Bankruptcy

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7^th Circuit Court of Appeals

Case Name: Scott Smith v. Gregory Kleynerman

Case No.: 22-2947

Officials: Easterbrook, Wood, and Kirsch, Circuit Judges.

Focus: Bankruptcy

The matter stems from a dispute following the dissolution of a business partnership between Gregory Kleynerman and Scott Smith. This dissolution led to Smith securing a state court judgment of $499,000 against Kleynerman, backed by Kleynerman’s membership interest in Red Flag Cargo Security Systems LLC. Subsequently, Kleynerman filed for bankruptcy, asserting his interest in Red Flag as having no value.

Smith contended in bankruptcy court that the state court judgment was a product of Kleynerman’s fraud and thus ineligible for discharge. However, this argument was rejected by the bankruptcy court. After the bankruptcy proceedings concluded, Kleynerman sought to have the state court recognize the discharge of the $499,000 judgment. Smith countered, citing Wisconsin law, which allows avoidance only for debts secured by real property. The state court sided with Smith, prompting Kleynerman to petition the bankruptcy court to reopen the case and explicitly declare the nullification of both the $499,000 debt and the lien on Kleynerman’s Red Flag interest.

Upon reopening, the bankruptcy court ruled in Kleynerman’s favor, a decision upheld by the district court. The appellate court affirmed these rulings, affirming the bankruptcy judge’s authority to reopen the case and acknowledging Kleynerman’s grounds for doing so. Additionally, the court emphasized that the valuation of Kleynerman’s interest in Red Flag was within the bankruptcy judge’s purview before discharge. Smith’s failure to contest Kleynerman’s valuation in a timely manner precluded his later objections. The court deemed Smith’s post-discharge inquiries into the value of Kleynerman’s Red Flag interest as harassment, rightfully dismissed by the bankruptcy judge. Consequently, the lower courts’ decisions were upheld.

Affirmed.

Decided 02/27/24

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