Little did Howard M. Ehrenberg know at the time of his appointment as trustee, that Rule 60(d)(3) of the Federal Rules of Civil Procedure would be the key to unraveling a more than 20-year-old fraud case. Daniel A. Lev, a Member of SulmeyerKupetz, A Professional Corporation, recently bylined an article in National Association of Bankruptcy Trustees explaining the successful use of this rule, which is rarely used by trustees.
The case involved a fraud perpetrated by two brothers, Harry and Theodosios Roussos, who engineered a scheme aimed at divesting a former partner of his interests in two valuable Los Angeles apartment buildings. The brothers created sham entities, filed individual chapter 11 cases, and then sought an order approving sales of the properties to bogus entities they indirectly controlled for virtually no consideration.
After Howard M. Ehrenberg, the Managing Partner of SulmeyerKupetz, was appointed chapter 7 trustee, he filed adversary proceedings in August 2015 against the brothers, their spouses and their sham entities, which still held title to the properties 21 years later, in order to remediate the evident fraud. Among other claims, Ehrenberg sought to vacate the 1994 sales for fraud on the court pursuant to Rule 60(d)(3), applied to bankruptcy cases by Rule 9024 of the Federal Rules of Bankruptcy Procedure.
As Mr. Lev explains, “The original court’s impartial review was fatally compromised by its lack of awareness of a crucial fact – that the purported arms-length sales were, in reality, sales to entities directly controlled by the debtors and their spouses.” Having survived multiple attempts by the debtor and their co-defendants to strip away various claims, especially the Rule 60(d)(3) claims, the debtors and the entities finally capitulated and entered into a series of court-approved settlements with Mr. Ehrenberg which “voided the 1994 sales, cancelled the grant deeds conveying title to the two sham entities, and confirmed that the buildings were property of the individual estates,” leading to the sale of one of the recovered buildings and significant distributions for creditors who were left “holding the bag” in 1994.
Read the full article here.