In Re: Harry Roussos

Filing 43

MINUTE (IN CHAMBERS) ORDER AFFIRMING BANKRUPTCY COURT'S ORDERS by Judge John F. Walter: the Bankruptcy Court's October 6, 2016 Settlement Approval Order and October 7, 2016 Property Judgments are AFFIRMED. (Made JS-6. Case Terminated.) (jp)

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

JS-6

CIVIL MINUTES -- GENERAL
Case No.

CV 16-8612-JFW

Date: April 20, 2017

[2:15-bk-21624-ER]

CV 16-8642-JFW
[2:15-ap–1404-ER]
[2:15-bk-21624-ER]

CV 16-8643-JFW
[2:15-ap–1406-ER]
[2:15-bk-21626-ER]
Title:

In Re Harry and Theodosios Roussos

PRESENT:
HONORABLE JOHN F. WALTER, UNITED STATES DISTRICT JUDGE
Shannon Reilly
Courtroom Deputy

None Present
Court Reporter

ATTORNEYS PRESENT FOR PLAINTIFFS:
None
PROCEEDINGS (IN CHAMBERS):

ATTORNEYS PRESENT FOR DEFENDANTS:
None

ORDER AFFIRMING BANKRUPTCY COURT’S
ORDERS

On October 20, 2016, Appellant Theodosios T. Roussos (“Roussos”) appealed the United
States Bankruptcy Court’s October 6, 2016 Settlement Approval Order and its October 7, 2016
Property Judgments.1 On January 25, 2017, the Court set an identical briefing schedule in all
three appeals. On February 15, 2017, Roussos filed his Opening Brief.2 On March 8, 2017,

1

Case No. 2:16-cv-08612-JFW is the appeal of the Settlement Approval Order entered in
Case No. 2:15-bk-21624-ER (jointly administered with Case No. 2:15-bk-21626-ER). Case No.
2:16-cv-08642-JFW is the appeal of the Property Judgment entered in Case No. 2:15-ap-01404ER. Case No. 2:16-cv-08643-JFW is the appeal of the Property Judgment entered in Case No.
2:15-ap-01406-ER.
2

For reasons that are not clear, the docket reflects that two of Roussos’s Opening Briefs
were filed after the February 15, 2017 deadline. However, the docket in Case No. 16-8642-JFW
indicates that Roussos’s Opening Brief was timely filed. Because the briefs in all three appeals are
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Appellee Howard M. Ehrenberg, Chapter 7 Trustee for the Estate of Appellant Theodosios
Roussos (the “Trustee”) filed his Opposition Brief. On March 15, 2017, Roussos filed his Reply
Brief. Pursuant to Rule 78 of the Federal Rules of Civil Procedure and Local Rule 7-15, the Court
found these matters appropriate for submission on the papers without oral argument. The matters
were, therefore, removed from the Court’s March 20, 2017 hearing calendar and the parties were
given advance notice. After considering the moving, opposing, and reply papers, and the
arguments therein, the Court rules as follows:
I.

Factual and Procedural Background

On June 14, 1993, two brothers, Theodosios Roussos and Harry Roussos (collectively, the
“Roussos Brothers”) filed separate Chapter 11 petitions commencing their respective bankruptcy
cases, specifically Case No. 2:15-bk-21624-ER, In re Harry Roussos, and Case No. 2:15-bk21626-ER, In re Theodosios Roussos. On May 9, 1994, in their Chapter 11 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 apartment building located at 2727-2741 Abbot Kinney Boulevard, Venice, California
(the “Abbot Kinney Property”) to OF Enterprises, LP (“OF”) and the apartment building located at
153 San Vicente Boulevard, Santa Monica, California (the “San Vicente Property”) (collectively, the
“Properties”) to SMB Investors Associates, LP (“SMB”).3 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. 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.

identical, the Court considers Roussos’s Opening Briefs as timely filed in all three appeals,
regardless of what dates appear on the docket.
3

