January 18, 2017
from the United States District Court for the Northern
District of Illinois, Eastern Division. No. l:12-cv-02372 -
John Robert Blakey, Judge.
Wood, Chief Judge, and Posner and Hamilton, Circuit Judges.
Hamilton, Circuit Judge.
appeal pivots on the procedural requirements of Federal Rule
of Civil Procedure 11 for seeking sanctions against a party
and its attorney for asserting a frivolous claim or defense.
Rule 11(c)(2) requires a party seeking Rule 11 sanctions
first to serve a proposed motion on the opposing party and to
give that party at least 21 days to withdraw or correct the
offending matter. Only after that time has passed may the
motion be filed with the court. To mix naval metaphors, the
party seeking sanctions must first fire a warning shot that
gives the opponent time to find a safe harbor.
case, the party who sought sanctions failed to comply with
that procedure. It argued, however, that two letters it sent
containing both settlement demands and threats to seek Rule
11 sanctions if its demands were not met amounted to
"substantial compliance" with Rule 11(c)(2) and
thus preserved its right to move for sanctions after the
district court granted summary judgment in its favor. The
district court accepted that argument and imposed sanctions.
Northern Illinois Telecom, Inc. v. PNC Bank, NA (NITEL
II), No. 12 C 2372, 2015 WL 1943271, at *9 (N.D. 111.
Apr. 29, 2015).
reverse. Whether "substantial compliance" with the
warning-shot/safe-harbor requirement of Rule 11(c)(2) can
ever be sufficient is controversial. We are the lone circuit
to say yes. Compare Venn, LLC v. Prosper Business Dev.
Corp., 773 F.3d 764, 768 (6th Cir. 2014) (eight circuits
reject substantial compliance theory), with Nisenbaum v.
Milwaukee County, 333 F.3d 804, 808 (7th Cir. 2003)
(substantial compliance with warning-shot requirement was
sufficient to allow sanctions). Even assuming substantial
compliance is sufficient, the defendant's settlement
demands in this case fell far short of substantial
compliance. We therefore reverse the district court's
award of sanctions.
Factual and Procedural Background
Plaintiff's Breach of Contract Claim
2007, a company called Nexxtworks contracted with two banks
in the Chicago area to upgrade communications facilities.
Northern Illinois Telecom, Inc. v. PNC Bank, NA (NITEL
I), No. 12 C 2372, 2014 WL 4244069 (N.D. 111. Aug. 27,
2014). Nexxtworks subcontracted with plaintiff NITEL to
install data and telephone cable at four bank branches. NITEL
performed the work, but Nexxtworks did not pay NITEL all that
it thought it was owed. Nexxtworks asserted there had been
quality problems that had required it to hire other
subcontractors to redo or finish NITEL's work. In 2009,
before their dispute was resolved, Nexxtworks filed for
bankruptcy protection in Florida and listed NITEL's claim
as a disputed debt. NITEL filed a proof of claim for $115,
000, but the bankruptcy court disallowed it because it was
filed too late.
2012, still seeking payment for what it thought it was owed,
NITEL filed this breach of contract suit in an Illinois state
court against PNC Bank, which by that time had acquired both
of the original banks in whose branches NITEL had installed
the cables. NITEL sought damages of $81, 300, plus late fees,
attorney fees, and costs. With the amount in controversy
greater than $75, 000, PNC Bank removed the case to federal
court based on diversity of citizenship under 28 U.S.C.
§ 1332. The problem for NITEL was that it had no
contract with PNC Bank, which moved for summary judgment on
that basis. District Judge St. Eve granted summary judgment
for PNC Bank. MTEL I, 2014 WL 4244069. NITEL did not appeal.
District Court Rule 11 Sanctions Order and Award
present appeal stems from the district court's
post-judgment award of Rule 11 sanctions against both NITEL
and its lawyer, appellant Riffner. Before discovery began and
again before PNC Bank moved for summary judgment, PNC
Bank's lawyer sent letters to Riffner asserting that
NITEL's breach of contract claim was frivolous. Both
letters proposed to settle the case by having NITEL dismiss
its suit and pay PNC Bank its attorney fees. Both letters
concluded by threatening to seek Rule 11 sanctions if NITEL
did not agree to the demands within a few days. Riffner did
not respond to those letters. Two months after final
judgment, PNC Bank moved for sanctions under Rule 11. The
case was reassigned to District Judge Blakey
Blakey awarded sanctions against NITEL and Riffner, jointly
and severally, for $84, 325. The judge held that the contract
claim was frivolous and asserted in bad faith. The court
found "clear evidence that, in fact, NITEL knew
Nexxt-works (and not PNC) was contractually obligated to pay
for the work NITEL did at the branches, and even a cursory
investigation would have shown that the Nexxtworks email and
the work orders could not support a breach of contract
claim." NITEL and Riffner both appealed the sanctions
order, but NITEL was later dismissed as an appellant. We have
before us only Riffner's appeal.
review a district court's grant of Rule 11 sanctions for
abuse of discretion. Cooter & Gell v. Hartmarx
Corp., 496 U.S. 384, 409 (1990); Mars Steel Corp. v.
Continental Bank, N.A., 880 F.2d 928, 933 (7th Cir.
1989) (en banc). An abuse of discretion may be established if
the district court based its decision on an erroneous view of
the law or a clearly erroneous evaluation of evidence.
Gastineau v. Wright, 592 F.3d 747, 748 (7th Cir.
raises both substantive and procedural objections to the
district court's award of sanctions. The substantive
arguments are not persuasive, and Riffner's attempt to
walk away from his and NITEL's earlier reliance on work
orders to prove it had contracts with the banks is flatly
contradicted by the record. The district court did not abuse
its discretion in finding that the breach of contract claim
that Riffner pursued against PNC Bank on behalf of NITEL was
objectively baseless because NITEL never had a contract with
problem with the sanctions award is procedural. PNC Bank
simply failed to follow the requirements of Rule 11. To
explain, we start with a word about the role of Rule 11 in
federal civil litigation and then examine the amendments that
led to the warning-shot/safe-harbor requirement.
civil cases within our jurisdiction, federal courts exercise
considerable discretion and great power. The proper exercise
of that power can be essential in preserving the rule of law
and the rights and liberties of the American people, in cases
large and small, landmark and mundane. When a plaintiff
invokes those powers in a civil case, it puts machinery in
gear that can be powerful, intimidating, and often expensive.
Those powers and machinery can be abused by litigants.
Federal Rule of Civil Procedure 11 seeks to ensure that those
powers and machinery are engaged only to address claims and
defenses that have a reasonable basis in fact and law and
that are asserted only for a ...