This is a Rule 11 sanctions case in which substantial sanctions were awarded to the Defendant and against plaintiff’s counsel. The old legal doctrine of privity of contract holds that only the parties to a contract have the right to sue to enforce that contract. (There are plenty of exceptions, but the old rule is still the law).
In this case Northern Illinois Telecom (NITEL) sued PNC Bank for breach of contract. The only small problem with the lawsuit was that there was no contract between the parties. Instead, NITEL had a contract with another company (Nexxtworks, Inc.), which, in turn had a contract with PNC Bank. There was no privity of contract between the plaintiff and the defendant. After Nexxtworks became insolvent, NITEL sued PNC Bank. The court granted summary judgment to the bank.
Before engaging in discovery, PNC sent NITEL a Rule 11 letter. The court explains:
“Before engaging in substantial discovery, PNC sent NITEL a letter detailing the defects in the claim against PNC. On July 31, 2012, Jim Crowley, counsel for PNC, wrote to Robert Riffner, counsel for NITEL, advising that PNC was taking the position that neither it, nor its predecessors, ever entered into an agreement with NITEL relating to the matters referenced in NITEL’s complaint. See 7/31/12 Letter from Crowley to Riffner [65-1] (attached as Exhibit A to PNC’s motion for sanctions). PNC asserted that NITEL performed the subject work as a subcontractor to Nexxtworks and that if it believed it was owed money, it should look to Nexxtworks. Id., p. 1. According to Crowley, NITEL knew its claim was with Nexxtworks, not PNC, and NITEL’s awareness of the real party in interest was obvious as of at least February 16, 2010, when NITEL filed a proof of claim in Nexxtworks’ bankruptcy case. Id. Crowley attached the proof of claim and, based upon the information and evidence, demanded that NITEL dismiss the complaint or risk sanctions under Rule 11. Id. Crowley advised that if NITEL did not dismiss the complaint, “PNC will be seeking sanctions under Federal Rule 11 against NITEL and your firm in connection with the matters which are set forth in the referenced Complaint.” Id., p. 2. PNC offered to settle the matter in exchange for a dismissal order and a check to cover PNC’s attorney’s fees and costs in defending against the lawsuit to date (which, at that time, amounted to about $9,000). NITEL did not respond (through counsel or otherwise), and PNC was forced to proceed with discovery.”
Some months later, a second Rule 11 letter was sent to NITEL’s attorney. PNC offered to settle the matter for a dismissal of the claim and payment of its attorneys fees.
Eventually PNC obtained summary judgment and filed a motion for Rule 11 sanctions. The district court granted the sanctions motion.
“NITEL’s and attorney Riffner’s failure to investigate the legal and factual bases for the breach of contract claim against PNC is sanctionable, as is the continued assertion of those claims through summary judgment proceedings here. The representations and statements in the complaint, pursued in this Court and repled in response to PNC’s motion for summary judgment, were made for an improper purpose — namely to harass PNC and to extort a settlement from PNC when no legal entitlement to damages could be established — and lacked any evidentiary support in the record. As such, they violate Rule 11.
In sum, the Court finds that NITEL’s breach of contract claim, initially pled in state court but maintained in this Court after removal, was frivolous, lacking any basis in existing law. Additionally, the factual allegation concerning the existence of a valid contract between PNC or its predecessors and NITEL lacked any support in fact or law, as there never was a contract between NITEL and the banks. Yet NITEL asserted the allegation in its verified complaint, throughout discovery, see e.g.,NITEL’s response to PNC’s motion to compel , pp. 1-2, and on summary judgment, see NITEL’s memorandum in support of its response to PNC’s motion for summary judgment , pp. 1-3. These pleadings all run afoul of Rule 11(b)(2) and (3). NITEL and counsel’s insistence on the existence of a contract despite the lack of evidentiary support, taken together with Coy’s deposition testimony, indicate that this case was filed and pursued for an improper purpose — namely, to force PNC to pay up — in violation of Rule 11(b)(1).”
The court excused PNC’s failure to comply with the Rule 11 safe harbor (that requires serving the Rule 11 motion on the opposing party and giving that party 21 days to withdraw the challenged claim or pleading). The Seventh Circuit allows the district court to excuse compliance with the safe harbor, where it is warranted. Here PNC sent two warning letters to opposing counsel and that was deemed sufficient.
This is a textbook example of a sanctions case where the lawyer and his client failed to do the proper investigation before filing suit. Also, the court may have been swayed by the fact that a basic legal doctrine – privity of contract – was ignored.
Edward X. Clinton, Jr.