Penn, LLC v. Prosper Business Development Corp.
773 F.3d 764
| 6th Cir. | 2014Background
- P&C (Plunkett & Cooney) filed federal RICO and related claims on behalf of Penn against Prosper, its owners, and the Arnold Firm (counsel for Prosper/BIGresearch) — the Arnold Firm was newly named as a defendant though it had represented Prosper in earlier disputes.
- On December 6, 2010 the Arnold Firm sent a warning letter accusing P&C of filing a frivolous complaint and threatening Rule 11 sanctions if the suit was not dismissed by December 20, 2010; the letter reserved additional sanction grounds in a footnote.
- The Arnold Firm moved to dismiss; the district court granted dismissal as to the Arnold Firm on May 27, 2011.
- On June 8, 2011 the Arnold Firm served P&C with a proposed Rule 11 motion (and later filed the motion on June 30, 2011), seeking reimbursement for fees incurred defending the dismissed claims.
- P&C opposed on both merits and procedural grounds, arguing the Arnold Firm failed to comply with Rule 11(c)(2)’s 21-day safe-harbor requirement (service of the motion under Rule 5 at least 21 days before filing).
- The district court denied sanctions on the merits but described the question whether a warning letter satisfies Rule 11’s safe harbor as “somewhat unsettled.” The Sixth Circuit affirmed, holding sanctions unavailable because the Arnold Firm failed to comply with Rule 11’s mandatory safe-harbor procedures.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether an informal warning letter satisfies Rule 11(c)(2)’s safe-harbor requirement | P&C: warning letter was insufficient; motion was untimely | Arnold Firm: December 6 warning letter satisfied safe harbor by notifying P&C of intent to seek sanctions | Held: Warning letter does not satisfy Rule 11(c)(2); movant must formally serve the motion under Rule 5 and permit a 21-day correction period |
| Whether failure to comply with Rule 11 safe-harbor precludes the court from imposing sanctions | P&C: late service (post-dismissal) and lack of formal motion service bars sanctions | Arnold Firm: substantive merits support sanctions despite procedural defects | Held: Failure to comply with safe-harbor bars sanctions; procedural compliance is mandatory |
| Whether the district court erred by denying sanctions on the merits | P&C: conduct did not merit sanctions; complaint had arguable basis | Arnold Firm: complaint was frivolous and filed for improper purpose | Held: Court declined to overturn district court’s merit-based denial (affirmed on alternative procedural ground) |
| Whether Sixth Circuit precedent allows “substantial compliance” via warning letters | P&C: controlling precedent requires strict compliance with Rule 11’s text | Arnold Firm: cited unpublished decisions suggesting warning letters may suffice | Held: Unpublished decisions do not bind; Sixth Circuit adopts majority view requiring formal service of the motion |
Key Cases Cited
- Ridder v. City of Springfield, 109 F.3d 288 (6th Cir.) (failure to comply with Rule 11 safe-harbor precludes sanctions)
- Barber v. Miller, 146 F.3d 707 (9th Cir.) (warning letters are not motions; Rule 11 requires service of a motion)
- Roth v. Green, 466 F.3d 1179 (10th Cir.) (letters are informal notice and do not satisfy Rule 11 safe harbor)
- In re Pratt, 524 F.3d 580 (5th Cir.) (formal service of a proposed sanctions motion required; cannot substitute informal notice)
- Star Mark Mgmt., Inc. v. Koon Chun Hing Kee Soy & Sauce Factory, Ltd., 682 F.3d 170 (2d Cir.) (warning letter without service of a Rule 11 motion does not trigger safe harbor)
- Nisenbaum v. Milwaukee County, 333 F.3d 804 (7th Cir.) (contrary view that informal notice may suffice; discussed and rejected by other circuits)