Interstate Specialty Marketing, Inc. v. ICRA Sapphire, Inc.
158 Cal. Rptr. 3d 743, 2013 WL 3223404, 217 Cal. App. 4th 708 (2013)
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Rule of Law:
Under California Code of Civil Procedure § 128.7, a court initiating sanctions on its own motion must provide the offending party a 21-day safe harbor period, starting from the service of the order to show cause, to correct the challenged conduct. Furthermore, such sanctions require a finding of bad faith or improper purpose and cannot be made payable to the opposing party.
Facts:
- Around November 2002, Interstate Specialty Marketing, Inc. (Interstate) contracted with ICRA Sapphire (Sapphire) for a computer software conversion project.
- After the project was allegedly not completed, Interstate's counsel diligently searched for but could not find a signed copy of the contract.
- In July 2011, Interstate filed a verified complaint against Sapphire for breach of contract, attaching a November 14-15, 2002 draft which it believed in good faith to be a true and correct copy of the agreement.
- In September 2011, Sapphire filed a cross-complaint and attached the correct, signed agreement, dated November 26, 2002.
- In a discovery response on December 21, 2011, Interstate formally admitted that the document it had attached to its complaint was not the final agreement between the parties.
- Despite this knowledge, Interstate's counsel did not immediately seek to amend the complaint to include the correct contract.
Procedural Posture:
- Interstate Specialty Marketing, Inc. sued ICRA Sapphire in a California trial court for breach of contract.
- Sapphire filed a motion for summary judgment on March 22, 2012, arguing Interstate's case was based on the wrong contract.
- On June 5, 2012, Interstate filed an ex parte motion for leave to amend its complaint to attach the correct contract.
- On June 22, 2012, the trial court denied Sapphire's summary judgment motion and granted Interstate's motion to amend.
- Simultaneously, the trial court, on its own motion, issued an order to show cause (OSC) why sanctions should not be imposed against Interstate and its counsel for filing a verified complaint with an incorrect document.
- Following a hearing, the trial court ordered Interstate's counsel to pay $5,076.16 in sanctions to Sapphire.
- Interstate's counsel, as the sanctioned party, appealed the sanction order to the California Court of Appeal.
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Issue:
Does a trial court improperly impose sanctions under California Code of of Civil Procedure § 128.7 on its own motion where the court fails to provide the statutorily required 21-day safe harbor period, the sanctioned conduct does not meet the statute's requirements for bad faith, and the sanctions are made payable to the opposing party?
Opinions:
Majority - Bedsworth, Acting P. J.
Yes, the trial court improperly imposed sanctions. A court cannot impose sanctions under § 128.7 on its own motion without strictly adhering to the statute's procedural and substantive requirements. The trial court committed three distinct errors. First, it violated the 21-day safe harbor provision of § 128.7(c)(2), which begins to run only upon service of the court's order to show cause (OSC), not from an opposing party's motion. Interstate's counsel had already corrected the error by the time the OSC was issued. Second, the conduct itself—attaching the wrong contract draft due to a good-faith mistake—did not rise to the level of sanctionable conduct under § 128.7(b), which requires an improper purpose or bad faith, not mere 'lamentable inattention.' Third, precedent establishes that when a court initiates sanctions on its own motion, any monetary penalty must be paid to the court, not to the opposing party, as was ordered here. The court's inherent 'common law' authority does not permit awarding attorney fees as sanctions in this context.
Analysis:
This decision reinforces the strict procedural safeguards embedded in sanctions statutes like California's § 128.7, ensuring they are used as a last resort for truly egregious conduct rather than a tool to punish simple negligence. It clarifies that the 21-day safe harbor is a bright-line rule that begins only with the court's formal OSC, preventing parties from being ambushed by sanctions. The court also sent a strong message encouraging professionalism and civility, suggesting that simple communication between counsel could have avoided the entire dispute, thereby discouraging a 'scorched earth' litigation mentality.
