Seventh Circuit Clarifies Preponderance of Evidence Standard Applies in Turnover Actions

On April 27, 2023, the U.S. Court of Appeals for the Seventh Circuit issued an opinion holding that the preponderance of the evidence standard, rather than clear and convincing evidence, applies in turnover actions under Bankruptcy Code § 542.

Dordevic v. Paloian (In re Dordevic), — F.4th — (7th Cir. 2023)

Jelena Dordevic’s bankruptcy case involves her mother, Jorgovanka, legal owner of a 50% stake in PHMX LLC. Trustee Gus A. Paloian argues that Jorgovanka is Jelena’s nominee, and the property should return to the bankruptcy estate. Jorgovanka counters that the court applied an incorrect standard of proof, favoring “clear and convincing evidence.” The bankruptcy and district courts sided with the trustee.

The opinion explores the summary turnover procedure’s history, the Bankruptcy Code, and relevant Supreme Court decisions. It argues for the preponderance standard, referencing cases like Kelley v. Stevanovich, although clarifying Kelley didn’t address turnovers under Sections 542 and 541. The opinion upholds the bankruptcy court’s finding of Jelena’s equitable ownership of the PHMX stake.

Using the Szaflarski factors to determine actual property ownership, the opinion supports Jelena’s equitable ownership, scrutinizing and dismissing Jorgovanka’s claims about her financial contributions. It dismisses theories from Jorgovanka and Zaric arguing their equitable ownership.

The opinion returns to the standard of proof debate, discussing evidence and conflicting testimonies about Zaric’s involvement in PHMX. It concludes the evidence and Szaflarski factors support the court’s finding of Jelena’s equitable ownership.

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