Court Opinion

ID: 3209327
Source: CourtListenerOpinion
Date Created: 2016-06-04 01:01:03.486175+00
Date Added: 2024-06-11T09:21:32.916067
License: Public Domain

FILED
                                                               JUN 03 2016
 1                         NOT FOR PUBLICATION
 2                                                       SUSAN M. SPRAUL, CLERK
                                                             U.S. BKCY. APP. PANEL
                                                             OF THE NINTH CIRCUIT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No. NV-15-1307-DFB
                                   )
 6   WALLACE E. BLOCK,             )      Bk. No. 14-51415-BTB
                                   )
 7                  Debtor.        )
     ______________________________)
 8                                 )
     SAMUEL KORNHAUSER,            )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )      M E M O R A N D U M1
11                                 )
     WALLACE E. BLOCK; CHRISTINE   )
12   LOVATO, Chapter 7 Trustee,    )
                                   )
13                  Appellees.     )
     _____________________________ )
14
                      Argued and Submitted on May 19, 2016
15                            at Las Vegas, Nevada
16                            Filed - June 3, 2016
17             Appeal from the United States Bankruptcy Court
                         for the District of Nevada
18
       Honorable Bruce T. Beesley, Chief Bankruptcy Judge, Presiding
19
20   Appearances:     Gayle A. Kern argued for Appellant; Kevin Darby
                      argued for Appellee Wallace E. Block.
21
22   Before:   DUNN, FARIS, and BARASH,2 Bankruptcy Judges.
23
24
          1
             This disposition is not appropriate for publication.
25   Although it may be cited for whatever persuasive value it may
26   have (see Fed. R. App. P. 32.1), it has no precedential value.
     See 9th Cir. BAP Rule 8024-1.
27
          2
             Hon. Martin R. Barash, United States Bankruptcy Judge for
28   the Central District of California, sitting by designation.
 1        The bankruptcy court overruled the objections of the
 2   chapter 73 trustee and a judgment creditor to the Nevada state
 3   law exemption that debtor claimed in his stock in two
 4   closely-held corporations to the extent those objections were
 5   based on debtor’s alleged misconduct, debtor’s allegedly improper
 6   amendment to his bankruptcy documents, judicial estoppel, or
 7   equitable estoppel.   The judgment creditor appealed.
 8        We AFFIRM.
 9                         I.   FACTUAL BACKGROUND
10   A.   Pre-Bankruptcy Facts.
11        1.   The Valentine Litigation.
12        By written contract entered into on or about September 22,
13   2002, Wallace E. Block and his corporation, Life Enhancement
14   Products, Inc. (“LEPI”), hired attorney Samuel Kornhauser to
15   recover a 50% ownership interest in LEPI, which Mr. Block had
16   gifted to Gayle Valentine, his former girlfriend, plus $70,000
17   Ms. Valentine had taken from LEPI.     On March 25, 2005, to induce
18   Mr. Kornhauser to continue providing legal services, Mr. Block
19   and LEPI executed a promissory note (“Note”) and pledge agreement
20   in favor of Mr. Kornhauser, committing $450,000 in LEPI stock as
21   security for payment of the Note.
22        Mr. Kornhauser successfully obtained the return to Mr. Block
23   of Ms. Valentine’s LEPI stock, a monetary award in favor of
24   Mr. Block, and a complete defense to all of Ms. Valentine’s
25
26        3
             Unless specified otherwise, all chapter and section
27   references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532, and
     all “Rule” references are to the Federal Rules of Bankruptcy
28   Procedure, Rules 1001–9037.

