Court Opinion

ID: 2997348
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:35:38.020747+00
Date Added: 2024-06-11T11:45:33.407865
License: Public Domain

In the
 United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 02-3878
GRACE M. KAPELANSKI and
STANLEY J. KAPELANSKI,
                                              Plaintiffs-Appellees,
                                 v.

SCOTT JOHNSON,
                                            Defendant-Appellant.

                          ____________
          Appeal from the United States District Court for
         the Northern District of Illinois, Eastern Division.
             No. 00 C 2131—Milton I. Shadur, Judge.
                          ____________
   ARGUED APRIL 2, 2004—DECIDED NOVEMBER 24, 2004
                     ____________

 Before EASTERBROOK, MANION, and WILLIAMS, Circuit
Judges.
  WILLIAMS, Circuit Judge. Stanley J. Kapelanski, a Chicago-
area dentist, and his wife and office manager, Grace M.
Kapelanski, brought this action in diversity for common law
fraud and breach of fiduciary duty under Illinois law, against
the defendant, Scott Johnson, a businessman based in Florida.
The Kapelanskis sought to recover monies they had con-
veyed to Johnson in a series of investments that included
an “Off-Shore Trading Program” and the purchase of auto-
2                                                  No. 02-3878

matic teller machines for leasing. After trial, the jury found
in favor of the plaintiffs and awarded them compensatory
and punitive damages. In an oral ruling, the district court
denied Johnson’s post-trial motions to amend the judgment,
or for a new trial, and entered judgment on the verdict.”
Johnson now appeals the jury verdict. Johnson argues that
the district court should have amended the judgment or
ordered a new trial because Johnson was unfairly preju-
diced. Specifically, Johnson argues that he was prejudiced
by the district court’s questioning of him on the witness
stand and the district court’s action in allowing plaintiffs to
change their theories about Johnson’s fraud during the
trial. Additionally, Johnson asserts that the damage awards
were untenable. For the reasons stated below, we affirm.

                       I. Background
  Plaintiff Stanley Kapelanski, an immigrant from Poland,
practices dentistry in Chicago, Illinois, and his wife, plaintiff
Grace Kapelanski, manages the dental practice. The
Kapelanskis were interested in making financial investments.
Calvert Heskiel, a friend of the Kapelanskis, put them in
contact with defendant Scott Johnson, an independent bus-
inessman based in Florida. After a series of telephone con-
versations with Johnson, the Kapelanskis transferred $15,000
to Johnson in July 1998 to invest in what Johnson termed
an “Offshore Venture” in the “Gateway International Group.”
  The investment relationship between the parties expanded
in late 1998. In October 1998, Johnson and the Kapelanskis
physically met in Chicago. Johnson urged the Kapelanskis
to invest in automatic teller machines (“ATMs”) through his
company. The Kapelanskis agreed to purchase the ATMs and
No. 02-3878                                                 3

wired Johnson a total of $301,500 in four separate install-
ments from October 26, 1998 to February 5, 1999.1
  On October 26, 1998, the Kapelanskis also decided to
invest an additional $100,000 in a deal the parties referred
to as the Offshore Trading Program (“OTP”). The Kapelanskis
transferred $100,000 to the escrow account of Feder &
Dunn, P.A., Johnson’s Florida-based attorneys, for invest-
ment in the OTP. In December 1998, Johnson sent the
Kapelanskis a check for $18,000. This amount represented
a $3,000 return on their July 1998 investment. The
Kapelanskis repeatedly requested information from John-
son regarding both their OTP and ATM investments. These
requests included items such as proof of purchase, locations,
and serial numbers for the ATM machines. Johnson did not
respond to the Kapelanskis’ requests, and the plaintiffs never
received any proof of purchase for the ATMs, nor any
information pertaining to the OTP.
  The Kapelanskis filed this action for fraud and breach of
fiduciary duty under Illinois law against Johnson. The
Kapelanskis sought both compensatory and punitive dam-
ages for their ATM and OTP investments. During the liti-
gation, despite three document requests and a court order