The Roussos Brothers are co-trustees of both the S.M.B. Investors Associates Irrevocable
Trust (the "SMB Trust") and the O.F. Management Irrevocable Trust (the "OF Trust"). OF is a
California limited partnership and holds record title to the Abbot Kinney Property. OF is a business
entity in good standing, as reflected by the records of the California Secretary of State. The OF
Trust owns a 99% interest in OF. Liro, Inc. ("Liro") is a California corporation and is the general
partner of OF. Liro owns a 1% interest in OF as its sole general partner. Liro was a suspended
business entity, as reflected by the records of the California Secretary of State. Liro was
suspended for failure to file the Statement of Information required by Cal. Corp. Code § 1502, and
for failure to meet its tax obligations. SMB is a California limited partnership and holds record title
to the San Vicente Property. SMB Trust owns a 99% interest in SMB. SMB Management, Inc.
("SMB Management") is a California corporation and is the general partner of SMB. SMB
Management owns a 1% interest in SMB as its sole general partner. SMB was suspended for
failure to meet its tax obligations, as reflected by the records of the California Secretary of State.
None of these relationships were known or disclosed to the Bankruptcy Court in connection with
the Sale Motion in 1994. In this Order, OF, SMB, SMB Management, and Liro will be referred to
collectively as the “Entities.”
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In July 2015, the bankruptcy cases of the Roussos Brothers were reopened when a creditor,
Lula Michaelides, discovered that the Roussos Brothers had committed a fraud on the Bankruptcy
Court in 1994.4 Howard M. Ehrenberg was appointed as the Chapter 7 Trustee. After the Trustee
concluded that the Roussos Brothers had orchestrated a fraud on the Bankruptcy Court in 1994,
the Trustee filed adversary proceedings against the Roussos Brothers and others who were
involved with the purportedly fraudulent sale of the Properties. These actions were entitled: (1)
Howard M. Ehrenberg v. Theodosios Roussos, Harry Roussos, Christine Roussos, Paula
Roussos, OF, Liro, SMB, SMB Management, Chase Bank, N.A., OneWest Bank, N.A., and CIT
Bank, N.A., Case No. 2:15-ap–1404-ER; and (2) Howard M. Ehrenberg v. Theodosios Roussos,
Harry Roussos, Christine Roussos, Paula Roussos, OF, Liro, SMB, SMB Management, Chase
Bank, N.A., OneWest Bank, N.A., and CIT Bank, N.A., Case No. 2:15-ap–1406-ER. In order to
prevent any transfer of the properties subject to the adversary proceedings, the Trustee filed a
Motion for Order Imposing Stay Pursuant to 11 U.S.C. § 105(a) (the “Initial Stay Motion”) on
August 25, 2015, seeking to enjoin the arbitration to avoid further harm to the creditors.
On September 30, 2015, the Bankruptcy Court granted the Initial Stay Motion, and enjoined
the arbitration through December 23, 2015, without prejudice to the Trustee filing a renewed
motion for injunctive relief in the adversary proceedings. On November 25, 2015, the Trustee filed
a 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 in each of the
adversary proceedings (the "Second Stay Motions") in order to maintain the status quo pending a
final judgment or settlement in the adversary proceedings. The Bankruptcy Court granted the
Trustee’s Second Stay Motions, and a preliminary injunction was issued in both adversary
proceedings on December 21, 2015. On January 27, 2016, Theodosios Roussos and his wife,
Paula, filed notices of appeal of the December 21, 2015 Orders, and elected to have them heard in
the District Court, where they were assigned the following case numbers: Case No. 2:16-cv-00601JFW and Case No. 2:16-cv-00607-JFW.
On June 27, 2016, after briefing by the parties, this Court affirmed the Bankruptcy Court’s
December 21, 2015 Order in each of the cases. Theodosios Roussos and his wife, Paula,
separately appealed the District Court’s June 27, 2016 Orders to the Ninth Circuit, where they were
assigned the following case numbers: Case No. 16-56065 and Case No. 16-56066. The Ninth

4

The Roussos Brothers’ fraud was discovered by Michaelides as a result of evidence
produced in an arbitration proceeding between the Roussos Brothers to resolve their disputes
regarding the ownership and management of various properties and entities. The arbitration was
commenced on June 19, 2012, when Harry Roussos and his wife, Christine, filed a petition to
compel arbitration against Theodosios Roussos and his wife, Paula, in Los Angeles Superior
Court, which was assigned Case No. BS138099. On June 6, 2016, the Honorable John P. Shook
(Ret.) (the "Arbitrator"), serving as arbitrator, issued his "Order No. Twenty-Seven," whereby he
appointed Sarah Daly as the “managing director to manage the affairs for Liro, Inc. and S.M.B.
Management, Inc., effective immediately." Because Liro is the general partner of O.F. and SMB
Management is the general partner of SMB, the Arbitrator's Order No. 27 had the effect of
appointing Daly as the manager/director/general partner of all of the Entities.
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Circuit consolidated the two appeals, the parties filed their respective briefs, and oral argument
was scheduled for January 10, 2017. On November 14, 2016, the Trustee filed a Motion for Order
(1) Dismissing Consolidated Appeals as Moot and (2) Continuing Oral Argument Pending Ruling
on Motion to Dismiss. In his motion, the Trustee sought dismissal of the consolidated appeals as
moot because the Trustee had entered into a settlement agreement with the majority of the
defendants in the underlying adversary proceedings, including Harry Roussos and his wife,
Christine.5 The settlement agreement provided that the two fraudulently sold apartment buildings
would be returned to the Roussos Brothers’ bankruptcy estates. The settlement agreement was
approved by the Bankruptcy Court on October 6, 2016 (the “Settlement Approval Order”), and
implemented, in part, by judgments entered on October 7, 2016 (collectively, the “Property
Judgments”), which (1) voided the original sale order; (2) cancelled the grant deeds originally
conveying title to the properties to OF and SMB; and (3) vacated the December 21, 2015
preliminary injunction.6 On January 4, 2017, the Ninth Circuit granted the Trustee’s motion and
dismissed the consolidated appeals as moot.
On October 20, 2016, Theodosios Roussos appealed the Settlement Approval Order and
the Property Judgments to the United States Bankruptcy Appellate Panel for the Ninth Circuit.7 On
November 17, 2016, the Trustee elected to have the appeals of the Settlement Approval Order and
the Property Judgments transferred to the District Court. As a result, the five appeals were
transferred and assigned the following case numbers: Case No. 2:16-cv-08612-JFW (Settlement
Approval Order in Case No. 2:15-bk-21624-ER (jointly administered with Case No. 2:15-bk-21626ER)); Case No. 2:16-cv-08613-JFW (Settlement Approval Order); Case No. 2:16-cv-08642-JFW
(Property Judgment in Case No. 2:15-ap-01404-ER); Case No. 2:16-cv-08643-JFW (Property
Judgment in Case No. 2:15-ap-01406-ER); and Case No. 2:16-cv-09115-JFW (Settlement
Approval Order).8 In this Order, the Court addresses the three remaining appeals.
II.

