[00:00:00] Speaker 01:
Good morning, counsel.

[00:00:00] Speaker 01:
How much time, if any, would you like to reserve for reply?

[00:00:03] Speaker 03:
Five, please, your honor.

[00:00:04] Speaker 01:
Certainly.

[00:00:04] Speaker 01:
You may proceed.

[00:00:07] Speaker 03:
May it please the court.

[00:00:09] Speaker 03:
This appeal turns on a missing element, actual reliance.

[00:00:14] Speaker 03:
Under Section 523A2, the government had to burden to prove that the SB actually relied on a specific false statement in approving this loan.

[00:00:23] Speaker 01:
That's true, so long as it's not an omission, correct?

[00:00:27] Speaker 03:
I believe it's both cases.

[00:00:29] Speaker 03:
You have to reply on a specific omission.

[00:00:32] Speaker 01:
You can't rely upon something that isn't said, and I think that's apt to yell the Ninth Circuit, isn't it?

[00:00:38] Speaker 03:
I agree, Your Honor.

[00:00:40] Speaker 03:
But reliance goes both ways.

[00:00:41] Speaker 03:
It can be relying on an omission, or it can be relying on a false statement.

[00:00:45] Speaker 03:
Either way, it works the same way, I believe, under the statute.

[00:00:48] Speaker 03:
It requires a fraud, which is knowing misstatement.

[00:00:52] Speaker 03:
In this case, the government offered no percipient witness

[00:00:56] Speaker 03:
It offered after the fact testimony from a witness who had no role in the transaction and testified only about what the SBA would have done.

[00:01:04] Speaker 04:
So counsel, under your theory then, the only way the SBA could prove this or any lender could prove a borrower committed fraud would be to call the actual loan officer?

[00:01:14] Speaker 04:
No, you can call somebody who specifically has some context within which to... Well, this individual was supposedly a loan specialist who supervised the people that actually approved the loan, and he was familiar with the process and procedures of the SBA.

[00:01:30] Speaker 04:
So wouldn't that be the same as a percipient witness that you're describing?

[00:01:34] Speaker 03:
No, Your Honor.

[00:01:35] Speaker 03:
In each of the cases the government cites, there was somebody who had an actual involvement in the actual loan.

[00:01:41] Speaker 04:
So you have to have an actual individual who approved the loan and under your theory the lender can't otherwise come in with other testimony about its normal practices and procedures.

[00:01:58] Speaker 04:
That's the only case that you've cited though that has any indication that there is something wrong with calling an individual Who is familiar with process and procedures who looked at the loan?

[00:02:09] Speaker 04:
Applications who reviewed the loan agreement and then came to certain conclusions.

[00:02:15] Speaker 03:
That's not the only case the other case We cited as a case I believe from the district of the Central District of California I don't have the specific site where the judge made it quite clear that where you have a witness who is testing to counterfactual

[00:02:28] Speaker 03:
Assumptions counterfactual assumptions.

[00:02:31] Speaker 03:
What's the government?

[00:02:32] Speaker 03:
What did what?

[00:02:33] Speaker 01:
Was that action actually contrary to the loan agreement as well, though?

[00:02:37] Speaker 01:
I mean, here the agreement says you're going to use this for working capital to address covid problems, correct?

[00:02:46] Speaker 03:
Yes, it does.

[00:02:47] Speaker 01:
So if it wasn't used for working capital as a result of COVID, why isn't that enough to say that's the problem here?

[00:02:57] Speaker 01:
And we evaluate the actual intent rather than the reliance.

[00:03:01] Speaker 03:
There are two fundamental problems with that, Your Honor.

[00:03:04] Speaker 03:
First, it's ex post facto reasoning.

[00:03:06] Speaker 01:
No, it's part of the condition of the of the loan application, isn't it?

[00:03:10] Speaker 03:
It is a condition of a loan application, but there is no evidence that when Mrs. Shainman signed this loan.

[00:03:16] Speaker 01:
That's a question of fact, isn't it?

[00:03:18] Speaker 03:
That is a question of fact, but there is no evidence to the contrary in this case.

[00:03:22] Speaker 01:
Well, it gets to a definition of what working capital is and if it was caused by COVID.

