brien, 28 who said he had additional funds. The equivocation further 1 supports a direct intent to deceive Producers, or a reckless 2 disregard of the same. 3 Debtor’s reliance on In re Evangelista, 76 B.R. 911 (Bankr. 4 N.D.N.Y. 1984), is misplaced. The court there relied on a bank’s 5 failure to directly discuss previous collateral encumbrances 6 with a debtor when loan documentation was signed as persuasive 7 of no intent to deceive. Id. at 914. That is not the case here. 8 Another major problem with the Evangelista decision is that it 9 applied a clear and convincing evidence standard. Id. at 913. 10 Evangelista predates by seven years Grogan, where the Supreme 11 Court established a preponderance of evidence standard. 12 The court finds there is a preponderance of evidence 13 supporting the fact that the debtor made the misrepresentations 14 contained in the personal financial statement with the intention 15 of deceiving Producers. 16 17 E. 18 Producers relied on the 2018 financial statement and Del 19 Toro’s representations concerning his financial condition. That 20 reliance was reasonable. 21 O’Brien, Producers’ president, testified Producers agreed 22 to renew Del Toro’s obligation in reliance on the 2018 financial 23 statement and Del Toro’s representations concerning his 24 financial condition. PX47. He also testified, without 25 contradiction, that based upon the 2018 financial statement and 26 Del Toro’s representations, Producers agreed to advance another 27 $34,389.00 to Del Toro so he could acquire more cows. Id. 28 To meet the reliance standard under § 523(a)(2)(B), the 1 reliance must be reasonable. Reasonable reliance means reliance 2 that would have been reasonable to a hypothetical average 3 person. Heritage Pac. Fin. LLC v. Machuca (In re Machuca), 483 4 B.R. 726, 736 (B.A.P. 9th Cir. 2012). Reasonable reliance is 5 judged in light of the totality of the circumstances on a case- 6 by-case basis. Id. at 736. 7 A creditor’s reliance may be reasonable if the creditor 8 adhered to its normal business practices. Gertsch, 237 B.R. at 9 172. The court may consider whether the lender’s normal 10 practices align with industry standards, or if any “red flags” 11 exist that would alert a reasonably prudent lender to consider 12 whether the representations relied on were inaccurate. Ins. Co. 13 of N. Am. v. Cohn (In re Cohn), 54 F.3d 1108, 1117 (3d Cir. 14 1995). If “red flags” exist, the creditor must support 15 reasonable reliance with evidence explaining why it was 16 reasonable for it to rely on the statements notwithstanding the 17 “red flags.” Machuca, 483 B.R. at 736-37. However, when the 18 evidence shows materially false statements were made by the 19 debtor, little investigation is required by the creditor to have 20 reasonably relied on the debtor’s representation. Gertsch, 237 21 B.R. at 170. 22 Among the evidence offered by Producers establishing 23 reasonable reliance is that Producers and Del Toro had a 24 relationship since 2015. When the security agreement was signed 25 in 2017, it extended to all personal property assets.11 PX5. The 10F 26 2017 promissory note was in the principal sum of $181,035.75. 27 11 The court has already found that Del Toro’s testimony concerning the 28 1 PX2. The amount of the renewal promissory note signed by Del 2 Toro in May 2018 had been reduced by more than $20,000.00. So, 3 through payments or otherwise, Del Toro had reduced the 4 principal by more than $20,000.00 in less than one year. 5 In addition, a UCC report dated January 2018 showed various 6 perfected liens on equipment. DXB. The only existing UCC-1, 7 which had not lapsed covering other collateral, was in favor of 8 Nebraska State Bank.12 Further, when Beechinor visited Del Toro 11F 9 in February 2018, he conducted a cow count, silage measurement, 10 hay count, and verification of feed and livestock numbers. PX45. 