Malec Holdings II v. English, Christopher

NONPRECEDENTIAL DISPOSITION
To be cited only in accordance with
Fed. R. App. P. 32.1
United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
Argued November 28, 2006
Decided January 24, 2007
Before
Hon. JOEL M. FLAUM, Circuit Judge
Hon. DANIEL A. MANION, Circuit Judge
Hon. ANN CLAIRE WILLIAMS, Circuit Judge
No. 06-1906 Appeal from the United States
District Court for the Eastern
Malec Holdings II Limited, District of Wisconsin
Plaintiff-Appellee, No. 04 C 991
v. J. P. Stadtmueller, Judge.
Christopher S. English, Anita
English, Ira B. Robins, and Robert
Mihelich,
Defendants-Appellants.
ORDER
After the district court dismissed Malec Holdings II Limited’s suit against
Christopher and Anita English, their attorney Robert Mihelich, and a process
server, Ira Robins, the defendants sought Rule 11 sanctions. The district court
denied the defendants’ motion for sanctions. Because the district court did not
address several viable arguments in favor of an award of Rule 11 sanctions, we
VACATE and REMAND.
No. 06-1906 Page 2
I.
In May 2004, attorney Robert Mihelich, representing Christopher and Anita
English and C.S. English Golf, LLC, filed a breach of contract action in state court
against their former employer, Malec Holdings II, Limited. (“Malec”). Malec’s
attorney, Sean Lanphier, advised that service was improper and did not file an
answer in that case. On October 5, 2004, the state circuit court granted the
Englishes’ motion for default judgment against Malec in the amount of $478,478.12.
On October 8, 2004, attorney Mihelich filed a garnishment summons and complaint
naming the Town Bank of Delafield, the bank where Malec had its accounts, and in
response, the bank froze Malec’s accounts.
After learning that Malec’s accounts had been frozen, attorney Lanphier
contacted attorney Mihelich on October 11, 2004. Attorney Lanphier claimed that
the service of process on Malec by the process server, Ira Robins, had been deficient,
and he allegedly demanded that the Englishes voluntarily stipulate to a stay of
execution of judgment. The Englishes refused to stipulate to a stay of execution.
Attorney Lanphier allegedly responded by threatening to sue the Englishes,
attorney Mihelich, and Robins if they did not voluntarily agree to stay the execution
of the judgment. On October 11, 2004, attorney Lanphier faxed to attorney
Mihelich a draft state court complaint that named the Englishes and attorney
Mihelich as defendants. The next day attorney Mihelich faxed a letter to attorney
Lanphier. That letter warned attorney Lanphier that if Malec proceeded with the
threatened state court lawsuit, the Englishes would seek sanctions for filing a
frivolous complaint for an improper purpose. Attorney Lanphier responded by
faxing attorney Mihelich a copy of a federal complaint and an Emergency Motion for
a Temporary Restraining Order. Attorney Mihelich responded with another letter,
again warning attorney Lanphier that the defendants would seek sanctions under
Rule 11 if he proceeded with the federal lawsuit, as the federal lawsuit was
frivolous and the federal court lacked subject matter jurisdiction. Attorney
Mihelich further stated in his letter that “[t]he underlying state claim that is the
subject matter of your federal complaint is already pending in state court in
Waukesha County. Your potential remedy must be pursued in that court through a
motion to reopen default judgment.”
Undaunted, Malec filed its federal complaint against the Englishes, Robins,
and attorney Mihelich, together with an Emergency Motion for a Temporary
Restraining Order. The Civil Cover Sheet filed with the complaint asserted as the
basis for jurisdiction “Federal Question (U.S. Government Not a Party).” The only
federal question alleged in the complaint, however, was that the defendants
violated Malec’s due process rights under the Fifth Amendment and 48 (sic) U.S.C.
No. 06-1906 Page 3
§ 1983. The complaint also alleged state law claims for abuse of process and fraud,
and sought an injunction restraining the defendants from pursuing their
garnishment action.
Shortly after Malec filed the federal complaint, the Wisconsin state court, on
October 15, 2004, stayed the garnishment proceedings against Malec’s bank
account. Later the circuit court vacated the default judgment against Malec, after
finding that the service of process was deficient. The Court of Appeals of Wisconsin
affirmed, explaining that “[a]lthough the record created on the motion to vacate the
default judgment may have established actual personal service or substitute
service, it remains a truism that when the default judgment was entered, the record
did not establish personal service on the corporation.” English v. Malec Holdings II,
Ltd., 701 N.W.2d 653 (table), 2005 WL 1459715 at 1 (Wis. Ct. App. 2005)
(unpublished).
Back in federal court, the Englishes, Robins and attorney Mihelich (“the
defendants”) filed a motion to dismiss, claiming: the federal court lacked
jurisdiction due to the Rooker-Feldman doctrine1; the case was filed for an
impermissible in terrorem purpose; the claims were objectively frivolous; and the
claim against attorney Mihelich was barred by Badger Cab Co., Inc. v. Soule, 492
N.W.2d 375, 378-79 (Wis. Ct. App. 1992), which forbids the filing of claims against
opposing counsel arising out of pending state court litigation. The defendants also
filed a motion for Rule 11 sanctions.
On June 15, 2005, the district court granted the defendants’ motion to
dismiss. The district court, however, denied the defendants’ motion for Rule 11
sanctions, without prejudice and with leave to re-file in 60 days. On August 15,
2005, the defendants filed a second motion for Rule 11 sanctions. The district court
denied the defendants’ second motion for sanctions. The defendants appeal.
II.
