In re Kleynerman

• Decision Date: 25 May 2020
• Docket Number: Case No. 18-26659-beh
• Citation: 617 B.R. 122
• Parties: IN RE: Gregory KLEYNERMAN, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

617 B.R. 122

IN RE: Gregory KLEYNERMAN, Debtor.

Case No. 18-26659-beh

United States Bankruptcy Court, E.D. Wisconsin.

Signed May 25, 2020

Mark L. Metz, Leverson Lucey & Metz S.C., Milwaukee, WI, for Debtor.

Steven R. McDonald, Oak Creek, WI, for Trustee.

DECISION AND ORDER DENYING CREDITOR'S MOTION FOR RULE 2004 EXAMINATION

Beth E. Hanan, United States Bankruptcy Judge

A creditor urges that he is "just seeking transparency" but a Rule 2004 examination is not a window to the world, or for all time. Here, the creditor—a former business partner and now disappointed state court litigant—wants to examine the debtor, two of debtor's new business partners, a major creditor of debtor, a federal agency, and one of its employees about a contract having nothing to do with a business that movant shared with debtor eleven years ago. For the reasons set forth below, the motion will be denied.

FACTS

Creditor Scott Smith seeks to conduct Rule 2004 examinations of the debtor, Gregory Kleynerman, two co-owners of the debtor's company, Red Flag LLC, James Kniestedt and Gregory Grinberg, a major secured creditor of the debtor, Bruce Glaser, the U.S. Customs and Border Protection (Department of Homeland Security), and one of its employees, Gary Orr. Smith seeks these examinations to investigate the circumstances surrounding Red Flag, LLC receiving a government contract, the award of which occurred between Kleynerman's petition date and his discharge date. Smith asserts that this award may lead to (1) a possible action to revoke Kleynerman's discharge under 11 U.S.C. § 727(d) and (2) a possible action for the Chapter 7 case trustee to revoke his April 2019 abandonment of Kleynerman's ownership interest in Red Flag LLC.

Kleynerman and the other two co-owners of Red Flag filed a joint objection, and secured creditor Bruce Glaser filed an objection. They each cite multiple bases to oppose the Rule 2004 examination. The Court set a hearing on the motion for April 20, 2020 but adjourned it until May 18, 2020 because Smith had not served the governmental targets properly. Thereafter, the governmental targets were served properly but did not respond. The Court held the hearing on May 18 and then took the matter under advisement.

Background

Smith and Kleynerman have a long history; ultimately it is not a happy one. Beginning in 2002, they operated a business together—Alpha Cargo Technology, LLC (ACT)—supplying cargo security seals for shipping containers. In 2007, Smith's wife was diagnosed with a terminal illness, and ultimately passed away. Smith stepped back from the business. In 2009, he sold his interest in assets of ACT to Kleynerman, who joined forces with Bruce Glaser and Greg Grinberg to form a new company, Red Flag.

At some point, Smith came to dispute details of this chain of events and sued Kleynerman. He sued in state court for intentional misrepresentation and breach of fiduciary duty. He did not prevail on the former but prevailed on the latter (the jury also awarded punitive damages on the former, which the judge struck on motions after). He obtained a judgment of $499,000.00. Smith also did not prevail on his allegation that he was incompetent when he signed the sale transaction documents. Smith pursued an appeal of the misrepresentation verdict,¹ but lost. Smith v. Kleynerman , 370 Wis. 2d 786, 882 N.W.2d 870 (Ct. App. 2016) (per curiam) (unpublished).

Primarily because of Smith's judgment against him for breach of fiduciary duty, Kleynerman filed for Chapter 7 bankruptcy on July 9, 2018. See ECF Claim Nos. 1-1 and 2-1 (totaling $586,369). Kleynerman filed his bankruptcy schedules identifying his 51% ownership in Red Flag as an asset, and liabilities resulting from business loans owed to Bruce Glaser, totaling $1,177,274² , and owed to Red Flag, totaling $300,000. ECF Doc. No. 9, at 6, 17, and 18 (respectively). Glaser filed a claim in the bankruptcy case, asserting a debt owed for $450,927.57. See ECF Claim No. 3-1.

On October 9, 2018, Smith filed an adversary proceeding, alleging that the judgment debt owed to him should be non-dischargeable under 11 U.S.C. § 523(a)(4) as a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny." See Smith v. Kleynerman , Case No. 18-02220, AP-ECF Doc. No. 1 at 6–7. After ruling on motions in limine ,³ the Court held a trial on March 18, 2019. At the conclusion of Smith's presentation, Kleynerman moved for judgment on the pleadings and the Court dismissed Smith's case. Smith v. Kleynerman , Case No. 18-02220, AP-ECF Doc. No. 30. Smith appealed that judgment, but the U.S. District Court dismissed his appeal on May 14, 2019. Smith v. Kleynerman , Case No. 18-02220, AP-ECF Doc. No. 35.