11 The court rejects Del Toro’s argument that when the 2017 12 promissory note was negotiated, Producers knew that Del Toro was 13 a credit risk. O’Brien testified of certain risks in financing 14 livestock. TT1 107:21-22. Under cross examination, O’Brien 15 explained that when a borrower is on extension, the lending 16 decision may be made without tax returns or profit and loss 17 statements. TT1 109:20-25. 18 Also, Bennett, Producers’ expert, testified that Producers’ 19 due diligence was objectively reasonable prior to the renewal 20 and extension of new credit. PX44; PX10; TT1 33:9-13. He also 21 testified that he reviewed Producers’ internal credit writeup 22 showing the information was in the financial statement. TT1 23 35:22-25. 24 Even more to the point, Del Toro presented no evidence that 25 the existence of the undisclosed debt was readily discoverable 26 by Producers at the time of the renewal and further credit 27 12 Producers never disputed that they were aware of Nebraska State 28 1 extension. 2 The court finds Producers relied on the February 2018 3 financial statement and the representations concerning Del 4 Toro’s financial status. The court further finds the reliance 5 was reasonable. 6 7 F. 8 Producers suffered damages proximately resulting from Del 9 Toro’s misrepresentation. The analysis of proximately caused 10 damages here requires two different considerations. 11 First, the extension of new monies by Producers in 2018 12 totaling $34,389.00. For new money loans, proximate cause is 13 established when the falsehoods are material and involve 14 significant amounts of money. Candland, 90 F.3d at 1471. Here, 15 the falsehoods involved are well into the six figures, which is 16 a significant amount of money. The amount involved is comparable 17 to Candland. The materiality of the misrepresentation has 18 already been discussed above. 19 Second, the $160,000.00 renewal in early 2018 must be 20 separately analyzed. In Siriani, the 9th Circuit held in the 21 case of credit renewals, “a creditor seeking nondischargeability 22 under § 523(a)(2)(B) must show that it had valuable collection 23 remedies at the time it agreed to renew its commitment to the 24 debtor, and that those remedies later became worthless.” 25 Siriani, 967 F.2d at 305. Notwithstanding that requirement, 26 bankruptcy courts are not required to “divine what might have 27 happened” with respect to the creditor’s diligence, or lack 28 thereof, in exercising its collection remedies. Id. at 306. 1 The 2017 security agreement gave Producers valuable 2 collection remedies. PX5. Those remedies include the right to 3 enforce its security interest in any or all collateral pursuant 4 to the Uniform Commercial Code. Id. It could seek the 5 appointment of a receiver to take possession of the collateral. 6 Id. Producers could use, sell, or dispose of the collateral, as 7 well as exercise other remedies. Id. § 6. Unfortunately, those 8 remedies became virtually worthless by the time the renewal came 9 due in March 2019. Approximately 50 head of cattle were 10 repossessed by Habib Cattle Company in February 2019. Howell 11 Test.; PX46. The value of those cows was approximately 12 $40,000.00. Id. Approximately $68,000.00 worth of livestock was 13 culled from Del Toro’s herd in 2019. Id. During 2019, the total 14 livestock leaving the herd, other than those removed by Habib 15 Cattle Company, were valued between $135,000.00, $198,034.00, 16 and $223,197.21. Id. Further, there was uncontradicted evidence 17 that over $124,000.00 in proceeds from Del Toro’s milk check 18 were paid to Lester Moss and the Hultgrens during 2018. PX42, 19 PX43. 20 Beechinor testified of learning from Nebraska State Bank, 21 in March 2019, that a significant number of cows were missing 22 from the Del Toro dairy and had essentially disappeared 23 overnight. PX45. Producers did not learn until at least March 24 2019, after the maturity date had passed, that Del Toro had 25 given a security interest in livestock to Harry Habib and had 26 assigned the milk checks to third parties.13 12F

