Sune Gaulsh

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	:
: 	Chapter 7
SUNE GAULSH, 	: 	Case No. 15-12496 (SMB)
:
Debtor. 	:
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MEMORANDUM DECISION AND ORDER GRANTING
REARGUMENT AND ADHERING TO ORIGINAL DECISION
A P P E A R A N C E S:
LAW OFFICE OF COLIN M. LINSENMAN
Attorney for Debtor
43 West 43rd St., Suite 62
New York, NY 10036
Colin M. Linsenman, Esq.
Of Counsel
AMANDA HILLER
Deputy Commissioner and Counsel
Attorney for New York State Department of Taxation and Finance
15 MetroTech Center
Brooklyn, NY 11201
Jeffrey K. Cymbler, Esq.
District Tax Attorney
Of Counsel
It may sound strange, but the debtor objected to the proof of claim filed by the
New York State Department of Taxation and Finance (“Department”) because the
amount of the claim was too low. After the Court overruled the claim objection, the
debtor filed this motion for reconsideration. (Motion for Reconsideration of Debtor’s
Objection to Proof of Claim #2 Filed by New York State Department of Taxation and
Finance, dated Apr. 22, 2019 (the “Motion”) (ECF Doc. # 45).) The Court will grant the
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Motion solely to amplify its prior bench decision. However, the debtor’s underlying
claim objection is meritless, and the Court will, therefore, adhere to its original decision.
BACKGROUND
The facts are undisputed. The debtor filed his chapter 7 petition on September 8,
2015 (“Petition Date”). His initial submissions suffered from two material deficiencies
that came to light only later. 	First, Schedule B (ECF Doc. # 1) did not disclose a claim
the debtor had against his former attorney although it was the subject of litigation.
Second, the debtor had not filed a 2013 tax return, but Schedule E did not list any
unsecured priority claims, which would have included his potential 2013 tax liability.
On November 2, 2015, and while the bankruptcy case was pending, the Debtor
filed his 2013 income tax return. (Response to Objection to Proof of Claim #2 Filed by
New York State Department of Taxation and Finance, dated Mar. 28, 2019 (“First
Response”), at ¶ 2 (ECF Doc. # 43).) The Department issued a Notice of Assessment
that same day in the sum of $39,878.61. 1 (Id. at ¶ 3 & Ex. A.) The Trustee eventually
filed a “no asset” report, meaning the case was fully administered and there were no
assets to distribute to creditors. The debtor received a discharge on April 12, 2016 and
the case was closed the same day.
The debt for 2013 income taxes was not dischargeable, see 11 U.S.C. §§
507(a)(8)(A)(i), 523(a)(1), and the Department subsequently collected most of the debt
1 	Although the debtor claims he disclosed the tax liability as well as the litigation claim to the
chapter 7 trustee (“Trustee”), the United States Trustee and his largest unsecured creditor, he never
amended his schedules to reflect the claim or the tax liability.
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outside of the bankruptcy. On April 1, 2016, the Department set off a $5,142.00 tax
refund pertaining to 2015 against the debtor’s New York State tax debt. 2 (First
Response, at ¶ 5 & Ex. B.) The debtor and the Department also entered into two
installment payment agreements (collectively, the “Agreements”) after the case was
closed to pay down the debt at the rate of $800.00 per month, and finally, the
Department set off an additional $10,103.81 of 2013 tax debt against another refund.
(Id. at ¶¶ 8-10 & Exs. C & D.)
On October 23, 2018, the debtor moved to reopen his case. (Debtor’s Motion for
an Order Reopening His Chapter 7 Case Pursuant to 11 U.S.C. § 350(b) and to
Reappoint the Chapter 7 Trustee, dated Oct. 23, 2018 (ECF Doc. # 23).) The motion
revealed that the debtor had commenced a state court action in December 2015 against
the attorney that had represented him in a child custody dispute, the attorney had
defaulted, and the state court had scheduled an inquest. 3 (Id. at ¶¶ 11, 14.) The debtor
had “inadvertently” failed to schedule the claim or list it in his statement of financial
affairs, (id. at ¶ 15), and the claim now looked to be valuable. In addition, he had
“inadvertently” failed to list his tax debt, (id. at ¶ 16), and he now sought to amend
Schedule E to list the Internal Revenue Service and the Department as priority creditors
in the respective sums of $95,307.25 and $39,878.61, based on unpaid 2013 income
taxes. (See id. at ¶ 16 & Ex. A, Sched. E.) The Court denied the motion without
prejudice because the debtor’s attorney had failed to submit a memorandum of law.
