Divane, William v. Curry, John J. ( 1999 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 98-2137
William T. Divane, Jr., et al.,
Plaintiffs-Appellees,
v.
Krull Electric Co., Inc.,
Defendant,
and
John J. Curry, Jr.,
Respondent-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 95 C 6108--George W. Lindberg, Judge.
Argued February 8, 1999--Decided December 28, 1999
Before Posner, Chief Judge, and Bauer and Kanne,
Circuit Judges.
Kanne, Circuit Judge. After a tortuous three-
year road to trial, which cost plaintiffs over
$40,000 in attorneys’ fees and costs (with only
$14,000 originally in dispute), the plaintiffs,
collectively known as Electric Insurance Trustees
("Trustees"), won a judgment at bench trial for
$54,001.07. During post-judgment proceedings
(based on pre-trial conduct), the district court
imposed Rule 11 sanctions on John J. Curry, Jr.,
counsel to defendant Krull Electric Co. Curry
appeals both the imposition of sanctions and the
determination of the nature and amount of these
sanctions, claiming that the court did not comply
with Rule 11 of the Federal Rules of Civil
Procedure and that the record does not contain
evidence of sanctionable conduct. We find that
the procedure employed by the district court
effectively complied with the requirements of
Rule 11(c)(1)(A) but find that the district court
did not properly limit the amount of attorneys’
fees that it assessed as a sanction. For this
reason, we affirm the sanction determination but
vacate the award and remand to the district court
for recomputation.
I. History
A. No. 95 C 2075 (Judge Kocoras Case)
In April 1995, Trustees filed suit against
Krull Electric to collect about $14,000 in
delinquent fringe-benefit contributions. This
delinquency arose in 1992 and 1993 and was
discovered by a 1994 audit. Krull Electric filed
a counterclaim alleging that Trustees had
breached their fiduciary duties and violated
various anti-discrimination laws.
Trustees claimed that Krull Electric had been
under-reporting hours worked each week by Tan
Lee, an employee and the husband of Krull
Electric President Pamela Lee, to minimize the
amount they were required to contribute for Tan
Lee to remain eligible for health benefits
available to members of Local 134 of the
International Brotherhood of Electrical Workers.
Krull Electric was liable to Local 134’s
employee-benefit plan for reimbursement of Lee’s
health benefits under the "Owner-in-Fact" clause
of a collective-bargaining agreement ("CBA")
signed by Krull Electric and Local 134.
On September 13, 1995, District Court Judge
Charles Kocoras dismissed Krull Electric’s
counterclaim because Krull Electric lacked
standing to sue Trustees. Eight months later, on
May 15, 1996, Krull Electric presented a motion
to amend its answer and counterclaim and to
remove certain admissions related to Pamela Lee’s
knowledge of the "Owner-in-Fact" clause and Krull
Electric’s status as a signatory to the CBA. The
court denied these motions. In October 1995,
Trustees filed a motion for summary judgment, and
in November 1995, despite the fact that its
counterclaim had been dismissed, Krull Electric
filed a motion for summary judgment on its
counterclaim. In support of its motion for
summary judgment, Krull Electric claimed, inter
alia, that it never received notice of the
"Owner-in-Fact" clause and that it was not a
party to the CBA. In all of the proceedings that
followed, Krull Electric never again raised lack
of notice again as a defense to Trustees’ claims.
In April 1997, based on two evidentiary hearings,
Magistrate Judge Joan Lefkow concluded that Krull
Electric received notice of the "Owner-in-Fact"
clause in 1992. Overruling Krull Electric’s
objections, Judge Kocoras entered summary
judgment for Trustees, which Krull Electric has
appealed separately in Divane v. Krull Electric
Co., No. 98-1276 (7th Cir. 1999).
B. No. 95 C 6108 (Judge Lindberg Case)
In 1995, Trustees filed a separate action
against Krull Electric after Krull Electric
stopped making required contributions to
Trustees’ employee-benefit plan in 1994. On May
10, 1996, Krull Electric filed its answer and a
counterclaim alleging that since it was no longer
a signatory to the CBA, Krull Electric’s suit
violated the Labor Management Relations Act
("LMRA"), 29 U.S.C. sec.sec. 141-187.
