in Re: 22 Fiske Place, LLC

Background

22 Fiske Place, LLC was a chapter 11 bankruptcy debtor, and Nicholas Gordon was its sole member. Ian J. Gazes served as the chapter 11 trustee. The bankruptcy plan allowed Gordon to retain his membership interest but provided that he would not receive a distribution of estate assets when the case closed.

The appeals concerned three bankruptcy-court orders. The Sanctions Order imposed sanctions on Gordon’s lawyer, Brent Chapman, and denied Gordon’s request to disqualify Gazes as trustee. The Interim Fee Order approved compensation and expenses for the trustee’s special counsel. The Dismissal Order dismissed Gordon’s adversary proceeding against Gazes and Gazes LLC.

Gordon’s adversary complaint alleged gross negligence and breach of fiduciary duty based on alleged failures involving taxes from the sale of the debtor’s property, estate funds, and foreclosure surplus funds. He sought damages, a surcharge against the trustee, and disgorgement of compensation. The bankruptcy court dismissed the complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state claims.

Standing to Appeal the Sanctions and Fee Orders

The district court explained that a bankruptcy appellant must be a person directly and adversely affected financially by the challenged order. Gordon argued that his status as the debtor’s sole member and his potential personal tax liability gave him standing.

The court rejected that argument as to the Sanctions Order and Interim Fee Order. Under the bankruptcy plan, Gordon’s membership interest remained unimpaired regardless of those orders, and he had no legally recognized ownership interest in the limited liability company’s specific property. The Interim Fee Order affected estate assets, not Gordon’s personal funds. The court also held that Gordon forfeited any challenge to the sanction imposed on his lawyer because he had not raised that challenge in the bankruptcy court.

The court therefore granted the trustee’s motion to dismiss Gordon’s appeals of the Sanctions Order and Interim Fee Order. It did not reach the merits of those orders.

Standing to Appeal the Dismissal of the Adversary Proceeding

The court reached a different standing conclusion regarding the Dismissal Order. Because 22 Fiske Place was treated as a disregarded entity for federal tax purposes, income from the debtor’s activities could be attributable to Gordon personally. The court concluded that this alleged personal tax impact was enough to give Gordon standing to challenge dismissal of the adversary proceeding.

Gross-Negligence Claim

The court affirmed dismissal of the gross-negligence claim. Under New York law, that claim required a duty, a breach, a close causal connection, and actual loss or harm; gross negligence also requires conduct showing reckless disregard or intentional wrongdoing.

The court held that the complaint did not plausibly allege that Gazes owed Gordon a duty of care concerning capital-gains taxes from the property sale. Because the debtor was not treated as a corporation for federal income-tax purposes, the debtor itself had no liability for those capital gains, and the trustee was not legally required to file a tax return for the debtor on that basis. The court also found that the complaint’s allegations that Gazes LLC was the trustee’s alter ego were conclusory and lacked supporting facts.

Breach-of-Fiduciary-Duty Claim

The court also affirmed dismissal of the breach-of-fiduciary-duty claim. The complaint alleged that Gazes owed fiduciary duties to both the debtor and Gordon, but it did not provide facts plausibly showing a fiduciary relationship between Gazes and Gordon personally. The court therefore agreed that the complaint failed to state a claim for breach of fiduciary duty.

Disposition

Judge Katherine Polk Failla granted the trustee’s motion to dismiss with respect to the appeals in Case Nos. 21 Civ. 8087 and 21 Civ. 8090. She affirmed the bankruptcy court’s Dismissal Order in Case No. 21 Civ. 8093. The clerk was directed to terminate pending motions, adjourn remaining dates, and close the three cases.