is also in the nature of a legal conclusion.
The fifth and sixth statements are contained in paragraphs 26
of the complaint in which Plaintiffs allege that they retained
CSG to act as an investment advisor prior to making their
investments. The Court finds that New York counsel had a factual
basis for these allegations based on his interviews with Joseph
Hurley, Plaintiffs' investment manager and agent.
The seventh statement is a misstatement by the CSG defendants
which does not actually appear in paragraph 27 of the complaint.
The eighth through tenth statements are found in paragraph
28(f), (h) and (i) of the complaint and allege that the CSG
defendants performed due diligence regarding the Theta Group, the
Theta Group offering and the individual managers of the Theta
Group. The Court finds that New York counsel had a sufficient
basis for the information based on his interviews with Hurley.
2. The Allegations Had Evidentiary Support
The central purpose of Rule 11 is to deter baseless filings to
streamline the administration and procedure of the federal
courts. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 397, 110
S.Ct. 2447, 2457, 110 L.Ed.2d 359 (1990), Rule 11 focuses on
conduct rather than result. Mars Steel Corp. v. Continental
Bank, 880 F.2d 928, 933 (7th Cir. 1989). "Frivolous filings
support but do not compel an inference of unreasonable
investigation" and thus each Rule 11 case in the district court
is unique. Id. How much investigation should have been done in
a given case is a question of fact. Id.
Unless there is a specific disclaimer stating that additional
investigation is necessary, sanctions are allowed under Rule 11
when no evidentiary support exists for a factual allegation.
O'Brien v. Alexander, 101 F.3d 1479, 1489 (2d Cir. 1996). The
standard certification for factual allegations under Rule
11(b)(3) is "that there is (or likely will be) `evidentiary
support' for the allegation, not that the party will prevail with
respect to its contention." Fed. R.Civ.P. 11(b)(3) Advisory
Committee Notes (1993 Amendments). A sanction will not be imposed
unless a specific allegation is utterly void of support.
O'Brien, 101 F.3d at 1489. This standard differs from the
pre-1993 amendments. Under the former Rule, a signature on a
pleading certified that the contentions therein were "well
grounded in fact." The current version of the Rule requires only
that an attorney conduct "an inquiry reasonable under the
circumstances" into whether "factual contentions have evidentiary
support." Fed.R.Civ.P. 11(b) and (b)(3).
Plaintiffs' filing of the complaint joining the CSG defendants
was based upon a reasonable investigation and had a factual
basis. New York counsel had multiple telephone conversations with
prospective witnesses and defendants in order to determine
whether Kurt Voldeng and Roy Moore were partners, employees and
controlling parties of CSG and each other. This reasonable
inquiry into the status of Voldeng and Moore led to evidentiary
support for factual contentions of the Plaintiffs' complaint.
Further, Plaintiffs' New York counsel interviewed the
Plaintiffs' investment manager and agent, Joseph Hurley, which
led to a factual basis for the allegation that Plaintiffs
retained CSG to act as an investment advisor prior to making
their investments. The interviews with Hurley also supplied
Plaintiffs' New York counsel with a sufficient basis for alleging
that the CSG defendants performed due diligence regarding the
Theta Group, the Theta Group offering, and the individual
managers of the Theta Group.
The Court finds that Hurley contradicted certain key
allegations alleged in the complaint after the filing of the
complaint by the Plaintiffs. Hurley's pre-complaint
statements, as well as New York counsel's conversations with
defendants, establish that counsel performed a reasonable
investigation. The Court finds that the factual allegations
regarding the CSG defendants did not violate Rule 11.
B. THE SAFE HARBOR PERIOD OF RULE 11 BEGINS TO RUN UPON SERVICE
OF THE MOTION
The second issue presented is whether Rule 11's twenty-one day
safe harbor period began on March 2, the date of the letter
demanding that the CSG defendants be dismissed, or on July 24,
the date the Rule 11 motion was served. The CSG defendants
contend the safe harbor period began to run March 3. Plaintiffs
contend that the safe harbor period did not begin to run until
July 24. The Court holds that the safe harbor period began on
Rule 11 specifically mandates that a motion for sanctions under
the Rule shall be made separately from other motions or requests.