The answer to Trustees’ claim refused to admit
several statements that Krull Electric admitted
in the companion litigation, including those
statements which Judge Kocoras denied Krull
Electric the opportunity to amend in 1996. The
counterclaim was predicated on the contention
that in October 1994, Local 134 determined that
Krull Electric was no longer a signatory to the
CBA, which Curry claims was supported by an
affidavit he prepared for Pamela Lee. This answer
and counterclaim were the first papers Curry
submitted to the court (Krull Electric was
initially represented by other counsel in the
litigation before Judge Kocoras), and these
filings constitute the basis for the sanctions
eventually imposed by Judge George Lindberg. On
May 24, 1996, Trustees deposed Pamela Lee, but
Curry objected to all questions regarding the
factual basis for Krull Electric’s counterclaim.
Pamela Lee claimed she did not know what Local
134 might have decided in 1994 and,
counterintuitively, that this information was
privileged. After these events, Trustees’ counsel
first orally warned Curry and Krull Electric that
they would seek sanctions if Krull Electric’s
counterclaim was factually unsupported.
In July 1996, after an inquiry into Krull
Electric’s finances revealed that Krull Electric
had a net worth of just $5,000, Judge Lindberg
instructed the parties to engage in settlement
discussions since judgment could not possibly be
collected. Trustees refused Krull Electric’s
settlement offer, and Krull Electric’s
counterclaim prevented Trustees from voluntarily
dismissing their complaint. To force Krull
Electric to dismiss its counterclaim, on
September 13, 1996, Trustees’ counsel sent a
motion to Curry requesting that he withdraw the
counterclaim or correct its answer by October 4,
1996, pursuant to Rule 11(c)(1)(A) of the Federal
Rules of Civil Procedure. Curry did not withdraw
or correct Krull Electric’s pleading, so on
October 17, 1996, Trustees filed a motion to
dismiss, requesting that the court strike Krull
Electric’s answer and enter sanctions against
Curry in the amount of $500. The district court
denied this motion, finding that the motion to
strike was a Rule 12 motion and, by claiming
Local 134 determined that Krull Electric was no
longer a signatory to the CBA, Krull Electric
raised a question of fact.
On November 13, 1996, both parties seemingly
agreed voluntarily to dismiss their claims with
prejudice and a stipulation of dismissal. When
asked about the nature of his party’s
counterclaim at the hearing, Curry confused Krull
Electric’s counterclaim with the counterclaim
filed in the other litigation and, when
corrected, responded, "Well, I don’t know what
you are talking about." The parties ultimately
could not agree to the language of a joint
stipulation, so the case moved towards trial. On
multiple occasions prior to trial, Curry
summarized Krull Electric’s counterclaim as
including allegations of sex discrimination and
equitable estoppel despite the fact that the
counterclaim did not contain such allegations.
A bench trial commenced on November 12, 1997,
and concluded on December 15, 1997. At trial,
Curry did not support the factual claims in Krull
Electric’s counterclaim with any evidence and
claimed that the October 1994 determination by
Local 134 was no longer legally relevant. On
December 23, 1997, the court entered a judgment
for Trustees in the amount of $54,001.37. At that
time, Judge Lindberg granted Trustees leave to
file a petition for attorneys’ fees and
sanctions.
On January 9, 1998, Trustees filed a motion for
Rule 11 sanctions against Curry along with a
petition for statutory attorneys’ fees. This
motion was served on Krull Electric and Curry on
the day it was filed. Curry and Krull Electric
filed a motion to strike the motion for Rule 11
sanctions on the grounds that Trustees had not
provided Krull Electric with the Rule 11(c)(1)(A)
twenty-one day safe harbor, the motion for
sanctions was untimely and the motion lacked
specificity. On February 6, 1998, Curry and Krull
Electric filed a brief in response to the motion
for sanctions.
On March 24, 1998, the court entered an order
imposing sanctions against Curry requiring that
Curry pay attorneys’ fees of $40,171.07 to
Trustees and $5,000 to the court, or, if Krull
Electric satisfied the entire judgment against
it, only to pay the $5,000 fee to the court. The
order was issued pursuant to Rule 11(b)(3) and
based on Krull Electric’s failure to substantiate
the statement raised in the counterclaim that
Local 134 determined in October 1994 that Krull
Electric was no longer a signatory to the CBA.