1
 The Kapelanskis’ transfers for the intended purchase of the
ATMs are itemized as follows:
    (1) $190,000 on October 26, 1998
    (2) $30,000 on January 26, 1999
    (3) $41,500 on February 4, 1999
    (4) $40,000 on February 5, 1999
The Kapelanskis transferred these ATM funds to New Century
Investors Incorporated. New Century Investors Incorporated is
Johnson's dissolved corporation. According to Johnson's testi-
mony, he used New Century Investors Incorporated's bank
account for money transfers.
4                                                    No. 02-3878

demanding Johnson’s compliance, Johnson failed to produce
evidence that the OTP investment program actually existed.
Johnson also failed to produce any evidence pertaining to
proof of purchase of the ATMs.
  The matter went to trial2 where only three witnesses, the
Kapelanskis and Johnson, testified. The jury was shown
plaintiffs’ exhibits of wire transfers. These wire transfers
demonstrated that two days after Johnson had transferred
$100,000 of the plaintiffs’ money to a Russel Pierce3 for the
OTP, Pierce sent $200,000 to Johnson. Plaintiffs presented
evidence at trial which showed that Johnson placed the
$301,500 for the ATMs into his business account. From this
business account, Johnson later withdrew almost $400,000
to purchase a ski house in Colorado, a condominium, designer
mountain bikes, boating equipment and two luxury auto-
mobiles—a Mercedes-Benz and a Jaguar.
  The jury returned a verdict in favor of the Kapelanskis.
The jury awarded the Kapelanskis $100,000 in compensa-
tory damages and $331,250 in punitive damages on their
fraud claim. The district court entered judgment on the jury’s
verdict. The district court also, in an oral ruling, denied the
defendant’s request for a new trial.
  Johnson appeals on several grounds. He argues that the
district court improperly denied his post-trial motion to
amend the judgment or for a new trial. Johnson claims that
there was insufficient evidence presented at trial to support
the verdict for the plaintiffs. Johnson also argues that the
compensatory and punitive damage awards are invalid.
Johnson further contends that the district court judge
committed error when he selectively questioned Johnson

2
   The jury was not presented with instructions on the breach of
fiduciary duty claim and it is not a subject of this appeal.
3
    Johnson claimed that Russel Pierce took the Kapelanskis’ money.
No. 02-3878                                                    5

and allegedly showed disbelief of Johnson’s credibility in
front of the jury. Finally, the defendant argues that the
district court allowed the plaintiffs to alter their trial theory
in violation of its pre-trial order.

                        II. Analysis
A. Post-Trial Motion
  As a federal court sitting in diversity, federal law governs
our evaluation of Johnson’s motion to amend the judgment
or for a new trial under Federal Rule of Civil Procedure 59.
M.T. Bonk Co. v. Milton Bradley Co., 945 F.2d 1404, 1407
(7th Cir. 1991). We review a district court’s decision to deny
such motions for abuse of discretion. Neal v. Newspaper
Holdings, Inc., 349 F.3d 363, 368 (7th Cir. 2003); Carter v.
Moore, 165 F.3d 1071, 1079 (7th Cir. 1998). Under the abuse
of discretion standard, “the proper inquiry is not how the
reviewing court would have ruled if it had been considering
the case in the first place, but rather whether any reason-
able person could agree with the district court.” EEOC v.
Century Broadcasting Corp., 957 F.2d 1446, 1460 (7th Cir.
1992).
  In ruling on a motion for new trial, federal law requires
a district court to determine “whether ‘the verdict is against
the weight of the evidence . . . the damages are excessive,
or . . . for other reasons, the trial was not fair to the party
moving.’ ” Id. (quoting General Foam Fabricators, Inc. v.
Tenneco Chems., Inc., 695 F.2d 281, 288 (7th Cir. 1982)). We
will not set aside a jury verdict if a reasonable basis exists
in the record to support the verdict, viewing the evidence in
the light most favorable to the prevailing party, and leaving
issues of credibility and weight of evidence to the jury.
Carter, 165 F.3d at 1079.
  As a federal court sitting in diversity, we apply state law
to all substantive claims. See, e.g., Mut. Serv. Cas. Ins. Co.
6                                                No. 02-3878