Appellate Issues
Appellant presents the following issues on appeal:
1. Whether the Bankruptcy Court erred in approving the Settlement Agreement and
entering the Property Judgments because it did not “provide a full and impartial review of a
settlement, or a [sic] turned a blind eye to a factual circumstances [sic] smacking of bad
5

Theodosios Roussos and his wife, Paula, were not parties to the settlement agreement.

6

Neither the Settlement Approval Order nor the Property Judgments are subject to a stay,
and the Trustee has assumed control and possession of the two apartment buildings for the benefit
of the Roussos Brothers’ creditors.
7

Theodosios Roussos’s wife, Paula, did not appeal the Settlement Approval Order or the
Property Judgments.
8

On January 23, 2017, Case No. 2:16-cv-08613-JFW (Settlement Approval Order) and
Case No. 2:16-cv-09115-JFW (Settlement Approval Order) were dismissed as duplicative of Case
No. 2:16-cv-08612-JFW (Settlement Approval Order) with the consent of Appellant Theodosios
Roussos.
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faith and collusion.” Appellant’s Opening Brief, p. 14.
2. Whether the Bankruptcy Court erred in approving the Settlement Agreement and
entering the Property Judgments because “Daly did not have corporate authority under the
governing corporate documents” to enter into the settlement. Id.
3. Whether the Bankruptcy Court erred in approving the Settlement Agreement and
entering the Property Judgments because Appellant had not “waived the right to challenge
the capacity of the Corporate Appellees”? Id.
4. Whether the Bankruptcy Court erred in approving the Settlement Agreement and
entering the Property Judgments because “the settlement violated the distribution scheme
of the Bankruptcy Code.” Id.
5. Whether the Bankruptcy Court “erred in making good faith findings” because they were
unavailable under the facts of this case. Id.
III.

Legal Standard9

A “district court functions as an appellate court in reviewing a bankruptcy decision and
applies the same standards of review as a federal court of appeals.” In re Crystal Props., Ltd., 268
F.3d 743, 755 (9th Cir. 2001). Accordingly, “[a] district court reviews a bankruptcy court's
conclusions of law and interpretation of the Bankruptcy Code de novo.” In re Orange Cnty.
Nursery, Inc., 439 B.R. 144, 148 (C.D. Cal. 2010). It reviews factual findings for clear error, and it
“must accept the bankruptcy court's findings of fact unless, upon review, the court is left with the
definite and firm conviction that a mistake has been committed by the bankruptcy judge.” In re
Greene, 583 F.3d 614, 618 (9th Cir. 2009) (citing Latman v. Burdette, 366 F.3d 774, 781 (9th Cir.
2004)).
A bankruptcy court's decision to approve a compromise is reviewed for abuse of discretion.
Martin v. Kane (In re A & C Props.), 784 F.2d 1377, 1380 (9th Cir. 1986), cert. denied, 479 U.S.
854 (1986); CAM/RPC Elecs. v. Robertson (In re MGS Mktg.), 111 B.R. 264, 266–67 (9th Cir. BAP
1990). Under the abuse of discretion standard, the district court cannot reverse the bankruptcy
court's ruling unless it has a definite and firm conviction that the bankruptcy court committed a
clear error of judgment in the conclusion it reached upon a weighing of the relevant factors. Marx
v. Loral Corp., 87 F.3d 1049, 1054 (9th Cir. 1996).
A court's determination of the good faith or lack of good faith of a settlement is reviewed for

9

Appellant argues that Appellate Issues Nos. 2, 3, and 4 should be reviewed de novo. The
Trustee seems to argue that all the Appellate Issues should be reviewed under an abuse of
discretion standard (except for the determination of whether a good faith settlement applies to a
party or claim, which the Trustee argues should be reviewed under the de novo standard).
However, the Court concludes that under either standard of review, the Bankruptcy Court’s
October 6, 2016 Settlement Approval Order and October 7, 2016 Property Judgments should be
affirmed.
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an abuse of discretion. Mason and Dixon Intermodal, Inc. v. Lapmaster International, LLC, 632
F.3d 1056 (9th Cir. 2011); see also KS Resources Ltd. v. A.W.L.I Group of Florida, Inc., 567 Fed.
Appx. 561 (9th Cir. 2014).
IV.

