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Summarizing by Shane Ramsey


Case Type:
Case Status:
21-2850 (7th Circuit, Jul 21,2022) Published
Years after Douglas Kelley (TR), liquidating trustee for Petters Company, Inc.,, secured a default judgment against Capital Strategies Fund, Ltd. (CS), a recipient of funds from the “infamous” multibillion-dollar Petters Ponzi Scheme, the U.S. Court of Appeals for the Seventh Circuit (Circuit) affirmed the turnover, granted by the U.S. District Court for the Northern District of Illinois (DC) on the briefs, of $1,948,670.79 from Steven Stevanovich, CS’ director and investment manager, to the TR under an Illinois law embezzlement theory due to his buying of wine for personal use with CS funds.
Procedural context:
In 2018, to enforce a default judgment against CS, solely led by Stevanovich (Stevanovich) during the relevant time period, after its dissolution, the TR turned to Stevanovich, an Illinois resident, and filed a post-judgment supplementary proceeding in the DC under its diversity jurisdiction. The TR had ample statutory basis for this action. Under Illinois law, applicable pursuant to Federal Rule of Civil Procedure 69, a judgment creditor may recover assets from a third party if the judgment debtor has an Illinois state law claim of embezzlement against the third party; thus, the TR could recover the full amount Stevanovich owed if CS had a valid embezzlement claim against Stevanovich. Additionally, Illinois Supreme Court Rule 277(a) allowed the Trustee to initiate proceedings against the third-party Stevanovich directly. In accordance with this law, in his turnover motion, the TR argued that Stevanovich embezzled CS funds to purchase high-end wine for his personal use and transferred the goods to Stevanovich’s personal wine cellar in Switzerland, a claim supported by "ample evidence." Notably, during Stevanovich's 2018 deposition in connection with the BC case, the Trustee asked Stevanovich about these purchases, but denied any memory of the vendor or purchases despite the TR's attempts at reviving his recollection. In his response to the turnover motion, Stevanovich relied "heavily" on his own affidavit providing a detailed recount of the same wine purchases "he could not recall just a year before." In reply, the TR questioned the veracity of Stevanovich's affidavit but suggested that a hearing could resolve any factual issues. Whether wisely or not, Stevanovich himself never requested a hearing or explained to what extent, if any, he would bring additional evidence in support of his affidavit; instead, he asked to be excused from ever attending future hearings or making appearances and filed a sur-reply arguing that no material factual dispute existed. Ruling on the evidence before it without conducting a hearing, the DC granted the TR's motion. Later, it denied Stevanovich's motion to vacate this ruling. Stevanovich appealed the former, but not the latter. In so doing, Stevanovich claimed the DC erred when it: (1) found the TR's claim to be timely; (2) ruled on the TR's motion without holding an evidentiary hearing; (3) used the preponderance of the evidence standard of proof for embezzlement, an argument partly predicated on excavating endorsement for a higher evidentiary standard (clear and convincing) from pre-Code case law; (4) applied Illinois embezzlement law; and (5) found the evidence sufficient to rule for the TR. It would in dispensing with Stevanovich's third argument that the Circuit would endorse use of the preponderance of evidence standard for turnover based on an embezzlement theory under both Illinois and federal bankruptcy law. After all, "[t]hough this case concern[ed] a turnover order in a state law supplementary proceeding, the balance of interests between the parties remains the same as with federal bankruptcy proceedings," in theory (and in dicta), if not in instant relevance.
In the 2000s, CS, with Stevanovich as its sole director, held tens to hundreds of millions of dollars belonging to a sole investor. CS invested in the multi-billion-dollar Petters Ponzi scheme, one orchestrated by Petters Company, Inc. (PC), but got out before the scheme collapsed in 2008, having seemingly earned tens of millions on its investments. To level the field, the U.S. Bankruptcy Court for the District of Minnesota (BC) presiding over PC's liquidation empowered the TR to recover funds from investors like CS who had arguably profited from the scheme at the expense of other investors. In 2015, in one such case, the BC granted a large default judgment against CS. By the time the TR attempted to use these powers against CS, however, it had dissolved.
Amy J. St. Eve; Michael B. Brennan; and Michael Y. Scudder

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