In re Roussos

         CIVIL MINUTES -- GENERAL

          PRESENT: HON. JOHN F. WALTER, UNITED STATES DISTRICT JUDGE

          PROCEEDINGS (IN CHAMBERS): ORDER AFFIRMING BANKRUPTCY COURT’S DECEMBER 21, 2015 ORDER

          HON. JOHN F. WALTER, UNITED STATES DISTRICT JUDGE

         On January 27, 2016, Appellants Theodosios and Paula Roussos (collectively, “Appellants”) filed an Appeal from the United States Bankruptcy Court’s December 21, 2015 Order, After Hearing, Granting Plaintiff’s Motion for Preliminary Injunction Re Verified Complaint (1) for Declaratory Relief; (2) to Vacate Sale for Fraud on the Court; (3) to Quiet Title; (4) for Turnover of Property; (5) for Fraud; (6) for Breach of Fiduciary Duty; and (7) for Aiding and Abetting Breach of Fiduciary Duty (“December 21, 2015 Order”). On April 18, 2016, Appellants filed their Opening Brief. On May 16, 2016, Howard M. Ehrenberg, Chapter 7 Trustee for the Estate of Appellant Theodosios Roussos (the “Trustee”) filed his Opening Brief. On May 31, 2016, Appellants filed their Reply Brief. Pursuant to Rule 78 of the Federal Rules of Civil Procedure and Local Rule 7-15, the Court finds that this matter is appropriate for decision without oral argument. After considering the moving, opposing, and reply papers, and the arguments therein, the Court rules as follows:

         I. Factual and Procedural Background

         A. The Acquisition of the Properties and the 1993 Bankruptcy Cases

         In the early 1980's, August Michaelides ("August") invested with two friends, Harry and Theodosios Roussos (the “Roussos Brothers”), to purchase apartment buildings located at 2727-2741 Abbot Kinney Boulevard, Venice, California (the “Abbot Kinney Property”) and 153 San Vicente Boulevard, Santa Monica, California (the “San Vicente Property”) (collectively, the “Properties”). Pursuant to August's agreement with the Roussos Brothers, August was to receive a thirty-three and one-third percent (33 1/3%) ownership interest in the Abbot Kinney Property and a ten percent (10%) ownership interest in the San Vicente Property. August died in 1992.

         After August’s death, his widow, Lula Michaelides ("Lula"), inquired about her pro rata share of the income from the Properties, and she eventually discovered that not only was she not receiving her pro rata share of income from the Properties, but that the Roussos Brothers had also failed to include August’s name on the title to either the Abbot Kinney Property or the San Vicente Property. As a result of these discoveries, Lula commenced an action for breach of fiduciary duty, fraud, and to quiet title on behalf of her husband's estate against the Roussos Brothers, among others, in the Los Angeles Superior Court, entitled Lula Michaelides v. Theodosios Roussos, LASC Case No. BC054809 (the "State Court Action").

         After Lula filed the State Court Action, on June 14, 1993, the Roussos Brothers filed separate Chapter 11 petitions commencing their respective bankruptcy cases. Subsequent to the filing of the Chapter 11 petitions, on March 2, 1994, a judgment was entered in the State Court Action in favor of Lula, awarding her monetary damages and quieting her title to the 10% interest in the San Vicente Property and the 33 1/3% interest in the Abbot Kinney Property (the “Original Judgment”). On June 15, 1994, an amended judgment was entered in the State Court Action in favor of Lula, awarding her $600, 000 in compensatory damages, $400, 000 in punitive damages, $10, 000 in costs, and quieted her title to the 10% interest in the San Vicente Property and the 33 1/3% interest in the Abbot Kinney Property (the “Amended Judgment”).

         On March 3, 1994, the day following the entry of the Original Judgment in the State Court Action, Robert Beaudry (Beaudry”), a now disbarred attorney who was counsel for the Roussos Brothers, formed S.M.B. Investors Associates, L.P., a California limited partnership ("S.M.B."). On April 5, 1994, Beaudry formed O.F. Enterprises, L.P., a California limited partnership ("O.F.").

         B. The Sale of the Properties to S.M.B. and O.F.

         On May 9, 1994, in their bankruptcy cases, the Roussos Brothers filed a Motion By Debtor-In-Possession for Order Authorizing Sale of Real Property Free and Clear of Co-Owner Interests and Liens, and Authorizing Disbursement of Sales Proceeds (the “Sale Motion”). In the Sale Motion, the Roussos Brothers sought approval of the sale of the Properties to the newly formed S.M.B. and O.F. Specifically, the Roussos Brothers sought, among other things, authority to (1) sell the Abbot Kinney Property to O.F. free and clear of Lula's interest for the amount of $500, plus the assumption of debts secured by the Abbot Kinney Property; and (2) sell the San Vicente Property to S.M.B. free and clear of Lula's interest for the amount of $0.00, plus the assumption of debts secured by the San Vicente Property. On August 5, 1994, the Bankruptcy Court granted the Sale Motion (the “Sale Order”).