Discussion
A.

Approval of the Settlement Agreement

Appellant argues that the Bankruptcy Court erred in approving the Settlement Agreement
and entering the Property Judgments because it did not provide a full and impartial review of the
settlement and ignored clear evidence of bad faith and collusion. The Court disagrees. The Court
concludes that the Bankruptcy Court undertook a full and impartial review of the settlement
required by Bankruptcy Rule 9019 and applicable case law.
Bankruptcy Rule 9019 permits the Bankruptcy Court to approve a compromise or
settlement. "In determining the fairness, reasonableness and adequacy of a proposed settlement
agreement, the court must consider: (a) the probability of success in the litigation; (b) the
difficulties, if any, to be encountered in the matter of collection; (c) the complexity of the litigation
involved, and the expense, inconvenience and delay necessarily attending it; (d) the paramount
interest of the creditors and a proper deference to their reasonable views in the premises." Martin
v. Kane (In re A&C Properties), 784 F.2d 1377, 1381 (9th Cir. 1986). "[C]ompromises are favored
in bankruptcy, and the decision of the bankruptcy judge to approve or disapprove the compromise
of the parties rests in the sound discretion of the bankruptcy judge." In re Sassalos, 160 B.R. 646,
653 (D. Ore. 1993); see also In re Blair, 538 F.2d 849, 851 (9th Cir. 1976) (holding that "the law
favors compromise"). Generally, a compromise should be approved if it is "fair and equitable" and
in "the best interests of the estate." In re Woodson, 839 F.2d 610, 620 (9th Cir. 1988); Blair, 538
F.2d at 851. Compromises are favored in bankruptcy, and have become "a normal part of the
process of reorganization." Protective Committee for Independent Stockholders of TMT Trailer
Ferry Inc. v. Anderson, 390 U.S. 414, 424 (1968), quoting Case v. Los Angeles Lumber Prods.
Co., 308 U.S. 106, 130 (1939). In approving a settlement agreement, the Court must "canvass the
issues and see whether the settlement `falls below the lowest point in the range of
reasonableness."' Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599, 608 (2d Cir. 1983).
Under the Bankruptcy Code, a trustee is vested with the standing and authority to seek
compromises of legal and factual disputes. Therefore, settlements which have been negotiated by
a trustee are entitled to deference. See In re Morrison, 69 B.R. 586, 592 (Bankr. E.D. Pa. 1987)
(objecting creditors may not substitute their judgment for that of the trustee). In addition, when
considering these factors, the court need only canvass the issues, and "a mini trial on the merits is
not required." Burton v. Ulrich (In re Schmitt), 215 B.R. 417, 423 (9th Cir. BAP 1997).
In its "Memorandum of Decision Granting Emergency Motion to Approve Settlement
Agreement [Doc. No. 571]" (the "Decision") entered on October 6, 2016, the Bankruptcy Court
provided a detailed analysis of facts and law which fully supported its decision to approve the
settlement. The Bankruptcy Court expressly found that the Trustee satisfied the A&C
Properties test for approvals of compromises in the Ninth Circuit. Specifically, the Bankruptcy
Court found that the first A&C Properties factor weighed in favor of approving the settlement
because the Trustee possessed a strong likelihood of succeeding in the litigation and defending
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against the lengthy appeal that was almost certain to be filed by the Roussos Brothers. Thus, the
settlement would result in immediate funds for the estate and resolve numerous disputes between
the parties. The Bankruptcy Court found that the second A&C Properties factor weighed in favor of
approving the settlement because even if the Trustee obtained judgment in his favor, there was a
substantial and significant risk that the Roussos Brothers would continue to obstruct the Trustee’s
efforts to enforce the judgment against the Roussos Brothers. In contrast, the settlement provided
that the Trustee would receive immediate title to and physical control over the Properties. The
Bankruptcy Court found, and it was not seriously disputed, that the third A&C Properties factor
weighed in favor of approving the settlement because the litigation was complex and the trial would
be lengthy. The Bankruptcy Court found that the fourth A&C Properties factor weighed in favor of
approving the settlement because the settlement would allow creditors to receive approximately
100% of their claims. Each of these findings by the Bankruptcy Court is amply supported by the
record.
In addition, the mere fact that the motion to approve the settlement agreement was heard
on an expedited basis – due to the impending trial date set by the Bankruptcy Court – does not
lead to the conclusion that the Bankruptcy Court did not conduct a full and fair assessment of the
compromise. The Roussos Brothers’ bankruptcy cases were reopened in July 2015, more than a
year prior to the hearing on the motion to approve the settlement agreement. During that time,
there were countless motions and hearings, and the Bankruptcy Court became intimately familiar
with the factual and legal issues involved in these cases, which were ultimately presented to the
Bankruptcy Court in the context of the motion to approve the settlement agreement. Furthermore,
although Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure prescribe a minimum
amount of notice for a motion seeking approval of a compromise, Bankruptcy Courts have
discretion to reduce or eliminate the notice period for settlements. In fact, the Local Bankruptcy
Rules specifically affords Bankruptcy Courts the right to shorten the notice period for cause shown.
In this case, the Trustee filed an application to shorten the regular twenty-one day notice period
because the looming trial dates established exigent circumstances requiring the court to act
quickly. However, in agreeing to shorten the regular notice period, the Bankruptcy Court did not
foreclose the right of Appellant, or any other party who received notice of the motion to approve the
settlement agreement, from fully contesting the settlement. In fact, Appellant filed a lengthy and
detailed opposition raising the same issues he now raises in this appeal.
Despite Appellant’s argument to the contrary, the Bankruptcy Court’s refusal to adopt
Appellant's specious theory of collusion and undisclosed conflicts does not support his claim that
the Bankruptcy Court rushed to approve the settlement in order to prevent the parties from
conducting discovery on these issues. The Bankruptcy Court was not required to permit discovery
and the cross examination of witnesses prior to granting the motion to approve the settlement.
Moreover, a trustee seeking approval of a settlement is not required to prove it would have been
impossible to obtain a superior result by trying the case. Greif & Co. v. Shapiro (In re Western
Funding Inc.), 550 B.R. 841, 851 (9th Cir. BAP 2016) ("If this were required, the settlement
approval process would degenerate into a trial of the underlying claims, which would defeat the
purpose of settling").
B.