                                      -2-
 1   claims against Mr. Block and LEPI.        The litigation (“Valentine
 2   Litigation”) took seven years to complete and required two jury
 3   trials and an appeal.
 4        2.     The Formation of SNF.
 5        In 2006, while the Valentine Litigation was pending,
 6   Mr. Block incorporated Scientific Nutritional Formulations, LLC
 7   (“SNF”),4 designating himself as SNF’s sole officer and director.
 8   Mr. Block continued to be identified as SNF’s sole officer and
 9   director in filings with the Nevada Secretary of State until
10   February 2, 2011, when “Will Block” was substituted.5       On June 8,
11   2012, SNF acquired commercial property (“Property”) in Minden,
12   Nevada consisting of a 16,800 square foot building on two acres.
13   SNF leases the Property to LEPI.
14        3.     The Kornhauser Litigation.
15        At the conclusion of the Valentine Litigation, Mr. Block and
16   LEPI owed Mr. Kornhauser $750,000 for attorney’s fees and
17   $100,000 for costs Mr. Kornhauser had advanced.        During the seven
18   years of litigation, Mr. Block and LEPI made ongoing promises to
19   pay the attorney’s fees and costs that were accruing.        However,
20   after the Valentine Litigation concluded, Mr. Block and LEPI sued
21   Mr. Kornhauser for legal malpractice, breach of contract, and
22   breach of fiduciary duty, and Mr. Kornhauser asserted cross-
23   claims against them for breach of contract, negligent
24
25
          4
             In spite of the confusion of SNF’s “LLC” name and the
26   subsequent evidence as to how Mr. Block treated it, SNF in fact
27   was incorporated as a Nevada corporation.
          5
28             Will Block appears to be an alias used by Mr. Block.

                                         -3-
 1   misrepresentation, fraud, quantum meruit, constructive trust and
 2   account stated (collectively, “Kornhauser Litigation”).    Four
 3   years later, a jury denied all claims against Mr. Kornhauser and
 4   awarded Mr. Kornhauser $1,085,157 in damages, plus punitive
 5   damages and attorney’s fees and costs.   The following morning,
 6   before the judgment was entered against him, Mr. Block filed a
 7   petition under chapter 7 of the Bankruptcy Code.6
 8   B.   Post-Bankruptcy Proceedings.
 9        On his Schedule B-Personal Property (“Initial Schedule B”),
10   Mr. Block disclosed that he held stock in LEPI and SNF.    He
11   valued his interest in the stock of both entities at $0.    On his
12   Schedule C-Property Claimed as Exempt (“Initial Schedule C”),
13   Mr. Block asserted that his interest in the LEPI stock was exempt
14   under Nevada Revised Statutes (“NRS”) 21.090(1)(bb),7 and that
15   both the value of his claimed exemption and the current value of
16   the stock were $0.
17
18        6
             Judgment against LEPI only was entered a week later in
19   the amount of $1,989,396.32. LEPI then filed its own bankruptcy
     case (Case No. 14-51572-btb7) in the District of Nevada.
20   Mr. Kornhauser subsequently obtained relief from the automatic
     stay to seek a determination of the attorney’s fees and costs to
21
     be included in the judgment. The new judgment amount was
22   $2,422,063. Mr. Kornhauser filed a claim in LEPI’s bankruptcy
     case (Case No. 14-51572-btb7), also pending in the District of
23   Nevada, in the amount of $2,592,961.50.
24        7
             Pursuant to § 522(b)(2), Nevada has opted out of the
25   federal exemptions. See NRS 21.090(3); Rowe v. Jackson
     (In re Rowe), 236 B.R. 11, 13 (9th Cir. BAP 1999). This panel
26   thus looks to Nevada state law rather than federal law to
27   determine the allowance of Mr. Block’s claimed exemption in
     stock. By its basic terms, NRS 21.090(1)(bb) provides that stock
28   of a closely-held corporation is exempt from execution.