[00:03:28] Speaker 01:
And since a large amount of this loan was used to pay professional expenses from a pre-COVID trial, it seems like, at least that's the clear import of the judge's decision, that would be contrary.

[00:03:44] Speaker 03:
There are two problems with that, if I may, Your Honor.

[00:03:47] Speaker 03:
The first is, let's go to working capital.

[00:03:51] Speaker 03:
Let's talk about that as a fact.

[00:03:53] Speaker 03:
It is undisputed that

[00:03:55] Speaker 03:
the probate litigation was attacking Mrs. Schoenman's business?

[00:03:59] Speaker 01:
No.

[00:04:00] Speaker 01:
How was it attacking the business?

[00:04:01] Speaker 01:
Did it challenge her as a trustee?

[00:04:03] Speaker 03:
It sought, I believe incorrectly, but it clearly sought, and the record is quite clear in this case, that the other side sought to place a value on her trustee practice and to take that over as part of the petition in the probate course, point one.

[00:04:22] Speaker 03:
Point two, it also sought to

[00:04:24] Speaker 03:
Take over all of her property her rental properties those are part of her business She applied also part of her residence too, right?

[00:04:32] Speaker 01:
I mean including her house where she had her business right in addition to the properties that she had in Arizona and the properties she had in Idlewild How were those part of her her trustees practice?

[00:04:43] Speaker 03:
They're not part of her trustee practice.

[00:04:45] Speaker 03:
They're part of her residential real estate practice she was renting them out and she spent the money to protect those assets and

[00:04:52] Speaker 03:
But let's go back to the basic situation.

[00:04:54] Speaker 04:
But there's another problem.

[00:04:55] Speaker 04:
And that problem is that she lied about the fact that she was going to use this money to resolve pandemic-related problems.

[00:05:05] Speaker 04:
None of those problems were related to the pandemic.

[00:05:07] Speaker 03:
Your Honor, if you take a look at the statutory history, there is a presumption in the law that there is COVID injury to any person who applies.

[00:05:16] Speaker 03:
A presumption in the law.

[00:05:17] Speaker 03:
The statute specifically says that.

[00:05:19] Speaker 03:
When she filled it out, she was

[00:05:21] Speaker 03:
offered the application.

[00:05:23] Speaker 03:
She didn't seek it out.

[00:05:25] Speaker 03:
She was offered the application by the SBA.

[00:05:27] Speaker 03:
She understood that she was using working capital, and she did use it in her view for working capital.

[00:05:33] Speaker 04:
But the court rejected that theory, didn't it?

[00:05:35] Speaker 04:
It said that her decision that working capital was defined this way was not reasonable, and it was not credible, and you rejected it, and that's a finding of fact, and we're bound by that fact.

[00:05:47] Speaker 04:
And you're bound by that fact.

[00:05:49] Speaker 03:
You are not bound by that fact.

[00:05:51] Speaker 03:
The court reviews de novo whether, one, discovery violations warrant exclusion, two... What discovery violation did you allege in this case that you sought a motion to compel?

[00:06:03] Speaker 03:
We did not allege... First of all, let me disabuse you of that notion.

[00:06:10] Speaker 03:
The rule does not require a motion to compel.

[00:06:13] Speaker 03:
The exclusion is automatic.

[00:06:16] Speaker 03:
Automatic.

[00:06:17] Speaker 03:
Under Goodman versus

[00:06:18] Speaker 03:
The Goodman versus stables under yeti by Molly the Ninth Circuit has made it clear that where you have a duty to disclose the complaint alleged one one one one fault that she did not disclose

[00:06:32] Speaker 03:
the probate litigation because it would impact the collateral that she specifically was using.

[00:06:38] Speaker 04:
That wasn't the theory they went to trial on.

[00:06:40] Speaker 04:
And that wasn't the theory that the judge ruled for summary judgment remain for trial in this case.

[00:06:48] Speaker 03:
And that is precisely why you need to reverse, because the rules are quite clear here, Your Honors.

[00:06:54] Speaker 03:
I want you to go back.

[00:06:57] Speaker 02:
You talk about the presumption that it's presumed that the injury was related to COVID and we should presume that that's the case.

[00:07:07] Speaker 02:
That's a rebuttable presumption.

