Bernal v. Baillio et al

1After trial, Daniel J. Behles became associated with Moore,
Berkson & Gandarilla, P.C.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
TROY MICHAEL BAILLIO and
JASMINE BAILLIO,
Debtors. 	No. 7-08-12171 JA
JAMES RICHARD BERNAL,
Plaintiff,
v. 	Adv. No. 08-1125 S
TROY MICHAEL BAILLIO and
JASMINE BAILLIO,
Defendants.
MEMORANDUM OPINION AFTER
TRIAL ON THE MERITS
This matter came before the Court for two days of trial on
the merits of Plaintiff’s Complaint objecting to the
dischargeability of his debt under Section 523(a)(2). 	Plaintiff
was represented by Cuddy, Kennedy, Ives, Archuleta-Staehlin,
Fairbanks & Vigil, LLP (Daniel J. Behles 1). 	Defendant was
represented by Moore, Berkson & Gandarilla, P.C. (George M. Moore
and Aren E. Berkson). 	This is a core proceeding to determine the
dischargeability of a debt. 	28 U.S.C. § 157(b)(2)(I).
INTRODUCTION
This adversary proceeding is Plaintiff’s request to declare
that a certain debt owed to him is nondischargeable in the
Defendants’ Chapter 7 bankruptcy. 	The complaint alleges that in
2007 Troy Baillio executed a promissory note to him in the
principal amount of $250,000. 	He further claims that at the time
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2This allegation was withdrawn during the trial.
Page -2-
Troy Baillio made certain representations to him that were false,
and were known by him to be false. 	These representations were:
1) the loan would be secured by a third lien on a residence at
8020 Rio Grande Blvd. NW, Albuquerque, New Mexico; 2) the home
had been appraised at and had a value of $3,300,000 or more; 3)
he had in excess of $1,000,000 equity in the home; 4) the home
was subject to a contract of sale that would close within 10
days; 5) the home was his separate property 2; 6) the prospective
purchaser was known to Troy Baillio, had been approved for a
loan, and there were no impediments to closing; and 7) Baillio
had an alternative source of repayment for the loan if the house
sale did not close. 	The complaint further alleges that Bernal
relied on each representation in agreeing to make the loan, and
has been damaged thereby because the loan has not been paid.
EXHIBITS
As the first matter of business at trial, the parties
submitted joint exhibits and stipulated to admission of Exhibits
1-24 and 27-30. 	During trial, Exhibits 25, 26, and 31-36 were
admitted. 	This case is heavily exhibit driven, so the Court will
review the exhibits first.
Exhibit 1 is a Commitment by Lawyers Title Insurance
Corporation to issue a policy of title insurance in favor of a
mortgagee to be determined, effective March 27, 2007, for
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Page -3-
property described by metes and bounds located in Tract 72-B and
Tract 96 of the Middle Rio Grande Conservancy District Map No. 25
(“8020 Rio Grande”). 	The Commitment states that the land is
vested in fee simple in Troy Baillio, a married man as his sole
and separate property. 	Schedule B-1, Requirements, states that
taxes for the year 2006 were due. 	Schedule B-2, Exceptions,
states as item 13 that there is a mortgage dated January 23, 2006
in favor of Suntrust Mortgage, Inc. executed by Troy Baillio, a
married man as his sole and separate property, in the amount of
$1,750,000.00, recorded January 27, 2006. 	Item 14 states that
there is also a mortgage dated May 8, 2006, in favor of Peoples
Bank, executed by Troy Baillio, a married man as his sole and
separate property, in the amount of $350,000.00, recorded May 17,
2006.
Exhibit 2 is a letter dated April 18, 2007, from Arthur L.
Silva, Qualifying Broker of Sunwest Mortgage Home Loans (“Sunwest
Mortgage”) in Albuquerque, New Mexico addressed It states that
Sunwest has received a loan application from Mr. Andrew McBride
for the purchase of 8020 Rio Grande. 	It also states that, after
a review of the application and supporting documents and credit
report and income, Sunwest has granted conditional approval for
up to 85% of the purchase price subject to:
1. 	Loan amount not to exceed $2,635,000.00
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Page -4-
2. 	Appraisal review with determined value of at
least $3,100,000.00
3. 	Fully executed purchase agreement
4. 	Preliminary Title Binder
5. 	Final Underwriting approval.
Exhibit 3 is a letter, undated, from Arthur Silva, CEO and
President of Sunwest Mortgage addressed “To Whom It May Concern”.
It states that it is in conjunction with the mortgage loan for
Andrew McBride on 8020 Rio Grande. 	“All lender conditions have
been cleared and docs are being sent to the title company for
closing. 	Per the purchase contract the closing is scheduled for
May 4, 2007.”
Exhibit 4 is a Purchase Agreement for Residential Resale.
It shows an offer date of April 4, 2007 from Andrew McBride to
Troy Baillio for 8020 Rio Grande. 	The purchase price is
$3,300,000. 	It calls for an approximate cash down payment of
$495,000 and a loan of $2,805,000. 	It states that the buyer will
deliver $50,000 earnest money to be escrowed at US Title Company.
The Purchase Agreement also includes the purchase of “All
Furnishings.” 	The Purchase Agreement calls for a settlement date
of May 3, 2007 and funding on May 4, 2007. 	It also calls for an
appraisal and provides that if the appraisal is less than the
purchase price, the buyer is excused from performance and may
recover the earnest money. 	The Seller was required to obtain a
title commitment from US Title. 	The Purchase Agreement was
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Page -5-
signed by Andrew McBride as Buyer on April 4, 2007. 	Troy Baillio
as Seller accepted the offer and signed off but did not list a
date or time.