                                    -4-
 1        Mr. Kornhauser timely filed an objection (“Kornhauser
 2   Objection”) to the exemption Mr. Block claimed in his LEPI stock
 3   for two reasons.   First, Mr. Kornhauser asserted that Mr. Block
 4   could exempt no more than the value of the stock he claimed on
 5   the Initial Schedule B, which was $0.   Second, Mr. Kornhauser
 6   asserted that even if Mr. Block otherwise could exempt the full
 7   value of his LEPI stock, he should be estopped from doing so
 8   because Mr. Block made a false oath in his schedules when he
 9   asserted that the LEPI stock had no value.   The LEPI bankruptcy
10   documents, filed five days after Mr. Block filed his Initial
11   Schedule B, disclosed that LEPI had gross sales through its 2014
12   petition date of $2.6 million and liabilities estimated at
13   $1.9 million.
14        In response to the Kornhauser Objection, Mr. Block amended
15   the Initial Schedule B to reflect that the value of the LEPI
16   stock was “Unknown” rather than $0 and the Initial Schedule C to
17   claim an exemption in 100% of the fair market value of the LEPI
18   stock, the current value of which he stated was “Unknown.”
19        Before resolution of the Kornhauser Objection, the chapter 7
20   trustee (“Trustee”) obtained an extension from the bankruptcy
21   court to file her own objection to Mr. Block’s claimed
22   exemptions.   As part of discovery into the basis for filing an
23   objection, the Trustee, through counsel, requested tax
24   information for SNF from Mr. Block, including its tax returns for
25   the tax years 2012 and 2013, its taxpayer identification number,
26   and a copy of the subchapter S election that had been filed with
27   the IRS.
28        Four days later, in response to the Trustee’s request,

                                     -5-
 1   Mr. Block again amended his Schedule B, this time to change the
 2   value of the SNF stock from $0 to “Unknown.”   Mr. Block also
 3   amended his Schedule C to include for the first time a claim for
 4   exemption in his SNF stock pursuant to NRS 21.090(1)(bb).
 5        Ultimately, the Trustee objected (“Trustee Objection”) only
 6   to Mr. Block’s claim of exemption in SNF.   The Trustee asserted
 7   that Mr. Block should be judicially and equitably estopped from
 8   claiming that he is entitled to an exemption under
 9   NRS 21.090(1)(bb) with respect to his equity interest in SNF for
10   the reason that, from its inception, Mr. Block treated SNF not as
11   a corporation but as an LLC.   The Trustee asserted that SNF “did
12   not operate as a corporation prepetition, has not adhered to the
13   formalities of a corporation, and has not filed corporate tax
14   returns.”   Significantly, Mr. Block claimed the rents and
15   deductions of and from the Property on Schedule E of his personal
16   tax returns, and he represented in every iteration of his
17   bankruptcy documents that SNF was an LLC.
18        With respect to the Kornhauser Objection, the bankruptcy
19   court determined that because Rule 1009(a) liberally allows a
20   debtor to amend his bankruptcy documents “as a matter of course
21   at any time before the case is closed,” Mr. Block was not bound
22   by his $0 valuation of his interest in LEPI stock in the Initial
23   Schedule B and the Initial Schedule C.   The bankruptcy court
24   further ruled that it had no equitable power to deny or disallow
25   Mr. Block’s exemption in the LEPI stock based on Mr. Block’s
26   alleged bad faith conduct in light of the Supreme Court’s
27   decision in Law v. Siegel, ___ U.S. ___, 134 S. Ct. 1188 (2014).
28        With respect to the Trustee Objection, the bankruptcy court

                                     -6-
 1   determined (1) that judicial estoppel did not apply where the
 2   court had not “issued any rulings that were dependent upon the
 3   now-amended claim of exemption,” and (2) that the state of Nevada
 4   has no procedure for allowing the denial or limitation of
 5   exemptions for bad faith.      Finally, with regard to the issue of
 6   whether Mr. Block was entitled to claim an exemption in the stock
 7   of SNF because he treated SNF as a limited liability company and
 8   not as a true corporation required an adversary proceeding for a
 9   determination that SNF was the alter ego of Mr. Block.
10        The bankruptcy court entered its order overruling the
11   Kornhauser Objection and the Trustee Objection on August 26,
12   2015.8   Mr. Kornhauser filed a timely notice of appeal.
13                            II.    JURISDICTION
14        The bankruptcy court had jurisdiction under 28 U.S.C.
15   §§ 1334 and 157(b)(2)(B).      We have jurisdiction under 28 U.S.C.
16   § 158.
17                               III.    ISSUES
18        Whether the bankruptcy court erred when it determined that
19   Mr. Block’s claimed exemption in LEPI stock was not limited to
20   the $0 value initially listed on Schedule C.
21        Whether the bankruptcy court erred when it interpreted Law
22   v. Siegel to hold that it had no equitable power to deny
23   Mr. Block’s claimed exemption in the LEPI and SNF stock based on
24   Mr. Block’s bad faith conduct, where Mr. Block’s exemption was
25   claimed under state law, not § 522.
26
          8
27           The order authorized both Mr. Kornhauser and the trustee
     to file an adversary proceeding for a determination whether SNF
28   and LEPI were the alter egos of Mr. Block.

