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In re Ayoub

United States District Court, E.D. Michigan, Southern Division

September 20, 2017




         On October 17, 2016, Appellants Ted Ayoub, a bankruptcy debtor, and Norton Gappy, Ayoub's counsel, filed a notice of appeal in this Court with respect to two orders entered by the United States Bankruptcy Court for the Eastern District of Michigan in Adversary Proceeding 15-04153. (See ECF #1.) In the first order, the Bankruptcy Court determined that Ayoub and Gappy should be sanctioned for pursuing baseless claims in the Adversary Proceeding against Defendants Joseph Yamin, John Gwyn, Weltman, Wienberg & Ries Co., LPA, Robert Szantner, RSA Design Group, Lambert Lesser, Stephen C. Cooper, Beier Howlett P.C., FirstMerit Bank, and Simon, Galasso & Frantz, PLLC (the “Sanctions Determination Order”). (Ad. Proc. Dkt. #87.) In the second order, the Bankruptcy Court established the nature of the sanctions - ordering Ayoub and Gappy to pay the Defendants a total of $93, 988, barring Ayoub and Gappy from commencing further related litigation without prior permission, and sealing the records of the Adversary Proceeding (the “Sanctions Establishment Order”). (Ad. Proc. Dkt. #96.)

         For the reasons explained below, this Court AFFIRMS the Sanctions Determination Order, VACATES the Sanctions Establishment Order, and REMANDS this case to the Bankruptcy Court for further proceedings consistent with this Order.


         This case and the related state-court proceedings underlying this action have a long and tortured history. This Court will not set forth most of the precise details of that history because they are not essential to the proper resolution of this appeal. The Court sets forth below only those basic facts that are required to understand the issues now before the Court.

         On July 16, 2010, Ayoub filed for Chapter 7 Bankruptcy. He received a Chapter 7 discharge on April 18, 2011.

         In October 2014, Ayoub, then represented by Gappy, moved under 11 U.S.C. § 350 to re-open his bankruptcy case for the purpose of filing an adversary proceeding against the above-identified Defendants. Over the Defendants' objections, the Bankruptcy Court granted Ayoub's motion, re-opened Ayoub's bankruptcy, and permitted Ayoyb to file a Complaint against the Defendants in an adversary proceeding.

         Ayoub filed the Complaint in February 17, 2015. In the Complaint, Ayoub alleged that during the course of his bankruptcy proceedings, certain Defendants violated the automatic stay under Section 362 of the Bankruptcy Code, 11 U.S.C. § 362, by (1) filing an Amended Complaint in a state-court civil action that sought to recover a debt owed by Ayoub and (2) undertaking certain collection activities related to the state-court action. Notably, the Amended Complaint in state court did not name Ayoub as a defendant and expressly stated that it was not seeking to recover from Ayoub individually. Ayoub's Complaint in the Adversary Proceedings also alleged that certain Defendants violated the discharge granted by the Bankruptcy Court when, following entry of that discharge, those Defendants moved in state court to block Ayoub from pursuing litigation to collect debts that, Ayoub claimed, were owed to him personally. Importantly, the state courts had previously agreed with the Defendants that in the litigation in question Ayoub (1) was impermissibly attempting to collect debts that belonged to corporations with which he had been affiliated and (2) was not attempting to collect debts that belonged to him personally.

         Thereafter, all Defendants filed motions in the Bankruptcy Court to dismiss the Complaint. That court granted those motions by order dated June 1, 2015. (Ad.Proc. Dkt. #50.) In an Opinion issued that same day, the court explained that Ayoub's claims were fundamentally flawed because they ignored the distinction between Ayoub personally (to whom the automatic stay and the discharge applied) and corporate entities in which Ayoub owned an interest and/or was affiliated (to which the automatic stay and discharge did not apply). (Ad. Proc. Dkt. #49.)

         The Defendants then filed motions for sanctions against both Ayoub and Gappy in which they argued that the claims asserted in Ayoub's Complaint were frivolous. Ayoub and Gappy opposed the sanctions motions.

         On September 6, 2016, the Bankruptcy Court entered the Sanctions Determination Order. In that order, the Bankruptcy Court found that Ayoub and Gappy lacked a good-faith basis to believe that the claims in the Adversary Proceeding had merit or were justified by an extension of existing law. Accordingly, the Bankruptcy Court granted all of the Defendants' requests for sanctions.[1]

         The Sanctions Determination Order did not establish the specific sanctions that would be imposed against Gappy and Ayoub. Instead, at the conclusion of that order, the Bankruptcy Court directed the Defendants to submit statements detailing the amount and type of sanctions sought, and the court directed the parties to appear for an evidentiary hearing on September 21, 2016. The Defendants submitted their sanctions statements prior to the scheduled hearing.

         Neither Gappy nor Ayoub appeared for the hearing on September 21. The Bankruptcy Court proceeded with the hearing in their absence and took the matter under advisement.

         Two days later, on September 23, 2016, Gappy filed a “Motion for Rehearing Regarding the Evidentiary Hearing of September 21, 2016.” (Ad. Proc. Dkt. #94.) In that motion, Gappy told the Bankruptcy Court that he had missed the September 21st hearing because he made a mistake when entering the hearing date into his calendar. (See id.) Gappy explained that he had been under a tremendous amount of stress because his father had been diagnosed with terminal bladder cancer, and he (Gappy) had been spending “a great deal of time” attending to his father's urgent needs. (Id.) Gappy further described how he had “been overwhelmed since his father was diagnosed with terminal bladder cancer, ” and he said that his father's “diagnosis and doctors' … appointments ha[d] apparently distracted/overwhelmed [him] more than [he] thought.” (Id.) Gappy further highlighted that he had not missed any of the other proceedings in the case and that he had had “every intention” of attending the evidentiary hearing. (Id.) Finally, Gappy promised that if the court did re-schedule the evidentiary hearing that he “[would] attend” that hearing “without doubt.” (Id.)

         The Bankruptcy Court did not rule on the merits of Gappy's request to reschedule the hearing. Instead, it issued a text-only order striking Gappy's motion. In full, the order provided as follows: “This pleading is stricken from the record because of Incomplete Case Caption and misuse of the generic event (should use Request for Hearing) (related documents Generic Motion). So Ordered by Judge Walter Shapero.” (Ad. Proc. Dkt #95.)

         The Bankruptcy Court issued the Sanctions Establishment Order on September 29, 2016. (Ad. Proc. Dkt. #96.) Before specifying the sanctions awarded, the court acknowledged Gappy's request to re-schedule the hearing and explained that it would not re-set the hearing because of, among other things, its impending retirement:

On September 23, 2016, the docket reflects the attempted filing of a Motion on behalf of Ayoub and Gappy seeking a rehearing of the September 21, 2016 hearing. On September 26, 2016 the docket reflects the entry of a docket order striking that motion due to procedural deficiencies. Irrespective of that, given the circumstances and particularly the fact that this Court is retiring effective September 30, 2016, and this Court having heard the matter, it should and must act on the subject matter of this order prior to its retirement. It is therefore appropriate that ...

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