[00:07:09] Speaker 02:
We know that the injury occurred before COVID.

[00:07:12] Speaker 02:
So isn't the presumption rebutted?

[00:07:14] Speaker 03:
No, Your Honor.

[00:07:15] Speaker 03:
I think you misperceived the statute as I understand it.

[00:07:19] Speaker 03:
applied across the board to a massive, the government was pouring money out right and left because they wanted to solve the economic problems that were facing this country.

[00:07:28] Speaker 03:
Caused by COVID.

[00:07:29] Speaker 03:
Caused by COVID.

[00:07:31] Speaker 03:
And so the statute specifically says working capital to allay a COVID related injury.

[00:07:36] Speaker 03:
And then the statute specifically says there is a presumption that anybody who is involved in working during this period of time was injured.

[00:07:44] Speaker 03:
And I think the court can understand that because the effect was

[00:07:47] Speaker 03:
massive across the board.

[00:07:49] Speaker 01:
But the problem I think that we're having is you're taking two points and you're drawing a line that we don't see, right?

[00:07:56] Speaker 01:
Because this was ongoing pre-COVID.

[00:07:59] Speaker 01:
So how was it related by COVID, except there's a presumption, but we know that it came prior to COVID.

[00:08:04] Speaker 01:
Why doesn't that rebut it?

[00:08:05] Speaker 02:
Yeah, the presumption is not, it can be rebutted.

[00:08:09] Speaker 02:
It's not an irrebuttable presumption.

[00:08:11] Speaker 03:
There was no rebuttal of that presumption in this case.

[00:08:14] Speaker 03:
But don't the facts show us that there was rebutted?

[00:08:18] Speaker 03:
No, Your Honor, there is none.

[00:08:19] Speaker 04:
Well, she presented no evidence that she suffered any COVID related injury.

[00:08:24] Speaker 04:
What she said was, I thought working capital could be described this way.

[00:08:28] Speaker 04:
And so I decided that I could use the money for this purpose.

[00:08:31] Speaker 04:
But I didn't suffer any COVID related injury.

[00:08:33] Speaker 04:
She didn't put any evidence in that she suffered any and that court found as a matter of fact, she didn't try to present any evidence that she had any COVID related injury.

[00:08:42] Speaker 03:
You are respectfully wrong on that.

[00:08:44] Speaker 03:
She specifically put in statistics information that showed that the filings in bankruptcy courts across the country and specifically in the Northern District of California were declining because of bankruptcy.

[00:08:57] Speaker 01:
And how did that impact needing to pay the attorneys from the probate action?

[00:09:02] Speaker 01:
Or the bankruptcy lawyers?

[00:09:05] Speaker 03:
You are to use working capital to allay, working capital is to protect your business.

[00:09:12] Speaker 03:
and she needed to protect her business, which was twofold.

[00:09:15] Speaker 03:
One, her trustee practice, which the bankruptcy, which the probate court specifically, and this is unrefuted, sought to monetize.

[00:09:24] Speaker 03:
Now, that may be wrong, and we all know it's wrong, but that's what they sought to do.

[00:09:28] Speaker 03:
Two, they sought to take over her revenue-producing rental properties, and she needed that to protect her assets, her business.

[00:09:36] Speaker 03:
So it's a perfectly legitimate use of that.

[00:09:39] Speaker 03:
But let me go back to the fundamental issue.

[00:09:42] Speaker 03:
the government completely changed its theory.

[00:09:45] Speaker 03:
Its complaint alleged that the collateral was used and it was impaired by the probate litigation.

[00:09:55] Speaker 03:
Mid-trial, the government completely abandoned that and said, no, we didn't rely upon that, relied upon the fact that she was supposed to prove a truthful thing.

[00:10:03] Speaker 03:
Now, the government has an obligation under those federal rules, quite clear, 26 says, you need to supplement.

[00:10:11] Speaker 03:
If you take a look at their discovery responses, please do.

[00:10:15] Speaker 03:
They are completely opaque.

[00:10:17] Speaker 03:
80% of them gave absolutely no answer.

[00:10:21] Speaker 04:
Because they objected and you never sought to compel them to give a better answer.

