In re: Wallace E. Block ( 2016 )


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  •                                                                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    1                         NOT FOR PUBLICATION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-