The order also imposed sanctions pursuant to Rule
11(b)(4) based on Krull Electric’s failure to
make admissions of fact in its answer that it had
previously admitted in the litigation before
Judge Kocoras.
On April 3, 1998, Curry filed a motion under
Rule 59(e) of the Federal Rules of Civil
Procedure to amend the March 24, 1998, order. The
court allowed Curry to supplement this motion
with an additional memorandum in support of his
motion. The court also allowed Trustees to file
a response to the Rule 59(e) motion. However, on
April 14, 1998, the court entered a memorandum
order that vacated the prior order of sanctions
and summarily imposed $33,292 in fees and
$2,306.69 in costs on Curry as a sanction because
it was "less likely than previously assumed" that
Krull Electric would satisfy its judgment. Krull
Electric appeared "less likely" to satisfy the
judgment against it because it filed for
bankruptcy on March 27, 1998.
II. Analysis
On appeal, Curry raises three issues: (1)
whether the trial court abused its discretion by
imposing sanctions in the manner that it did; (2)
whether the trial court erred in holding that
Curry violated Rule 11 in filing Krull Electric’s
counterclaim; (3) whether the trial court abused
its discretion in calculating the nature and
amount of Rule 11 sanctions.
We review a trial court’s decision to grant
Rule 11 sanctions with deference. See Retired
Chicago Police Ass’n v. Firemen’s Annuity and
Benefit Fund, 145 F.3d 929, 933 (7th Cir. 1998).
As we have stated, "because the trial court alone
has an intimate familiarity with the relevant
proceedings, its decision whether counsel has
conducted the kind of inquiry required by Rule 11
and taken a position reasonable in light of the
facts and governing law is reversible only when
there has been an abuse of discretion." R.K. Harp
Inv. Corp. v. McQuade, 825 F.2d 1101, 1103 (7th
Cir. 1987).
A. Violations of Rule 11(c)
Curry’s primary argument is that, in its orders
to impose sanctions, the trial court failed to
follow the procedures required by Rule 11(c),
which are designed to give Curry a full and fair
opportunity to respond and show cause before
sanctions are imposed. Under the 1993 amendments
to Rule 11(c), sanctions proceedings may be
initiated in two ways, by motion or at the
initiative of the trial court.
When sanctions are requested by a party’s
motion, Rule 11(c)(1)(A) requires that two
procedures be followed. First, the motion for
sanctions must be made "separately from other
motions or requests and [must] describe the
specific conduct alleged to violate subdivision
(b)." Fed. R. Civ. P. 11(c)(1)(A). Permitting a
motion for sanctions to be made in conjunction
with another motion constitutes an abuse of
discretion. See Corley v. Rosewood Care Center,
Inc., 142 F.3d 1041, 1058 (7th Cir. 1998).
Second, to facilitate deterrence, the motion may
not be presented to the court unless, within
twenty-one days of service, the movant has not
withdrawn or corrected the challenged behavior.
Fed. R. Civ. P. 11(c)(1)(A). A court that imposes
sanctions by motion without adhering to this
twenty-one day safe harbor has abused its
discretion. See id.; Johnson v. Waddell & Reed,
Inc., 74 F.3d 147, 150-51 (7th Cir. 1996).
Appellant claims that the district court abused
its discretion by failing to abide by the terms
of Rule 11(c)(1)(A) in three distinct ways: (1)
by allowing Trustees to petition for sanctions
post-judgment; (2) by allowing Trustees to
petition for sanctions without allowing Krull
Electric the twenty-one day safe harbor; and (3)
by allowing Trustees to file a petition when a
petition for sanctions was no longer timely.