[00:10:26] Speaker 03:
Because under the law, and I know because I helped draft these rules, under the law, under the rules, there is no requirement to file a motion.

[00:10:34] Speaker 03:
There is no requirement to do anything.

[00:10:36] Speaker 03:
The duty is upon

[00:10:38] Speaker 03:
the disclosing party or here the non-disclosing party to supplement its answers when it knows they are wrong.

[00:10:45] Speaker 03:
And we were completely, I hate to use these words, but we were completely sandbagged, ambushed when the government changed its trial completely.

[00:10:52] Speaker 03:
I asked the government's witness, did you rely upon the collateral?

[00:10:55] Speaker 03:
No.

[00:10:56] Speaker 03:
I asked each one of them, did you rely upon the collateral?

[00:10:58] Speaker 03:
No, because that wasn't within our ambit.

[00:11:01] Speaker 03:
And then they came in and said, well, she wasn't truthful.

[00:11:04] Speaker 03:
Had we known she wasn't going to be truthful, then we wouldn't have given her the loan.

[00:11:08] Speaker 03:
Well, that makes the whole process of reliance, fraudulent intent, everything completely illusory, because every lender relies upon somebody to specifically, quote, be truthful.

[00:11:19] Speaker 03:
And you have to show specific reliance on specific facts, and here the government completely changed its course, and there is no requirement to file a motion.

[00:11:27] Speaker 03:
As soon as we learned about this when we got up to the trial, we filed a motion to eliminate, which under Yeti versus Mali under the Ninth Circuit,

[00:11:34] Speaker 03:
Under the Grouse River case under the Ninth Circuit We are specifically not required to do that.

[00:11:39] Speaker 03:
It is incumbent upon the government to supply that information I reserve the rest of my time for rebuttal.

[00:11:45] Speaker 01:
Thank you very much.

[00:11:46] Speaker 03:
Thank you very much your honor And oh by the way, I reserve all of my other arguments in the brief Thank you

[00:12:06] Speaker 00:
Good morning, Your Honors, and may it please the Court.

[00:12:08] Speaker 00:
Assistant U.S.

[00:12:08] Speaker 00:
Attorney Kelsey Helland for the government.

[00:12:10] Speaker 00:
I'm joined by Assistant U.S.

[00:12:12] Speaker 00:
Attorney Audrey Pack.

[00:12:14] Speaker 00:
Your Honors, since Congress created the SBA in 1953, it has been authorized to issue loans to small businesses who are affected by disasters.

[00:12:25] Speaker 00:
In 2020, during the COVID pandemic, Congress moved quickly to expand the SBA's authority so that small businesses affected by the coronavirus pandemic could likewise obtain disaster relief loans.

[00:12:37] Speaker 00:
Billions of dollars of loans went out under that program, providing critical assistance to American small businesses at a time when the global pandemic was wrecking the economy.

[00:12:49] Speaker 00:
Appellant Lynn Shainman has been on the bankruptcy trustee panel for 26 years.

[00:12:55] Speaker 00:
She's a sophisticated lawyer and businesswoman.

[00:12:59] Speaker 00:
She has never claimed that her business was affected by the coronavirus pandemic.

[00:13:05] Speaker 00:
Miss Shaman took out an idle loan in 2021.

[00:13:09] Speaker 00:
When she signed the loan agreement for that loan, she promised the SBA that she would only use the proceeds for working capital to alleviate her injuries from the coronavirus pandemic.

[00:13:20] Speaker 01:
Is there any evidence in there about the rental business and the effect of it in the record on the trial?

[00:13:26] Speaker 00:
There was a little bit of trial testimony.

[00:13:27] Speaker 00:
As the Bankersley Court found, it was at trial that she said for the first time that she considered those rental properties to be part of her business.

[00:13:35] Speaker 00:
There's no evidence in the record that they were affected by the coronavirus pandemic.

[00:13:40] Speaker 00:
So there's nothing that would say that she thought she was using funds to alleviate injury from the pandemic, even if she was trying to protect her interest in those rental properties.

[00:13:49] Speaker 00:
As the bank's record found, and the record is quite clear, that probate litigation was pre-existing before the coronavirus pandemic even started.

[00:13:57] Speaker 00:
So there's no way in which any injuries resulting from that probate litigation and the threat it had on her rental properties

[00:14:05] Speaker 00:
was an injury caused by the pandemic.