Exhibit 5 is a Uniform Residential Appraisal Report for 8020
Rio Grande with an effective date of June 26, 2006 that values
the property at $3,000,000.
Exhibit 6 is a copy of two checks. 	The first is check
number 1351, dated April 26, 2007, payable to James R. Bernal for
$15,000 and drawn on account #4294 of Troy Baillio and Jasmine
Baillio for “Points”. 	The second is check number 1352, dated
April 26, 2007, payable to Dave Carlberg for $5,000 and drawn on
the same account and also for “Points”.
Exhibit 7 is a Promissory Note (“Note”) dated April 27, 2007
from Troy Baillio as Borrower to James R. Bernal for $250,000
plus interest at the rate of 8.5% per year beginning on April 27,
2007. 	It is payable as follows: 1) if the principal balance is
repaid in full on or before 5:00 PM of the seventh day after the
Note, no interest is due; 2) if the principal is not repaid in
full by the seventh day, interest only shall be paid weekly
beginning on May 11, 2007 and continuing on the same day each
week until the Note is paid in full; 3) the entire principal and
all accrued unpaid interest is due on or before June 27, 2007.
The Note is immediately due and payable at the option of the
holder without notice or demand if any payment required is not
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3The term “Mortgage” is defined later in the Note as a
mortgage on 8020 Rio Grande.
Page -6-
paid when due, if any representation or warranty contained in the
Mortgage 3 is untrue, or if there is a breach of any covenant
contained in the Mortgage. 	The Note also states that the it may
be prepaid without penalty and that it is secured by a mortgage
on 8020 Rio Grande and by a deed to said property held by James
R. Bernal.
Exhibit 8 is a document dated April 26, 2007 entitled
“Mortgage Deed.” 	It states, in part:
This Mortgage is given by Troy M. Baillio ... [to]
James R. Bernal ... to secure the payment of the
PRINCIPAL SUM of ($250,000.00) Two-Hundred Fifty
Thousand and 00/100 together with interest thereon
computed on the outstanding balance, all as provided in
a Note having the same date as this Mortgage, and also
to secure the performance of all the terms, covenants,
agreements, conditions and extensions of the Note and
this Mortgage.
In consideration of the loan made by [Bernal] to
[Baillio] and for the purpose expressed above,
[Baillio] does hereby grant and convey to [Bernal],
with MORTGAGE COVENANTS, [8020 Rio Grande].
[Baillio] further covenants and agrees that
[10 other items, including payment of
attorney fees in the event of default]
This Mortgage is upon the STATUTORY CONDITION and the
other conditions set forth herein, for breach of which
[Bernal] shall have the STATUTORY POWER OF SALE to the
extent existing under State Law.
Exhibit 8 was signed by Troy M. Baillio, notarized, and filed for
record in the Bernalillo County records as document # 2007062345
on April 27, 2007.
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Page -7-
Exhibit 9 is check 1408 on account #9294 signed by Troy
Baillio payable to James R. Bernal in the amount of $265,000.00
dated May 22, 2007 and returned NSF.
Exhibit 10 is Default Judgment dated May 9, 2008, in Case
No. CV 2007-07719, Bernalillo County, Second Judicial District
Court, New Mexico, in Bernal v. Troy M. Baillio and Jasmine
Baillio. 	The judgment is for $273,063.78 and provides for
interest at 8.5% from and after April 25, 2008.
Exhibit 11 is a Release of Mortgage executed by High Desert
State Bank (“HDSB”) on February 15, 2006 for a second mortgage
executed by Troy Baillio on December 30, 2004 for 8020 Rio
Grande. 	It was filed for record in the Bernalillo County records
on February 27, 2006 as document # 2006027381. 	This exhibit is
not relevant.
Exhibit 12 is a Line of Credit Mortgage executed on October
31, 2006 between Troy and Jasmine Baillio, as husband and wife,
to lender HDSB for 8020 Rio Grande. 	It states that it will have
a maximum obligation limit of $920,000.00. 	It secures a
Promissory Note dated October 31, 2006 executed by Troy and
Jasmine Baillio in the amount of $920,000 with a maturity date of
November 30, 2006. 	It also secures future advances. 	It was
filed for record in the Bernalillo County records on October 31,
2006 as document # 2006166455.
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4Exhibit 29 is a partial closing statement for the purchase
of this property on October 31, 2006.
Page -8-
Exhibit 13 is a Loan Modification Agreement dated December
26, 2006, between HDSB and Troy and Jasmine Baillio. 	It states
that the borrowers executed and delivered to the bank a
promissory note in the amount of $920,0000 dated October 31,
2006, and as a means of securing the note executed and delivered
a Mortgage which was recorded in Bernalillo County on November 2,
2006 as document # 2006167545 and a mortgage dated October 31,
2006 which was recorded in Bernalillo County but the “recording
information not yet received.” 	The parties amended the October
31, 2006 note as follows:
1. 	The maturity date is extended to January 30,
2007.
2. 	The current balance is $914,202.20
3. 	The interest rate remains at WSJP + 1.00
(currently 9.25%)
4. 	Principal and Interest to be paid in full at
maturity on January 30, 2007.