v. Elizabeth State Bank, 265 F.3d 601, 612 (7th Cir. 2001).
The parties do not dispute that we are to apply Illinois state
law in our review of plaintiffs’ fraud claim. As the district
court’s instructions to the jury indicated, to sustain an
action for fraud under Illinois law, the plaintiff must prove
by clear and convincing evidence that: (1) the defendant made
a false statement of material fact; (2) the defendant knew or
believed that the statements were false, or the statements
were made with a reckless disregard of whether they were
true or false; (3) the statements were made with the intent
to induce action; (4) the plaintiff reasonably believed the
statements and justifiably acted in reliance on those
statements; and (5) the plaintiff suffered damages as a
result. See Soules v. Gen. Motors Corp., 402 N.E.2d 599, 601
(Ill. 1980).
  Contrary to Johnson’s assertion, there is reasonable basis
in the record to support the jury’s verdict. At trial, Johnson
admitted that he represented to the Kapelanskis that he
would invest their money in ATMs. The Kapelanskis relied
on that representation. Johnson admitted at trial that he
knew of the Kapelanskis’ reliance. The Kapelanskis did in
fact transfer their money to Johnson based on these
expectations. The Kapelanskis presented documentary
evidence of the wire transfers they made for the ATMs. The
Kapelanskis also submitted documentary evidence of the
check for $100,000 they sent to Johnson’s attorneys, as
instructed, to be invested in the “Offshore Trading Program.”
Johnson also admitted on the stand that he did not produce
any document to the Kapelanskis that would account for the
$100,000.
  In addition, the jury saw evidence which reflected that
Johnson’s attorneys sent $100,000 to the “Russel Pierce
Consulting Company,” which, within days of receipt, trans-
mitted $200,000 to an account held by New Century Investors
Incorporated. Johnson admitted that he never produced
documentation or other evidence that would prove the
No. 02-3878                                                  7

existence of the OTP. Johnson failed to produce this
evidence despite a court order compelling him to do so. The
Kapelanskis never received proof of purchase of the ATMs
and none was presented to the jury. Further, Grace
Kapelanski testified that after failing to return repeated
phone calls, Johnson eventually did get in touch with her
only to call her a “belly-acher” and to insist that she did not
“know how to play with the big boys.”
  Johnson claimed that Pierce was the individual respon-
sible for stealing the Kapelanskis’ money. However, John-
son presented no proof as to Pierce’s actual existence.4
Johnson also failed to demonstrate that the OTP existed. In
addition, Johnson failed to comply with a court order to sub-
mit evidence demonstrating the existence of the OTP. Johnson
admitted this fact on the witness stand. From this, a
reasonable jury could properly conclude that (1) Johnson
appropriated the ATM money for his own personal benefit
and (2) either there was no OTP or that Pierce and Johnson
had worked in tandem to commit the OTP fraud on the
plaintiffs.
  Johnson also points to conflicts in the parties’ testimony
to challenge the sufficiency of the evidence supporting the
verdict. For example, Johnson claims that Grace Kapelenski
actually insisted that the couple’s money go into the OTP
over Johnson’s alleged warnings about the risks and dangers
of investing in it. However, Stanley Kapelanski testified
that he did not remember Johnson attempting to dissuade
his wife or him from investing the $100,000. In any case,
the jury is entitled to weigh the evidence presented to it and
to evaluate the credibility of the witnesses. See Sheenan v.
Donlen Corp., 173 F.3d 1039, 1046 (7th Cir. 1999) (reaffirm-
ing that “the jurors, and they alone, are to judge of [sic] the
facts, and weigh the evidence.”) Therefore, any conflicts

4
 Pierce did not testify for either party. In addition, Pierce’s
whereabouts could not be determined.
8                                                 No. 02-3878