[00:14:09] Speaker 01:
Is that enough to deny the loan?

[00:14:12] Speaker 00:
Would that have been enough to deny the loan?

[00:14:14] Speaker 00:
Yes.

[00:14:14] Speaker 01:
Even if it was working capital?

[00:14:17] Speaker 00:
Well, yes, because she promised to only use the loan to alleviate her injury from the pandemic.

[00:14:25] Speaker 00:
That was the very purpose of the loan.

[00:14:26] Speaker 04:
So if she had indicated in the loan

[00:14:29] Speaker 04:
application that she intended to use the proceeds to pay attorneys in the probate litigation to pay bankruptcy lawyers and to play experts in the probate litigation.

[00:14:39] Speaker 04:
Would the loan have been approved?

[00:14:40] Speaker 00:
No, it would not have been approved.

[00:14:42] Speaker 00:
And I think we have multiple witnesses from the SBA who testified to that.

[00:14:45] Speaker 00:
Including Mr. Olivas?

[00:14:46] Speaker 00:
Including Mr. Olivas, but also including the two loan officers who actually did work on Ms.

[00:14:51] Speaker 00:
Shainman's loan.

[00:14:52] Speaker 00:
I want to be clear about this.

[00:14:54] Speaker 00:
The actual people who physically handled Ms.

[00:14:57] Speaker 00:
Shainman's loan did testify at trial.

[00:14:59] Speaker 00:
They did not submit evidence during the summary judgment briefing, and that was one of the issues that led to reconsideration, but they did testify at trial.

[00:15:07] Speaker 00:
The SBA wanted to present the full record on this and wanted to alleviate any concerns the bank's report may have had about needing to have those witnesses who physically handled that loan.

[00:15:18] Speaker 00:
So two of them flew to San Francisco to testify, in addition to Mr. Olivas, who supervised and was responsible for putting together the manual and the instructions for how these loans were handled.

[00:15:32] Speaker 00:
So there was multiple sources of evidence at the trial about how the loan would have been rejected if the SBA knew how she was actually going to use the proceeds, contrary to what she promised in the loan agreement that she signed.

[00:15:46] Speaker 00:
So that was our first theory of non-dischargeability, the 523A2A theory.

[00:15:52] Speaker 00:
There's also the 523A2B theory.

[00:15:55] Speaker 01:
And before you get to that, I want to go back to one of the questions I asked your opposing counsel.

[00:16:00] Speaker 01:
Do you agree with the statement of law that in omission as fraudulent, that the plaintiff must prove reliance?

[00:16:11] Speaker 00:
I do think that is still true, Your Honor, but I think the reliance can be shown by an agency, by the lender following its normal business practices.

[00:16:19] Speaker 00:
And if the disclosure, if the material omission would have changed the process for reviewing that loan, then reliance has been shown, material reliance has been shown, which I think there's adequate evidence of here.

[00:16:33] Speaker 00:
And those are findings of fact that the bankruptcy court made, that there was reliance and it was material.

[00:16:38] Speaker 00:
So clear error review.

[00:16:41] Speaker 00:
So I want to be clear that our theory about the omission of the contingent liability has been consistent throughout this case.

[00:16:49] Speaker 00:
It's present in the complaint.

[00:16:52] Speaker 00:
It was the major subject of the summary judgment briefing.

[00:16:55] Speaker 00:
Mr. Olivas declaration in support of the summary briefing talks about reliance on that omission and how if the contingent liability of legal claims against miss shaman had been disclosed then an entirely additional part level of review would have been conducted which may well have resulted in denying the loan.

[00:17:16] Speaker 00:
That was all in the evidentiary record well before we went to trial.

[00:17:20] Speaker 00:
There was not a bait and switch or last minute change of theory.

[00:17:24] Speaker 00:
There is a consistent through line from our complaint to the dispositive motion briefing to the testimony at trial that the for for 523 a to be.

[00:17:34] Speaker 00:
The omission of the legal claims against Ms.

[00:17:37] Speaker 00:
Shaman in that probate litigation was the material omission.

[00:17:42] Speaker 00:
That was the fraud in her written statement about her financial condition that renders the balance of the loan non-dischargeable.