5. 	A modification fee in the amount of $1,525.00
to be collected at payoff, a recording fee of
$13.00 to be collected at signing.
6. 	All other terms of the Promissory Note and
Mortgage to remain unchanged.
The Modification Agreement describes the collateral as: 1) Lot
Eighteen P-1 Block numbered One of the Estates at Tanoan 4, and 2)
8020 Rio Grande. 	Both Troy and Jasmine Baillio signed the
Agreement, as did a bank officer. 	The Loan Modification
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Page -9-
Agreement was filed in the Bernalillo County records on January
9, 2007 as document # 2007005371. 	The Loan Modification
Agreement does not purport to be a new mortgage; the borrowers do
not grant or convey any interest in real estate to secure
performance of the Loan Modification Agreement. 	It simply refers
to the existing note [sic, notes] and mortgage [sic, mortgages],
states that they remain “unaffected, unchanged and unimpaired” by
the modification. 	The borrowers signatures indicate that they
“accept the foregoing modification, and in consideration thereof,
agree to pay the indebtedness evidenced by said note [sic, notes]
and secured by said deed of trust [sic, mortgages], according to
the terms thereof as modified and amended herein.” 	The Court
finds that the Loan Modification Agreement was simply that, it
modified the terms of the loan. 	It did not amend the existing
mortgages.
Exhibit 14 is a Release of Mortgage executed by HDSB on
March 1, 2007 for a mortgage executed by Troy Baillio and Jasmine
Baillio on October 31, 2006 for 8020 Rio Grande and filed for
record in Bernalillo County as # 2006166455. 	The Release of
Mortgage was filed for record in the Bernalillo County records on
March 7, 2007 as document # 2007036184.
Exhibit 15 is a Line of Credit Mortgage executed on October
31, 2006 between Troy and Jasmine Baillio, as husband and wife,
to lender HDSB for 8020 Rio Grande. 	It is the same document as
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Page -10-
Exhibit 12 and contains both the October 31, 2006 County
Recorder’s information (document # 2006166455) as well as a new
County Recorder’s stamp as document # 2007061233 filed April 26,
2007. 	It contains the October 31, 2006 signatures, and there is
no evidence or indication that either Mr. or Ms. Baillio
authorized this or was aware of this filing. 	On the bottom right
there is handwriting that says “Released in error” and has some
illegible initials.
Exhibit 16 is another document titled “Mortgage Deed” dated
December 26, 2006, given by JTS Properties & Investments, LLC to
Alan Reeves, to secure the payment of $100,000.00 with interest
thereon as provided in the note of even date. 	It is the same
form as Exhibit 8, with the same covenants. 	It purports to
convey an interest in 8020 Rio Grande. 	It is signed by a
borrower without listing the capacity in which the person was
signing. 	The signature appears to be that of Troy Baillio. 	It
was filed for record in the Bernalillo County records on December
27, 2006 as document # 2006193383. 	JTS Properties & Investments,
LLC had no interest in 8020 Rio Grande. 	This exhibit is
therefore irrelevant.
Exhibit 17 is a Real Estate Mortgage Note executed by Troy
Baillio, a married man, and Andrew McBride, a single man, in the
amount of $40,000.00 payable to Zia Trust, Custodian for the
Gregory N. Anderson IRA. 	The entire balance plus $4,750.00
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Page -11-
interest is due and payable in full ninety days after the date of
the note, which was April 18, 2007. 	The document states that it
is secured by a Mortgage of same date on 8020 Rio Grande. 	It was
filed for record in the Bernalillo County records on May 31, 2007
as document # 2007080286.
Exhibit 18 is a Mortgage executed by Troy Baillio on April
15, 2007, to Zia Trust, Custodian for the Gregory N. Anderson IRA
to secure the Exhibit 17 Real Estate Mortgage Note. 	The
collateral is 8020 Rio Grande. 	It was filed for record in the
Bernalillo County records on May 31, 2007 as document #
2007080287.
Exhibit 19 is a Real Estate Mortgage Note executed by Troy
Baillio, a married man, and Andrew McBride, a single man, in the
amount of $40,000.00 payable to Zia Trust, Custodian for the
Scott Garretson IRA. 	The entire balance plus $4,750.00 interest
is due and payable in full ninety days after the date of the
note, which was April 18, 2007. 	The document states that it is
secured by a Mortgage of same date on 8020 Rio Grande. 	It was
filed for record in the Bernalillo County records on May 31, 2007
as document # 2007080288.
Exhibit 20 is a Mortgage executed by Troy Baillio on April
15, 2007, to Zia Trust, Custodian for the Scott Garretson IRA to
secure the Exhibit 19 Real Estate Mortgage Note. 	The collateral
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Page -12-
is 8020 Rio Grande. 	It was filed for record in the Bernalillo
County records on May 31, 2007 as document # 2007080289.
Exhibit 21 are Answers to Interrogatories served by
Plaintiff and answered by Troy Baillio on February 9, 2010.
Exhibit 22 is a duplicate of Exhibit 12.
Exhibit 23 is a Line of Credit Mortgage executed by Troy
Baillio as a married man as his sole and separate estate to
Peoples Bank dated May 8, 2006. 	The collateral is 8020 Rio
Grande. 	It was filed for record in the Bernalillo County records
on May 17, 2006 as document # 2006071706. 	The maximum debt limit
was $700,000.00.
