Kelley v. Stevanovich

• Decision Date: 21 July 2022
• Docket Number: 21-2850
• Parties: Douglas A. KELLEY, Plaintiff-Appellee, v. Steven STEVANOVICH, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

40 F.4th 779

Douglas A. KELLEY, Plaintiff-Appellee,

v.Steven STEVANOVICH, Defendant-Appellant.

No. 21-2850

United States Court of Appeals, Seventh Circuit.

Argued May 26, 2022

Decided July 21, 2022

Sean S. Buckley, Adam Lavine, Igor Margulyan, Attorneys, Kobre & Kim LLP, New York, NY, for Plaintiff-Appellee.

Sarah Riedl, Attorney, Gordon Rees Scully Mansukhani, LLP, Chicago, IL, for Defendant-Appellant.

Before Brennan, Scudder, and St. Eve, Circuit Judges.

St. Eve, Circuit Judge.

This case concerns high-end wine and spirits purchased with funds linked to the now infamous multi-billion-dollar Petters Ponzi Scheme. In 2015, a bankruptcy court in the District Court of Minnesota entered a $578,366,822 default judgment for Douglas A. Kelley—the liquidating trustee for Petters Company, Inc.—against Capital Strategies Fund, Ltd. ("Capital Strategies"), a recipient of the scheme's funds. In 2018, Kelley ("the Trustee") initiated post-judgment supplementary proceedings in the Northern District of Illinois against Capital Strategies' director and investment manager, Steven Stevanovich, to enforce the judgment against Capital Strategies. The Trustee claimed Stevanovich owed Capital Strategies $1,948,670.79 under an Illinois state law theory of embezzlement. The Trustee presented evidence that Stevanovich used Capital Strategies' assets to purchase wine for his personal use. The district court agreed. It granted the Trustee's motion for a turnover order on the briefs, without conducting an evidentiary hearing, and found by a pre-ponderance of the evidence that Stevanovich embezzled the funds. Because Stevanovich owed Capital Strategies, and Capital Strategies owed the Trustee, the Trustee could step into Capital Strategies' shoes and collect Stevanovich's debt.

On appeal, Stevanovich alleges a series of errors, challenging the district court's application of procedural and substantive law. We find no error and affirm.

I. Background

In the 2000s, Capital Strategies held tens to hundreds of millions of dollars belonging to a sole investor, with Stevanovich at the helm as its sole director. Capital Strategies invested in the multi-billion-dollar Petters Ponzi scheme and got out before the scheme collapsed in 2008. While some investors lost everything, Capital Strategies seemingly benefited and earned tens of millions on its investments. To level the field, the Bankruptcy Code empowers the Trustee to recover funds from investors like Capital Strategies, who otherwise would profit from the scheme at the expense of other investors. By the time the Trustee attempted to use these powers against Capital Strategies, it had dissolved; the Trustee had a large money judgment against an entity that no longer existed. To enforce the judgment, the Trustee turned to Stevanovich, an Illinois resident, and filed a post-judgment supplementary proceeding in the Northern District of Illinois under the court's diversity jurisdiction. See 28 U.S.C. § 1332.

Federal Rule of Civil Procedure 69 instructs courts to apply state law in post-judgment proceedings. Under Illinois law, 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.

735 ILCS 5/2-1402(c)(3). Thus, the Trustee could recover the full amount Stevanovich owed if Capital Strategies had a valid embezzlement claim against Stevanovich. Further, Illinois Supreme Court Rule 277(a) allows the Trustee to initiate proceedings against the third-party Stevanovich directly.

In his turnover motion, the Trustee argued that Stevanovich embezzled Capital Strategies' funds to purchase high-end wine for his personal use and transferred the goods to Stevanovich's personal wine cellar in Switzerland. The Trustee submitted ample evidence to support his claim. A vendor attested that he sold the wine to Stevanovich and shipped it to Switzerland. The vendor stated that Stevanovich placed all orders personally, and the vendor sent all invoices directly to Stevanovich. Finally, the vendor's bank statements indicate payments for the shipments came from Capital Strategies' accounts.

During Stevanovich's 2018 deposition in the bankruptcy proceedings in the District of Minnesota, the Trustee asked Stevanovich about these purchases. Stevanovich admitted he collected wine, and explained that he enjoyed expensive wine and frequently gave bottles as gifts. He vehemently denied, however, any memory of the vendor or purchases, despite admitting he may have been the only person with signatory authority over Capital Strategies' accounts at the time. The Trustee unsuccessfully attempted to refresh Stevanovich's recollection of the events with various pieces of evidence. Stevanovich held firm, even after reviewing the vendor's statements showing Capital Strategies' payments ranging from tens of thousands to hundreds of thousands of dollars. The Trustee submitted a full transcript of the deposition with his turnover motion.