Authority to Enter the Settlement Agreement

Appellant argues that the Bankruptcy Court erred in approving the Settlement Agreement
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and entering the Property Judgments because the Entities lacked authority to enter into the
settlement. However, the Court concludes there was no error because, as the Bankruptcy Court
found, the Entities, acting through Sarah Daly, the arbitrator appointed managing director of Liro
and SMB Management, had the authority to enter into the Settlement Agreement. As the
Bankruptcy Court correctly held, because the Roussos Brothers subjected themselves to the
decisions of Judge Shook by agreeing to binding arbitration, they necessarily agreed to Judge
Shook’s appointment of Daly as the managing director of Liro and SMB Management. Because
Liro is the general partner of OF and SMB Management is the general partner of SMB, Judge
Shook's order had the effect of making Daly the managing director of all of the Entities.
In his order appointing Daly as the managing director, Judge Shook incorporated by
reference the Bankruptcy Court's Management Order, explaining that the Management Order set
forth the scope of Daly's authority. The Management Order provided that Daly had the authority to
"manage the affairs" of the Entities, and specified that Daly's responsibilities included hiring and
paying counsel to represent the Entities. The Bankruptcy Court found that the Management Order
granted Daly the authority to enter into the Settlement Agreement because Daly's authority to
"manage the affairs" of the Entities necessarily included the authority to settle litigation involving
the Entities. The Bankruptcy Court also found that Daly's authority to settle was reinforced by the
Management Order's provisions permitting Daly to hire counsel to represent the Entities because
the authority to hire counsel would be meaningless unless it also included the authority to direct
counsel to either settle or continue to defend against the Trustee's litigation.
Appellant also argued that the Settlement Agreement was void because it provided for the
sale of the Properties in contravention of the relevant provisions of the SMB and OF Partnership
Agreements. However, the Arbitrator's July 29, 2016 Statement of Decision and Judgment in
Binding Arbitration (the “Arbitrator’s Decision”) provided for the marketing and sale of the
Properties, and specifically provided that the sales were to occur even if the voting requirements of
the Partnership Agreements were not satisfied. Although Appellant argued to the Bankruptcy
Court that the Arbitrator’s Decision had not been confirmed by the Superior Court, and, thus, could
not serve as the basis for the Entities’ authority to enter into the Settlement Agreement, California
Code of Civil Procedure §1287.6 provides that an arbitration decision "that has not been confirmed
or vacated has the same force and effect as a contract in writing between the parties to the
arbitration." Therefore, the Bankruptcy Court did not err in concluding that the various provisions
of the Partnership Agreement were superseded by the Arbitrator's Decision.
C.