2 	This set off occurred while the bankruptcy case was still pending. Nothing in this decision
precludes the appropriate party from seeking relief based on this set off.
3 	The debtor did not disclose the pending lawsuit in response to Part 4 of his amended statement of
financial affairs, which he filed on January 12, 2016. (See ECF Doc. # 13.)
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(Order Denying Debtor’s Motion for an Order Reopening His Chapter 7 Case Pursuant
to 11 U.S.C. § 350(b) Without Prejudice, dated Nov. 16, 2018 (ECF Doc. # 25).)
The debtor filed a second motion to reopen with an accompanying memorandum
of law, (Debtor’s Motion for an Order Reopening His Chapter 7 Case Pursuant to 11
U.S.C. § 350(b) and to Reappoint the Chapter 7 Trustee, dated Nov. 19, 2018 (ECF Doc.
# 26)), and this time, the Court reopened the case. (Order Granting Debtor’s Motion
for an Order Reopening His Chapter 7 Case Pursuant to 11 U.S.C. § 350(b), dated Dec.
17, 2018 (ECF Doc. # 29).) The Trustee, who had been reappointed by the United States
Trustee, notified the Clerk of Court of a possible dividend, (Letter from Trustee to Clerk
of Court, dated Dec. 18, 2018 (ECF Doc. # 31)), and the Clerk sent a notice to creditors
setting a deadline of March 25, 2019 to file claims. (Notice of Possible Payment of
Dividends and of Last Date to File Claims, dated Dec. 19, 2018 (ECF Doc. # 34).) The
Department filed an amended unsecured priority claim in the sum of $4,182.58 (the
“Claim”), representing the remaining balance due from the debtor for his 2013 income
tax liability. (Claim # 2-2.) In addition, the Internal Revenue Service filed an unsecured
priority claim in the sum of $90,803.27, (Claim # 4-1), and the American Express
National Bank filed a general unsecured claim in the sum of $28,533.99. (Claim # 3-1.)
A. The Claim Objection
The debtor filed an objection to the Claim on March 8, 2019. (Objection to Proof
of Claim #2 Filed by New York State Department of Taxation and Finance, dated Mar.
8, 2019 (“Objection”) (ECF Doc. # 42).) He reasoned that once an objection to a claim is
filed, the Court must determine the amount of the claim “as of the date of the filing of
the petition.” (Objection ¶ 7 (quoting 11 U.S.C. § 502(b).) He conceded that he owed the
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Department $39,878.61 on the Petition Date, (id. at ¶ 4), and the Department had,
therefore, “improperly reduced [the Claim] to account for payments made by the Debtor
post-petition, and with funds that were not part of the bankruptcy estate.” (Id. at ¶ 8.)
Consequently, the Department should be “ordered to enter a Proof of Claim in the
amount of the debt owed to it as of the date of the filing of the petition.” (Id.,
WHEREFORE Clause at ¶ A) (emphasis added).) Thus, instead of a claim in the amount
of $4,182.58, the Department should be forced to file a claim in the amount of
$39,878.61.
The debtor was attempting to use section 502 as a “back door” avoidance
provision for his personal benefit. He contended that the Court should allow the
Department’s $39,878.61 claim, the Trustee should pay that claim from estate funds
recovered in litigation, and he should be reimbursed by the Department for any surplus.
(Brief in Support of Objection to Proof of Claim #2 Filed By New York State
Department of Taxation and Finance, dated Mar. 8, 2019, at ECF p. 6 of 14 4 (“To the
extent that Debtor is able to recover funds in the lawsuit filed in state court, those funds
should be applied to the claim in the amount as of the petition date. To the extent that
payment results in a surplus for the creditor, the Debtor should be reimbursed in an
amount equal to the surplus, as those payments were made with post-petition funds,
and were not part of the bankruptcy estate.”) (ECF Doc. # 42).) Depending on the
success of the litigation, the surplus could exceed $35,000.
4 	“ECF p.” refers to the page number and number range printed at the top of each page by the
Court’s CM/ECF system.
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The Department submitted a brief response. After recounting the history of the
case, it simply stated that the Department had validly collected the debt from non-estate
property after the case was closed and before the case was reopened. (First Response at
¶ 16.)