[00:17:51] Speaker 00:
It is true that at trial, the SBA witnesses also talked about how her dishonesty may have been an independent basis for denying the loan.

[00:17:59] Speaker 00:
But that is not the basis that the banks of the court relied on in finding that the loan was non-dischargeable.

[00:18:05] Speaker 00:
It was a side issue.

[00:18:06] Speaker 00:
And to be clear, there was quite a bit of testimony about how the legal claims themselves, the failure to disclose the legal claims against Ms.

[00:18:16] Speaker 00:
Shaman, was itself a material omission upon which the SBA reasonably relied.

[00:18:23] Speaker 00:
That is, it would have changed how it evaluated that loan if it had known about those claims against her.

[00:18:29] Speaker 00:
And it is those claims against her that immediately rendered her unable to repay the SBA.

[00:18:34] Speaker 00:
It is because she was on the verge of losing a probate trial that she promptly declared bankruptcy and still has not been able to repay the SBA for the nearly million dollar loan that it made to her.

[00:18:46] Speaker 01:
Well, but for the bankruptcy, as it has been revealed through the facts, she would have had over $400,000 to continue to make the payments.

[00:18:56] Speaker 01:
Would that have been consistent with the SBA loan application and agreement?

[00:19:01] Speaker 00:
I'm not sure I understand your question, Your Honor.

[00:19:03] Speaker 04:
She kept the $450,000 in her brokerage account.

[00:19:06] Speaker 00:
Yes.

[00:19:07] Speaker 04:
Is that consistent with the loan application and agreement that she signed?

[00:19:10] Speaker 00:
I don't think that it is, Your Honor.

[00:19:11] Speaker 00:
That itself is not a use of funds for alleviating economic injury from the COVID pandemic.

[00:19:17] Speaker 00:
And as the Bankersby Court recognized, her taking of that amount of money denied the SBA's ability to issue that money to other borrowers who would have needed it.

[00:19:30] Speaker 00:
So that was not a proper use of those funds.

[00:19:34] Speaker 00:
Unless there are other questions about those two claims for nondischargeability, I wanted to turn to the penalty briefly.

[00:19:41] Speaker 01:
Much has been made about the

[00:19:45] Speaker 00:
Use of the collateral that issue do you want to address that before you move on to the penalty yeah, I Don't think that the SBA Pleaded in its complaint or needed to prove at trial that actually relying on the collateral was

[00:20:03] Speaker 00:
an aspect of its reliance or an aspect of the fraud here.

[00:20:07] Speaker 00:
What was testified to at trial and what has been the consistent main theory since the complaint was pled is that the omission of the claims against her prevented the SBA from performing the review that it would otherwise perform and understanding her financial picture.

[00:20:24] Speaker 00:
So the court doesn't need to get into and the banks of the court didn't make a finding about the reliance on the collateral itself.

[00:20:32] Speaker 00:
What the banks found, and consistent with our theory all along, has been that merely omitting the claims against her was sufficient to hide from the SBA a material aspect of its review.

[00:20:46] Speaker 00:
So I don't think you need to get into how the collateral would have been used.

[00:20:50] Speaker 04:
Thank you.

[00:20:52] Speaker 04:
And just to clarify, you're suggesting that the failure to disclose the use of the proceeds in the loan application, which was not related to the pandemic, which was for a pre-petition or pre-pandemic litigation purpose, would have been a false statement to the SBA under 523A2A, and that was what the court found.

[00:21:21] Speaker 04:
under that provision.

[00:21:23] Speaker 00:
That's exactly right.

[00:21:24] Speaker 00:
And I just want to be very clear on this.

[00:21:25] Speaker 00:
These are independent theories of fraud, right?

[00:21:28] Speaker 00:
523A2A is the loan agreement where she made the promise for how she would use the funds.

[00:21:34] Speaker 00:
The entire balance of the loan is non-dischargeable because of that fraud.

[00:21:38] Speaker 00:
That is completely separate with the application where she omitted the legal claims against her under 523A2B.

[00:21:45] Speaker 00:
That itself is an independent theory of fraud.

[00:21:48] Speaker 00:
that also results in the full balance of the loan being non-dischargeable.