                                        -7-
 1        Whether the bankruptcy court erred when it ruled that
 2   Mr. Block had not waived the right to claim an exemption under
 3   NRS 21.090(1)(bb) in the SNF stock by treating SNF as a limited
 4   liability company rather than as a corporation.
 5                         IV.   STANDARDS OF REVIEW
 6        Application of basic rules of procedure and construction of
 7   the Bankruptcy Code present questions of law that we review de
 8   novo.   All Points Capital Corp. v. Meyer (In re Meyer), 373 B.R.
9   84, 87 (9th Cir. BAP 2007).
10        The right of a debtor to claim an exemption is a question of
11   law that we review de novo.      Elliott v. Weil (In re Elliott),
12   523 B.R. 188, 191-92 (9th Cir. BAP 2014).      We review a bankruptcy
13   court's interpretation of state exemption law and the Bankruptcy
14   Code de novo.   Hopkins v. Cerchione (In re Cerchione), 414 B.R.
15   540, 545 (9th Cir. BAP 2009).      De novo review requires that “we
16   consider a matter anew, as if no decision had been rendered
17   previously.”    Mele v. Mele (In re Mele), 501 B.R. 357, 362 (9th
18   Cir. BAP 2013).
19                               V.   DISCUSSION
20   A.   The Bankruptcy Court Applied the Correct Law In Overruling
          the Kornhauser Objection and the Trustee Objection.
21
22        As a preliminary matter, we set in context the claim of an
23   exemption in a bankruptcy case.      The Bankruptcy Code requires a
24   debtor to file a schedule of assets and liabilities.
25   § 521(a)(1)(B)(ii).   Rule 1007(b)(1)(A) directs that a chapter 7
26   debtor shall file schedules of assets and liabilities “prepared
27   as prescribed by the appropriate Official Forms.”      At the time
28   Mr. Block filed his bankruptcy case, Official Form 6B “Schedule B

                                        -8-
 1   - Personal Property” was the required form to use to schedule
 2   personal property assets.   Using the Official Form 6B, Mr. Block
 3   filed his Initial Schedule B.
 4        The Bankruptcy Code also permits an individual debtor to
 5   exempt property from property of the estate as defined by § 541.
 6   See § 522(b)(1).   At the time Mr. Block filed his bankruptcy
 7   case, Official Form 6C “Schedule C - Property Claimed as Exempt”
 8   was the required form to use to claim an exemption from property
 9   of the bankruptcy estate.   Using Official Form 6C, Mr. Block
10   filed his Initial Schedule C.
11        The bankruptcy schedules provide important means by which
12   disclosures are made regarding a debtor’s affairs.     As noted by
13   the bankruptcy court, Rule 1009(a) provides that “[a] . . .
14   schedule . . . may be amended by the debtor as a matter of course
15   at any time before the case is closed.”
16        Applying Rule 1009(a), the bankruptcy court correctly
17   determined that Mr. Block could amend both his Initial Schedule B
18   and his Initial Schedule C to claim an exemption greater than $0
19   in his stock.
20        However, as the Ninth Circuit previously has stated,
21   “allowing an amendment claiming an exemption is different from
22   allowing the exemption itself.”     Martinson v. Michael
23   (In re Michael), 163 F.3d 526, 529 (1998) (quoting
24   In re Sandoval, 103 F.3d 20, 22 (5th Cir. 1997)).     We turn now to
25   Mr. Kornhauser’s issues regarding allowance of the claimed
26   exemption.
27        NRS 21.090(1)(bb)
28        Mr. Kornhauser asserts that under NRS 21.090(1)(bb),