Curry initially contends that, since the purpose
of Rule 11(c)(1)(A) is to deter claimants from
filing frivolous motions and pleadings, delaying
the decision to allow motions for sanctions until
after judgment "completely defeats the interests"
that the Rule hopes to promote. After judgment
has been entered, imposition of sanctions cannot
affect the prior filing of motions, because
parties have no opportunity to correct their
sanctionable conduct. However, Rule 11(c)(1)(A)
does not specify any time period when a motion
for sanctions must be filed, and we see no need
to establish one. The decision to impose
sanctions is left to the discretion of the trial
court in light of the available evidence. In this
case, the court found that "the lack of
evidentiary support for defendant’s counterclaim
could not have been determined until trial was
completed." In such circumstances, the interest
in deterring further frivolous post-judgment
motions by the same litigants or in deterring
future litigants may be promoted by a post-
judgment request for sanctions. By themselves,
the purposes of Rule 11(c)(1)(A) do not justify
a broad rule that sanctions cannot be imposed as
a result of a motion properly submitted to the
court after a judgment.
Rule 11(c)(1)(A) states that a sanctions motion
"shall not be filed with or presented to the
court unless, within twenty-one days after the
service of the motion (or such period as the
court may prescribe), the challenged paper,
claim, defense, contention, allegation or denial
is not withdrawn or appropriately corrected." We
have previously held that this phrase
contemplates a twenty-one day safe harbor, which
a party may use to withdraw or correct its
actions to avoid the imposition of sanctions. See
Corley, 142 F.3d at 1058. The trial court
acknowledged that Trustees’ most recent motion
had been presented to the court simultaneously
with its service on Krull Electric and Curry.
However, because there was no way that Curry or
Krull Electric could withdraw Krull Electric’s
pleadings, the court found that "there is no need
to allow any safe harbor period for defendant."
The court additionally noted that "Curry received
numerous oral and written warnings from opposing
counsel during the pendency of this lawsuit
regarding his sanctionable conduct along with
oral and written demands for the withdrawal or
correction of his answer and counterclaim."
Curry asks us to adopt the approach of other
circuits, which have held that a district court
has abused its discretion by granting a motion
for sanctions first submitted to it after the
court granted a motion for summary judgment. In
Barber v. Miller, 146 F.3d 707, 710-11 (9th Cir.
1998), the Ninth Circuit found it "abundantly
clear" that repeated notice was given of a
party’s violation of Rule 11(b). Id. at 710.
Despite this notice, the appellee never served a
motion on the appellant, and the Ninth Circuit
found that this procedural defect was sufficient
to cause the reversal of the imposition of
sanctions. The Ninth Circuit noted that "[i]t
would therefore wrench both the language and
purpose of the amendment to [Rule 11(c)(1)(A)] to
permit an informal warning to substitute for
service of a motion." Id. Similarly, in Ridder v.
City of Springfield, 109 F.3d 288, 295 (6th Cir.
1997), the Sixth Circuit reversed the district
court’s imposition of sanctions where the motion
for sanctions was not filed until the conclusion
of the case by summary judgment. The district
court imposed sanctions initiated by a party’s
motion after the court granted that party’s
motion for summary judgment without requiring the
twenty-one day safe harbor, which the district
court considered an "empty formality." The Sixth
Circuit disagreed, finding that "sanctions under
Rule 11 are unavailable unless the motion for
sanctions is served on the opposing party for the
full twenty-one day ’safe harbor’ period before
it is filed with or presented to the court; this
service and filing must occur prior to final
judgment or judicial rejection of the offending
contention." Id. at 297. We agree with both the
Sixth and the Ninth Circuits that the twenty-one
day safe harbor is not merely an empty formality.
However, in Barber no motion for sanctions was
ever filed, and in Ridder the motion for
sanctions that was filed never complied with the
twenty-one day safe harbor. In this case,
Trustees served Curry with a motion for sanctions
more than twenty-one days prior to submitting the
motion to the court and more than twenty-one days
prior to the rendering of a final judgment.
Therefore, the precedent cited by Curry has no
relevance to the case before us.
The district court found that the twenty-one
day safe harbor was a mere formality, and in
addition, that Trustees had provided Curry with
proper warning. Rather than accept the district
court’s contention that the twenty-one day safe
harbor is unnecessary on post-judgment motions
for sanctions, we look to the record before us
and take notice of the September 1996, service on
Curry by Trustees. We are not bound by the
district court’s reasoning and may affirm a grant
of sanctions on any basis supported by the record
and the law. See In re Volpert, 110 F.3d 494, 500
(7th Cir. 1997).