27 13 Apparently, the reason Harry Habib’s UCC-1 did not appear on the UCC Report is that the UCC was prepared without an accurate surname for Mr. Del 28 1 Both Bennett, Producers’ lending expert, and O’Brien, 2 Producers’ president, testified the 2018 personal financial 3 statement was highly inaccurate based upon the undisclosed debt. 4 The disclosure of the debt would have resulted in a different 5 lending decision. PX44; TT1 133:15-134:27. The missing livestock 6 and the undisclosed milk check assignments are proximately 7 caused damages beyond the unpaid debt. 8 Del Toro’s argument that Producers’ filing of a UCC-1 or 9 branding of cattle would have mitigated their losses is 10 unpersuasive. Del Toro sold or otherwise removed cattle from his 11 dairy after Habib and Nebraska State Bank filed their UCC-1 12 statements. There is no evidence that the filing of a UCC-1 13 would have prevented the removal of the livestock or the loss of 14 proceeds due to the milk check assignments. Further, under 15 Siriani, it is not necessary for the bankruptcy court to 16 speculate as to what would have occurred had Producers filed a 17 UCC-1 financing statement or branded the livestock. Siriani, 967 18 F.2d at 306. Between the livestock loss and the milk check 19 assignments, there is more than enough value in Producers’ 20 collateral to satisfy a $160,000.00 renewal in May 2018. 21 The court finds Producers’ damages were proximately caused 22 by the false information contained in the February 2018 personal 23 financial statement. 24 25 G. 26 Producers seeks treble damages against Del Toro under Cal. 27 Pen. Code § 496(c). The court declines to order such relief. 28 Pen. Code § 496(a) prohibits knowingly concealing or 1 withholding stolen property. See, Verdugo-Gonzalez v. Holder, 2 581 F.3d 1059, 1061 (9th Cir. 2009). Those injured by a 3 violation may bring an action for treble damages, plus costs and 4 attorneys’ fees. Pen. Code § 496(c). Producers holds a 5 prepetition judgment against Del Toro for the balance owed on 6 its renewed promissory note and extension of new funds. 7 Since the state court adjudicated the debt, the only issue 8 before this court is whether the debt was dischargeable. With an 9 existing valid state court judgment, the bankruptcy court should 10 not issue a new judgment. Hamilton v. Elite of L.A., Inc. (In re 11 Hamilton), 584 B.R. 310, 322-24 (B.A.P. 9th Cir. 2018), aff’d, 12 785 F. Appx. 438 (9th Cir. 2019). The court’s judgment here 13 deems the Merced County Superior Court’s judgment to be 14 nondischargeable. 15 That said, the other aspects of the judgment, including 16 attorneys’ fees and accrual of interest at the state rate, are 17 appropriate damages accruing. Shoen v. Schoen, 176 F.3d 1150, 18 1166 (9th Cir. 1999); see also, Sasson v. Sokoloff (In re 19 Sasson), 424 F.3d 864, 874 (9th Cir. 2005) (although a 20 bankruptcy court has jurisdiction to enter a new money judgment, 21 recognizing “the existence of a prior judgment may introduce 22 some prudential concerns, such as comity, that a bankruptcy 23 court should take into consideration in fashioning relief.”); 24 Smith v. Lachter (In re Smith), 242 B.R. 694, 703 (B.A.P. 9th 25 Cir. 1999) (“[I]t follows that a separate judgment is not 26 necessary when the claim has already been reduced to judgment by 27 another court of competent jurisdiction.”). The court here is 28 not entering a new money judgment but merely a judgment deeming 1 the state court judgment to be nondischargeable. Accordingly, 2 the court is not going to eliminate, reduce, or augment any of 3 the components of the Merced Superior Court judgment. 4 5 CONCLUSION 6 For the foregoing reasons, judgment shall be entered in 7 favor of Producers Livestock Marketing Association and against 8 Gustavo Del Toro, by which the state court judgment rendered by 9 the Merced County Superior Court on May 28, 2019 in Case No. 19- 10 CV-01019 is nondischargeable under 11 U.S.C. § (2) (B). 11 Counsel for Producers shall prepare a judgment in conformance 12 with this ruling. Any claim for attorneys’ fees shall be brought 13 before the court under Fed. R. Civ. P. 54, as applicable under 14 Fed. R. Bankr. P. 7054. Should any fees be awarded, an amended 15 judgment shall be prepared as ordered. 16 7 Dated: Mar 28, 2023 By the Court

19 Ore streto II, Judge — 50 United States Bankruptcy Court

21 22 23 24 25 26 27 28

1 Instructions to Clerk of Court Service List - Not Part of Order/Judgment 2

3 The Clerk of Court is instructed to send the Order/Judgment or other court generated document transmitted herewith to the 4 parties below. The Clerk of Court will send the Order via the BNC or, if checked , via the U.S. mail. 5

6 Gustavo Del Toro 2274 Dickenson Ferry Rd 7 Merced CA 95341

8 Henry D. Nunez 4478 W Spaatz Ave 9 Fresno CA 93722

10 Michael J. Gomez 1000 Wilshire Boulevard, 19th Floor 11 Los Angeles CA 90017

12 Garrick Warrington 1000 Wilshire Blvd 19th Floor 13 Los Angeles CA 90017 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28