ORDER (1) Affirming the Bankruptcy Court's Order Granting Defendant's 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 Proceedings. Signed by District Judge Matthew F. Leitman. (HMon)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
TED T. AYOUB,
Case No. 16-cv-13687
Hon. Matthew F. Leitman
ORDER (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 PROCEEDINGS
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
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
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
Some of the Defendants served their sanctions motions twenty-one days before
filing the motions; other did not. With respect to the Defendants who served their
sanctions motions in advance of filing, the Bankruptcy Court awarded sanctions
against Gappy, the signer of the Complaint, under Bankruptcy Rule 9011. With
respect to the remaining Defendants, the Bankruptcy Court awarded sanctions
against Gappy under its inherent authority. Finally, with respect to all of the
Defendants, the court awarded sanctions against Ayoub under its inherent authority.
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
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 /s/ 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
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 this order be entered and any request for rehearing,
whenever filed, be addressed to and heard by the Judge to whom this case is
(Id. at n.1.)
The Bankruptcy Court then ordered the following sanctions: (1) it required
Ayoub and Gappy, jointly and severally, to pay a total of $93,988 to the Defendants;
(2) it enjoined Ayoub and Gappy from filing litigation related to the subject matter
of the Adversary Proceeding; and (3) it sealed the records of the Adversary
Proceeding, other than its own Opinions and Orders. (Ad. Proc. Dkt. #96.)
Ayoub and Gappy filed a timely Notice of Appeal, and the parties then fully
briefed the appeal. This Court held a hearing on the appeal on August 17, 2017.
Pursuant to 28 U.S.C. § 158, a district court has jurisdiction over appeals from
the bankruptcy court in the same district. A reviewing court will not set aside a
bankruptcy court’s factual findings under they are clearly erroneous. In re Laguna
Assocs. Ltd. Partnership, 30 F.3d 734, 737 (6th Cir. 1994). A bankruptcy court’s
conclusions of law are reviewed de novo. See id.
An award or denial of sanctions is reviewed under the abuse of discretion
standard. See Hartleip v. McNeilab, Inc., 83 F.3d 767, 778 (6th Cir.1996). A court
abuses its discretion when the court’s (1) decision is based on an erroneous
conclusion of law; (2) the court’s findings are clearly erroneous; or (3) decision is
unreasonable, arbitrary, or fanciful. In re M.T.G., Inc., 298 B.R. 310, 317 (E.D.
Ayoub and Gappy challenge the Sanctions Determination Order on two
grounds. First, they argue that the claims in Ayoub’s Complaint could not have been
frivolous because the Bankruptcy Court necessarily found at least some merit in the
claims when that court granted the motion to re-open Ayoub’s bankruptcy and
allowed Ayoub to file the claims in the first instance. Second, they argue that the
claims in Ayoub’s Complaint were, in fact, meritorious and that the award of
sanctions was thus plainly wrong and constituted an abuse of discretion. This Court
will address these arguments separately below.
The Court rejects Ayboub’s and Gappy’s argument that the Bankruptcy Court
found some merit in Ayoub’s claims when that court agreed to permit Ayoub to
assert the claims.
When the Bankruptcy Court announced its ruling granting
Ayoub’s motion to re-open his bankruptcy and file his Complaint against the
Defendants, the court made clear that it was not pre-judging the merits of Ayoub’s
THE COURT: My ruling on this matter is as follows:
I am going to grant the motion to reopen the case, but I
have other comments to make. The -- the statute and rule
permit the reopening of the case for cause.
It’s been said many times that this is a fairly low threshold
and so I think cause has been shown to pursue violations
or alleged violations of the other – particularly the
But let me say other things in connection with this. I think
the parties that have spoken to the Court today on the
record as far as I have perceived it at least, have made a
fairly strong case for their position in terms of the merits
of any claim that may be made.
But the point is, that is not before me today. And for me to
deny the opening of the case is in effect, given the nature
of this situation, a pre-determination of the merits of the
claim that the debtor says he’s going to make if the case is
And given the complexity of the State Court proceeding,
the duration, the timing, I mean there are laches issues,
there are all kinds of issues. And for me to determine -pre-determine on a reopening motion, the merits of the
proceedings, or the lack of merits of the proceeding would
be a mistake.
So that said, and so the merits ought to be determined in
the context of a proceeding where we have the entire
record and the matters at issue. And then I can decide the
merits of the case in that context as opposed to denying the
moving party here the opportunity to at least assert that.
So that said, that’s my rationale. And I will sign the order.
