Court Opinion

ID: 9945480
Source: CourtListenerOpinion
Date Created: 2024-02-27 21:01:22.800066+00
Date Added: 2024-06-11T14:25:30.340318
License: Public Domain

In the
    United States Court of Appeals
                For the Seventh Circuit
                    ____________________

No. 22-2947
IN THE MATTER OF:
       GREGORY KLEYNERMAN,
                                                           Debtor.
APPEAL OF:
     SCOTT SMITH
                    ____________________

           Appeal from the United States District Court
                for the Eastern District of Wisconsin.
           No. 22-CV-162-JPS — J.P. Stadtmueller, Judge.
                    ____________________

 ARGUED SEPTEMBER 19, 2023 — DECIDED FEBRUARY 27, 2024
                ____________________

   Before EASTERBROOK, WOOD, and KIRSCH, Circuit Judges.
   EASTERBROOK, Circuit Judge. Gregory Kleynerman and
ScoG Smith fell out, and their business dissolved in acrimony.
Smith sued Kleynerman in Wisconsin and obtained a judg-
ment of $499,000, which the state’s judiciary provided would
be secured by his membership interest in Red Flag Cargo Se-
curity Systems LLC. Kleynerman then ﬁled for bankruptcy.
   Smith contended in the bankruptcy that the state court’s
judgment reﬂected Kleynerman’s fraud and so could not be
2                                                     No. 22-2947

discharged. 11 U.S.C. §523(a)(4). The bankruptcy court re-
jected that contention. For his part, Kleynerman valued his in-
terest in Red Flag at $0 and invoked an exemption for prop-
erty worth $15,000 or less. (This state-law exemption, Wis.
Stat. §815.18(3)(b), is incorporated into federal bankruptcy
law by 11 U.S.C. §522(b)(3)(A).) Having lost his argument that
Kleynerman had commiGed fraud, Smith did not object either
to the $0 valuation or the discharge.
    Smith was not done, however. When Kleynerman asked
the state court to deem the $499,000 judgment discharged,
Smith contended that, under Wis. Stat. §806.19(4), only debts
secured by real property can be avoided. The state’s judiciary
agreed with Smith, which led Kleynerman to ask the bank-
ruptcy court to reopen the case and provide expressly that
both the $499,000 debt and the lien on Kleynerman’s interest
in Red Flag no longer exist.
   The bankruptcy court obliged, 638 B.R. 111 (Bankr. E.D.
Wis. 2022), and the district court aﬃrmed, 647 B.R. 196 (E.D.
Wis. 2022). Security interests and other liens often pass
through bankruptcy unaﬀected, see Johnson v. Home State
Bank, 501 U.S. 78, 83 (1991), but there are exceptions—among
them one for assets exempt from execution. The eﬀect of an
exemption is a maGer of federal rather than state law. Kleyn-
erman claimed an exemption; the Trustee agreed with that $0
valuation and abandoned the asset as worthless; Smith did
not argue otherwise before the discharge was entered.
   Under the Bankruptcy Code, “the debtor may avoid the
ﬁxing of a lien on an interest of the debtor in property to the
extent that such lien impairs an exemption to which the
debtor would have been entitled under subsection (b) of this
section, if such lien is—(A) a judicial lien, other than a judicial
No. 22-2947                                                     3

lien that secures a debt of a kind that is speciﬁed in section
523(a)(5)”. 11 U.S.C. §522(f)(1). The bankruptcy judge con-
cluded that Smith’s interest was a “judicial lien” that could be
avoided because enforcing it would impair Kleynerman’s ex-
emption, and the lien was not “a kind that is speciﬁed in sec-
tion 523(a)(5)” (which deals with domestic-support obliga-
tions). That’s straightforward—if Red Flag really was worth
less than $15,000 when Kleynerman ﬁled for bankruptcy.
(During the bankruptcy proceedings Red Flag landed a big
contract and may be worth a good deal today, but the ﬁling
date is the time for valuation of an asset claimed as exempt.)
    Smith’s lead argument on appeal is that the bankruptcy
judge should not have reopened the proceeding to entertain
Kleynerman’s request. Yet the bankruptcy judge had author-
ity: “A case may be reopened in the court in which such case
was closed to administer assets, to accord relief to the debtor,
or for other cause.” 11 U.S.C. §350(b). All the court needed
was “cause”, which the state judiciary’s decision supplied. A
debtor who has cause for reopening cannot dilly-dally, but
Kleynerman sought reopening 70 days after the discharge’s
entry and 36 days after the state judge’s post-discharge deci-
sion. Smith has not cited any case deeming 70 days too long.
A court should exercise discretion under §350(b) without
causing needless prejudice to anyone, and the bankruptcy
judge ordered Kleynerman to pay the legal costs that Smith
had incurred in the post-discharge litigation in state court, so
that Smith would not suﬀer prejudice from the absence of an
express §522(f) clause in the original discharge. Our opinion
in Redmond v. Fifth Third Bank, 624 F.3d 793 (7th Cir. 2010), cat-
alogs these and other things for a bankruptcy judge to con-
sider. None was overlooked. Like the district judge we
4                                                  No. 22-2947