between the parties’ testimony was apparently resolved by
the jury in the Kapelanskis’ favor, given the verdict for the
plaintiffs.
   Johnson also claims that his promise to invest the money
is not actionable as a fraudulent misrepresentation. For
support, Johnson directs the court’s attention to People v.
Murphy-Knight, 618 N.E.2d 459 (Ill. App. Ct. 1993). In
Murphy-Knight, the court explained that “[e]ven a false
promise of future conduct with no current intent to fulfil[l]
that promise will not constitute fraud.” 618 N.E.2d at 463.
Johnson’s reliance on Murphy-Knight and similar cases is
misplaced. The investment opportunity in Murphy-Knight
actually existed, while here, the Kapelanskis suggest that
there was no evidence that “Russel Pierce Consulting Corpora-
tion,” “Russel Pierce,” “Offshore Trading Program,” or the
ATMs actually existed. Also, the Murphy-Knight court was
careful to caution against the use of the above-quoted
language in all cases involving future action. Specifically, the
Murphy-Knight court held, “an exception to the general rule
exists whereby a false promise as to future circumstances
may be actionable if the false statements were part of a
fraudulent scheme.” Id. (citing Steinberg v. Chicago Med.
Sch., 371 N.E.2d 634, 641 (Ill. 1977)). Although the
Kapelanskis understood that Johnson made no guarantees,
the Kapelanskis justifiably did not believe Johnson would
simply convert the transferred money for his own personal
use. Indeed, it was reasonable for the jury to conclude on the
evidence presented that Johnson hatched a plan to, in effect,
steal the Kapelanskis’ money rather than invest it. In sum,
the evidence provides a reasonable basis to support the ver-
dict and therefore we cannot find that the district court
abused its discretion in refusing to grant Johnson a new
trial.
 As for Johnson’s motion to alter or amend the judgment,
we conclude the district court properly dismissed the
motion. Such motions are “to bring the court’s attention to
No. 02-3878                                                      9

newly discovered evidence or to a manifest error [of] law or
fact.” Neal, 349 F.3d at 368; see also FDIC v. Meyer, 781 F.2d
1260, 1268 (7th Cir. 1986). Johnson’s motion did not present
any new evidence. Moreover, as we found the fraud verdict
to be sound for the reasons discussed above, the district
court did not abuse its discretion when it denied this
motion.

B. Damages
      1. Compensatory
  We review challenges to the propriety of a compensatory
damages award for abuse of discretion. Lamply v. Onyx
Acceptance Corp., 340 F.3d 478, 483 (7th Cir. 2003); see also
EEOC v. AIC Sec. Investigations, Ltd., 55 F.3d 1276, 1285 (7th
Cir. 1995). In making this determination, the “relevant
inquiries may include whether the award is monstrously
excessive, whether there is no rational connection between
the award and the evidence, and whether the award is
roughly comparable to awards made in similar cases.”
Lamply, 340 F.3d at 483-84 (internal citations omitted).
  Johnson attacks the validity of the $100,000 compensatory
award by arguing that the evidentiary connection between
the verdict and the award is absent. He asserts that the dis-
trict court’s instructions to the jury on damages amounted
to an interrogatory.5 Specifically, Johnson argues that the

5
    The district court's instruction to the jury stated:
If you decide for plaintiffs on the question of liability in accor-
dance with the earlier instruction, you must then fix the amount
of money that will reasonably and fairly compensate them for any
of the following elements of damages proved by the evidence to
have resulted from defendant’s conduct:
      (1) any resulting loss from their transfer of $100,000 on
          October 26, 1998 [for OTP];
                                                   (continued...)
10                                                    No. 02-3878

only reasonable way the jury could have arrived at a value
of $100,000 is if it found the defendant liable on the OTP
fraud claim only. Furthermore, Johnson contends that the
verdict on the OTP fraud claim cannot be sustained because
the evidence, or the inferences they allow, in no way
support that claim. Johnson asserts that if we do not find
that the jury hinged liability solely on the OTC claim, then
we must conclude that the verdict was an impermissible
compromise under Nat’l Fire Ins. Co. of Hartford v. Great
Lakes Warehouse Corp., 261 F.2d 35, 38 (7th Cir. 1958). We
disagree.
  As a preliminary matter, we agree with the plaintiffs that
the instruction did not function as an interrogatory. The
instruction did not restrict the jury to merely decide the
issue of liability on the different transactions and then
apply the fixed amount provided in the instruction. The in-
struction gave the jurors guidance and it was properly with-
in their domain to weigh evidence, assess witness cre-
dibility, and determine whether the Kapelanskis suffered

