40 F.4th 779
7th Cir.2022Background:
- Douglas A. Kelley, the liquidating trustee for Petters Company, obtained a $578,366,822 default bankruptcy judgment against Capital Strategies Fund, Ltd., which later dissolved.
- Trustee filed post-judgment supplementary proceedings in the N.D. Ill. under diversity against Capital Strategies’ director/manager Steven Stevanovich to collect $1,948,670.79 alleged embezzled from Capital Strategies.
- Evidence: vendor affidavit and records showing orders placed by Stevanovich, invoices to him, and payments from Capital Strategies’ accounts; shipments to Stevanovich’s personal wine cellar in Switzerland; Stevanovich’s earlier deposition denying recollection.
- Stevanovich later submitted an affidavit claiming the purchases were for the sole investor and that the wine was transferred to a related vehicle (TGG Capital) and sold at auction; documentary support was limited and partly contradicted earlier testimony.
- The district court, without an evidentiary hearing, applied Illinois supplementary-proceeding law (seven-year limitations), found by a preponderance that Stevanovich embezzled Capital Strategies’ funds for personal use, and ordered turnover of $1,948,670.79.
- Stevanovich appealed, arguing the statute of limitations, denial of a hearing, standard of proof, misapplication of Illinois embezzlement law, and insufficiency of evidence; the Seventh Circuit affirmed.
Issues:
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Stevanovich) | Held |
|---|---|---|---|
| Statute of limitations: which period governs supplementary proceedings | Seven-year period for enforcing judgments controls; Trustee’s 2018 action timely | Five-year limitations for underlying embezzlement should apply, so claim time-barred | Seven-year supplementary-proceeding limitations apply (Dexia governs); action timely |
| Evidentiary hearing: required before ruling on turnover | Hearing not required where no material factual dispute or affidavit is sham/uncorroborated | Rule 277/equipment and Illinois cases require a hearing before turnover | No abuse of discretion denying hearing; Dowling does not mandate one and record lacked disputes warranting a hearing |
| Standard of proof for embezzlement in turnover | Preponderance of the evidence (default civil standard) suffices | Clear and convincing required based on older Supreme Court turnover precedents (Maggio/Oriel) | Preponderance applies; Grogan’s default civil standard governs |
| Application of Illinois embezzlement law (elements) | Elements satisfied: special relationship, conversion for personal use, intent to embezzle | Purchases were an open investment for the sole investor; no concealment or intent to steal | Court correctly applied Illinois law and reasonably inferred conversion and intent from the record |
| Sufficiency of evidence | Vendor records, payment traces, shipments to personal cellar, and deposition inconsistencies prove embezzlement | Affidavit and escrow/wire documents show transactions were for investor and transfers to TGG Capital; evidence creates factual dispute | Evidence sufficient by preponderance; Stevanovich’s affidavit lacked corroboration and contradicted prior sworn testimony |
Key Cases Cited
- Dexia Credit Local v. Rogan, 629 F.3d 612 (7th Cir. 2010) (supplementary proceedings governed by judgment-enforcement limitations statute)
- Resolution Trust Corp. v. Ruggiero, 994 F.2d 1221 (7th Cir. 1993) (Rule 69 gives federal courts some procedural discretion in supplementary proceedings)
- Star Ins. Co. v. Risk Mktg. Grp. Inc., 561 F.3d 656 (7th Cir. 2009) (Rule 69 requires adopting state procedure absent controlling federal statute)
- Bank of Am., N.A. v. Veluchamy, 643 F.3d 185 (7th Cir. 2011) (Illinois supplementary law grants broad enforcement options to courts)
- Grogan v. Garner, 498 U.S. 279 (1991) (preponderance is the default civil standard of proof unless statute or Constitution requires higher)
- Dowling v. Chicago Options Assocs., Inc., 875 N.E.2d 1012 (Ill. 2007) (absence of evidentiary hearing in turnover affects standard of review but is not per se reversible)
- Perez v. Staples Contr. & Com. LLC, 31 F.4th 560 (7th Cir. 2022) (sham-affidavit rule bars creating a genuine fact issue by contradicting prior sworn testimony)
- James v. Hale, 959 F.3d 307 (7th Cir. 2020) (explaining the sham-affidavit principle)
- Maggio v. Zeitz, 333 U.S. 56 (1948) (older turnover precedent applying clear-and-convincing standard; discussed and not followed here)
- Oriel v. Russell, 278 U.S. 358 (1929) (older turnover precedent cited on standard of proof)