Exhibit 24 is a Sole and Separate Property Agreement and
Conveyance executed by Troy Baillio and Jasmine Baillio on May
22, 2003 and filed for record in the Bernalillo County records on
May 29, 2003 as document # 2003090336. 	It states that 8020 Rio
Grande is the separate property of Troy Baillio.
Exhibit 25 is a Promissory Note that is identical to Exhibit
7 in all respects, except it names the borrower as JTS Properties
and Investments, LLC and there is no signature in the space
provided for “Troy M. Baillio, President and LLC member.”
Exhibit 26 is a Mortgage Deed that is identical to Exhibit 8
in all respects, except it names the borrower as JTS Properties
and Investments, LLC and there is no signature in the space
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Page -13-
provided for “Troy M. Baillio, LLC member.” 	The notary
information is also blank.
Exhibit 27 is a 30 year Mortgage from Troy Baillio, a
“Married Man Sole and Separate” to Suntrust Mortgage, Inc. dated
January 23, 2006 in the amount of $1,750,000.00 payable in
monthly installments and secured by 8020 Rio Grande. 	It was
filed for record in the Bernalillo County records on January 27,
2006 as document # 2006012470.
Exhibit 28 is a First Community Bank account statement of
account # 9294 for Troy M. Baillio or Jasmine Baillio for the
period April 12, 2007 to May 13, 2007. 	It shows a customer
deposit on April 27, 2007 of $250,000.00. 	The statement also
contains information on a related savings account with about
$5,000.00.
Exhibit 29 is an Estimated Statement prepared by First
American Title Insurance Company for Troy and Jasmine Baillio’s
purchase of 10518 City Lights Drive, Albuquerque, New Mexico on
October 31, 2006. 	It shows a purchase price of $915,000.00 and a
loan from HDSB in the amount of $920,000.00.
Exhibit 30 is a HUD Settlement Statement dated January 23,
2007 for a refinance of the City Lights property with lender
National City Mortgage. 	Troy Baillio is the only listed
borrower.
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Page -14-
Exhibit 31 is a statement from Chubb Insurance to Troy
Baillio and Jasmine Baillio stating that effective December 12,
2006, the mortgagee for 8020 Rio Grande was changed from Peoples
Bank to HDSB for an insurance policy issued by Pacific Indemnity
Company for the period April 29, 2006 to April 29, 2007.
Exhibit 32 is a Release of Mortgage executed by HDSB on
March 1, 2007 for a mortgage executed by Troy Baillio and Jasmine
Baillio on November 2, 2006 for the City Lights property and
filed for record in Bernalillo County as # 2006167545. 	The
Release of Mortgage was filed for record in the Bernalillo County
records on March 7, 2007 as # 200706182.
Exhibit 33 is a Line of Credit Mortgage executed on October
31, 2006 between Troy and Jasmine Baillio, as husband and wife,
to lender HDSB for the City Lights property. 	It states that it
will have a maximum obligation limit of $1,840,000. 	It secures a
Promissory Note dated October 31, 2006 under the names of Troy
and Jasmine Baillio in the amount of $920,000 with a maturity
date of November 30, 2006. 	It also secures future advances. 	It
was filed for record in the Bernalillo County records on October
31, 2006 as document # 2006166454.
Exhibit 34 is a carbon copy of a First Community Bank
official check #593576889, dated April 27, 2007, remitter James
R. Bernal, payable to Troy M. Baillio as “Loan proceeds” in the
amount of $250,000.00.
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5It would have been helpful for the Court if either the
exhibits were arranged in a rational order or a chronology had
been presented. 	The Court does not have the time or desire to
arrange parties’ exhibits for them.
Page -15-
Exhibit 35 is a document prepared by First Community Bank
that states that on April 27, 2007 at 9:30:36 AM it issued a
cashiers check #593576889 payable to Troy Baillio in the amount
of $250,000.00 for remitter James Bernal.
Exhibit 36 is a photocopy of a money market savings account
deposit to the account of Mr. Bernal of $15,000.00 on April 27,
2007.
CHRONOLOGY 5 OF 8020 RIO GRANDE’S TITLE
Exhibit 	Party(ies) 	Document 	Dated 	Filed 	Document #
Troy Baillio 	purchases
8020 Rio
Grande
2003 	not in
evidence
24 	Troy &
Jasmine
Baillio
Sole &
Separate
Prop Agt.
05/22/03 	05/29/03 	2003090336
27 	Troy Baillio
to Suntrust
30 year
Mortgage
01/23/06 	01/27/06 	2006012470
11 	HDSB 	Release of
2004 Mtg.
02/15/06 	02/27/06 	2006027381
IRRELEVANT
23 	Troy Baillio
to Peoples
Bank
Line of
Credit
Mtg.
05/08/06 	05/17/06 	2006071706
12 	Troy &
Jasmine
Baillio to
HDSB
Line of
Credit
Mtg.
10/31/06 	10/31/06 	2006166455
(released
03/01/07)
31 	Chubb
Insurance
changes
mortgagee
Peoples to
HDSB
12/12/06
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Exhibit 	Party(ies) 	Document 	Dated 	Filed 	Document #
Page -16-
13 	Troy &
Jasmine
Baillio &
HDSB
Loan Mod.
Agreement
12/26/06 	01/09/07 	2007005371
14 	HDSB 	Release of
Mtg. dated
10/31/06
2006166455
03/01/07 	03/07/07 	2007036184
1 	Lawyers
Title Ins.
Co.