Capacity to Enter the Settlement Agreement

Appellant argues that the Bankruptcy Court erred in approving the Settlement Agreement
and entering the Property Judgments because Liro and SMB Management lacked the requisite
corporate capacity to enter into the settlement. Specifically, Appellant argues that because Liro
and SMB Management are suspended business entities, as reflected in the records of the
California Secretary of State, they lacked the corporate capacity to participate in the litigation or
sign the Settlement Agreement. However, the Court concludes, as the Bankruptcy Court did, that
Appellant has long since waived that argument.
Generally, if a corporation has been suspended for failure to meet its tax obligations, the
corporation "shall not be entitled to sell, transfer, or exchange real property in California during the
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period of forfeiture or suspension." Cal. Revenue and Tax Code §23302(d). In addition, a
corporation that has been suspended – either for failure to comply with tax obligations or for failure
to file the Statement of Information – is "disabled from participating in any litigation activities."
Palm Valley Homeowners Assn, Inc. v. Design MTC, 85 Cal. App. 4th 553, 560 (2000).
In this case, OF and SMB, which held record title to the Properties, were not suspended.
As a result, OF and SMB were able to enter into the Settlement Agreement and transfer the
Properties under the terms of the Settlement Agreement. Because it was OF and SMB who
transferred the Properties – and not Liro and SMB Management – California Revenue and Tax
Code §23302(d) was not a bar to those property transfers. Therefore, the sole issue was whether
Liro and SMB Management lacked the capacity to participate in the litigation – and sign the
Settlement Agreement – as a result of their suspended status.
The issue of the suspended status of Liro and SMB Management was raised by Appellant
for the first time in his opposition to the motion to approve of the settlement. The Court agrees with
the Bankruptcy Court that Appellant waived the right to raise the issue of the suspended status of
Liro and SMB Management. See Ctr. for Self-Improvement & Cmty. Dev. v. Lennar Corp., 173
Cal. App. 4th 1543, 1552-53 (2009) ("Corporate incapacity is nothing more than a legal disability,
depriving the party of the right to come into court and represent its own interests. As such, lack of
capacity is not a jurisdictional defect and is waived if not properly raised. Not surprisingly, unless
mandated by governing statute, the capacity of the plaintiff to sue is not an element of a cause of
action and the plaintiff corporation need not allege it is qualified to do business in this state or that
it has paid all state taxes. Accordingly, the suspended status of corporate powers at the time of
filing suit does not impede the trial court's jurisdiction to proceed, nor does a suspension after suit
commences but before rendition of judgment deprive the court of jurisdiction or render the
judgment void"). Liro and SMB Management first appeared in the Roussos Brothers’ bankruptcy
adversary proceedings on September 28, 2015, and from their initial appearance, they actively
participated in the litigation. Prior to Appellant raising the issue in his opposition to the motion to
approve the settlement, no party raised the issue of Liro's and SMB Management’s suspended
status, including Liro’s and SMB Management’s own counsel. In fact, as the Bankruptcy Court
astutely pointed out, Appellant was “happy to ignore” Liro’s and SMB Management’s suspended
status during the time that Liro’s and SMB Management’s position aligned with that of Appellant in
opposing settlement. It was only when Liro and SMB Management (along with OF and SMB)
entered into a settlement agreement against Appellant’s wishes that corporate capacity suddenly
became an issue. This Court agrees with the Bankruptcy Court that Appellant’s attempt to raise
the corporate capacity issue at such a late date was nothing more than a bad faith attempt to
obstruct or “scuttle” settlement and cause additional delay.
D.

Distribution Pursuant to Section 726 of the Bankruptcy Code

Roussos argues that the Bankruptcy Court erred in approving the Settlement Agreement
and entering the Property Judgments because the settlement violates the required distribution
scheme of the Bankruptcy Code.
A central policy of the Bankruptcy Code is the equitable distribution of a debtor's assets
among its creditors. Begier v. IRS, 496 U.S. 53, 58 (1990); In re McCafferty, 96 F.3d 192, 196 (6th
Cir. 1996). Similarly, the Code is designed to achieve an "equality of treatment among similarly
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situated creditors." In re Lockard, 884 F.2d 1171, 1178 (9th Cir. 1989); In re Jet Florida
System, Inc., 841 F.2d 1082, 1083 (11th Cir. 1988). Another objective of the Code is to
accomplish a prompt and efficient administration of the bankruptcy estate. Katchen v. Landy, 382
U.S. 323, 328-29 (1966); Chemetron Corp. v. Jones, 72 F.3d 341, 346 (3d Cir. 1995); 11 U.S.C. §
704.
In this case, the Court concludes that the Bankruptcy Court correctly determined that the
settlement did not violate the required distribution scheme embodied in 11 U.S.C. § 726 of the
Bankruptcy Code. In order to understand the distribution scheme embodied in 11 U.S.C. § 726, it
is important to examine the definition of several of its terms. "Creditor," which is defined by 11
U.S.C. § 101, is an "entity that has a claim against the debtor that arose at the time of or before the
order for relief concerning the debtor." 11 U.S.C. § 101(10)(A). Section 101(5) of the Bankruptcy
Code defines the term "claim" as a:
(A) right to payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise
to a right to payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or
unsecured.
Thus, the term "claim" includes either a "right to payment" or a "right to an equitable
remedy" for a debtor's breach of performance so long as the breach gives rise to a right to
payment. In addition, the term "debt" is defined as a "liability on a claim." 11 U.S.C. § 101(12).
Therefore, a "creditor" has a "claim" against the debtor and the debtor owes a "debt" to the
"creditor." Alan N. Resnick & Henry J. Sommer, 2 Collier on Bankruptcy ¶101.12 (16th ed. 2015).
Moreover, "[a]bsent an overriding federal interest, the existence of a claim in bankruptcy is
generally determined by state law." Securities Exchange Comm'n v. Cross (In re Cross), 218 B.R.
76, 78 (9th Cir. BAP 1998).
Section 726(a) sets forth five classes of creditors holding claims that must be paid before a
debtor is entitled to any surplus. The right of a class of claimants to receive a distribution flows
down, as outlined in each subsection of priorities contained in Section 726(a)(1)-(5), with no
subordinate class receiving anything unless the preceding class has been paid in full and "[w]hen
there is a class of claims that an estate cannot pay in full, § 726(b) directs the court to divide the
assets pro rata among all claims in the class that cannot be fully satisfied." In re Jonick Deli Corp.,
263 B.R. 196 (S.D.N.Y. 2001). Once the five superior classes of creditors are paid in full, a debtor
is entitled to a distribution of any residual surplus under Section 726(a)(6).
In this case, because the Trustee will use the payment from the settlement to pay the claims
of creditors according to the priority scheme found in Section 726(a), it is a misnomer to suggest
that the payment which will be made to Harry Roussos, who is a debtor, is the legal equivalent of a
surplus payment under Section 726(a)(6). Any consideration flowing to Harry Roussos and the
Entities from the settlement agreement is in exchange for their settlement of the Verified