Fed.R.Civ.P. 11(c)(1)(A). The motion must be served "as provided
in Rule 5, but shall not be filed with or presented to the court
unless, within 21 days after service of the motion (or such other
periods as the court may prescribe), the challenged paper, claim,
defense, contention, allegation, or denial is not withdrawn or
appropriately corrected." Id. Thus, upon notification of the
alleged violative conduct, an offending party can avoid sanctions
altogether if they withdraw their challenged position within 21
days. Ridder v. City of Springfield, 109 F.3d 288, 293 (6th
The CSG defendants sent a warning letter on March 2, but did
not serve their motion until July 24. The warning letter did not
trigger the twenty-one day safe harbor period and cannot
substitute for formal service of the Rule 11 motion. According to
the safe harbor provision, a party seeking sanctions must: 1)
serve a separate Rule 11 motion for sanctions on the opposing
party; and, 2) file the motion with the court after 21 days in
the event the allegedly offending paper is neither withdrawn nor
corrected. Corley v. Rosewood Care Center, Inc. of Peoria,
142 F.3d 1041, 1058 (7th Cir. 1998); Photocircuits Corp. v. Marathon
Agents, Inc., 162 F.R.D. 449, 452 (E.D.N.Y. 1995) (commencement
of the 21 day safe harbor period is not triggered by informal
notice, either by letter or other means); Weeks Stevedoring Co.,
Inc. v. Raymond International Builders, Inc., 174 F.R.D. 301,
305 (S.D.N.Y. 1997) (a letter "does not meet the strict
procedural requirements of Rule 11"); Sears Roebuck & Co. v.
Sears Realty Co., 932 F. Supp. 392, 408 (N.D.N.Y. 1996) (Rule 11
requires service of a formal motion for sanctions rather than a
letter of warning or oral request to withdraw the offending
The Seventh Circuit has continually recognized a party's duty
to mitigate by appropriately tailoring a response to a baseless
motion or complaint. Dubisky v. Owens, 849 F.2d 1034, 1038 (7th
Cir. 1988). Parties should use the least expensive alternative to
alert the court and the offending party of a possible Rule 11
violation. Id. at 1038. This duty to mitigate is further
reflected in Rule 11's obligation to serve the motion for
sanctions upon opposing counsel before filing the motion with the
court. Fed.R.Civ.P. (11)(c)(1)(A). Counsel is even expected to
give informal notice to the opposing party whether in person, by
telephone, or letter, of a potential violation before preparing
and serving a Rule 11 motion. Fed.R.Civ.P. 11 Advisory Committee
Notes (1993 Amendments).
While informal notice is often expected, the safe harbor period
only begins to run upon service of the motion. Fed.R.Civ.P. 11
Advisory Committee Notes (1993 Amendments). Multiple warnings
given to the plaintiff regarding defects in the presented claim
are not motions. Barber v. Miller, 146 F.3d 707, 710 (9th Cir.
1998). The Rule requires service of a motion. Id. The defendant
in Barber initially sent a
letter to the plaintiff to "serve as formal notice pursuant to
Federal Rule of Civil Procedure 11(c)" and a subsequent letter
claiming its intention to seek Rule 11 sanctions. Id. at 709.
The Barber court found that to allow a warning of one's intent
to file a Rule 11 motion to substitute for service of a formal
motion would "wrench both the language and purpose of the
amendment to the Rule to permit an informal warning to substitute
for service of a motion." Id. at 710. No motion was served on
March 2. Consequently, the Court finds that the safe harbor
period was triggered on July 24, not on March 2, 1998.
C. THE RULE 11 MOTION WAS UNTIMELY
1. The 1993 Amendments Require a Prompt Filing
The third issue raised is whether the CSG defendants' motion
was untimely because it was filed after they were dismissed with
prejudice. The Rule 11 motion for sanctions must be timely served
on an opposing party, and timely filed with the court. The safe
harbor provision of Rule 11 provides that the motion may not be
filed with the court until at least 21 days after service of the
motion on the offending party. Fed.R.Civ.P. 11(c). "If during
this period, the alleged violation is corrected, as by
withdrawing (whether formally or informally) some allegation or
contention, the motion should not be filed with the court."
Fed.R.Civ.P. 11 Advisory Committee Notes (1993 Amendments).
