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You Can't Have That: Moving to Nevada and Claiming Exemptions

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There is no question that Nevada holds itself out as an attractive location for the wealthy. See, e.g., Jason C. Morris, Nevada: The Premier Asset Protection State, Northern Nevada Business Weekly, July 15, 2013. In addition to favorable trust laws and the absence of income tax, Nevada provides some of the most generous exemptions in the nation to protect assets from creditors. NRS 21.090. The exemptions often arise in bankruptcy, as the recent downturn showed even the wealthy can end up upside down. This article explores some issues that may arise when the wealthy move to Nevada, file for bankruptcy and claim Nevada’s exemptions.
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Can a wealthy debtor file for bankruptcy in Nevada?
Yes, a debtor can file, even though he is solvent. In re Lepe, 470 B.R. 851, 862 (9th Cir. B.A.P. 2012). Second, the absence of ties to Nevada does not prevent the filing of bankruptcy here, and proper venue is not required to file a case. See 11 USC § 301. In any event, one can create proper venue by making Nevada his residence, domicile, principal place of his business or the principal place of his assets. 28 USC § 1408. The definition of the “principal place of assets” was construed broadly in a recent decision, affirming the venue of a bankruptcy case filed in Nevada for a non-Nevadan. In re Blixseth, 484 B.R. 360 (9th Cir. B.A.P. 2012). Therein, the debtor’s assets were held indirectly through a Nevada entity, rather than directly in his name. Even though the underlying assets were not in Nevada, the courts held that the debtor’s primary assets actually were his ownership interest in the Nevada entity. Thus, the principal place of his assets was in Nevada, and the case was properly filed in Nevada.
Can a debtor assert Nevada’s exemptions?
Simply filing in Nevada does not assure a debtor of Nevada’s exemptions. A debtor must claim the exemptions of the state where he was domiciled for two years prior to filing for bankruptcy; if none, then the debtor looks to the 180 days prior to that period. 11 USC § 522(b)(3)(A). The two-year look-back provision was added in 2005, as Congress sought to prevent wealthy debtors from relocating in order to obtain more expansive exemptions in other states. See In re Kane, 336 B.R. 477, 481-85 (Bankr. D. Nev. 2006). If a potential debtor has not already moved to Nevada, he will probably have to wait at least two years if he wants to claim Nevada’s exemptions. In re Stanton, 457 B.R. 80, 85-87 (Bankr. D. Nev. 2011) (discussing intent associated with domicile, as well as the possibility of domicile based on ongoing residence with temporary absence from state).
“person,” which is further defined as including an “individual, partnership, and corporation.” 11 USC §§ 101(13), (41). Thus, the combined term of “individual debtor” means human beings, to the exclusion of other types of debtor persons, namely, partnerships and corporations. 9A Am. Jur.2d Bankruptcy § 1266 (1999). Thus, as a practical matter, human debtors can claim exemptions, but business entities cannot. In re Aston-Nevada L.P., 391 B.R. 84, 92 n.5 (Bankr. D. Nev. 2006) (dicta), vacated on other grounds, 409 Fed. Appx. 107 (9th Cir. 2010).
What can a debtor exempt as a vehicle?
Vehicles may not be the most valuable assets of a wealthy debtor, but their vehicles still may come with a substantial valuation. Nevada generally protects up to $15,000 in value in one vehicle per exemption, although joint debtors may “stack” their exemptions to protect $30,000 in a single vehicle. NRS 21.090(1)(f); In re Longmore, 273 B.R. 633 (Bankr. D. Nev. 2001). A starting point for determining the extent of a vehicle exemption is whether the debtor files for bankruptcy by himself, or jointly with a spouse. The effect of the choice is often minimal to a case in other ways, as all community property and debt comes into the bankruptcy estate. But
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Can he exempt assets from his businesses since “corporations are people?”
