Roussos v. Roussos (In re Roussos)

Decision Date22 September 2016
Docket NumberCase No.: 2:15-bk-21624-ER,Adv. No.: 2:15-ap-01404-ER,Adv. No.: 2:15-ap-01406-ER,Case No.: 2:15-bk-21626-ER (jointly administered)
CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California
PartiesIn re: Harry Roussos, Debtor In re: Theodosios Roussos, Debtor (jointly administered) HOWARD M. EHRENBERG, Chapter 7 Trustee for the Estates of Harry Roussos and Theodosios Roussos, Plaintiff v. HARRY ROUSSOS; THEODOSIOS ROUSSOS; O.F. ENTERPRISES, L.P.; LIRO, INC.; S.M.B. INVESTORS ASSOCIATES, L.P.; S.M.B. MANAGEMENT, INC.; CHRISTINE ROUSSOS; PAULA ROUSSOS; CHASE BANK N.A.; ONEWEST BANK N.A., and DOES 1 through 50, Defendants

In re: Harry Roussos, Debtor

In re: Theodosios Roussos, Debtor (jointly administered)

HOWARD M. EHRENBERG, Chapter 7 Trustee for the Estates of Harry Roussos
and Theodosios Roussos, Plaintiff
v.
HARRY ROUSSOS; THEODOSIOS ROUSSOS; O.F. ENTERPRISES, L.P.;
LIRO, INC.; S.M.B. INVESTORS ASSOCIATES, L.P.; S.M.B. MANAGEMENT, INC.;
CHRISTINE ROUSSOS; PAULA ROUSSOS; CHASE BANK N.A.;
ONEWEST BANK N.A., and DOES 1 through 50, Defendants

Case No.: 2:15-bk-21624-ER
Case No.: 2:15-bk-21626-ER (jointly administered)
Adv. No.: 2:15-ap-01404-ER
Adv. No.: 2:15-ap-01406-ER

UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA LOS ANGELES DIVISION

September 22, 2016


MEMORANDUM OF DECISION DENYING MOTIONS FOR JUDGMENT ON THE PLEADINGS

Date: September 21, 2016

Time: 10:00 a.m.

Location: Ctrm. 1568
Roybal Federal Building
255 East Temple Street
Los Angeles, CA 90012

On September 21, 2016, the Court conducted a hearing on identical motions for judgment on the pleadings filed by S.M.B. Investors Associates, L.P., S.M.B. Management, Inc., O.F. Enterprises, Ltd., and Liro, Inc. (the "Four Entities")1 and Theodosios Roussos (Theodosios and

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the Four Entities are collectively referred to as the "Defendants"). The Court issued a tentative ruling prior to the hearing. At the conclusion of the hearing, the Court took the matter under submission. For the reasons set forth below, the Motions are DENIED. Substantive additions to the Court's tentative ruling are highlighted in red text.

I. Facts and Summary of Pleadings

Summary of the Complaint

The allegations of the Complaint are as follows:

In the early 1980s, August Michaelides partnered with Theodosios Roussos ("Theodosios") and Harry Roussos ("Harry")2 (collectively, the "Roussos Brothers") to purchase two apartment buildings in the greater Los Angeles area: (1) a 20-unit building located at 2727-2741 Abbott Kinney Boulevard, Venice, CA ("Abbot Kinney Property") and (2) a 30-unit building located at 153 San Vicente Boulevard, Santa Monica, CA ("San Vicente Property") (collectively, the "Properties"). Complaint [Doc. No. 1] at ¶26.3 Pursuant to the agreement with the Roussos Brothers, August was to receive a 33 1/3% ownership interest in the Abbot Kinney Property and a 10% ownership interest in the San Vicente Property. Id. at ¶27.

August Michaelides died in 1992. Id. at ¶28. When his widow Lula Michaelides ("Michaelides") inquired about her pro-rata share of income from the Properties, she failed to receive satisfactory responses from the Roussos Brothers. Id. at ¶29. Michaelides then discovered that the Roussos Brothers had failed to include her husband August on title to the Properties. Id.

Michaelides commenced an action to quiet title in the Los Angeles Superior Court ("State Court").4 Id. at ¶30. On March 2, 1994, the State Court entered judgment awarding Michaelides monetary damages and quieting title to the Properties. Id. at ¶31. On June 15, 1994, the State Court entered an amended judgment ("Amended State Court Judgment") awarding $600,000 in compensatory damages, $400,000 in punitive damages, and $10,000 in costs, and quieting Michaelides' title to the 10% interest in the San Vicente Property and the 33 1/3% interest in the Abbot Kinney Property. Id. at ¶¶31-32.

The Roussos Brothers retained attorney Robert Beaudry ("Beaudry") to facilitate a conspiracy in which the Properties would fraudulently be transferred out of their names and into the names of corporate entities which they secretly controlled, thereby extinguishing Michaelides' fractional interest. Id. at ¶33. In furtherance of the conspiracy, Beaudry formed S.M.B. and O.F., both of which were controlled by Harry and Theodosios and their spouses

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Paula and Christine. Id. at ¶¶34-36. The Roussos Brothers then filed individual chapter 11 petitions5 and filed a motion to sell the Properties to S.M.B. and O.F. free and clear of Michaelides' interest ("Sale Motion"). Id. at ¶¶37-39. On August 5, 1994, the Bankruptcy Court approved the sale, free and clear of Michaelides' interest ("Sale Order"). Id. at ¶40 and Exhibit 4. The Sale Order gave S.M.B. and O.F. protection as good-faith purchasers pursuant to §363(m). Id.