Before the 1993 Amendments took effect, a Rule 11 motion could
be presented after final judgment, subject to the standards of
local rules. See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384,
397, 110 S.Ct. 2447, 2457, 110 L.Ed.2d 359 (1990) (upholding
sanctions awarded three and a half years after voluntary
dismissal). The 1993 amendments establish a significant change in
the timing of a Rule 11 motion. Ridder v. City of Springfield,
109 F.3d 288, 295 (6th Cir. 1997). The text of the Rule does not
explicitly state when a Rule 11 motion should be brought, but the
drafters advise that it should be brought early:
The revision leaves for resolution on a case-by-case
basis, considering the particular circumstances
involved, the question as to when a motion for
violation of Rule 11 should be served and when, if
filed, it should be decided. Ordinarily the motion
should be served promptly after the inappropriate
paper is filed, and, if delayed too long, may be
viewed as untimely. In other circumstances, it should
not be served until the other party has had a
reasonable opportunity for discovery. Given the "safe
harbor" provisions . . . a party cannot delay serving
its Rule 11 motion until conclusion of the case (or
judicial rejection of the offending contention).
Fed.R.Civ.P. 11 Advisory Committee Notes (1993 Amendments).
The court must give the rule its plain meaning and apply the
text rather than try to improve upon it. Pavelic & LeFlore v.
Marvel Group, 493 U.S. 120, 123, 126, 110 S.Ct. 456, 107 L.Ed.2d
438 (1989). If interpretation is necessary, the court must
consider both the purpose of the rule and the deficiencies in its
prior form which the amendment was designed to correct. Cooter,
496 U.S. at 392, 110 S.Ct. at 2454. The purpose of the 1993
amendments was to "reduce the number of motions for sanctions
presented to the court" by affording a party the opportunity to
avoid sanctions by withdrawing the allegedly offending complaint.
Fed.R.Civ.P. 11 Advisory Committee Notes (1993 Amendments). A
court is required to consider this goal when applying Rule 11.
See Cooter, 496 U.S. at 392, 110 S.Ct. at 2454.
2. A Sanctions Motion Filed After a Voluntary Dismissal With
Prejudice is Untimely
The Court finds that the CSG defendants failed to file the Rule
for sanctions with the Court in a timely manner. The CSG
defendants are not entitled to sanctions because they filed their
motion after they had been voluntarily dismissed with prejudice
as party defendants. AeroTech, Inc. v. Estes, 110 F.3d 1523,
1528 (10th Cir. 1997) ("Because [defendant] did not move for Rule
11 sanctions until after [plaintiff] had moved to dismiss its
claims against him, . . . Rule 11's cure provision prevents
[defendant] from seeking sanctions."); Photocircuits Corp. v.
Marathon Agents, Inc., 162 F.R.D. 449, 452 (E.D.N.Y. 1995) ("In
this case, the complaint was voluntarily withdrawn prior to the
filing of the motion which act immunized Plaintiff's counsel.").
Service of the Rule 11 motion on Plaintiffs accomplished the
desired result of causing Plaintiffs to dismiss the CSG
defendants without further work on the part of the court or
counsel, except for preparation and entry of the dismissal order.
In the case at hand, Plaintiffs' Texas counsel notified the CSG
defendants on August 21, 1998, of their intent to dismiss the CSG
defendants with prejudice. This informal notice was given to the
CSG defendants 28 days after the service of the Rule 11 motion.
The CSG defendants were subsequently formally dismissed with
prejudice on September 9, 1998. The Court finds that the August
21, 1998 telephone call confirmed Plaintiffs' intent to withdraw
the complaint. This was a valid notification because Plaintiffs
did not continue to insist on a position that was adverse to the
CSG defendants. The Court holds that when an alleged violation is
informally or formally corrected by withdrawing some allegation
or contention, the motion should not be filed with the court.
Fed.R.Civ.P. 11 Advisory Committee Notes (1993 Amendments).
The Court concludes that the CSG defendants failed to timely
file the Rule 11 motion for sanctions prior to the voluntary
dismissal of the case against them. Since the Court found that
Plaintiffs withdrew their position on August 21, 1998, the CSG
defendants were required to file their Rule 11 motion after the
expiration of the safe harbor period, August 14, 1998, but before
withdrawal of Plaintiffs' alleged contention, August 21, 1998.
Because the CSG defendants failed to file their Rule 11 motion
prior to being voluntarily dismissed, they were time-barred from
doing so later.
D. IN THE EXERCISE OF DISCRETION, THE COURT WOULD DENY
Alternatively, the Court holds that if Plaintiffs were in
violation of Rule 11 by failing to dismiss the complaint before
the expiration of the safe harbor period, this violation was de
minimis and therefore does not warrant any sanctions. Once a
violation of Rule 11 has been identified, the imposition of
sanctions is within the discretion of the district court. Land
v. Chicago Truck Drivers Union,