         The Bankruptcy Court based its decision to approve the Sale Motion on the separate declarations from the Roussos Brothers allegedly falsely stating that, among other things: (1) the proposed sales were arms-length, third party transactions; (2) neither one of the Roussos Brothers were partners or had an interest in O.F. or S.M.B.; (3) prior to the proposed transactions, neither one of the Roussos Brothers knew of O.F. or S.M.B. or their partners; (4) neither one of the Roussos Brothers were insiders of O.F. or S.M.B.; and (5) the Properties were over encumbered. As a result of their false statements, the Bankruptcy Court approved the sale of the Properties to S.M.B. and O.F. free and clear of the interests of Lula in the Properties and to the prejudice of the other creditors.

         On October 19, 1994, pursuant to the Sale Order, the Roussos Brothers executed a grant deed conveying title to the Abbot Kinney Property to O.F., which was recorded on October 24, 1994, as Instrument No. 94-1923612 (the "O.F. Grant Deed"). On November 29, 1994, pursuant to the Sale Order, the Roussos Brothers executed a grant deed conveying title to the San Vicente Property to S.M.B., which was recorded on December 5, 1994, as Instrument No. 94-216228 (the "S.M.B. Grant Deed").

         Shortly after the conveyance of the Properties to O.F. and S.M.B. their Chapter 11 cases were converted to Chapter 7 cases. After conversion of their cases, the Roussos Brothers received discharges except for their indebtedness to Lula under the Amended Judgment, which was determined to be non-dischargeable, and their bankruptcy cases were subsequently closed in 2002.

         C. Lula Attempts to Enforce Her Judgment and Discovers the Alleged Fraud

         After the bankruptcy cases were closed, Lula sought to enforce the Amended Judgment against the Roussos Brothers. During her attempts in 2015 to enforce the Amended Judgment, Lula discovered the existence of an arbitration proceeding between the Roussos Brothers regarding the management of their entities and the ownership of various properties. The arbitration had been commenced on June 19, 2012, when Harry and Christine Roussos filed a petition in Los Angeles Superior Court (the "Petition") to compel Theodosios and Paula Roussos to arbitrate their numerous disputes (the "Arbitration Action").

         Although Harry had testified during his 2014 judgment debtor examination by Lula that all of his properties were "wiped out" in his bankruptcy, in his June 13, 2012 declaration attached to the Petition, Harry declared that for more than 20 years he and his brother owned and operated various multi-family rental properties in Los Angeles and San Bernardino Counties and that they continued to oversee the daily operations of these properties. In addition, Harry declared that the Roussos Brothers had entered into an arbitration agreement in order to resolve any potential disputes regarding their properties, including the dissolution of their businesses and the equitable distribution of the assets owned by those businesses. A letter from Harry's attorney to Theodosios's attorney was attached to the Petition. In that letter, Harry's attorney stated “Harry and Christine assert the following claims in arbitration, and hereby reserve the right to amend their claims at a later Dated: . . . For dissolution of [S.M.B.], Liro, Inc., [O.F.], and any related or affiliated entities, and distribution of all assets managed by those entities to Harry and Ted per their respective ownership interests in said entities."

         On August 15, 2012, a declaration was filed in the Arbitration Action by David Haberbush (“Haberbush”), one of the Roussos Brothers' former attorneys, who stated that he had acted as legal counsel, mediator, and arbitrator for Harry, Christine, Theodosios, and Paula "as to various matters, including, but not limited to, their business operations regarding the following properties . . .: ‘(1) 153 San Vicente Blvd., Santa Monica, California. (2) 2727 through 2741 Abbot Kinney Blvd., Venice, California; (3) 2721 Abbot Kinney Blvd., Venice, California; (4) 39 Paloma Ave, Venice, CA; (5) 2209 Ocean Front Walk, Venice, CA; and (6) 580 WE Street, Colton, CA." Attached to the August 15, 2012 declaration was a written offer made by Theodosios to purchase Harry's interest in the properties and businesses owned by the Roussos Brothers.

         D. The Adversary Proceeding

         On August 4, 2015, after the Trustee was alerted to the disputes among the Roussos Brothers and their wives by counsel for certain of the judgment creditors, the Trustee investigated those disputes and discovered facts demonstrating that the Roussos Brothers and their wives directly or indirectly owned and controlled both S.M.B. and O.F. from the initial formation of each entity, and, therefore, committed a fraud on the Bankruptcy Court. The Trustee filed identical Complaints against each of the Roussos Brothers (the “Adversary Proceedings”). In each of those Complaints, the Trustee alleged claims for relief for: (1) for Declaratory Relief; (2) To Vacate Sale ...