Commitment 	03/27/07
15 	HDSB 	Rerecords
Line of
Credit
Mtg. of
10/31/06
n/a 	04/26/07 	2007061233
8 	Troy Baillio
to Bernal
Mortgage
Deed
04/26/07 	04/27/07 	2007062345
18 	Troy Baillio
to Zia/
Anderson
Mortgage 	04/15/07 	05/31/07 	2007080287
20 	Troy Baillio
to Zia/
Garretson
Mortgage 	04/15/07 	05/31/07 	2007080289
WITNESSES
Three witnesses testified during the two days of trial. 	The
first was David Carlberg (“Carlberg”). 	He now works at the
University of New Mexico as a business advisor at the Small
Business Development Center. 	In 2007 he worked for Sundance
Financial, a commercial real estate loan broker, that primarily
put together lenders and borrowers. 	He was a loan officer. 	He
met Baillio at the end of January, 2007 when Baillio was seeking
funding for a project involving condominiums in Taos, New Mexico.
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Page -17-
Baillio was also attempting to buy the Simms Building, a
commercial building in downtown Albuquerque. 	Carlberg did not
end up getting a loan for Baillio for the Simms Building.
Carlberg did, however, obtain a short term loan from Bernal
for Baillio. 	Bernal’s wife is the sister of Carlberg’s wife.
Around mid-April, 2007, Baillio approached Carlberg and told him
he was financially strapped and could not make payroll and it
would shut down his Simms Building project and other projects.
He needed a 30 day loan in the amount of $250,000. 	He also
stated he needed a “hard money loan” and that he was willing to
pay fees to the lender and offer security on a property being
sold shortly. 	Baillio also produced several documents that are
now Exhibits 1 through 5, which are: 1) the Lawyers Title
Insurance commitment effective March 27, 2007, that showed that
8020 Rio Grande had two existing liens, one to Suntrust Mortgage
and one to Peoples Bank; 2) letter from Arthur Silva at Sunwest
Mortgage stating conditional approval of Andrew McBride’s loan to
purchase 8020 Rio Grande; 3) second letter from Arthur Silva
stating that all lender conditions have been cleared and the
documents were being sent to the title company for a closing on
May 4, 2007; 4) a copy of the Purchase Agreement between Andrew
McBride and Baillio to buy 8020 Rio Grande for $3,300,000; and 5)
an appraisal report for 8020 Rio Grande dated June 26, 2006
stating a value of $3,000,000. 	Carlberg testified that Baillio
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Page -18-
said “Here are the documents. 	There is plenty of equity. 	The
sale will go through. 	I am desperate for these funds.”
Carlberg next testified that he called his brother-in-law
Bernal to ask if he knew of anyone who had $250,000 to loan on a
short term basis. 	Bernal stated that he might be interested.
Bernal and Carlberg met and Carlberg gave Exhibits 1 through 5 to
Bernal.
Carlberg testified that the check to him on Exhibit 6 that
says “Points” was his commission of 2 points for structuring the
deal. 	He received this check at the closing of the loan on April
27, 2007. 	Carlberg testified that he had prepared the Exhibit 7
Promissory Note from a form.
On cross examination, Carlberg testified that the processes
used for this loan transaction were out of the ordinary.
Normally the creditor will take an application and gather
financial information including documentation of the collateral.
In this case there was no loan application. 	The only due
diligence that Carlberg did was to call Arthur Silva who told him
that they were sending the documents for 8020 Rio Grande to
closing. 	Carlberg admitted that the situation was that Baillio
needed a large hard money loan in a few hours and that Baillio
was under extreme financial pressures. 	Carlberg testified that
he read Exhibits 1 through 5 and saw no red flags. 	Carlberg
again stated he had prepared exhibit 7, and had also prepared
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Page -19-
exhibit 8. 	He emailed both of those exhibits to Baillio, who
took them to the closing.
The second witness to testify was Plaintiff James Bernal.
He owns a convenience store. 	He testified that the day before
the loan he received a call from Carlberg asking if he knew
anyone interested in making a loan that was a good deal and
included points and would be repaid. 	Bernal testified that he
said he did not know anyone, but he might be interested. 	Then he
testified that Carlberg “went on” about the points and how it was
secured by collateral, it was a short term deal that would close
in a short time and would be paid at closing. 	Carlberg told him
it was a “good deal.” 	Bernal then testified that “after some
encouragement”, and talking about the security and the short term
quick sale he was interested. 	The next morning Bernal went to
his bank and withdrew $250,000 in the form of a cashier’s check.
He had not seen any documents at this point. 	Bernal testified
that he met Baillio for the first time at the closing at a title
company on April 27, 2007 at about 11:30 A.M. 	Carlberg was also
present.
Bernal testified that at closing he first asked Baillio
personal information, where he was from, why he was in New
Mexico, and other “general pleasantries” to get a read on his
personality. 	He asked the reason for the loan and Baillio told
him it was for cash flow needs such as payroll and taxes and
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Page -20-
other expenses. 	Baillio told him he bought properties,
refurbished them and resold them for profit. 	Bernal was then
given Exhibits 1 through 5. 	He testified that Baillio told him
he would have a third position on 8020 Rio Grande and that there
was $1,000,000 of equity in the property, the sale was scheduled
to close on May 4, he personally knew the buyer. 	He testified
that Baillio gave him an appraisal (exhibit 5).
Bernal testified that he asked Baillio to verify the term of
the loan, and was assured that the loan would be paid at closing
on May 4, and that if need be, the loan would be paid from the
Taos project or from equity in the Simms Building. 	Bernal
testified that “he assured me I would be repaid.”
