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Northern Illinois Telecom, Inc. v. PNC Bank, N.A.

United States Court of Appeals, Seventh Circuit

March 10, 2017

Northern Illinois Telecom, Inc., Plaintiff,
v.
PNC Bank, N.A., Defendant-Appellee. and Robert G. Riffner, Respondent-Appellant,

          Argued January 18, 2017

         Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. l:12-cv-02372 - John Robert Blakey, Judge.

          Before Wood, Chief Judge, and Posner and Hamilton, Circuit Judges.

          Hamilton, Circuit Judge.

         This 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.

         In this 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).

         We 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.

         I. Factual and Procedural Background

         A. Plaintiff's Breach of Contract Claim

         In 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.

         In 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.

         B. District Court Rule 11 Sanctions Order and Award

         The 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

         Judge 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.

         II. Analysis

         We 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. 2010).

         Riffner 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.[1] 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 PNC Bank.

         The 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.

         In 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 ...


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