New York District Court Nixes Shareholder’s Appeal in Trustee Suit

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July 18, 2022, US District Court for Southern New York – The District Court for Southern New York granted Trustee Ian J. Gazes’ motion to dismiss Nicholas Gordon’s appeal from Bankruptcy Court’s orders. The orders dismissed the adversary proceeding filed by Nicholas Gordon against Trustee Gazes and imposed sanctions against Gordon’s counsel, Brent Chapman. 

Appellant Nicholas Gordon is the sole member of 22 Fiske Place, LLC (the “Debtor”). In 2015, Ian J. Gazes was appointed as chapter 11 trustee (the “Trustee”) in the Debtor’s bankruptcy case and the Chapter 11 Plan was confirmed in 2016. 

Appellant Nicholas Gordon initiated an adversary proceeding against the Trustee and Gazes, LLC, alleging “gross negligence” and “breach of fiduciary duty” while also alleging “willful and deliberate failure” on the part of the Trustee.

• Gordon alleged that Trustee Gazes failed to file income tax returns and pay income taxes ostensibly arising from the sale of the Debtor’s primary property at 22 Fiske Place, Brooklyn, New York;

• Gordon alleged that Trustee Gazes failed to disburse to the Debtor the so-called “tax escrow” that had ostensibly been set aside to pay income taxes and, instead used those funds to pay post-confirmation professional fees; and

• Gordon alleged that Trustee Gazes caused “deficiency” in the estate funds by making payment of the fees to the lawyers hired to assist the Debtor in filing its claim for the Foreclosure Surplus Funds.

“Foreclosure Surplus Funds” is the amount that the Debtor paid in excess of the sum mortgaged when purchasing the 22 Fiske Place property in a foreclosure sale in 2008. However, the Debtor alleged that the property’s previous owner remained in possession of the property without paying rent for eight years. In a 2014 state court proceeding, the Debtor sued the previous owner and obtained a default judgment in the amount of $717,271.00. The Debtor claimed an interest in the surplus funds held by Kings County Clerk to the amount of default judgment. 

The Bankruptcy Court had found in its order that the assertions upon which Appellant Gordon relied in the adversary complaint were “conclusory, unsupported, and not entitled to the assumption of truth”. The Bankruptcy Court concluded that the complaint did not state with particularity the factual allegations that plausibly supported the elements of claims of gross negligence and breach of fiduciary duty. 

While ruling on the claim of gross negligence, the District Court found that the adversary complaint failed to establish that the Trustee owed any duty of care to Appellant Gordon with respect to capital gains arising from the sale of the 22 Fiske Place property. The Court observed that a trustee is obligated to pay taxes incurred during the administration of the case in performance of its duties towards the creditors of the estate. The Court concluded that the trustee’s obligations to file tax returns under 11 U.S.C. § 1106(a)(6) arises only when “required by law” and the Trustee in the instant case was not “required by law” to file returns on behalf of the post-petition Debtor. 

The Court further ruled that the Debtor is a single member limited liability company that did not affirmatively elect to be treated as a corporation for federal income tax purposes, and therefore the Debtor has no liability for any capital gains. The Court dismissed the Trustee’s alleged duty to pay tax under IRC sections 1398 and  6012(b)(3) as they are applicable only to corporations. The Court held Appellant Gordon personally liable for any capital gains resulting from the sale of the 22 Fiske Place property. In the view of the Court, the Appellant failed to establish that the Trustee owed him any duty of care with respect to taxes and therefore, his claim for gross negligence was dismissed. 

The District Court also dismissed a possibility of fiduciary relationship between the Trustee and the Appellant due to lack of pertinent facts in the Appellant’s pleadings. 

The District Court affirmed the decision of the Bankruptcy Court and granted the Trustee’s motion to dismiss Appellant Gordon’s appeal.  

Gordon v. Gazes (In re 22 Fiske Place, LLC), 2022 U.S. Dist. LEXIS 127430

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