The Rule 2004 Motion

Over three months after the adversary proceeding case was closed and Kleynerman received his Chapter 7 discharge, but before the bankruptcy case was closed, Smith brought the instant Rule 2004 motion. The motion failed to specify the types of documents requested, beyond the following description:

[T]he documents and testimony that Smith is seeking via the subpoenas relate directly to, among other things: (a) the debtor's assets, property, liabilities, and financial conditions (i.e. the value of Red Flag and the Red Flag equity interest, including the scope and nature of claims against it) and (b) the Debtor's right to a discharge (while the discharge has been granted, the Trustee and parties in interest have one year to seek to revoke the discharge).

ECF Doc. No. 52, at 12.

Accompanying the motion, Smith filed his own declaration, which purports to recite some business history of ACT and of Red Flag. Id. , at Exhibit B. Pertinent for the Court's discussion are the following statements:

1. I was a founder and 50% owner of Alpha Cargo Technology LLC ("ACT"), the business now operated by Red Flag Cargo Security Systems LLC ("Red Flag").

...

3. Based on my historical knowledge of ACT n/k/a Red Flag, the business generates an average profit margin in the range of approximately 60% on the upper end and 45% on the lowest end. The profit margin depends on numerous factors, including, amongst others, whether materials are purchased overseas and re-sold, or if they are manufactured locally, and if so, the location of manufacturing.

4. With respect to the government contract with U.S. Customs & Border Protection/Homeland Security awarded to Red Flag (the "Government Contract"), based on the short time frame between the posting of the opportunity (on August 31, 2018) and the award being granted (September 28, 2018), it appears that Red Flag likely may have known about the likely award well before it was officially posted (even potentially prior to the Petition Date)... Given the volume of product the government requested, it would have been seemingly difficult for Red Flag to fulfill the ... order in a timely fashion... if Red Flag had not already known about the contract and proactively started preparing to fulfill orders...

Id. Smith's motion also included a declaration of Paul Rodrigues, who is a senior director of The BERO Group. Id. , at Exhibit C. The declaration states that Rodrigues is a CPA, certified in financial forensics. Rodrigues purports to value Red Flag, LLC, using figures that Kleynerman disclosed in his Statement of Financial Affairs, information from the September 28, 2018 government contract, other data regarding Red Flag's imports, and documents that he previously prepared for Smith in the state court proceedings.

As support for their objections to Smith's motions, Kleynerman, Kniestedt and Grinberg filed declarations attesting that they did not know, prior to September 28, 2018, that the government contract would be awarded to Red Flag. ECF Doc. Nos. 62-1, 62-2, 62-3. They assert that one of the advantages Red Flag had in the bidding process for the contract was its status as a "HUBZone-certified" business, a status to which the federal government gives preferential consideration. Id. The declarants also testified that the seals Red Flag is supplying to the government under this contract are based on technology that is different from that described in the patents that ACT sold to Red Flag in 2009. Id. Red Flag received its first payment under the contract on March 12, 2019. Id.

Kleynerman's counsel filed declarations describing multiple contacts with the Chapter 7 Trustee between June 18, 2019 and September 2019 regarding Red Flag and the debtor's membership interest therein, including limitations on its marketability, and confidentiality of information. ECF Doc. Nos. 62-4, 68.

Just before the original hearing date on this motion, Smith filed a supplement, responding to the targets' objections that Smith failed to identify specific documents or information sought, and providing a list of 25 different categories of documents he seeks. ECF Doc. No. 70. The list includes an array of financial documents sought from both the debtor, and third-party Red Flag LLC and its investors or co-owners:

Entire native QuickBooks files for Red Flag; all tax returns from 2015 through 2018 for both Red Flag and Kleynerman individually; all tax forms issued by Red Flag to its owners, or received by its owners from Red Flag, including, without limitation, W-2 and K1 forms; all financial statements for Red Flag for 2015 through 2018; all government contracts awarded to Red Flag from 2017 through the present; all documents, including any applications, related to any government contract awarded to Red Flag from 2017 through the present; W-2s for all Red Flag employees from 2015 through 2018; 1099s for all Red Flag contractors from 2015 through 2018; all documents, including security agreements, related to any loan from Glaser to Red Flag; all documents, including security agreements, related to any loan from Glaser to an individual, other than the Debtor, or entity, other than Red Flag, which is secured by Red Flag assets; all patents currently owned by, previously owned by, or

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