United States District Court, E.D. Michigan, Southern Division
IN RE TED T. AYOUB, Debtor.
(1) AFFIRMING THE BANKRUPTCY COURT'S ORDER GRANTING
DEFENDANTS' MOTION FOR SANCTIONS; (2) VACATING THE
BANKRUPTCY COURT'S ORDER ESTABLISHING NATURE AND AMOUNT
OF SANCTIONS AGAINST PLAINTIFF TED AYOUB AND PLAINTIFF'S
COUNSEL NORTON T. GAPPY; AND (3) REMANDING FOR FURTHER
MATTHEW F. LEITMAN UNITED STATES DISTRICT JUDGE
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.)
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.
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
16, 2010, Ayoub filed for Chapter 7 Bankruptcy. He received a
Chapter 7 discharge on April 18, 2011.
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
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.
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.
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.
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.
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.
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.
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.”
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.)
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 ...