On September 19, 1996, Trustees served Curry
with a written motion to strike the counterclaim,
and Trustees in a separate written motion
informed Curry that they would move for Rule 11
sanctions on the counterclaim. On October 17,
1996, at the motion hearing, Trustees informed
Curry that they would additionally move for
sanctions based on Curry’s answer to Trustees’
complaint. At the same hearing, the district
court addressed Trustees’ motion for Rule 11
sanctions. The district court felt that such a
motion was premature, because the counterclaim
raised questions of fact that still had adequate
time to be discovered. By so ruling, Judge
Lindberg effectively extended the safe harbor for
Krull Electric and Curry until trial, by which
time the factual basis for the answer and
counterclaim would have been determined.
As the district court noted, Rule 11(c)(1)(A)
allows the court discretion to grant a party
additional time to correct or withdraw its
action. Although taking Trustees’ motion under
advisement pending the resolution of the factual
dispute would have been a more appropriate method
to provide Curry with time, the court instead
dismissed the motion as untimely while taking
notice of Trustees’ fair warning to Curry. The
court noted in its memorandum order for sanctions
that "[Curry] received several oral and written
warnings from opposing counsel during the
pendency of this lawsuit regarding his
sanctionable conduct along with oral and written
demands for the withdrawal or correction of his
answer and counterclaim." Having been provided
with an additional year in which to substantiate
Krull Electric’s factual claims with evidence, or
in the alternative to correct or withdraw the
counterclaim and answer, Curry failed to do
either. In fact, on several instances, Curry
seemed confused about the very nature of the
counterclaim, confounding the LMRA claim in the
present litigation with the counterclaims that
were dismissed in the companion litigation.
Rule 11(c)(1)(A) contemplates that the district
court may allow a party more than twenty-one days
to correct or withdraw its pleadings, and the
fact that Judge Lindberg effectively gave Curry
until the end of trial to do so does not vitiate
the numerous effective warnings given by
Trustees. We find that Trustees effectively
complied with the twenty-one day safe harbor
provision of Rule 11(c)(1) (A), and the dismissal
of Trustees initial motion to sanction Curry as
premature did not extinguish this effective
notice. Therefore the district court did not
abuse its discretion in granting Trustees’ motion
for sanctions on this ground.
Appellant also asserts that he was served with
Trustees’ motion for sanctions on January 9,
1998. If the only effective notice of the
motion’s pendency was given in 1996, Curry
contends that we should estop action on the
motion because it was not filed in a timely
fashion. As we stated in Kaplan v. Zenner, 956
F.2d 149, 151 (7th Cir. 1992), motions for Rule
11 sanctions should be filed, "as soon as
practicable after discovery of a Rule 11
violation." Curry uses our admonition to suggest
that, if Trustees determined he violated Rule
11(b) in September 1996, they should have filed
an independent motion for sanctions soon
thereafter. By waiting one-and-one-half years to
file, their motion should have been granted only
in the exercise of the court’s equitable powers.
Since Trustees raised no equitable considerations
to explain such a delay, the motion should have
been denied. Even though Kaplan addressed the
imposition of Rule 11 sanctions before the 1993
amendments, in that case we addressed arguments
that correspond to those made here.
In Kaplan, the appellant had been named as a
defendant in a civil RICO action in 1987. In
1988, he filed a motion to dismiss for failure to
state a claim. This motion was granted, and the
appellant played no further role in the
litigation. Two years later, when the parties
appeared in court to settle, the appellant moved
for Rule 11 sanctions against the original
plaintiff. The district court denied the
appellant’s motion, finding that the motion for
sanctions had not been brought in a timely
fashion. We reversed, finding that plaintiff
could have relied on our prior precedent in Szabo
Food Serv. Inc. v. Canteen Corp., 823 F.2d 1073
(7th Cir. 1987), and for purposes of timely
filing of a sanctions motion, "[r]easonableness
is necessarily dictated by the specific facts and
circumstances in a given case." Kaplan, 956 F.2d
at 152.
