ORDER ON OBJECTION TO DEBTOR'S CLAIMED EXEMPTIONS PURSUANT TO 11 U.S.C. § 522(l) AND FEDERAL RULE OF BANKRUPTCY PROCEDURE 40031
Honorable Mike K. Nakagawa, United States Bankruptcy Judge.
On August 15, 2018, the court heard the Objection to Debtor's Claimed Exemptions Pursuant to 11 U.S.C. § 522(l) and Federal Rule of Bankruptcy Procedure 4003 ("Objection") brought on behalf of Chapter 7 panel trustee, Shelley D. Krohn ("Trustee"). The appearances of counsel were noted on the record. After arguments were presented, the matter was taken under submission.
BACKGROUND
On May 10, 2018, a voluntary Chapter 7 bankruptcy petition was filed by Lou Shamoon Gagow ("Debtor") along with his schedules of assets and liabilities ("Schedules"), his statement of financial affairs ("SOFA"), and other required information. (ECF No. 1). On the same date, a notice of the Chapter 7 filing was issued scheduling a meeting of creditors for June 13, 2018, and notifying creditors of the Trustee's appointment. (ECF No. 7). On the Debtor's initial Schedule "A/B," Debtor listed cash in the amount of $25,000 ("Cash"), the source of which is identified as an "IRA Withdraw due to IRS levy." Debtor separately listed a "checking account ending #9309" in the amount of $508.91 maintained at Wells Fargo Bank ("WFB Checking Account"). Debtor also separately listed an "IRA ending 0412" in the amount of $95.00 maintained at Edward Jones ("Edward Jones IRA").2 Debtor further listed a 10% ownership interest in an entity identified as "4th Junction, LLC." He described the value of that ownership interest in 4th Junction, LLC ("LLC") as "Unknown."
On his initial Schedule "C," Debtor claimed the $25,000 in Cash as exempt under NRS 21.090(1)(r). He also claimed the amount in the WFB Checking Account as exempt under NRS 21.090(1)(g) and 21.090(1)(z). Debtor also claimed the amount in the Edward Jones IRA as exempt under NRS 21.090(1)(r). He also claimed the amount of $10,000 for the LLC as exempt under NRS 21.090(1)(d).
On July 11, 2018, Debtor filed an amended Schedule "C," in which he claimed an exemption of the Cash in the amount of $15,827.23 under NRS 21.090(1)(r), and an additional exemption of the Cash in the amount of $9,172.77 under NRS 21.090(1)(z). (ECF No. 23). No changes were made to the exemptions claimed for the WFB Checking Account, the Edward Jones IRA, and the LLC.
On July 13, 2018, the Trustee filed the instant Objection with respect to the Debtor's claimed exemptions in both the Cash and in the LLC. (ECF No. 24). The Objection is supported by the Declaration of Shelley D. Krohn ("Krohn Declaration"). (ECF No. 25).
On August 1, 2018, the Debtor filed a further amended Schedule "C" wherein he now claims an exemption in the Cash in the amount of $15,827.23 under NRS 21.090(1)(r), and an additional exemption of the Cash in the amount of $9,172.77 under NRS 21.090(1)(z) or in the alternative NRS 21.090(1)(r). (ECF No. 32). No changes were made to the exemptions claimed for the WFB Checking Account or the Edward Jones IRA. However, the Debtor's amended Schedule "C" also claims an exemption in an unknown amount for the LLC under NRS 21.090(1)(bb), instead of under NRS 21.090(1)(d). On the same date, the Debtor filed his Response in Opposition to Debtor's Claimed Exemptions Pursuant to 11 U.S.C. § 522(l) and Federal Rule of Bankruptcy Procedure 4003 ("Opposition"), along with the supporting Declaration of Lou Shamoon Gagow ("Gagow Declaration"). (ECF Nos. 33 and 34).
On August 8, 2018, the Trustee filed her Reply to Response in Opposition to Debtor's Claimed Exemptions Pursuant to 11 U.S.C. § 522(l) and Federal Rule of Bankruptcy Procedure 4003, along with the supporting Declaration of Jacob L. Houmand, Esq. ("Houmand Declaration"). (ECF Nos. 36 and 37).
On August 14, 2018, an Order of Discharge was entered. (ECF No. 39).