                                       -9-
 1   Mr. Block’s exemption in the LEPI stock is limited to the amount
 2   claimed on his Initial Schedule C.      NRS 21.090(1)(bb) simply
 3   provides an exemption in “[s]tock of a corporation described in
 4   subsection 2 of NRS 78.746 except as set forth in that section.”
 5   NRS 78.746 provides the process pursuant to which a judgment
 6   creditor may obtain a charging order against stock held by a
 7   judgment debtor.   NRS 78.746 incorporates the provisions of
 8   NRS 78.747, which defines when a stockholder acts as the alter
 9   ego of a corporation and provides that “[t]he question of whether
10   a stockholder . . . acts as the alter ego of a corporation must
11   be determined by the court as a matter of law.”
12        Under Nevada law, exemption statutes must be liberally
13   construed in favor of debtors.    Christensen v. Pack, 149 P.3d 40,
14   43 (Nev. 2006).    However, in this case, there is nothing for us
15   to construe on this issue.   Notably, nothing in any of the
16   foregoing statutes provides any support to Mr. Kornhauser’s
17   position that NRS 21.090(1)(bb) somehow applies to limit
18   Mr. Block’s ability to amend his schedules to alter the amount of
19   the exemption he is claiming in his stock.
20        Schwab v. Reilly
21        Mr. Kornhauser asserts that under Schwab v. Reilly, 560 U.S.
22   770, 792-94 (2010), Mr. Block’s exemption in the LEPI stock is
23   limited to the amount claimed on the Initial Schedule C.      In
24   Schwab v. Reilly, the debtor scheduled “equipment” with a value
25   of $10,718 as a personal property asset on her Schedule B.      She
26   then claimed the full amount of that value exempt under § 522(d)
27   on her Schedule C, but using two exemptions, each of which
28   carried a dollar amount that statutorily could not be exceeded:

                                      -10-
 1   the tools of the trade exemption under § 522(b)(6) was limited to
 2   property within that category with an aggregate value not to
 3   exceed $1,850, and a “wildcard” exemption under § 522(b)(5)
 4   limited to property not to exceed $10,225 in value.    The debtor
 5   claimed the full $1,850 value under § 522(b)(6) and the balance
 6   of the $10,718 value of the equipment or $8,868 under
 7   § 522(b)(5).   The trustee did not object to the debtor’s
 8   exemptions claimed in the equipment.    The trustee did, however,
 9   seek permission from the bankruptcy court to auction the
10   equipment after obtaining an appraisal that showed that the value
11   of the equipment was $17,200.    The debtor opposed, asserting that
12   because she had equated the value of the exemptions with her
13   estimate of the market value of the equipment, she had put
14   creditors on notice of her intent to exempt the full value of the
15   exemptions, even if the value turned out to be more than she had
16   estimated.    The debtor asserted that the estate had forfeited its
17   right to any value that exceeded the amount of the claimed
18   exemptions because the trustee did not timely object to her
19   exemptions.    The Supreme Court determined that the trustee was
20   not required to object to the exemptions in order to preserve the
21   bankruptcy estate’s right to retain any value in the equipment
22   beyond the value of the claimed exempt interest.
23        Schwab v. Reilly does not support the proposition asserted
24   by Mr. Kornhauser in two important ways.    First, the exemption
25   provided by NRS 21.090(1)(bb) is not limited in amount.     Second,
26   and more importantly, nothing in Schwab v. Reilly suggests that
27   Mr. Block was not allowed to amend his Schedule C to change the
28   amount claimed exempt from $0.