Here, no specific facts or circumstances
indicate that Trustees wrongly delayed seeking
Rule 11 sanctions. Immediately after Pamela Lee’s
testimony, when it became apparent to Trustees’
counsel that the counterclaim lacked a factual
basis, Trustees informed Krull Electric and Curry
that they would file for sanctions if factual
information to substantiate this claim did not
emerge. Instead of waiting until trial, Trustees
moved ahead with a motion for sanctions, serving
Krull Electric in September 1996, and moving for
sanctions before the court on October 17, 1996.
As noted earlier, the court dismissed the motion
then because sanctions would be premature before
Krull Electric had an opportunity to prove the
counterclaim. For this reason, Trustees waited
until after trial to move again for sanctions.
Curry’s timeliness argument against a motion for
Rule 11 sanctions mirrors the common law doctrine
of laches. To make a claim of laches, Curry must
prove that Trustees’ delay unreasonably
prejudiced Curry and Krull Electric. Having been
granted additional time to amend or withdraw the
pleadings, neither Curry nor Krull Electric was
unreasonably prejudiced by the delay in filing
the motion. Moreover, weighing the competing
equities with regard to such a timeliness claim
lies within the sound discretion of the trial
court. We do not overrule such judgments lightly.
Therefore, we find that the court did not abuse
its discretion here in denying Curry’s equitable
argument against the motion for sanctions.
B. Findings of Fact
Curry also argues that the district court erred
in applying Rule 11 to Krull Electric’s
counterclaim and answer. The application of Rule
11 to the facts and circumstances of a particular
case is an exercise of the trial court’s
discretion, which will be reviewed for abuse of
discretion. See Johnson, 74 F.3d at 151. None of
the findings of fact which underlie the
imposition of sanctions will be set aside unless
clearly erroneous. See Finance Investment Co. v.
Geberit AG, 165 F.3d 526, 530 (7th Cir. 1998).
Rule 11(b) mandates that an attorney who
presents a pleading to the court certify that:
to the best of [his or her] knowledge,
information, and belief, formed after an inquiry
reasonable under the circumstances . . . (3) the
allegations and other factual contentions have
evidentiary support or, if specifically so
identified, are likely to have evidentiary
support after a reasonable opportunity for
further investigation or discovery [and] . . .
(4) the denials of factual contentions are
warranted on the evidence or, if specifically so
identified, are reasonably based on a lack of
information or belief.
Fed. R. Civ. P. 11(b) (emphasis added).
To measure the reasonableness of a party’s
inquiry into the factual bases of its claims, we
look to a number of factors including: "whether
the signer of the documents had sufficient time
for investigation; the extent to which the
attorney had to rely on his or her client for the
factual foundation underlying the pleading,
motion or other paper; whether the case was
accepted from another attorney; the complexity of
the facts and the attorney’s ability to do a
sufficient pre-filing investigation; and whether
discovery would have been beneficial to the
development of the underlying facts." Brown v.
Federation of State Medical Bds. of the United
States, 830 F.2d 1429, 1435 (7th Cir. 1987).
The district court found that Curry violated
Rule 11(b)(3) in filing Krull Electric’s
counterclaim because Curry never presented
evidence to support any facts that could prove
its counterclaim under the LMRA nor did Curry
direct Krull Electric to withdraw or amend its
counterclaim. The court made a factual
determination that Curry could not have made a
reasonable inquiry because the counterclaim never
had any factual support. Curry does not argue
that the facts presented as the basis for the
counterclaim were supported in fact. Instead, he
argues that the factual allegations made in the
counterclaim were reasonable under the
circumstances.
Curry contends that the appropriate time to
measure reasonableness of the inquiry is at the
time of filing the pleading. He argues that, at
the time pleadings were filed, many extenuating
circumstances impeded his inquiry. Curry also
argues that his abandonment of certain factual
contentions in his counterclaim allow him to
avoid Rule 11 sanctions, even though he failed to
amend or correct the initial pleadings. For these
reasons, Curry believes that the district court
failed to apply the proper legal standards to his
conduct and abused its discretion by imposing
sanctions without making the requisite factual
determinations.