[00:21:52] Speaker 00:
They are completely independent, and the Bankers of the Court found that both apply here.

[00:21:58] Speaker 00:
So either one would be sufficient to affirm non-dischargeability of the full loan.

[00:22:02] Speaker 00:
I think both were plainly correct, and the Bankers of the Court did find both.

[00:22:08] Speaker 00:
As to the penalty, Your Honors,

[00:22:11] Speaker 00:
The law is clear that when an individual misuses funds that were taken out under this loan program, that they will be subject to a one and a half times penalty of the entire loan balance.

[00:22:28] Speaker 00:
The district court, sorry, the banks, the court found that miss shaman intentionally misused these funds right in going through the elements for the A to A claim and the A to B claim.

[00:22:40] Speaker 00:
He found intentional misuse.

[00:22:43] Speaker 00:
So.

[00:22:44] Speaker 00:
Whether the statute, the level of intent required to award a penalty under this statute, this court doesn't need to decide some question about just how much is enough.

[00:22:57] Speaker 00:
Here there was intentional misuse, a factual finding by the bankruptcy court.

[00:23:02] Speaker 00:
So I don't think appellant can be heard to complain that somehow the wrongfulness standard was not satisfied here when the bankruptcy court found intentional misuse.

[00:23:15] Speaker 00:
i think the banks court was well within its discretion in applying that penalty to uh... the full value of the of the loan uh... there's uh... there was no good reason to uh... issue penalties less than one and a half times the the full amount uh... i don't think uh... palance constitutional arguments or statutory arguments are well taken on this regard this was plainly a disaster loan under section seven b of the small business act

[00:23:44] Speaker 00:
about a dozen different ways that it was described as a disaster loan.

[00:23:47] Speaker 00:
So to argue somehow that this was actually a loan under a different program and the penalty wouldn't apply, I don't think survives any level of scrutiny.

[00:23:56] Speaker 04:
As for the... The loan agreement itself described the 636B provision as being applicable to this loan.

[00:24:05] Speaker 00:
Exactly.

[00:24:06] Speaker 00:
And the loan agreement itself said, this is a disaster loan under 7B, right?

[00:24:12] Speaker 00:
And then the end of it said,

[00:24:14] Speaker 00:
The penalty provision 636B will apply to this if you wrongfully misuse the loans.

[00:24:20] Speaker 00:
It's clear from the face of it.

[00:24:22] Speaker 00:
It's also just very clear as a matter of the statute.

[00:24:24] Speaker 00:
This was an economic injury disaster loan to which the penalty applied.

[00:24:30] Speaker 00:
I'm happy to address the constitutionality arguments, but I don't need to take your honor's time unless there's questions about them.

[00:24:37] Speaker 04:
I don't have any.

[00:24:39] Speaker 00:
Your honors unless there are any further questions we would ask that this court affirm the banks of the court judgment.

[00:24:45] Speaker 01:
Thank you Yes, thank you very much counsel.

[00:24:48] Speaker 01:
Thank you Mr.. Keefe, I think you have about three three nineteen.

[00:24:56] Speaker 01:
Thank you honor I

[00:24:59] Speaker 03:
The two witnesses who supposedly worked on this loan did not testify about reliance or what the what the SBA would have done under certain counterfactual assumptions.

[00:25:09] Speaker 03:
So that argument does not fly.

[00:25:13] Speaker 03:
Working capital is nowhere defined in the statute and the regulations.

[00:25:18] Speaker 03:
It simply says working capital.

[00:25:20] Speaker 03:
And given that ambiguity, I believe that Ms.

[00:25:23] Speaker 01:
Shainman's... Isn't that a little hard to believe given the sophistication and nature of your client?

[00:25:28] Speaker 01:
Isn't... Again, that's a question of fact, right?

[00:25:32] Speaker 01:
What she believed and understood.

[00:25:35] Speaker 01:
That was for the bankruptcy judge at trial to ultimately decide, correct?

[00:25:40] Speaker 03:
There's no finding, I believe, that she somehow misunderstood the term.

[00:25:44] Speaker 01:
No, I think it was more than that.

[00:25:46] Speaker 01:
I think the court just didn't believe her.

[00:25:51] Speaker 01:
I don't think you have to say, I don't believe you.

