Managing Member Howard M. Ehrenberg and Member Daniel A. Lev were successful in resolving bankruptcy cases reopened in July 2015 to investigate a fraud allegedly perpetrated on the bankruptcy court in 1994 by two brothers, Theodosios Roussos and Harry Roussos. As a result of their investigation, Mr. Ehrenberg, who was appointed chapter 7 trustee of the reopened cases, recently obtained an order from the presiding bankruptcy court approving a comprehensive settlement which, among other things, voided a sale order entered in 1994 and revested two valuable apartment buildings in the brothers’ reopened bankruptcy estates.
What makes this case particularly noteworthy is the bankruptcy court’s finding that when there is a fraud on the court, Rule 60(d)(3) of the Federal Rules of Civil Procedure, made applicable to bankruptcy cases by virtue of Rule 9024 of the Federal Rules of Bankruptcy Procedure, does not impose a statute of limitations. In attempting to insulate and protect the fraudulently procured sale order, the brothers argued, among other things, that the trustee’s claims were barred by the one-year statute of limitations contained in Rule 60(b)(3). In rejecting the attempts to prevent Mr. Ehrenberg from voiding the 1994 sale order, the bankruptcy court adopted those cases which hold that fraud on the court is an especially serious type of fraud and embraces “only that species of fraud which does, or attempts to, defile the court itself, or is a fraud perpetrated by officers of the court so that the judicial machinery cannot perform in the usual manner its impartial task of adjudging cases that are presented for adjudication.”
In the early 1980’s, the Roussos Brothers partnered with a third party to purchase two valuable apartment buildings located in Santa Monica and Venice, California. After the partner passed away, his widow discovered that her husband was excluded from title and she was not receiving any income. As a result, she commenced an action for breach of fiduciary duty, fraud, and to quiet title on behalf of her husband’s estate against the Roussos Brothers. Concerned with the prospects of losing the action, the Roussos Brothers consulted with and retained an attorney to represent and assist them in forming a conspiracy to fraudulently transfer the properties out of their names and into the names of sham entities to be indirectly owned and controlled by the Roussos Brothers and their wives. In connection with this conspiracy, the Roussos Brothers filed individual chapter 11 bankruptcy cases in 1993 and sought a court order approving the sale of the properties to their sham entities free and clear of the widow’s interests which also provided the entities with the protections afforded by the Bankruptcy Code to good faith buyers. In convincing the original bankruptcy court to approve the sale, Mr. Ehrenberg alleged that the Roussos Brothers submitted knowingly false declarations to the bankruptcy court stating, among other things, (i) the proposed sales were arms-length, third party transactions, (ii) neither of the brothers were partners or interest holders in either of the two entities, (iii) prior to the proposed sale, neither of the brothers knew of the entities or their partners, (iv) neither of the brothers were “insiders” of the entities, and (v) the properties were over-encumbered. Mr. Ehrenberg’s investigation proved these allegations wrong.
As a result, on August 4, 2015, Mr. Ehrenberg filed two complaints against the Roussos Brothers, their wives, and the sham entities, among others, seeking to void the 1994 sale and returning the properties to the newly reopened bankruptcy estates. In order to prevent the Roussos Brothers from further placing the properties outside Mr. Ehrenberg’s reach pending a resolution of the complaints, Mr. Lev successfully petitioned the bankruptcy court to enjoin an arbitration action commenced in June 2012 by one of the brothers which, at its core, sought to resolve various business disputes between the brothers, including the properties which were still being held by the bogus entities which took title in 1994. In entering the preliminary injunction, the bankruptcy court found that if the arbitration continues, “title to and ownership of the Properties will likely be transferred or otherwise impaired, circumscribing the Bankruptcy Court’s ability to determine” issues raised in the sale motion filed in 1994. The Roussos Brothers appealed the bankruptcy court’s ruling, but it was affirmed by the District Court in June 2016. The District Court’s order was appealed to Ninth Circuit.
After months of discovery and numerous pre-trial motions, Mr. Ehrenberg and Mr. Lev, together with special litigation counsel, were instrumental in structuring a settlement with one of the brothers and his wife, and the entities formed to take title to the two properties. The settlement was approved by the bankruptcy court on an emergency basis on October 5, 2016. As a result, (i) the 1994 sale order was voided, (ii) the grant deeds originally conveying title to the properties to bogus entities were cancelled, (iii) the properties were returned to the reopened bankruptcy estates, and (iv) the preliminary injunction was vacated. The non-settling brother has appealed the bankruptcy court’s order, but has neither sought nor been granted a stay pending appeal.
Due to the efforts of Mr. Ehrenberg and Mr. Lev, creditors who went unpaid as a result of the 1994 sale will be virtually assured of receiving payment, in full, of their claims.