By focusing on the time of filing, Curry
misunderstands what conduct constitutes the
gravamen of the sanctions. Curry filed a
counterclaim based upon facts that were supported
only by an affidavit that he prepared for Pamela
Lee. Lee later disavowed any knowledge of the
October 1994 decision made by Local 134, which
the court found was the factual basis for Krull
Electric’s counterclaim. As the counterclaim’s
lack of factual foundation became apparent to all
parties involved, Trustees asked that the
counterclaim be withdrawn so that their claim
could be dismissed. By this time, Curry admits
that he had abandoned the original factual basis
of the counterclaim, the October 1994 termination
of CBA signatory status, in favor of other
arguments against Trustees. However, Curry and
Krull Electric refused to withdraw or amend the
counterclaim, imposing an additional year of
meaningless proceedings on the court and
Trustees.
At the conclusion of these proceedings, Judge
Lindberg found as a matter of fact that the
factual contentions upon which the counterclaim
(never amended or withdrawn) was based were
unsupported and meritless. The court found that
Curry had failed to perform a reasonable inquiry
at any point throughout the proceedings to
determine whether these pleadings should have
been corrected or withdrawn. Failure to withdraw
or amend a counterclaim that Curry knew lacked
any factual basis demonstrates that Curry never
performed a reasonable inquiry into Krull
Electric’s counterclaim before presenting it to
the court at trial. Curry’s abandonment of the
facts that supported his counterclaim does not
alleviate the need to sanction him; it compounds
that need. We find no error in the district
court’s findings of fact.
The district court also found that Curry’s
initial answer to Trustees’ claim violated Rule
11(b)(4) because Krull Electric had admitted many
of the facts in prior litigation between the same
parties that it denied knowledge of here. Curry
contends that he lacked any basis on which to
ascertain that the facts which Krull Electric
admitted previously were accurate. He notes that
Krull Electric moved to amend or withdraw certain
of these admissions in the other litigation. The
trial court found that Curry could not have
reasonably believed that Krull Electric had a
basis in fact to deny these contentions after
admitting them in a related action. Curry does
not cite any authority to suggest that such a
finding of fact constitutes clear error. He
claims that he had no way of procuring documents
from prior counsel on which the prior admissions
were based. Yet, Curry appended excerpts from the
CBA to the answer, even though he claims that
Krull Electric had not received a copy of it. In
the counterclaim, he alleged that Trustees
committed certain acts, even though Krull
Electric denied knowledge of the Trustees’
identities in its attached answer. Krull
Electric’s answer claimed that it had no
knowledge of deposition testimony, of which it
had a copy, because its transcript of the
testimony could have been inaccurate. Based on
these types of discrepancies, the court could
have found that Krull Electric’s refusal to make
certain admissions was patently unreasonable. We
find no clear error in the district court’s
findings of fact.
C. Application of Sanctions
Curry contends that Rule 11 was not intended to
allow fee-shifting, so the district court’s
sanction of all Trustees’ attorneys’ fees
constituted an abuse of discretion. He also
contends that the amount of sanctions awarded
violates the Rule 11(c)(2) limitation of fees to
those "incurred as a direct result of the
violation." Finally, Curry argues that the
sanctions constitute a financial hardship. The
amount or form of a sanction is reviewable only
for abuse of discretion. See Johnson v. A.W.
Chesterton Co., 18 F.3d 1362, 1366 (7th Cir.
1994).
Rule 11(c)(2) allows the imposition of
attorneys’ fees against a party only if the
sanctions were initiated by motion. Thus, Judge
Lindberg would have abused his discretion if he
imposed sanctions sua sponte, pursuant to Rule
11(c)(1)(B). However, as we have discussed, the
district court imposed sanctions that were
initiated by Trustees’ September 1996 motions,
pursuant to Rule 11(c)(1)(A). For sanctions
initiated by motion, we held, prior to the 1993
amendments to Rule 11, that attorneys’ fees may
be used as a justifiable measure for Rule 11
sanctions. See Brandt v. Schal Assocs., 960 F.2d
640 (7th Cir. 1992). The 1993 amendments to Rule
11(c)(2) limited the amount of attorneys’ fees
that may be imposed as a sanction, contemplating
the award of reasonable attorneys’ fees and costs
"incurred as a direct result of the violation,"
but endorsed the use of attorneys’ fees as a
sanction. Fed. R. Civ. P. 11(c)(2). We therefore
find no basis for the contention that the award
of reasonable attorneys’ fees constitutes an
abuse of discretion.