In approving the sale, the Bankruptcy Court relied upon declarations submitted by Theodosios and Harry, which falsely stated that the sale was an arms-length transaction; that neither Theodosios or Harry held any interest in S.M.B. and O.F.; and that the Properties were over-encumbered. Id. at ¶41. The Bankruptcy Court would not have approved the sale had it known that Theodosios and Harry controlled S.M.B. and O.F.; that the Properties were not over-encumbered; and that the sale motion was part of the Roussos Brothers' conspiracy to dispossess Michaelides of her fractional interest. Id. at ¶42.

On October 19, 1994, the Roussos Brothers executed a grant deed conveying title to the Abbott Kinney Property to O.F. Id. at ¶45. On November 29, 1994, the Roussos Brothers executed a grand deed conveying title to the San Vicente Property to S.M.B. Id. at ¶46.

The Roussos Brothers' chapter 11 cases were converted to chapter 7 on May 2, 1995.6 Both Harry and Theodosios received discharges on January 2, 1996.7 Michaelides' Amended State Court Judgment was excepted from discharge. Id. at ¶47. The cases were closed on June 27, 2002.8

On November 14, 2005, Michaelides conducted Theodosios' judgment debtor examination, during which Theodosios falsely testified that he and his brother Harry were not limited partners of S.M.B.; that he did not know who the limited partners of S.M.B. were; that he had not spoken to any of S.M.B.'s general partners; and that he and Harry had no interest in either S.M.B. or O.F. Id. at ¶49.

On November 14, 2005, Michaelides filed an alter ego action ("Alter Ego Complaint") in the Los Angeles Superior Court alleging that O.F. and S.M.B. were alter egos of the Roussos Brothers. The Alter Ego Complaint was dismissed. Id. at ¶50.

On July 20, 2006, Beaudry resigned from the California State Bar with charges pending relating to Beaudry's formation of sham corporations on behalf of his clients. Id. at ¶51.

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In September and December 2014, Michaelides conducted Harry's judgment debtor examination. Harry testified that he had no interest in the Properties or in O.F. and S.M.B. Id. at ¶53.

In the beginning of 2015, Michaelides discovered that an arbitration action, Case No. BS138099 ("Arbitration Action"), existed between Harry and Theodosios regarding management of the Properties. Id. at ¶56. On June 19, 2012, Harry and his spouse Christine commenced the Arbitration Action against Theodosios and his spouse Paula. Id. In connection with the Arbitration Action, David Haberbush, counsel for the Roussos Brothers, submitted a declaration stating that he had acted as legal counsel with respect to the Roussos Brothers' business operations pertaining to the Properties. See Declaration of David Haberbush at ¶1 (attached to the Complaint as Exhibit 8).

On June 18, 2015, Michaelides informed the United States Trustee ("UST") of the Arbitration Action. See generally Ex-Parte Motion to Reopen Chapter 7 Case under 11 U.S.C. §350(b) [Doc. No. 367, Case No. 2:15-bk-21624-ER]. On July 21, 2015, the UST moved to reopen Harry and Theodosios' chapter 7 cases and to appoint a Chapter 7 Trustee. The Court granted the motion on July 23, 2015. The Chapter 7 Trustee ("Trustee") filed the instant Complaints on August 4, 2015.

Based upon the foregoing allegations, the Trustee seeks to vacate the Sale Order for fraud on the court pursuant to Fed. R. Civ. P. 60(d)(3), and to vacate the grant deeds transferring ownership of the Properties to O.F. and S.M.B. Complaint at ¶¶61-68 (second claim for relief). Plaintiff seeks a declaratory judgment, pursuant to 28 U.S.C. §2201, that the Properties are property of the Roussos Brothers' estates. Id. at ¶¶58-60 (first claim for relief). Plaintiff seeks to quiet title to the Properties as of August 5, 1994 (the date the Sale Order was entered) pursuant to California Code of Civil Procedure §761.010. Id. at ¶¶67-73 (third claim for relief). Plaintiff seeks turnover of the Properties, and the income from the Properties, pursuant to Bankruptcy Code §542. Id. at ¶¶74-79 (fourth claim for relief).

Summary of Motion for Judgment on the Pleadings and Supporting Reply

Defendants make the following arguments in support of the Motion:

The Trustee Lacks Standing Based Upon the In Pari Delicto Doctrine

In Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 355-56 (3d Cir. 2001), the Court observed that there are two types of actions that a trustee may pursue: "Such actions ... fall into two categories: (1) those brought by the trustee as successor to the debtor's interest included in the estate under Section 541, and (2) those brought under one or more of the trustee's avoiding powers." The Trustee's claims are not avoidance claims. Therefore, the Trustee has standing to pursue the claims only if they are "property of the estate" under §541.

The Trustee cannot maintain an action "against a third party that could not have been maintained by the debtor." In re Gaudette, 241 B.R. 491, 498 (Bankr. D.N.H. 1999). Applying the in pari delicto doctrine in effect in New Hampshire, the Gaudette Court held that the trustee lacked standing to sue co-conspirators with the debtor:

The Trustee also lacks standing under the New Hampshire doctrine of in pari delicto. To have standing to assert a cause of action under New Hampshire law, a person must plead and prove that he suffered some injury to his legal rights. See Roberts v. General Motors Corp., 138 N.H. 532, 535, 643 A.2d 956 (1994) ("In evaluating whether a party

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has standing to sue, we focus on whether the plaintiff suffered a legal injury against which the law was designed to protect."). Under the New Hampshire doctrine of in pari delicto, the Debtor, as an alleged co-conspirator, would not be able to maintain a cause of action for
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