Divane v. Krull Electric Co.

• Decision Date: 28 December 1999
• Docket Number: No. 98-2137,98-2137
• Citation: 200 F.3d 1020
• Parties: (7th Cir. 1999) William T. Divane, Jr., et al., Plaintiffs-Appellees, v. Krull Electric Co., Inc., Defendant, and John J. Curry, Jr., Respondent-Appellant
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1020

200 F.3d 1020 (7th Cir. 1999)

William T. Divane, Jr., et al., Plaintiffs-Appellees, v. Krull Electric Co., Inc., Defendant, and John J. Curry, Jr., Respondent-Appellant.

No. 98-2137

In the United States Court of Appeals For the Seventh Circuit

Argued February 8, 1999

Decided December 28, 1999

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 95 C 6108--George W. Lindberg, Judge. [Copyrighted Material Omitted] 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...