Curry also claims that, because Krull Electric
presented other affirmative defenses, a trial
would have been necessary. For that reason, the
district court’s blanket award of all attorneys’
fees included fees and costs that did not
directly result from Curry’s sanctionable conduct
and, therefore, was unreasonable. Rule 11(c)(2)
expressly limits the award of attorneys’ fees to
those that directly result from a party or
attorney’s sanctionable conduct, and an award of
sanctions should be the least severe that is
adequate to serve the purposes of deterrence. See
Johnson, 18 F.3d at 1366. Therefore, we examine
Judge Lindberg’s decision to sanction Curry for
the cost of all attorneys’ fees generated by this
litigation with great care.
The district court found that Curry’s
sanctionable conduct "infected" the entire
proceeding. Accordingly, the court sanctioned
Curry by imposing on him the cost of all
attorneys’ fees claimed by Trustees. We cannot
accept the court’s suggestion that all Trustees’
legal expenses were costs directly resulting from
Curry’s sanctionable activities. Trustees were
the plaintiffs in the suit against Krull Electric
and incurred legal expenses before Curry played
any part in this litigation. Neither Curry nor
Krull Electric could have engaged in sanctionable
conduct before they were served with Trustees’
complaint in the matter before Judge Lindberg.
Because the award of all attorneys’ fees wrongly
includes fees even from the period before a
complaint was filed against Krull Electric, the
award necessarily includes attorneys’ fees that
do not result directly from Curry’s sanctionable
conduct. For this reason, the sanction imposed on
Curry violates Rule 11(c)(2) and constitutes an
abuse of discretion.
Although we affirm the district court’s decision
to impose sanctions, we reject the blanket award
of attorneys’ fees. See Johnson, 18 F.3d at 1366
(finding that awarding attorneys’ fees may be a
normal method to calculate sanctions, but "the
deterrent purpose of the rule should be served by
impos[ing] a sanction that fits the inappropriate
conduct"). In 1993, Rule 11(c)(2) was amended to
limit the extent that attorneys’ fees may be used
as a measure of sanctions for exactly this
reason. See Fed. R. Civ. P. 11, 1993 Amendment
Advisory Committee’s Note ("Since the purpose of
Rule 11 sanctions is to deter rather than to
compensate, the rule provides that, if a monetary
sanction is imposed, it should ordinarily be paid
into the court as a penalty."). Although we
understand the court’s desire to compensate
Trustees, who have been ensnarled in months of
litigation with a nearly insolvent adversary, the
imposition of all attorneys’ fees against Curry
is an inappropriate attempt to calculate a
reasonable sum for purposes of deterrence.
The district court is in the best position to
determine which of a party’s legal costs are the
direct result of sanctionable conduct, so a
remand to the district court is necessary. We add
a cautionary note, however, on remand. In using
attorneys’ fees to determine the amount of
sanctions, that amount must be limited to fees
incurred as a direct result of the response and
counterclaim filed by Curry. See Fed. R. Civ. P.
11(c)(2). As a matter of guidance, we note that
these fees would naturally include any research
conducted into the sole issue raised in Curry’s
counterclaim, the purported LMRA violation, but
they cannot include such activities as the cost
of deposing witnesses like Pamela Lee, who
Trustees would have deposed without regard to the
frivolous counterclaim filed on her behalf by
Curry. In addition, because Trustees noted that
the denials made in the response were directly at
odds with admissions made in other litigation
between the parties, we see no reason why these
sanctionable denials would directly cause
Trustees to generate additional attorneys’ fees.
III. Conclusion
On appeal, Curry never convincingly argues that
his conduct was not sanctionable. Instead, he
focuses on the procedure that the district court
used to impose sanctions and on the amount of
sanctions imposed on him personally. Because we
find that the record presents sufficient evidence
for the imposition of Rule 11 sanctions and the
district court effectively followed the notice
procedures required by Rule 11(c)(1)(A), we AFFIRM
the decision of the district court to impose
sanctions. However, because we find that the
amount of the sanction is inappropriate, we VACATE
the award of attorneys’ fees and costs and REMAND
to the district court to reconsider the
appropriate amount of attorney’s fees to award as
a sanction.