Barry, it is possible to say that, but only as a way to show contrast, as in: Were they happy? They are (up until today). But in the sense of: Were they happy? Yes they were. It should be the same as in English, both in past form. ¿Estaban felices? Sí, estaban felices. (literally "yes, they were happy") Sí, lo estaban. (literally "yes, they were it", "it" meaning "happy"). Both answers are possible. I hope this helps you.