conclude that the bankruptcy judge did not abuse her discre-
tion in reopening.
    Smith’s other appellate contention is that the bankruptcy
judge refused to entertain his argument that Kleynerman’s in-
terest was worth more than $15,000. No one doubts that a
bankruptcy judge must listen to such an argument. See Fed.
R. Bankr. P. 4003(d). But when must the bankruptcy judge en-
tertain it? The bankruptcy judge and district judge thought
that the right time is before the discharge, not afterward, and
we agree with that conclusion (with a qualiﬁcation below).
Rule 4003(b)(1) requires a party in interest to object to a
claimed exemption within 30 days of the meeting of creditors.
That meeting occurred on October 4, 2018, giving Smith until
November 3 to object (unless he sought an extension under
the terms of the Rule, as he did not). But Smith did not object
then or at any other time before the bankruptcy court entered
its discharge order on December 12, 2019. Nor did he seek ad-
ditional information to facilitate an objection.
    Rule 4003(d), which applies to proceedings under §522(f)
to avoid liens, does not have a separate time limit. That leaves
timing to the discretion of the bankruptcy judge. See In re
Schoonover, 331 F.3d 575 (7th Cir. 2003). Schoonover rejects an
argument that lienholders are subject to the same time limit
as other creditors under Rule 4003(b). But bankruptcy judges
can set and enforce time limits under Fed. R. Bankr. P. 9014.
    During the main bankruptcy proceedings Smith tried and
failed to persuade the judge that the $499,000 was not dis-
chargeable. After that he was quiescent until the discharge.
Smith next mounted an argument in state court. In February
2020, after the discharge had been entered, Smith sought per-
mission from the bankruptcy judge to issue extensive
No. 22-2947                                                     5

subpoenas that would (Smith said) yield information about
the value of Kleynerman’s interest in Red Flag. The bank-
ruptcy judge deemed this a ﬁshing expedition—worse, an ex-
ercise in harassment—and denied the requests. The district
court concluded that this was not an abuse of discretion, and
again we agree. It was too much, too late. Carefully targeted
requests might have been appropriate, given the diﬀerence
between Rule 4003(b) and Rule 4003(d), but Smith’s blunder-
buss requests were anything but carefully targeted.
    Before the discharge, Smith knew that Kleynerman had re-
ceived about $600,000 in income from Red Flag during 2016
and 2017, plus another $51,000 in 2018 before the bankruptcy
began. These numbers were disclosed in Kleynerman’s own
schedules. Smith also had the ﬁnancial statements for Alpha
Cargo, the predecessor to Red Flag that ran the business when
Kleynerman and Smith were on speaking terms. Smith could
have used this information to contest Kleynerman’s assertion
that his interest in Red Flag was worth less than $15,000. If the
bankruptcy judge had determined, in response to such an ar-
gument, that Smith needed more information, he could have
proposed subpoenas then and there—and, if the bankruptcy
judge said no, Smith could have appealed to the district court
(from the ﬁnal decision) and ultimately to us. But he did none
of this. He put all of his eggs in one basket (the fraud objection
to discharge) and let the valuation of Red Flag pass without
objection. That left only Kleynerman’s assessment, which the
bankruptcy judge was entitled to accept, plus the blunderbuss
post-discharge subpoenas, which were properly rejected.
                                                       AFFIRMED