DISCUSSION
Exemptions are intended to preserve property interests essential for an individual to survive. An individual who is subject to collection proceedings is able to retain such essential items by claiming exemptions. See In re Bower, 234 B.R. 109, 112 (Bankr. D. Nev. 1999) ("The historical purpose of exemptions in Nevada is to protect a debtor by permitting him to retain the basic necessities of life so that he and his family will not be left destitute."). See also Weinstein v. Fox (In re Fox), 129 Nev. 377, 302 P.3d 1137, 1139 (2013) ("The legislative purpose of NRS 21.090 is `to secure to the debtor the necessary means of gaining a livelihood, while doing as little injury as possible to the creditor.'"). The list of items considered to be essential varies widely from state to state. See generally BANKRUPTCY EXEMPTION MANUAL, Appendix B (William Houston Brown, Lawrence R. Ahern III, and Nancy Fraas MacLean, eds., 2018 ed. update). When individuals file for bankruptcy protection, their property interests become property of their bankruptcy estate under Section 541(a). See Rousey v. Jacoway, 544 U.S. 320, 325-26, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005).
Section 522(b)(1) authorizes an individual debtor to exempt property of the bankruptcy estate. Section 522(d) sets forth a variety of specific exemptions that may be claimed in bankruptcy cases, but Section 522(b)(2) allows individual States to "opt out" of those exemptions so that their residents may claim only the exemptions provided under state law and non-bankruptcy federal law. Under NRS 21.090(3), Nevada has "opted out" of the federal bankruptcy exemptions. See Leavitt v. Alexander (In re Alexander), 472 B.R. 815, 821 (9th Cir. 2012).
Section 522(l) requires an individual debtor to file a list of the property he or she claims as exempt. FRBP 4003(a) requires the list to be included in the schedules of information that the debtor is required to file under Section 521(a)(1)(B)(i). Section 522(l) also specifically provides that "[u]nless a party in interest objects, the property claimed as exempt on such list is exempt." The official form on which the list of exempt property must appear is Schedule "C."
Under FRBP 4003(b)(1), a party in interest must object, if at all, to a debtor's claim of exemptions within 30 days after conclusion of the meeting of creditors. Failure to timely object bars any subsequent challenge to the validity of the claimed exemption, see Taylor v. Freeland & Kronz, 503 U.S. 638, 642, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992),3 except to the extent the debtor subsequently seeks relief under Section 522(f). See FED.R.BANKR.P. 4003(d).
Under FRBP 4003(c), the objecting party has the burden of proving that an exemption is not properly claimed. See, e.g., In re Mailatyar, 2018 WL 3814293, at *4 (Bankr. D. Ariz. Aug. 8, 2018) (sustaining and overruling objections to homestead claims for two separate residences). In Diener v. McBeth (In re Diener), 483 B.R. 196 (9th Cir. BAP 2012), the bankruptcy appellate panel for this circuit explained the allocations of the burdens of production and persuasion on an exemption objection as follows:
A claimed exemption is "`presumptively valid.'" Tyner v. Nicholson (In re Nicholson), 435 B.R. 622, 630 (9th Cir. BAP 2010)(citing Carter v. Anderson (In re Carter), 182 F.3d 1027, 1029 n. 3 (9th Cir.1999)). "[I]f a party in interest timely objects, `the objecting party has the burden of proving that the exemptions are not properly claimed.'" Id. (quoting Rule 4003(c)). Initially, this means that the objecting party has the burden of production and the burden of persuasion. In re Carter, 182 F.3d at 1029 n. 3. The objecting party must produce evidence to rebut the presumptively valid exemption. Id. Once rebutted, the burden of production then shifts to the debtor to come forward with unequivocal evidence that the exemption is proper. Id. The burden of persuasion, however, always remains with the objecting party. Id.
483 B.R. at 203.4 The standard of proof is by a preponderance of the evidence. See Leavitt v. Alexander (In re Alexander), 472 B.R. 815, 821 (9th Cir. BAP 2012).
In the present case, the meeting of creditors was concluded on June 13, 2018, and the Trustee timely filed the instant Objection. The Trustee maintains that none of the Nevada statutory provisions asserted by the Debtor support the exemptions claimed in the Cash and the LLC. For the reasons set forth below, the court agrees with the Trustee and will sustain the Objection.