The Court denied the Objection from the bench. 5 (Order Denying Debtor’s
Objection to Proof of Claim #2 Filed by New York State Department of Taxation and
Finance, dated Apr. 19, 2019 (ECF Doc. # 44).) The Court pressed debtor’s counsel on
what he hoped to accomplish since the debt was not dischargeable and was reduced by
offsets to refunds and payments under the Agreements executed after the case was
closed. The Department was free to collect the non-dischargeable taxes directly from
the debtor and it made no sense for the Department to file a claim for more than it was
owed.
B. Reargument
The Motion seeks reconsideration “to present to the Court an argument in
response to the additional arguments raised by the Court, which were not relevant to
Debtor’s Objection, but which it appears the court relied on heavily in making its
decision.” (Motion, at ECF p. 2 of 6.) The debtor contends that permitting the
Department to keep the tax payments (and thereby take a smaller distribution from the
estate) prejudices the debtor because the creditors will receive the benefit of the post-
petition payments by receiving a larger distribution from the same pot of assets. (See id.
at ECF pp. 3-4 of 6.) On the other hand, if the Department receives a distribution in this
5 	The transcript is not available, but the digital recording is.
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case of more than the unpaid balance of $4,182.58 on a $39,878.61 claim (a 10.49%
dividend), the debtor will recover the surplus from the Department “which is not a
concern of the bankruptcy estate.” (Id. at ECF p. 3 of 6.)
The Department responded that the debtor failed to cite any legal authority to
support the proposition that the Department must file a claim in the amount owed on
the Petition Date and ignore subsequent collections that reduced the debt. (Response to
Motion for Reconsideration of Debtor’s Objection to Proof of Claim #2 Filed by New
York State Department of Taxation and Finance, dated May 22, 2019, at ¶ 5 (ECF Doc.
# 47).) In addition, the Court had previously rejected the debtor’s argument regarding
his right to recover a surplus. (Id. at ¶ 7.)
DISCUSSION
A motion for reargument or reconsideration is governed by Local Bankruptcy
Rule 9023-1. 6 The “motion must set forth concisely the matters or controlling decisions
6 	Local Bankruptcy Rule 9023-1(a) states:
A motion for reargument of a court order determining a motion must be served within
fourteen (14) days after the entry of the Court's order determining the original motion, or
in the case of a court order resulting in a judgment, within fourteen (14) days after the
entry of the judgment, and, unless the Court orders otherwise, shall be made returnable
within the same amount of time as required for the original motion. The motion must set
forth concisely the matters or controlling decisions which counsel believes the Court has
not considered. No oral argument shall be heard unless the Court grants the motion and
specifically orders that the matter be re-argued orally.
The Motion invokes Rules 59(e) and 60 of the Federal Rules of Civil Procedure, made applicable
to this contested matter by Rules 9023 and 9024 of the Federal Rules of Bankruptcy Procedure,
as well as Rule 3008 of the Federal Rules of Bankruptcy Procedure, (Motion at ECF p. 1 of 6), but
the standards are the same as the local reargument rule. Cf. In re Facebook, Inc. IPO &
Derivative Litig., 43 F. Supp. 3d 369, 373 (S.D.N.Y. 2014)(Sweet, J.) (discussing the analogous
Local District Court Rule 6.3), aff’d, 841 F.3d 122 (2d Cir. 2016). The debtor also cites
Bankruptcy Rule 3008 which addresses reconsideration of orders allowing or disallowing claims.
As the Court’s order overruling the debtor’s objection did not allow or disallow the Department’s
claim, it does not apply.
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which counsel believes the Court has not considered.” The movant must show that the
court overlooked controlling decisions or factual matters that might have materially
influenced its earlier decision. In re Asia Global Crossing, Ltd., 332 B.R. 520, 524
(Bankr. S.D.N.Y. 2005). Alternatively, the movant must demonstrate the need to
correct a clear error or prevent manifest injustice. Perez v. Progenics Pharm., Inc., 46
F. Supp. 3d 310, 314 (S.D.N.Y. 2014); accord In re Asia Global Crossing, Ltd., 332 B.R.
at 524. “These criteria are strictly construed against the moving party so as to avoid
repetitive arguments on issues that have been considered fully by the court,” Griffin
Indus., Inc. v. Petrojam, Ltd., 72 F. Supp. 2d 365, 368 (S.D.N.Y. 1999); accord Liberty
Media Corp. v. Vivendi Universal, S.A., 861 F. Supp. 2d 262, 265 (S.D.N.Y. 2012), and a
motion for reargument is not an opportunity to present the case under new theories,
secure a rehearing on the merits, or otherwise take a “second bite at the apple.” Sequa
Corp. v. GBJ Corp., 156 F.3d 136, 144 (2d Cir. 1998); see also Liberty Media Corp., 861
F. Supp. 2d at 265 (“A motion for reconsideration is not an opportunity for making new
arguments that could have been previously advanced, nor is it a substitute for appeal.”)