At the closing, Bernal asked for a copy of the insurance on
the house and was given Exhibit 31. 	It showed Peoples Bank and
High Desert State Bank, which are not the two lenders on the
Title Commitment (exhibit 1). 	Baillio told him that High Desert
State Bank was Peoples Bank.
Bernal testified that the sale never closed and he was never
repaid. 	In May Baillio gave him a post-dated check, but it never
cleared. 	Eventually Bernal sued Baillio and obtained a default
judgment. 	He said that then Baillio entered bankruptcy and then
8020 Rio Grande was foreclosed on and he got nothing.
Bernal was next asked why he would loan $250,000 on a house
with prior mortgages against it. 	He answered that he had been
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6The appraisal actually states the value as $3,000,000.
7The appraisal clearly states the effective date as June 26,
2006.
Page -21-
told repeatedly by his brother-in-law that it was a good deal and
he would be repaid. 	He thought it seemed like a secure deal and
he knew his brother-in-law needed the commission.
On cross examination Bernal affirmed that the only documents
he had seen before closing were Exhibits 1 through 5 and 31. 	He
affirmed that Carlberg told him that this was a good deal. 	When
asked, he said that he saw that the house was selling for $3.3
million and that the appraised value was $3.3 million 6 and he
assumed the appraisal was a current one because that’s what the
house was selling for 7 . 	He believed there were only two liens
because the Title Commitment listed two and Baillio told them
there were only two. 	He admitted that, to the date of trial, he
did not know the amount of any liens that actually were on the
property.
On cross examination he also affirmed that he knew that
Carlberg was having financial constraints and stated “I had a
sense he could use $5,000.” 	He also admitted that Carlberg was
“eager” to get him involved with this loan.
On redirect Bernal clarified that it was Carlberg that told
him there was over $1,000,000 in equity in the property.
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Page -22-
The third witness was Troy Baillio called as an adverse
witness. 	In 2006 and 2007 he was buying and selling real estate.
He testified that he disagreed with Bernal’s overall description
of the closing. 	He stated that the entire process took about
thirty minutes and they did not discuss things, they just signed
the documents.
Next, Baillio testified that the Promissory Note and
Mortgage Deed were actually forms on his computer that he emailed
to Carlberg, who inserted all the numbers.
Regarding 8020 Rio Grande, several brokers were aware that
Baillio was trying to sell his house and knew that McBride had
just sold his house and was looking to replace it. 	They steered
McBride to Baillio’s real estate agent Dale Scott who in turn
sent him to Baillio. 	In October 2006 McBride and Baillio started
talking about a sale and purchase, both of the house and all its
furnishings. 	Baillio then went out and purchased the City Lights
property. 	Sometime around late December 2006 they arrived at a
price of $3,300,000 but did not put it into writing until April,
2007. 	Baillio moved to the City Lights property in late January.
That week he also let McBride move into 8020 Rio Grande, without
any contract or written agreement, “because he showed a lot of
money in the bank.”
When May 4, 2007 came the sale did not close. 	Baillio
testified that he was not sure why. 	One possible reason was that
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Page -23-
it did not appraise for $3,300,000 but only $3,000,000. 	Baillio
stated that he was willing to drop the price, but then McBride
could not get a loan. 	Baillio then testified that about a week
after the sale did not close he was contacted by McBride’s real
estate broker and asked to allow McBride to put liens against the
house for $100,000 so he could come up with $100,000 cash for a
closing. 	Baillio stated that he allowed him to do this.
Exhibits 18 and 19 are two mortgages on 8020 Rio Grande dated
April 18, 2007. 	Baillio testified that these were two of the
three liens he granted and that the date is incorrect. 	Baillio
was positive that they should have been dated May 18, 2007,
because the idea behind these only came up after the failure to
close on May 4, 2007. 	The Court finds this testimony credible.
It is also supported by the recording date, May 31, 2007.
Baillio testified that he signed these notes and mortgages and
that McBride got the money, but McBride still did not close. 	At
this point Baillio refused to deal with McBride any longer, and
McBride moved out of 8020 Rio Grande.
Baillio next testified about the City Lights property. 	He
borrowed $920,000 from HDSB to purchase it in October 2006. 	He
testified that the collateral was both City Lights and 8020 Rio
Grande, but he was not sure how that happened. 	When shown
Exhibit 12 (October 31, 2006 joint mortgage to HDSB on 8020 Rio
Grande) Baillio was confused and stated he believed it had been a
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Page -24-
mortgage on City Lights, which was jointly purchased with Jasmine
on October 31, 2006, the same date as the mortgage. 	He also
stated that City Lights was the only jointly held property and
she would not have had to sign a mortgage on 8020 Rio Grande.
Furthermore, he could not recall signing any other mortgage
documents on City Lights.
On cross examination, Baillio testified that he prepared
Exhibits 25 and 26, the Promissory Note and Mortgage Deed that
was from JTS Properties and Investments, LLC. 	He emailed them to
Carlberg, who changed the identity of the borrower to Baillio.
Carlberg then brought the documents to closing and the changed
ones were used. 	This is reasonable, considering that title to
8020 Rio Grande was in Baillio.
He next testified that he believed McBride had financing in
place right up to the date of closing. 	On the day of closing,
the appraisal [not in evidence] came in $100,000 short. 	He also
testified that he never would have bought his current residence
if he had not thought that 8020 Rio Grande would close.