1. The Cash.
Debtor attests that he withdrew funds from the Edward Jones IRA on February 13, 2018, and deposited the net amount of $21,906.64 into the WFB Checking Account. See Gagow Declaration at ¶ 6.5 See also Krohn Declaration at ¶ 10 and Exhibit "1" thereto. Debtor asserts that the Cash now sitting in the WFB Checking Account is exempt pursuant to NRS 21.090(1)(r)(1). That Nevada statute provides an exemption of:
money, not exceeding $1,000,000 in present value, held in: (1) an individual retirement arrangement which conforms with or is maintained pursuant to the applicable limitations and requirements of section 408 or 408A of the Internal Revenue Code, 26 U.S.C. §§ 408 and 408A, including, without limitation, an inherited individual retirement arrangement.
Nev.Rev.Stat. 21.090(1)(r) (emphasis added).6
Here, the Trustee does not object to the Debtor's exemption under NRS 21.090(1)(r) of the funds remaining in the Edward Jones IRA. The amount of $95.00 apparently is still held in that account, and no one questions whether the Edward Jones IRA complies with the applicable provisions of the Internal Revenue Code. Compare Rousey, 544 U.S. at 322-323, 125 S.Ct. 1561. Nor does any party in interest assert that if the Cash had not been withdrawn by the Debtor and was still held in the Edward Jones IRA, an objection would not have been asserted by the Trustee. Although the Debtor's explanation that the Cash resulted from an "IRA Withdraw due to IRS levy" raises more questions than it answers,7 no one forced him to engage in what might be described as "reverse exemption planning."8
In this instance, the Nevada statute expressly refers to money "held in" an individual retirement arrangement9 rather than to money "from" or "for" an individual retirement arrangement.10 Debtor maintains that the exemption of the retirement funds should not be lost simply because the funds have been accessed by the individual and are no longer held in the retirement account. See Opposition at 6:7 to 8:25. He repeatedly argues that exemptions in Nevada are "liberally and beneficially construed." Id. at 6:7-9, 8:24-25, and 10:10-11, citing, e.g., Jackman v. Nance, 109 Nev. 716, 718, 857 P.2d 7 (Nev. 1993). Debtor cites no decisions, however, by courts in Nevada or other jurisdictions interpreting NRS 21.090(1)(r) to apply to monies that are no longer held in an individual retirement account.11
While the Debtor's argument ignores the plain language of the statute,12 it also ignores that the Nevada legislature has made other exemptions available to protect the assets of a judgment debtor, including funds withdrawn from a retirement account as well as the proceeds of such funds. The purpose of allowing individuals to exempt retirement accounts and pension funds is to ensure that funds are "set aside for the day an individual stops working." Clark, 134 S.Ct. at 2246. Whether retirement occurs voluntarily or involuntarily, however, it does not come cheap and living expenses still must be met even though the debtor no longer has income from employment. Fortunately, the Nevada exemptions generally do not distinguish between individuals who are working and those who are not.13 Once an individual stops working, nothing prevents the debtor from using his retirement funds, not surprisingly, to pay his ordinary living expenses, or to acquire other exempt property.14 For example, a debtor can acquire a personal dwelling as a homestead or increase the equity in an existing dwelling that also would be subject to the $550,000 homestead exemption under NRS 115.010(2). Or, a debtor can acquire a vehicle or increase the equity in an existing vehicle that also would be subject to the $15,000 vehicle exemption under NRS 21.090(1)(f). Moreover, a Nevada debtor can rely on the recently increased "wildcard" exemption under NRS 21.090(1)(z) to protect up to $10,000 of cash withdrawn from a retirement arrangement, or any other interest in personal property.15 Under Nevada's generous exemption scheme, the prospect of a judgment creditor swooping down on any cash withdrawn from an individual retirement account is more apocryphal than real.16 It is even less realistic in a bankruptcy context when the individual debtor also would be protected from such acts by the discharge injunction.17 In the instant case, the Debtor received his discharge on August 14, 2018, and any funds he could have withdrawn from the Edward Jones IRA would not have been subject to execution by his creditors.18
Under these circumstances, the court concludes that the exemption provided by NRS 21.090(1)(r)(1) does not apply to the Cash that the Debtor withdrew from the Edward Jones IRA.
2. The LLC.
Debtor also attests that the LLC is a California limited liability company in which he holds a ten percent membership interest. See Gagow Declaration at ¶¶ 9 and 10; Krohn Declaration at ¶ 11 and Exhibit "2" thereto. He attests that the LLC no longer operates, but receives income from collection of contracts for prior services. Id. at ¶ 10. As receivables are collected, Debtor apparently receives "non-passive income" from the LLC. Id. at ¶¶ 11-13. Debtor asserts that the monies received from the LLC are exempt pursuant to NRS 21.090(1)(bb). That Nevada statute provides an exemption for "[s]tock of a corporation described in subsection 2 of NRS 78.746 except as set forth in that section." NRS 21.090(1)(bb) (emphasis added).