                                      -11-
 1        Law v. Siegel
 2        In Law v. Siegel, the Supreme Court determined broadly that
 3   the Bankruptcy Code does not provide bankruptcy courts with a
 4   general, equitable power to deny exemptions based on a debtor’s
 5   bad faith conduct.    In Elliott v. Weil (In re Elliott), 523 B.R
 6   188, 194 (9th Cir. BAP 2014), this panel interpreted Law v.
 7   Siegel to instruct that bankruptcy courts “can no longer deny
 8   claimed exemptions or bar amendments to exemptions on the ground
 9   that the debtor acted in bad faith, when no statutory basis
10   exists for doing so.”    (Emphasis added.)
11        Mr. Kornhauser asserts that the bankruptcy court erred when
12   it applied Law v. Siegel in determining that it could not
13   preclude Mr. Block from asserting an exemption based on any bad
14   faith conduct, because the exemption at issue was claimed under
15   Nevada law, not under § 522(d).     “It is of course true that when
16   a debtor claims a state-created exemption, the exemption’s scope
17   is determined by state law, which may provide that certain types
18   of debtor misconduct warrant denial of the exemption.”     Law v.
19   Siegel, 134 S. Ct. at 1196-97 (italic emphasis in original; bold
20   emphasis added).     We observe that Mr. Kornhauser appears to have
21   overlooked our emphasized language from the Supreme Court quote.
22   As determined by the bankruptcy court, and as discussed above,
23   nothing in the Nevada statutory scheme appears to preclude a
24   claim of exemption under NRS 21.090(1)(bb) based upon bad faith
25   conduct of Mr. Block.
26        Mr. Kornhauser asserts that Nevada law equitably estops a
27   debtor with unclean hands from seeking the aid of a court to
28   claim an exemption, citing Las Vegas Fetish & Fantasy Halloween

                                       -12-
 1   Ball, Inc. v. Ahern Rentals, Inc., 182 P.3d 764, 766-67 (Nev.
 2   2008).   However, in Ahern Rentals, a case involving a contract
 3   dispute, the Nevada Supreme Court emphasized that the unclean
 4   hands doctrine is not a per se rule in Nevada.    Id. at 276.
 5        Mr. Kornhauser has cited no Nevada case which explicitly
 6   makes the unclean hands doctrine applicable to claims of
 7   exemption.   To the contrary, the Nevada Supreme Court has held in
 8   the exemption context that the plain language of the statute
 9   controls.    Weinstein v. Fox (In re Fox), 302 P.3d 1137, 1140
10   (Nev. 2013) (in construing exemption statute the court must
11   neither depart from the statutory language nor extend the
12   legislative grant).    Here, the language of NRS 21.090(1)(bb) does
13   not include any exception to the right to claim the exemption
14   based on the claimant’s “bad faith.”
15        Therefore, in light of Ahern Rentals and Fox, we determine
16   that equitable doctrines do not apply to limit claims to the
17   exemption allowed in NRS 21.090(1)(bb).
18        Alter ego
19        Mr. Kornhauser’s final issue on appeal is that the
20   bankruptcy court erred when it ruled that Mr. Block had not
21   waived the right to claim an exemption under NRS 21.090(1)(bb) in
22   the SNF stock by treating SNF as a limited liability company
23   rather than as a corporation.    We do not reach this issue.
24        In his opening brief, Mr. Kornhauser acknowledged that the
25   bankruptcy court had preserved his right and that of the trustee
26   to file and proceed with an adversary proceeding to determine
27   whether LEPI and SNF are alter egos of Mr. Block under
28   NRS 78.747, which would warrant disallowance in whole or in part

                                      -13-
 1   of Mr. Block’s claim of exemption in stock under
 2   NRS 21.090(1)(bb).   “Kornhauser does not object to, or appeal
 3   from, that portion of the Bankruptcy Court Decision.”   Opening
 4   Brief at 1:7-8.
 5                             VI.   CONCLUSION
 6        The bankruptcy court correctly determined that Mr. Block
 7   could amend his bankruptcy schedules as a matter of course to
 8   alter the value of the stock he claimed exempt under
 9   NRS 21.090(1)(bb).   Accordingly, the bankruptcy court did not err
10   when it determined that the amount of Mr. Block’s exemption was
11   not limited to $0.   Further, the bankruptcy court did not err
12   when it refused to preclude Mr. Block from claiming an exemption
13   greater than $0 in the stock where Law v. Siegel makes clear the
14   bankruptcy court has no general equitable authority to do so and
15   where Nevada state law does not so provide.
16        We AFFIRM the bankruptcy court’s order overruling the
17   Kornhauser Objection and the Trustee Objection.
18
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                                      -14-