Baillio also testified that he and McBride borrowed the
$100,000 in May to allow McBride to close. 	He did not know why
they had done it the way they did, but he believed it
accomplished what he was trying to do: to drop the price by
$100,000. 	He also affirmed that these borrowings and related
liens were done on May 18, 2007.
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Page -25-
Baillio testified that he did not know that HDSB had
rerecorded the mortgage it released; he stated “They didn’t ask
me or tell me.” 	The Court finds this credible. 	It appears from
Exhibit that someone at HDSB realized they had released the
mortgage in error, wrote that on the copy of the originally filed
mortgage, and refiled it the day before Baillio executed the
Mortgage Deed to Bernal.
Baillio reaffirmed his earlier testimony that the liens
involving Zia Trust were signed after the Bernal note. 	It was
not until late May that he finally realized that the 8020 Rio
Grande sale to McBride would not close.
Baillio testified that he never promised a property in Taos
as a source of repayment to Bernal. 	He stated that Carlberg knew
that he had never purchased the Taos property and forfeited his
$50,000 earnest money on it, and that Carlberg was present during
the entire closing and would have known that any such statement
was false.
On redirect Baillio was asked why he had prepared Exhibits
25 and 26 in the name of JTS Properties and Investments, LLC. 	He
testified that he owned JTS, and the money was going to JTS, so
he prepared the documents in JTS’s name. 	When asked if he knew
the difference, he answered “I do now. 	It was my understanding
that if JTS was going to use the money they had to borrow it.”
On redirect he also elaborated on the May liens; Silva prepared
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8Actually, exhibit 4 shows a purchase price of $3,300,000.
9See Exhibit 1.
10 Id.
11 See Exhibit 16. 	Although Baillio testified that he now
understood the difference between a corporate asset or debt and a
personal asset or debt it appears he still does not fully grasp
that he does not owe JTS’s debts and JTS does not own his real
estate.
Page -26-
them and Baillio signed them hoping that 8020 Rio Grande would
close. 	He stated “they told me to.”
At this point Plaintiff rested. 	The second day of trial was
of Defendant’s case and consisted of testimony of Baillio and
Bernal. 	The first witness was Baillio.
Baillio testified that at the time of the Bernal loan he
believed there was $1,000,000 equity in 8020 Rio Grande,
calculated as follows: $3,200,000 purchase price 8 less mortgages
in the amount of $1,750,000 9 , $350,000 10 and $100,000 11 equals
equity of $1,000,000.
Defendant’s next witness was Bernal. 	He testified that he
was sued in the foreclosure of 8020 Rio Grande. 	He believed his
attorney filed an answer, but he did not recall what the property
sold for at the special master’s sale. 	He believed the JTS
mortgage to Reeves on 8020 Rio Grande was valid because Baillio
was a principal of JTS.
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Page -27-
Defendant rested. 	Plaintiff put on rebuttal that introduced
Exhibits 34, 35 and 36. 	These establish that the closing of the
Bernal loan actually took place on April 27, 2007.
DISCUSSION
In general, after an individual debtor files for
chapter 7 bankruptcy, the bankruptcy court discharges
all of the debtor's pre-existing obligations, absent
the applicability of a statutory exception. 	See 11
U.S.C. § 523(a) 	(identifying nineteen statutory
exceptions to discharge). 	Because exceptions to
discharge are narrowly construed in favor of the debtor
in an effort to further the “fresh start” policy
underlying the Bankruptcy Code, the creditor asserting
an exception to discharge must show that its claim
“comes squarely within an exception enumerated in
Bankruptcy Code § 523(a).” 	See Century 21 Balfour Real
Estate v. Menna (In re Menna), 16 F.3d [7] at 9 [(1st
Cir. 1994)]; see also McCrory v. Spigel (In re Spigel),
260 F.3d 27, 32 (1st Cir.2001); Palmacci [v. Umpierrez
(In re Umpierrez)], 121 F.3d [781] at 786 [(1st Cir.
1997)].
Pursuant to § 523(a)(2), some debts incurred as a
result of the debtor's fraudulent actions or statements
are excepted from discharge. 	See 11 U.S.C. §
523(a)(2). 	Specifically, § 523(a)(2)(A) excepts from
discharge debts obtained by “false pretenses, a false
representation, or actual fraud, other than a statement
respecting the debtor's or an insider's financial
condition.” 	11 U.S.C. § 523(a)(2)(A). 	Section
523(a)(2)(B), on the other hand, bars the discharge of
a debt obligation obtained by a false written statement
“respecting the debtor's ... financial condition.” 	See
11 U.S.C. § 523(a)(2)(B). 	Based on this statutory
language, discharge claims based on fraudulent written
statements concerning a debtor's financial condition
must be brought pursuant to § 523(a)(2)(B), not §
523(a)(2)(A).
Douglas v. Kosinski (In re Kosinski), 424 B.R. 599, 607-08 (1st
Cir. BAP 2010) (footnote omitted). 	There was no evidence
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12 The United States Supreme Court ruled that for section
523(a)(2)(A) the reliance must only be “justifiable.” 	Field, 516
U.S. at 74-75.
Page -28-
presented about an alleged false financial statement, therefore
Plaintiff’s cause of action is under Section 523(a)(2)(A).