5
    (...continued)
       (2) any resulting loss from their transfer of $190,000 on
            October 26, 1998 [for ATMs];
      (3) any resulting loss from their transfer of $30,000 on
          January 26, 1999 [for ATMs];
      (4) any resulting loss from their transfer of $41,500 on
          February 4, 1999 [for ATMs];
      (5) any resulting loss from their transfer of $40,000 on
          February 5, 1999 [for ATMs].
   The defendant claims that this instruction functioned as an
interrogatory, and that the selection of only one of these transfers
as the basis of liability necessarily means the jury found liability
on that loss to the exclusion of all others. Conversely, the plain-
tiffs maintain that the instruction permitted the jury to decide on
any combination of the above amounts, or portions of those
amounts, to arrive at a compensatory damages award of $100,000.
No. 02-3878                                                   11

any loss from their hapless investments. True, the jury
could have simply chosen to find liability only on the OTP
investment. However, the jury was also free to measure out
portions of the transactions to arrive at the $100,000 figure.
  In addition, the jury’s compensatory damages award does
not represent an impermissible compromise verdict under
the reasoning of National Fire. There is not enough evi-
dence in the record to support Johnson’s claim that the
jury’s decision was the result of compromise. National Fire
concerned the refusal by a warehouse operator to compen-
sate one of National’s insureds for damages sustained when
a fire at the facility destroyed its stored Kool-Aid, a soft
drink concentrate. 261 F.2d at 37. The court regarded the
cases as close and found the jury verdict represented
exactly half of the damages sought. Id. We reasoned in that
case:
    By its verdict the jury found that plaintiff was en-
    titled to recover, yet it awarded only one-half of the
    amount of its loss as established by the undisputed
    evidence on this subject and under the court’s in-
    structions. It is absurd to say this is anything other
    than a compromise verdict and highly improper as
    a compromise, not only as to damages, but on the
    issue of liability.
Id. at 38. That did not occur in this case. The jury instruc-
tions did not mandate that the award for any particular lia-
bility finding on any specific investment had to be fixed at
the amounts listed.6 Also, whereas in National Fire there
was no other rational explanation for how the jury could
have arrived at the figure of one-half of the damages, here
the possible explanations seem almost limitless.

6
   Recall, the actual jury instructions state that the jury could
compensate the Kapelanskis for “any resulting loss” from their
itemized investments with Johnson.
12                                                  No. 02-3878

     2. Punitive Damages
  Johnson contends that the jury’s punitive damage award
of $331,250 is untenable because the jury’s liability verdict
is without evidentiary basis and is excessive. Because we
have already found the liability verdict to be sound, we reject
Johnson’s first argument.
  As for the alleged excessiveness of the punitive damages,
Johnson cites BMW of North America, Inc. v. Gore, 517 U.S.
559 (1996). We review the district court’s determination of
the constitutionality of punitive damages de novo. Cooper
Indus., Inc. v. Leatherman Tool Group, 532 U.S. 424, 436-37
(2001).
  Under BMW, we consider three guideposts to determine
whether a punitive damage award is grossly excessive such
that it offends due process: (1) the degree of reprehensibility
of defendant’s conduct; (2) the disparity between the harm or
potential harm suffered by the plaintiff and his punitive
damages award; and (3) the difference between this remedy
and the civil penalties authorized or imposed in comparable
cases. BMW, 517 U.S. at 575. The award must also be con-
sistent with Illinois state law to be valid in this diversity case.
See Medcom Holding Co. v. Baxter Travenol Labs., Inc., 106
F.3d 1388, 1397 (7th Cir. 1997) (“Illinois law governs the
substantive assessment of whether the evidence supports
the damages awarded when liability is based on Illinois
law.”) Illinois allows punitive damages to be awarded when
“torts are committed with fraud, actual malice . . . or when
the defendant acts willfully, or with such gross negligence
as to indicate a wanton disregard of the rights of others.”
Cirrincione v. Johnson, 703 N.E.2d 67, 70 (Ill. 1998); Home
Sav. and Loan Ass’n of Joliet v. Schneider, 483 N.E.2d 1225,
1228 (Ill. 1985) (“While deceit alone cannot support a
punitive damage award, such damages may be allowed
where the wrong involves some violation of duty springing
from a relation of trust or confidence, or where the fraud is
No. 02-3878                                                 13