Well, do we need to get in -- into an argument about the - the order? Let’s see what the order -- well, this is a -I’m not sure there was an order presented.
Given the nature of the -- of the original filing is an ex
parte matter. That said, I’ll ask the moving party to simply
present an order -- present it under the local rule so there’s
no issue of further need for any complex problems here.
And -- but that’s my ruling. And present an order that
simply grants the motion.
(Ad. Proc. Dkt. #117; 12/11/14 Tr. at 29-31; emphasis added.)
Simply put, the bankruptcy court expressly withheld any consideration of the
merits of Ayoub’s claims when it granted Ayoub’s motion to re-open his bankruptcy
and file his Complaint against the Defendants. Thus, Ayoub and Gappy are not
entitled to reversal of the Sanctions Determination Order on the ground that the
Bankruptcy Court found some merit in Ayoub’s claims before the court agreed to
re-open Ayoyb’s bankruptcy.
The Court rejects Ayoub’s and Gappy’s argument that there was at least some
merit in claims Ayoub raised in his Complaint against the Defendants. The Court
addresses each of the claims Ayoub raised separately below.
In the claim for violation of the automatic stay, Ayoub alleged that certain
Defendants violated the stay by pursuing litigation and collection efforts related to
that litigation in state court. But, critically, Ayoub was not a defendant in the
relevant state court litigation; the Amended Complaint in that action – which,
according to Ayoub, was filed in violation of the automatic stay – did not seek entry
of a judgment against Ayoub. Indeed, as the Bankruptcy Court correctly noted, the
state court Amended Complaint expressly stated that “the above action has not been
stated against [Ayoub] individually due to [his] bankruptcy filing.” (Ad. Proc. Dkt.
#87 at 3, quoting state court Am. Compl.) While the Amended Complaint did assert
claims against a corporation whose stock was wholly owned by Ayoub, that is
plainly not the same as asserting a claim against Ayoub personally. The related
collection activities were likewise not even arguably directed at Ayoub personally.
Ayoub and Gappy counter that the Amended Complaint violated the
automatic stay because it asserted a claim against a corporation on the ground that
the corporation was Ayoub’s alter ego. Ayoub and Gappy contend that that is the
same (or effectively the same) as proceeding against Gappy himself. But Ayoub and
Gappy have not cited any authority for the proposition that the assertion of such an
alter ego claim – which seeks to collect assets held by the corporation and titled in
the corporation’s name – violates the automatic stay.2 Moreover, it is significant
that Ayoub did not respond to the filing of the Amended Complaint or to the
Ayoub and Gappy cite a number of cases in which an automatic stay issued to a
debtor has been extended to protect an entity that is closely related to the debtor.
(See Ayoub’s Appeal Brief, ECF #26 at Pg. ID 297-98.) But those cases are no help
to Ayoub and Gappy. In these cases, a court entered an order extending the
automatic stay to the related party. Nothing in those decisions suggests that the stay
applied to the related parties in the absence of a court order. Here, Ayoub never filed
a motion to extend the automatic stay to the defendants named in the Amended
Complaint in state court, and the Bankruptcy Court never extended the stay to any
of those parties. The cases cited by Ayoub do not indicate that the automatic stay
would apply to the state court defendants under these circumstances.
undertaking of the related collection actions by moving in his bankruptcy
proceedings – which were ongoing at that time – for entry of an order holding that
those actions violated the automatic stay. If Ayoub truly had a good-faith belief that
the inclusion of an alter ego theory in the Amended Complaint and the pursuit of
related collection activities violated the stay – and, as described above, he has not
cited any authority for that proposition – then he surely would have sought to remedy
those violations when they occurred. Simply put, the Court is not persuaded that
Ayoub and Gappy had a good-faith basis for claiming in the Adversary Proceeding
that the filing of the state court Amended Complaint and the collection actions
related to that Amended Complaint violated the automatic stay entered in Ayoub’s
In the claim for violation of the discharge, Ayoub alleged that the Defendants
violated the discharge by preventing him from pursuing state court litigation in
which, according to Ayoub, he was seeking to collect debts owed to him personally.
But, as the Bankruptcy Court noted, the state courts repeatedly ruled that Ayoub was
improperly attempting to assert claims that did not belong to him personally, and,
instead, belonged to corporate entities in which he owned an interest or with which
he was affiliated. Ayoub has not presented any basis on which to question the state
court’s rulings in this regard nor any basis on which one could conclude that any of
the Defendants violated his bankruptcy discharge by seeking to block him from
asserting the claims in question in state court.
