United States District Court, C.D. California
In Re Theodosios Roussos, et al.
v.
Howard M. Ehrenberg, et al. Theodosios Roussos, et al
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 ...