gross, or the case presents other extraordinary or excep-
tional circumstances clearly showing malice and willful-
ness.” (internal citations omitted)). Here, Johnson was found
guilty of willfully defrauding the Kapelanskis for large
sums of money.
  Further, the punitive damage award of $331,250 repre-
sents a ratio of 3.3 to 1 which is easily permissible. State
Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003)
(noting that “[s]ingle-digit multipliers are more likely to
comport with due process, while still achieving the State’s
goals of deterrence and retribution, than awards with ratios
in range of 500 to 1.”). See also Mathias v. Accor Econ.
Lodging, Inc., 347 F.3d 672 (7th Cir. 2003) (sustaining a
punitive damages award with a ratio to compensatory
damages of 37.2 to 1). Here, not only is our ratio a single
digit, but a low one at that. We therefore find the punitive
damage award to be sound both under federal and state
law.

C. Questioning by the District Court
  Johnson contends that he suffered prejudice when the
district court questioned him on the stand in front of the
jury. We review the propriety of judicial examination of a
witness for abuse of discretion. United States v. Martin, 189
F.3d 547, 553 (7th Cir. 1999). While the defendant describes
the questioning as a “hostile interrogation,” the law on this
point is reasonably clear. A judge has discretion under
Federal Rule of Evidence 614(b) to question a witness. We
have upheld the principle that a judge may question the
defendant for the purposes of making the testimony clear
for the jury. See id. at 553 (a district court “can question a
witness in an effort to make the testimony clear for the jury”),
so long as the judge does not advocate for either side or ex-
press any favoritism. See also Ross v. Black & Decker, Inc.,
977 F.2d 1178, 1187 (7th Cir. 1992). Here, the district court
14                                               No. 02-3878

only asked questions when Johnson did not answer ques-
tions as asked. The court intervened only to help guide the
testimony. Furthermore, we find no prejudice to Johnson
when the district court commented, outside the presence of
the jury and after the jury returned its verdict, that John-
son was not a very credible witness.

D. Unfair Surprise
  Finally, Johnson alleges unfair surprise due to the
plaintiffs changing their theory about how Johnson accom-
plished the fraud during the trial. The Kapelanskis alleg-
edly did this in violation of the final pre-trial order, which
outlined the agreed upon statements of contested issues of
fact and law. Johnson asserts that the Kapelanskis initially
claimed that his attorneys gave him the $100,000 that the
Kapelanskis intended to be invested in the OTP. Johnson
asserts that at trial, the Kapelanskis argued a kickback
theory, where Johnson’s attorneys transferred the money to
Russel Pierce who then returned it to Johnson. Johnson
alleges that this change caused him prejudice, which can
only be cured by a new trial.
  Johnson’s argument is unconvincing. Johnson was on no-
tice that the trial was about his alleged fraud. Though the
kickback theory was not explicitly in the final pre-trial or-
der as among the “Agreed statements of contested issues of
fact and law,” the following statement, which was in the
order, encompasses the kickback theory: “Whether or not
the $100,000.00 paid on October 25, 1998 to JOHNSON was
indeed invested in an offshore trading account for Plaintiffs’
benefit.” Whether Johnson himself took the money or did so
with Pierce’s help, both of these theories are consistent with
the quoted language of the pre-trial order.
  Johnson cites Twigg v. Norton Co., 894 F.2d 672 (4th Cir.
1990) to support his claim. However, Twigg was a product
liability case that concerned a change in the theory of lia-
No. 02-3878                                              15

bility. In Twigg, the machine at question was defective be-
cause it required a protective guard. Here, the Kapelanskis’
kickback theory is simply an explanation of how the alleged
fraud was accomplished, not the type of liability. There was
no abuse of discretion when the trial court allowed the
Kapelanskis to introduce the kickback theory to the jury.

                     III. Conclusion
  For the reasons discussed above, we AFFIRM the district
court on all grounds.
A true Copy:
      Teste:

                        ________________________________
                        Clerk of the United States Court of
                          Appeals for the Seventh Circuit

                  USCA-02-C-0072—11-24-04