The Court finds persuasive, and adopts as its own, the Bankruptcy Court’s
thorough analysis and well-supported conclusions (as set forth in the Sanctions
Determination Order) on the issue of whether Ayoub and Gappy should have been
sanctioned for the claims asserted against the Defendants. As the Bankruptcy Court
aptly noted, an award of sanctions was especially appropriate in light of the fact that
– as the Bankruptcy Court described in detail – the state courts had repeatedly
rejected Ayoub’s efforts to conflate his personal status with that of corporations in
which he owned an interest. Accordingly, the Court AFFIRMS the Sanctions
The Bankruptcy Court should not have entered the Sanctions Establishment
Order without re-scheduling the evidentiary hearing that Gappy failed to attend and
giving Ayoub and Gappy a full opportunity to present evidence and argument with
respect to the requested sanctions. While Gappy clearly made a mistake in missing
the scheduled hearing date, he offered the Bankruptcy Court an entirely reasonable
explanation for his error – the terminal illness of his father and the havoc that illness
was wreaking in his life. With so much at stake – given the substantial sums
demanded by the Defendants and the potential impact of a large sanctions award on
Gappy, a solo practitioner – the balance of equities tipped decidedly in favor of resetting the evidentiary hearing. And doing so would not have unfairly prejudiced
The Bankruptcy’s Court desire to enter the Sanctions Establishment Order and
to conclude the Adversary Proceeding was understandable in light of that court’s
impending retirement. There is no doubt that that court was best positioned to
determine the sanctions to be awarded, that judicial efficiency was best served by
having that court do so, and that that court had the best interests of the system in
mind when it proceeded to impose the sanctions rather than “kicking” the sanctions
“can” down the “road.” But the successor judge was (and is today) surely capable
of deciding which sanctions to impose, and under the unique circumstances of this
case (including the significant impact that the requested sanctions could have had on
Gappy and Ayoub), the hearing concerning the type of sanctions to be imposed
should have been held before the successor judge even if that resulted in some
measure of judicial inefficiency.
The Bankruptcy Court seemed to recognize that Gappy and Ayoub should be
given an opportunity to address the nature and amount of the sanctions in that court
and prior to any appeal. The court suggested that Gappy and Ayoub could file a
motion for rehearing to be heard by the successor judge. But a motion for rehearing
was not a sufficient substitute for an evidentiary hearing prior to a ruling on which
sanctions to impose. In the context of a motion for rehearing, Gappy and Ayoub
would have had to demonstrate both a palpable defect and that correction of that
defect would have resulted in a different disposition. See, e.g, In Re Bressler, 2005
WL 1177908 (Bkrtcy. E.D. Mich. 2005). In contrast, if the Bankruptcy Court had
conducted the evidentiary hearing before entering the Sanctions Establishment
Order, Gappy and Ayoub could have presented their evidence and argument free of
that formidable burden.3
For the reasons explained above, this Court VACATES the Sanctions
Establishment Order and REMANDS to the Bankruptcy Court for further
proceedings consistent with this Order, including allowing Gappy and Ayoub to
present evidence and argument opposing the nature and amount of Defendants’
requested sanctions. Following the presentation of evidence and argument by Gappy
and Ayoub (and any other proceedings or evidentiary submissions the Bankruptcy
Court deems appropriate), the Bankruptcy Court, guided by relevant Sixth Circuit
and other precedent concerning the factors to consider when imposing sanctions,
The Court recognizes that Gappy titled his submission as a motion for “rehearing.”
(See Ad. Proc. Docket #94.) But he was not seeking rehearing of the decision
concerning which sanctions to impose because that decision had not yet been made.
Gappy was asking the court to hold a hearing before making a final ruling.
may enter a new order establishing the nature and amount of sanctions it deems
As explained above, IT IS HEREBY ORDERED that the Sanctions
Determination Order is AFFIRMED; the Sanctions Establishment Order is
VACATED; and this case is REMANDED for further proceedings consistent with
s/Matthew F. Leitman
MATTHEW F. LEITMAN
UNITED STATES DISTRICT JUDGE
Dated: September 20, 2017
I hereby certify that a copy of the foregoing document was served upon the parties
and/or counsel of record on September 20, 2017, by electronic means and/or
s/Holly A. Monda
Nothing in this Order shall in any way preclude the Bankruptcy Court from
imposing the same sanctions imposed in the Sanctions Establishment Order if, after
reviewing the evidence and argument, the court deems those sanctions appropriate.
This Court expresses no opinion whatsoever as to whether any particular sanction or
amount of monetary sanctions is appropriate. This Court vacates the Sanctions
Establishment Order for procedural, not substantive, reasons.
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