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Complaints.10 Accordingly, the Trustee’s payment to Harry Roussos will not violate Section
726(a)'s priority distribution scheme because the payment will be made pursuant to the settlement
agreement and not as a surplus payment being made prior to the payment of senior creditor
claims. Instead, all creditors of the Roussos Brothers' estates will be paid from the settlement
according to Section 726(a) and any surplus in Appellant's estate will be paid to Appellant at the
conclusion of the case. This fully complies with the requirements of Section 726(a).
The fact that the Settlement Agreement complies with Section 726(a) and does not
discriminate against any of the Roussos Brothers’ creditors is further demonstrated by the fact that
none of the creditors opposed the motion to approve the settlement agreement. In fact, only
Appellant opposed the motion and is now challenging the Settlement Approval Order.
E.

The Bankruptcy Court’s Determination of Good Faith Settlement

Appellant also argues that the Bankruptcy Court erred in finding that the settlement was
entered into in good faith under California law. As the Trustee argues, the Bankruptcy Court’s
finding of good faith was not a condition of the settlement and was effectively severed from the
motion to approve the settlement agreement and independently determined in a later proceeding
by a subsequent order. Nonetheless, the Court has considered Appellant’s argument, and
concludes that the Bankruptcy Court did not err in making the good faith finding.
In Tech-Bilt, Inc. v. Woodward-Clyde & Assocs., 38 Cal. 3d 488 (1985), the California
Supreme Court explained that Sections 877 and 877.6 were enacted to remedy the inability of joint
tortfeasors, at common law, to seek contribution against co-defendants. Id. at 493-94 ("The
primary purpose of the bill was the equitable objective of ameliorating the punitive effect of the
no-contribution rule upon joint tortfeasors"). The consequence of the rigid no-contribution rule was
to make it less likely that individual defendants in multi-defendant suits would want to settle with
the plaintiff. Id. at 493. With the enactment of Sections 877 and 877.6, individual defendants can
seek a finding that their settlement is a good-faith settlement, thereby preventing co-defendants
from pursuing contribution claims against them. The Court in Tech-Bilt, in adopting a "reasonable
range test," listed the following factors to consider when determining whether a settlement is a
good faith settlement:
[T]he intent and policies underlying section 877.6 require that a number of factors be
taken into account including a rough approximation of plaintiffs' total recovery and the
settlor's proportionate liability, the amount paid in settlement, the allocation of
settlement proceeds among plaintiffs, and a recognition that a settlor should pay less
in settlement than he would if he were found liable after a trial. Other relevant
considerations include the financial conditions and insurance policy limits of settling
defendants, as well as the existence of collusion, fraud, or tortious conduct aimed to
injure the interests of nonsettling defendants. Finally, practical considerations