On appeal, the defendants claim that the district court erred in denying their
request for Rule 11 sanctions. Rule 11 provides that a court may “impose an
1
The Rooker-Feldman doctrine bars federal lawsuits “brought by state-court losers
complaining of injuries caused by state-court judgments rendered before the district court
proceedings commence and inviting district court review and rejection of those judgments.”
Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284 (2005). See Rooker v. Fid.
Trust Co., 263 U.S. 413 (1923); D.C. Court of Appeals v. Feldman, 460 U.S. 462 (1983).
No. 06-1906 Page 4
appropriate sanction upon the attorneys, law firms, or parties that have violated
subdivision (b) or are responsible for the violation.” Fed.R.Civ.P. 11(c). Subdivision
(b) of Rule 11 provides that:
by presenting to the court (whether by signing, filing, submitting, or
later advocating) a pleading, written motion, or other paper, an
attorney or unrepresented party is certifying that to the best of the
person’s knowledge, information, and belief, formed after an inquiry
reasonable under the circumstances,--
(1) it is not being presented for any improper purpose, such as to
harass or to cause unnecessary delay or needless increase in the cost of
litigation;
(2) the claims, defenses, and other legal contentions therein are
warranted by existing law or by a nonfrivolous argument for the
extension, modification, or reversal of existing law or the
establishment of new law;
(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).
In denying the defendants’ motion for Rule 11 sanctions, the district court
explained:
Given the complexity of the Rooker-Feldman doctrine, the court
concludes that even after reasonable inquiry into the law Malec could
have reasonably concluded that it had a valid claim. Moreover, the
record indicates that Malec was required to file its claim expeditiously
because its bank accounts were about to be frozen and it was seeking
to restrain the defendants from pursuing their garnishment action.
District Court Opinion at 5.
No. 06-1906 Page 5
We review a district court’s denial of a motion for Rule 11 sanctions for an
abuse of discretion. LaSalle Nat’l Bank of Chicago v. County of DuPage, 10 F.3d
1333, 1337 (7th Cir.1993). However, “[d]eferential review will not prevent this court
from ensuring that district judges reflect seriously, and consider fully, before
imposing (or denying) sanctions.” Mars Steel Corp. v. Cont’l Bank N.A., 880 F.2d
928, 936 (7th Cir.1989). Moreover, “a district court abuses its discretion when it
denies sanctions with no explanation, or with an explanation that is so conclusory
that the appellate court cannot review the substance of its decision.” LaSalle, 10
F.3d at 1338 (internal citations omitted).
In this case, had the only basis for the defendants’ Rule 11 motion been a
claim that Malec’s complaint was frivolous under the Rooker-Feldman doctrine, the
district court’s observations about the complexity of that area of the law would
suffice.2 However, the defendants presented several other justifications for Rule 11
sanctions. For instance, the defendants argued that Malec’s § 1983 claim lacked a
reasonable basis in law because there was no state actor involved. In its filings
before the district court, Malec claimed a reasonable basis for filing a § 1983 action
against the defendants based on Sniadach v. Family Fin. Corp. of Bay View, 395
U.S. 337 (1969). However, Sniadach was an appeal from a state court decision and
did not involve § 1983. Id. at 338. Moreover, it is well established that § 1983
requires that a defendant have acted under color of state law, and thus, in general,
only state actors are subject to § 1983 liability. See Loubser v. Thacker, 440 F.3d
439, 445 (7th Cir. 2006) (“Section 1983 can reach private citizens only where a
plaintiff adequately alleges that they conspired with a state actor to deprived that
plaintiff of a constitutional right.”). In short, from the cold record, it appears that
Malec manufactured a § 1983 claim to get its foot in the door of the federal court
because the state court was not acting expeditiously enough. (Even then, attorney
Lanphier seemingly ignored the Younger abstention doctrine, leaving unclear what
remedy he thought he could obtain for his clients in federal court, even if
jurisdiction were proper.) The district court, however, did not consider whether
suing the defendants under § 1983 justified Rule 11 sanctions.
2
The district court also based its decision on Brown v. Federation of State Medical
Boards of the United States, 830 F.2d 1429, 1435 (7th Cir. 1987), which held that the amount of
time an attorney has to prepare a document is relevant in determining whether Rule 11 sanctions
are appropriate. Brown was decided before the 1993 addition of Rule 11’s twenty-one -day safe
harbor provision. See Fed. R. Civ. P. 11(c)(1)(A). Because Rule 11 now provides an attorney
twenty-one days to withdraw or correct a filing before sanctions are imposed, an attorney facing
such sanctions can no longer defend a frivolous legal claim by arguing that he or she filed the
document in haste.
No. 06-1906 Page 6
The district court also did not consider several other arguments that the
defendants made in support of their motion for Rule 11 sanctions. Specifically, the
district court did not address attorney Mihelich’s claim that suing him personally
(and thereby creating a conflict of interest with his clients the Englishes)
constituted the filing of suit for an improper purpose, and that such a claim is
barred by Badger Cab Co., Inc. v. Soule, 492 N.W.2d 375 (Wis. Ct. App. 1992). The
defendants also argued that they were entitled to sanctions because Malec filed suit
for the improper purpose of extorting the Englishes into staying enforcement of
their state court default judgment. Finally, the defendants sought sanctions
because the fraud and abuse of process claims were frivolous. Again, the district
court did not address whether Malec filed the federal suit for an improper purpose
or whether the claims brought, especially the § 1983 claim, were frivolous. From
our review of the record, all of these arguments are “worthy of serious
consideration, . . . [but] [t]he lack of any statement of reasons by the district court,
however, precludes effective appellate review.” Cunningham v. Waters Tan & Co.,
65 F.3d 1351, 1361 (7th Cir. 1995). Accordingly, we must VACATE the district
court’s denial of defendants’ motion for Rule 11 sanctions and REMAND to the
district court for further consideration.