(citations and internal quotation marks omitted).
The Court will grant reargument to further explain its decision but will not order
oral argument because the debtor’s arguments are ill-conceived and oral argument
would be a waste of time. Here’s why. First, the debtor misunderstands the claims
allowance process. Bankruptcy Code § 501, which governs the filing of a claim, does not
mandate that the creditor file the claim in the amount owed on the petition date. In
fact, later events can affect the amount of the claim. The creditor may, as here,
subsequently collect the debt from the debtor (or from guarantors) or the non-debtor
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party aggrieved by the debtor’s breach may mitigate its damages, such as by reselling
goods the debtor wrongfully rejected or reletting premises following the debtor’s
eviction. Because of the unusual procedural posture of the case resulting from the
debtor’s “inadvertent” failure to schedule the litigation claim, the case was closed, the
Department thereafter collected a substantial part of the debt from the debtor and by
the time the case was reopened over two years later, the debtor owed the Department
much less than he did on the Petition Date. Nothing in the Code allows much less
requires the Court or the creditor to ignore a reduction in the amount of a claim. In fact,
the assertion of the paid portion of the claim in those circumstances might run afoul of
Bankruptcy Rule 9011.
Second, the debtor misreads or only partially reads section 502(b). Section
502(b) provides, in relevant part, that if an objection to a claim is made:
the court . . . shall determine the amount of such claim in lawful currency
of the United States as of the date of the filing of the petition, and shall
allow such claim in such amount, except to the extent that—
(1) such claim is unenforceable against the debtor and property of
the debtor, under any agreement or applicable law for a reason other than
because such claim is contingent or unmatured . . . .
11 U.S.C. § 502(b)(1) (emphasis added). Subparagraph (b)(1) incorporates the
affirmative defenses available to the debtor under non-bankruptcy law. 4 RICHARD
L EVIN & H ENRY J. SOMMER, COLLIER ON B ANKRUPTCY ¶ 502.03[2][b], at 502-23 (16th ed.
2019). The debtor has asserted an objection in the belief that this requires the
Department to file a larger claim but has not identified a substantive basis for its
objection, i.e., why the Department’s claim for only $4,182.58 rather than $39,878.61
would be unenforceable under New York law. To the contrary, and not surprisingly,
payment and offset are affirmative defenses under New York law, see Hill v. St. Clare’s
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Hosp., 490 N.E.2d 823, 830 (N.Y. 1986) (payment); Wooten v. New York, 753 N.Y.S.2d
266, 269 (N.Y. App. Div. 2002) (offset), leave to appeal denied, 807 N.E.2d 289 (N.Y.
2003), that limit the allowed amount of the Claim under section 502(b)(1).
Third, the debtor ignores the role of the Trustee. There is currently no property
of the estate to distribute to creditors but if the estate recovers funds from the debtor’s
former attorney, there will be. In that event, the Trustee is compelled by statute to
object to the Department’s $39,878.61 claim on the basis of part payment and seek to
reduce it to $4,182.58, the amount still owed. 11 U.S.C. § 704(a)(5) (“The trustee shall . .
. if a purpose would be served, examine proofs of claims and object to the allowance of
any claim that is improper . . . .”) In the end, the Department would be left with the
same $4,182.58 claim.
Fourth, the debtor’s argument turns bankruptcy law on its head. He contends
that his recovery of the surplus “is not a concern of the bankruptcy estate,” but he is
wrong. As concerns creditors, the goal of bankruptcy is to pay them as much as
possible. If the Department’s claim is $4,182.58 rather than $39,878.61, there will be
more money to pay the other claims. The debtor bemoans the fact that his post-
bankruptcy payments will benefit his creditors and contends that the Department
should be forced to file a claim for a debt in an amount he no longer owes so that he
rather than the creditors can benefit. In bankruptcy, however, the debtor comes last,
not first, and is not entitled to any surplus unless and until all timely and untimely
claims are paid in full with interest. 11 U.S.C. § 726(a). The debtor has not pointed to
any principle of bankruptcy law that requires that he rather than his creditors should
receive the benefit of the payments he voluntarily agreed to make or refunds the
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Department was entitled to set off in partial satisfaction of unpaid income taxes he
failed to schedule.
Accordingly, reargument is granted but the Court adheres to its original decision.
So ordered.
Dated:New York, New York
July 17, 2019
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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