10

In addition, Appellant, like Harry Roussos, will receive $1,500,000 under the Settlement
Agreement. However, because Appellant chose not to settle, his distribution, unlike Harry
Roussos’s distribution, is subject to levy by Michaelides. Appellant chose not to settle, and, thus,
is not entitled to the same benefit as those who did.
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obviously require that the evaluation be made on the basis of information available at
the time of settlement. A defendant's settlement figure must not be grossly
disproportionate to what a reasonable person, at the time of the settlement, would
estimate the settling defendant's liability to be.
Id. at 499 (internal citations and quotations omitted).
The Tech-Bilt decision makes clear that an acceptable settlement range – like that under a
Rule 9019 analysis – is extremely broad. Id. at 499-501 (noting that (i) settlement figure must not
be "grossly disproportionate" to what a reasonable person would pay, (ii) permitting an objector to
demonstrate, "if he can, that the settlement is so far "out of the ballpark" such that it is inconsistent
with equitable objectives of the statute," and (iii) emphasizing the "broad parameters of the
"ballpark" within which settlements will be deemed to be in good faith"). Similar to cases
interpreting Rule 9019, a party objecting to the good faith of a settlement has no right to a mini-trial
on valuation. Instead, the procedure for determining whether the settlement was made in good
faith is left to the sound discretion of the trial court. Abbott Ford, Inc. v. Superior Court, 43 Cal. 3d
858, 880 n. 23 (1987). The mere fact that a settling party may be shown to have paid less than its
theoretical proportionate share of liability to the plaintiff does not establish any lack of good faith.
Tech-Bilt, 38 Cal. 3d at 499. Thus, the process of determining whether a particular settlement
actually satisfies the good faith standard under California law is not unlike that employed by
bankruptcy courts in approving settlements proposed under the authority of Rule 9019.
Although not equivalent to a finding of good faith under Sections 877 and 877.6, Rule 9019
calls upon the bankruptcy court to exercise discretion that is analogous to that of California courts
and does not expressly describe the standards to be applied in approving settlements. See
Protective Comm. for Indep. Stockholders, 390 U.S. 414 (1968) (holding that settlements must be
"fair and equitable" and bankruptcy judge must apprise "himself of all facts necessary for an
intelligent and objective opinion of the probabilities of ultimate success should the claim be
litigated."); see also In re Plant Insulation Co., 469 B.R. 843, 884-86 (Bankr. N.D. Cal. 2012), aff'd,
485 B.R. 203 (N.D. Cal. 2012), rev'd on other grounds, 734 F.3d 900 (9th Cir. 2013) (holding that
“[t]he Rule 9019 standard is actually more exacting than the section 877.6 standard, because
under Rule 9019 the party proposing the settlement has the burden of proof, while under section
877.6 the party opposing the settlement has the burden of proof").
Appellant argues that Section 877 is not applicable because the fraud on the court claim
was not a tort. However, as the Bankruptcy Court correctly held, Appellant’s argument ignores the
fact that the settling defendants were seeking the Section 877 determination with respect to the
settlement with Michaelides. The Settlement Agreement resolved all of Michaelides' claims
against the settling defendants, which included tort liability for fraud based on alter ego theory.
Appellant raised a number of other arguments, each of which was properly rejected by the
Bankruptcy Court. Having reviewed the settlement against the backdrop of the settling defendants'
potential liability in the litigation, and based upon the evidence presented to it, the
Bankruptcy Court found that: (1) the settling defendants entered into the settlement with
Michaelides in good faith within the meaning of Section 877.6; and (2) the settlement discussions
were conducted at arms-length and were free of collusion. As to the collusion issue, the
Bankruptcy Court also found that the absence of collusion was demonstrated by the fact that
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Theodosios and Paula Roussos had the opportunity to enter into the settlement on the same terms
as Harry and Christine Roussos.
The Bankruptcy Court also correctly found that the settlement did not allocate a
disproportionate share of liability to Theodosios and Paula Roussos. The cost of the settlement,
according to the Bankruptcy Court, was borne by the Entities, in which the Roussos Brothers each
hold ownership interests. The only advantage that Harry and Christine Roussos obtained by
entering into the settlement was a limitation on the collection of Michaelides’s judgment, and three
to six months of rent-free living in the San Vicente Property. As the Bankruptcy Court observed, in
comparison to the $11,000,000 settlement amount, these advantages were relatively
inconsequential. In addition, these advantages were equally available to Appellant had he, like
Harry and Christine Roussos, joined in the settlement.
Appellant also argued that the settlement appeared collusive because the settlement
amount was too high. Appellant claimed that the real purpose of the settlement was to provide the
attorneys a windfall of fees. However, the Bankruptcy Court properly rejected this frivolous
argument. Harry and Christine Roussos were represented by competent counsel and freely
entered into the settlement, and they would not have done so had they not believed that the
settlement was in their best interests. Generally, the concern that arises in the context of a
Section 877 determination is that by settling for too little, the settling defendants acted in collusion
and prejudiced the non-settling parties. Accordingly, there is simply no support for Appellant's
theory that collusion may be shown because the defendants allegedly settle for too much.
As the Bankruptcy Court concluded, Appellant's real reason to “scuttle” the settlement was
his belief that the defendants could have obtained a better result if the cases had proceeded to
trial. However, Appellant failed to demonstrate in opposing the settlement that the agreement was
collusive, not in good faith, or in any way motivated by a desire to harm him. In addition, in
determining the Section 877.6 issue, the Bankruptcy Court held that it was merely enforcing and
implementing the Settlement Approval Order, not expanding upon it as Appellant has suggested in
his opposition. See Neary v. Padilla, 222 F.3d 1184,1190 (9th Cir. 2000) (holding that with respect
to a judgment or order that has been appealed, the trial court also retains jurisdiction to implement
or enforce the judgment or order but may not alter or expand upon the judgment).
V.

Conclusion

For all the foregoing reasons, the Bankruptcy Court’s October 6, 2016 Settlement Approval
Order and October 7, 2016 Property Judgments are AFFIRMED.
IT IS SO ORDERED.

CC: U.S. Bankrupcty Court

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