NRS 78.746 is part of Chapter 78 of the Nevada Revised Statutes that governs Private Corporations in the State of Nevada. NRS 78.030 through NRS 78.055 specify the requirements for the formation of a private corporation in Nevada. Under NRS 78.030(1 and 2), articles of incorporation must be filed with the Office of the Secretary of State of Nevada, and must contain the information specified in NRS 78.035. Under NRS 78.050(1), a corporation comes into existence only upon the filing of articles of incorporation pursuant to NRS 78.030.
NRS 78.745 through NRS 78.752 govern suits brought against private corporations, as well as their directors, officers, employees, agents, and stockholders. NRS 78.746 addresses actions by a judgment creditor of a stockholder to charge the stock of a private corporation for payment of an unsatisfied judgment. Subsection 2 of NRS 78.746 contains certain limitations on the execution of a judgment against the corporate stock held by the shareholder, but the provisions of part (c) of subsection 2 makes clear that the statute only applies to a corporation that (1) has fewer than 100 stockholders at any time, (2) is not publicly traded, and (3) is not a professional corporation. See Nev.Rev.Stat. 78.746(2)(c)(1, 2 and 3).
In this case, the LLC is not a corporation, but is a limited liability company. Limited liability companies have members, but not stockholders. In certain circumstances, limited liability companies may be treated as corporations, see, e.g., AE Rest. Assocs., LLC v. Giampietro (In re Giampietro), 317 B.R. 841 (Bankr. D. Nev. 2004) (application of corporate alter ego doctrine to limited liability company), but the formation and regulation of limited liability companies typically are governed by separate statutory provisions. See, e.g., NRS 86.011 through 86.590 [limited liability companies]. Because NRS 21.090(1)(bb) refers only to stock of a corporation described in Chapter 78 of the Nevada Revised Statutes, rather than a membership interest in a limited liability company described in Chapter 86 of the Nevada Revised Statutes, the Debtor's ten percent membership interest in the LLC is not encompassed by the language of the exemption statute.
Moreover, Chapter 78 of the Nevada Revised Statutes governs the formation of private corporations in the State of Nevada. There is no dispute that the LLC was formed in California, presumably in compliance with California law. Limited liability companies formed in another state are permitted to do business in Nevada, see Nev.Rev.Stat. 86.5463 and Nev.Rev.Stat. 86.5483, but are required to register with the Nevada Secretary of State and comply with the statutory requirements governing foreign limited liability companies. Likewise, corporations formed in another state are permitted to do business in Nevada, see Nev.Rev.Stat. 80.010 through Nev.Rev.Stat. 80.290, but also are required to register with the Nevada Secretary of State and comply with the statutory requirements governing foreign corporations.19 Permission to do business in Nevada, however, does not transform a foreign fictitious business entity into a Nevada entity. The express language of NRS 21.090(1)(bb) is limited to "stock of a corporation described in subsection 2 of NRS 78.746." That description only embodies corporations formed in Nevada.
Under these circumstances, the court is not persuaded by the Debtor that it should essentially re-write NRS 21.090(1)(bb) to apply to a limited liability company instead of a corporation, and to a California fictitious entity rather than a Nevada fictitious entity. As the circuit court observed in Gordon, see note 11, supra, "even a liberal construction [of an exemption] must find support in the statutory text."
Based on the foregoing, the court concludes that the Trustee has met her burden of proving that the exemption of the Cash under NRS 21.090(1)(r)(1) is not properly claimed. Additionally, the Trustee has met her burden of proving that the exemption of the LLC under NRS 21.090(1)(bb) is not properly claimed. To the extent that any portion of the wildcard under NRS 21.090(1)(z) remains available, however, the Debtor may claim that portion with respect to the Cash or the LLC.20
IT IS THEREFORE ORDERED that the Objection to Debtor's Claimed Exemptions Pursuant to 11 U.S.C. § 522(l) and Federal Rule of Bankruptcy Procedure 4003, brought by Shelley D. Krohn, Docket No. 24, be, and the same hereby is, SUSTAINED.
IT IS FURTHER ORDERED that the Debtor's above-described claim of exemption to Cash in the amount of $25,000 as well as his claim of exemption to the ten percent ownership interest in 4th Junction, LLC, is limited to any remaining amounts available under NRS 21.090(1)(z).