Stevanovich's response to the turnover motion relied heavily on his own affidavit providing a detailed recount of the same wine purchases he could not recall just a year before. He now claimed that the wine purchases were an investment strategy for Capital Strategies' sole investor—one of Stevanovich's in-laws. Stevanovich chose to store the wine in his personal wine cellar in Switzerland to cut down on costs. In 2009, Capital Strategies transferred the wine to TGG Capital Ltd. ("TGG Capital"), a separate investment vehicle belonging to the same sole investor but with which Stevanovich had no affiliation. In 2012, the sole investor instructed TGG Capital to auction the wine at Christie's. Three payments passed through a third party's United States escrow account on their way to TGG Capital's Bermuda bank account. Stevanovich included scant evidence to corroborate his story: escrow statements for the first two payments, wire instructions to the escrow agent, and TGG Capital's statements showing receipt of all three wires. The escrow documents indicated that Stevanovich was personally involved in the transactions. None of the documents provided context for the fund transfers. In effect, Stevanovich's defense would succeed or fail on the strength of his uncorroborated affidavit.

In reply, the Trustee questioned the veracity of Stevanovich's affidavit but suggested that a hearing could resolve any factual issues. For his part, Stevanovich never requested a hearing or stated the extent to which he planned to back up his affidavit with additional testimony or evidence. To the contrary, he previously asked not to come to court. He also filed a surreply arguing that no material factual dispute existed.

The district court ruled on the evidence before it without conducting a hearing. It first addressed threshold questions the parties had briefed, including whether the Trustee's supplementary action was timely. The district court rejected Stevanovich's argument that the five-year statute of limitations for embezzlement applied, accruing from the dates of the wine purchases. See 735 ILCS 5/13-205. Instead, it applied the seven-year statute of limitations for supplementary proceedings accruing from the date of the bankruptcy court judgment. See 735 ILCS 5/12-108(a) ; Dexia Credit Local v. Rogan , 629 F.3d 612, 627 (7th Cir. 2010).

Next, the district court explained that to prove embezzlement under Illinois law the Trustee had to show by a preponderance of the evidence that Stevanovich (1) had a special relationship with Capital Strategies, (2) converted Capital Strategies' property for his own use, and (3) had the intent to embezzle. See People v. Curoe , 97 Ill.App.3d 258, 52 Ill.Dec. 722, 422 N.E.2d 931, 941–42 (1981). The district court found that the Trustee satisfied each element. First, Stevanovich was Capital Strategies' sole director and was authorized to use the fund's bank account at the time of the purchases. Second, Stevanovich purchased the wine with Capital Strategies' funds and had the wine shipped to his personal wine cellar. Third, the evidence sufficiently established intent. Stevanovich never disputed the underlying facts.

Then, the district court addressed Stevanovich's affidavit. It noted that Stevanovich's story was internally inconsistent. If Stevanovich had transferred the wine to TGG Capital in 2009, why was he involved in the subsequent transaction? The affidavit also directly conflicted with Stevanovich's prior sworn deposition testimony in the previous adversary proceeding, and Stevanovich failed to offer any explanation for the inconsistencies. The district court found it incredible that Stevanovich could not recall a $2 million transaction with which he had been intimately involved. Further, Stevanovich did not present sufficient documentary evidence to support his affidavit. The district court believed the evidence undermined Stevanovich's story by suggesting he had a personal stake in the transaction. It concluded that the Trustee met his burden, and the "negligible weight" of Stevanovich's affidavit could not overcome the Trustee's showing.

The district court further found that Stevanovich did not present evidence sufficient to create disputes of fact that would require a hearing. Indeed, Stevanovich did not identify any disputed issues of fact. The district court granted the Trustee's motion and ordered Stevanovich to turn over the $1,948,670.79 he embezzled from Capital Strategies to purchase wine for his personal use.

Stevanovich moved the district court to vacate its order, arguing that the district court should have held a hearing and afforded Stevanovich the opportunity to support his affidavit in court. Stevanovich suggested that a second look at the evidence would resolve the district court's concerns and show that he did not benefit from the wine sale. The district court denied the motion. It explained that Stevanovich's focus on the 2012 sale was irrelevant—the district court based its findings...