[00:25:53] Speaker 01:
Given all the other findings, isn't that implicit that he did not believe that she really didn't have a true sense of what working capital meant?

[00:26:06] Speaker 03:
requires specific requirements of finding, not implicit findings based upon some supposition.

[00:26:14] Speaker 01:
I believe his quote at working capital, what it was and that it was, how did he put it?

[00:26:20] Speaker 04:
He actually said,

[00:26:23] Speaker 04:
A professional should understand the difference between business expenses, also characterized as working capital and expenses incurred during personal litigation between family members, however characterized.

[00:26:34] Speaker 03:
Isn't that specific enough?

[00:26:36] Speaker 03:
I don't believe so because specifically she's testified without contradiction that this was a time... Credibility is always an issue at trial.

[00:26:43] Speaker 03:
Excuse me?

[00:26:44] Speaker 01:
Credibility is always an issue at trial, isn't it?

[00:26:46] Speaker 03:
The quantity and quality of the evidence is an issue of law for this court, Your Honor.

[00:26:51] Speaker 03:
I believe.

[00:26:52] Speaker 03:
in its review.

[00:26:54] Speaker 03:
And if you take a look at the Anderson case, it makes it quite clear.

[00:26:57] Speaker 03:
Let me go back to another point that Mr. Hallin raised.

[00:27:00] Speaker 03:
The application does not ask anywhere, how are you going to use these funds?

[00:27:05] Speaker 01:
But it does say that it will be used for working capital to address COVID issues.

[00:27:10] Speaker 03:
Economic injury caused by COVID.

[00:27:13] Speaker 03:
And I believe that given the fact that all of the cases were declining in the bankruptcy court,

[00:27:19] Speaker 03:
She was entitled to assume that there was going to be some damage to her injury.

[00:27:23] Speaker 04:
So she used the money to alleviate her COVID related injury by doing what?

[00:27:29] Speaker 04:
Paying professionals in the probate litigation?

[00:27:32] Speaker 01:
Absolutely, your honor.

[00:27:33] Speaker 01:
And her bankruptcy, prepaying bankruptcy fees.

[00:27:36] Speaker 01:
Excuse me?

[00:27:37] Speaker 01:
Prepaying for her bankruptcy filing.

[00:27:39] Speaker 03:
Correct, because she was carrying on a business in bankruptcy and she needed to have counsel

[00:27:45] Speaker 03:
So that was necessarily being used for working capital to alleviate economic injury.

[00:27:51] Speaker 03:
Let me go to one other point.

[00:27:52] Speaker 02:
Isn't that a question of fact?

[00:27:57] Speaker 02:
The connection.

[00:27:59] Speaker 03:
As I say, let me go back to my reliance point.

[00:28:02] Speaker 03:
You need to have some reliance on this by the government, and there's no evidence of that.

[00:28:06] Speaker 03:
This is sustainable, your honor.

[00:28:10] Speaker 03:
Let me go to the misuse.

[00:28:13] Speaker 03:
Well, let me first of all,

[00:28:14] Speaker 03:
In terms of the fraud case was that she failed to check off a box that says contingent liabilities.

[00:28:20] Speaker 03:
It didn't ask her, are you a defendant and a lawsuit?

[00:28:23] Speaker 03:
Other SBA forms do that.

[00:28:25] Speaker 03:
She testified, had she been asked that, she of course wouldn't have answered it.

[00:28:29] Speaker 03:
But in terms of the misuse, there was no willful misuse under the statute, which requires a mens rea.

[00:28:37] Speaker 03:
I see my time has expired, Your Honor.

[00:28:39] Speaker 03:
Thank you for your time.

[00:28:39] Speaker 03:
Thank you very much.

[00:28:40] Speaker 01:
I appreciate it.

[00:28:42] Speaker 03:
Unless the Court has any other further questions, we rest on our briefs.

[00:28:45] Speaker 01:
Thank you.

[00:28:45] Speaker 03:
All right.

[00:28:46] Speaker 03:
Thank you very much.

[00:28:46] Speaker 01:
Thank you both for a very good oral argument.

[00:28:48] Speaker 01:
The Court will take the matter under submission, try to gather a decision as soon as possible.