To establish that a claim is non-dischargeable under
section 523(a)(2)(A) the creditor must prove the following by a
preponderance of the evidence: (1) the debtor made a false
representation; (2) the debtor made the representation with the
intent to deceive the creditor; (3) the creditor relied on the
representation; (4) the creditor’s reliance was reasonable 12 ; and
(5) the debtor’s representation caused the creditor to sustain a
loss. 	Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373
(10th Cir. 1996). 	The Court finds that Plaintiff has failed to
meet its burden of proof on every element.
First, the Court does not find any false representations.
It appears that from all information available to Baillio,
Bernal’s lien was to be in third position. 	The table on pages 15
and 16 shows that there were two mortgages, to Suntrust and
Peoples, in place. 	HDSB had a mortgage, but released in on March
1, 2007. 	The Title Commitment showed these two mortgages.
Baillio was unaware that the day before the Bernal transaction
HDSB rerecorded its mortgage.
Bernal did not prove that Baillio stated the house had been
appraised at $3,300,000 or more. 	The only evidence is Exhibit 5,
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Page -29-
which is the appraisal the witnesses agreed Baillio gave to
Carlberg. 	It shows a value of $3,000,000.
Debtor believed he had over $1,000,000 equity in the home,
even deducting for the invalid JTS mortgage for $100,000. 	This
was not a false representation.
Debtor believed, and all documents demonstrate, that the
house was under contract to sell for $3,300,000 on May 4, 2007 to
a qualified buyer. 	This was not a false representation.
Bernal did not meet his burden of proof of showing that
Baillio falsely stated that he had alternative sources of
repayment if the house did not close.
Bernal suggested that Baillio lied about Peoples Bank
becoming HDSB but offered no evidence on whether this was a false
statement or not.
Second, because the Court cannot find any false
representations the Court cannot find a related intent to
deceive.
Third, Bernal did not meet his burden of proof of showing
that he, in fact, relied on anything Baillio said or produced.
The Court believes that he in fact relied on Carlberg’s opinion
that this was such a great deal, safe, with a high return. 	This
conclusion is evidenced in part by the fact that Bernal withdrew
$250,000 from his accounts and showed up at closing without
seeing a single document or having a clue about who Baillio was
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13 The face amount of the loan was $250,000 but Baillio had
to pay $20,000 of “points” up front, so he received $230,000.
The loan was made on April 27, 2007 and was to be paid at closing
on May 4, 2007, which is eight days later. 	Therefore, eight days
of interest was $20,000. 	One day of interest would then be
$2,500. 	One 365 day year of interest would be $912,500. 	This
interest rate is 396% (912,500 ÷ 230,000).
14 See Johnson v. Curtis (In re Curtis), 2006 WL 1506209 at
*10 (Bankr. C.D. Ill. 2006)(Promises of high returns – in this
case 100% in 15 days – on investments that seem too good to be
true usually turn out to be too good to be true.)(Citing U.S. v.
(continued...)
Page -30-
or what he did. 	It appears that his decision was made based
solely on what Carlberg told him, and that when he appeared at
closing he was already prepared to advance the funds.
Fourth, the Court does not find any reliance justifiable.
Carlberg was a loan officer and knew the procedures for reducing
risk such as taking applications and verifying information. 	The
Court is not suggesting that those procedures had to be followed
in this case, which was an urgent situation. 	However, Baillio
was an unknown and $250,000 is a significant amount of money.
There were also a few red flags that suggested further inquiry
might be called for. 	Exhibit 2 shows that Sunwest conditionally
approved McBride on the condition that the appraisal come in at
$3,100,000 and the maximum loan would be $2,635,000. 	Exhibit 4
shows the Purchase Agreement called for a loan of $2,805,000.
Exhibit 5 is a slightly out of date appraisal for $3,000,000.
Another red flag was the high interest rate 13 . 	The deal was too
good to be true 14 . 	As the facts present themselves, however,
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14 (...continued)
Frykholm, 362 F.3d 413, 414 (7 th Cir.), cert. denied, 543 U.S.
928 (2004)(Ponzi scheme)).
Page -31-
there is no indication that an investigation would have shown
that McBride would not close on May 4, 2007.
Finally, any representation made by Baillio did not cause
Bernal to sustain a loss.
As Field teaches, § 523(a)(2) requirements must be
determined under common law tort principles. 	For this
reason, a damage requirement is uniformly read into §
523(a)(2)(A), even though no express inclusion of such
a requirement appears in the text of that Code section.
We attribute the presence of the requirement that
“resulting injury” proximately caused by alleged
fraudulent conduct is included as a requirement in a §
523(a)(2)(A) claim to the fact that this is an element
which is necessary for the proof of common law fraud
generally.
Woodstock Housing Corp. v. Johnson (In re Johnson), 242 B.R. 283,
292 (Bankr. E.D. Pa. 1999). 	The real cause of the loss was
McBride’s failure to qualify for his mortgage and, possibly,
HDSB’s rerecording its mortgage without telling Baillio.
SUMMARY
For the reasons set forth above, the Court finds that
Judgment should be entered for Defendant Troy Baillio. 	In
addition, there was no evidence that Jasmine Baillio had anything
to do with this transaction and Judgment should be entered for
her as well.
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Page -32-
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	April 15, 2011
Copies to:
Daniel J Behles
Moore, Berkson & Gandarilla, P.C.
P.O. Box 7459
Albuquerque, NM 87194
George M Moore
Moore, Berkson & Gandarilla, P.C.
PO Box 7459
Albuquerque, NM 87194
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