Given the residency restrictions on exemptions in bankruptcy, it seems plausible that a wealthy debtor might suggest a corporate filing to claim exemptions for his business. “Corporations are people” has become a catchphrase in recent years following the 2012 presidential elections and the U.S. Supreme Court’s decision on corporate campaign contributions. Citizens United v. FEC, 558 U.S. 310 (2010). But the concept also has been long recognized as a legal fiction. Lon L. Fuller, Legal Fictions (1967), cited by Partlow v. State, No. 1D10–5896, 2013 WL 45743 at *6, n.12 (Fla. App. Jan. 4, 2013).The real question is whether a corporation can claim exemptions. An “individual debtor” may exempt property of the bankruptcy estate. 11 USC § 522(b)(1). But “individual debtor” and “individual” are not defined terms. See 11 USC §§ 101, 522. To be sure, some circuits interpret “individual” to include corporations under other Bankruptcy Code provisions. In re Goodman, 991 F.2d 613, 619 (9th Cir. 1993) (citing cases). However, Ninth Circuit case law has not addressed this construction of “individual debtors” regarding exemptions, but it has adopted the majority position that “individual” is limited to “natural persons” under other bankruptcy statutes. See Goodman, 991 F.2d at 61920 (11 USC.§ 362(h)(1)); NLRB v. Better Bldg. Supply Corp., 837 F.2d 377, 378-79 (9th Cir. 1988) (11 USC § 727(a)(1)). A similar conclusion is reached through statutory construction. The definition of “debtor” includes
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property and debt comes into the bankruptcy estate. But the Nevada Supreme Court recently highlighted a negative consequence when one spouse files but the other does not: the debtor is limited to a single set of exemptions and cannot assert exemptions for the non-filing spouse. In re Fox, 129 Nev. A.O. 39, 302 P.3d 1137 (2013). Personal circumstances, however, still might warrant the protection of a second vehicle. For example, a debtor may assert a separate exemption for a vehicle equipped or modified to provide mobility for a dependent with a permanent disability. NRS 21.090(1)(p). This exemption is distinguishable from the standard vehicle exemption at issue in the prior decision from the Nevada Supreme Court, because statutory language explicitly permits a debtor to separately exempt a vehicle “for the use by … the judgment debtor’s dependent.” If the debtor provides evidence of his ownership of the vehicle and of a dependent’s permanent disability, the vehicle is completely
exempt. Longmore, supra; see Pro Nitro, LLC v. Pro Racing Fuels, LLC, No. 3:06–cv–00119– HDM–VPC, 2010 WL 3748750 (D. Nev. Sept. 20, 2010) (discussing ownership requirement to assert exemptions). Another recent decision suggests a possible hybrid basis for an unlimited vehicle exemption claim. Nevada’s vehicle exemption is not limited to a car, because “vehicle” is not defined in the exemption statutes. In re Alexander, 472 B.R. 815 (BAP 9th Cir. 2012). In that case, the Bankruptcy Court had cited Nevada’s other statutes as broadly defining “vehicle” such that it allows a vehicle exemption for a non-motorized trailer. And, on review, the appellate court also looked at the plain language meaning of “vehicle” as including “any conveyance used in transporting passengers or things by land, water or air.” Under this definition, “vehicle” could include a boat or a plane. However, the standard vehicle exemption would only provide $30,000 in protection if joint debtors stacked their exemptions, potentially a pittance compared to the value of a boat or plane owned by wealthy debtors. But, if the boat or plane was modified to provide mobility for a permanent disability, a combined reading of statutes and cases might result in a complete exemption of the boat or plane. While this unlimited exemption may be hypothetical, other creative arguments have been made to get around the $15,000 cap in the standard vehicle exemption. In a high profile case, the debtor sought to exempt a 1968 Shelby Mustang valued at $125,000, citing Nevada’s unlimited exemption for family keepsakes. NRS 21.090(1)(a); In re Molasky, Case No. 08-14517 (Bankr. D. Nev. 2012). The debtor claimed the vehicle had great sentimental value, because he had received a similar one from his father as a teenager. The Bankruptcy Court ruled that the vehicle was not a keepsake or exempt, because it was not the same one that he had received many years earlier from his father. In that case, the exemption failed as a factual matter, but that might not be the case involving debtors from generations of wealth who had actually inherited vehicles.
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homestead exemption here. If property owners divorce and one of them seeks to exempt Nevada property, the question of residence will be central. Compare In re Greene, 583 F.3d 614 (9th Cir. 2009) (discussing date of acquisition of property, without addressing whether debtor’s residence in tent constituted dwelling house for residence to claim exemption), aff’g & rev’g in part 346 B.R. 835 (Bankr. D. Nev. 2006).
What if the debtor is divorced?
The Nevada Supreme Court recently held that residence is a key requirement for claiming a homestead exemption. In re Nilsson, 129 Nev. Adv. Op. 101, 315 P.3d 966 (2013). Given the number of people owning second homes or investment property in Nevada, this ruling on residence may have significant implications on the availability of the
LOUIS M. BUBALA, III is a partner with Armstrong Teasdale LLP, advising clients on bankruptcy and other financial disputes in Reno and Las Vegas. He authors the Nevada section in the annual West’s Bankruptcy Exemption Manual.
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