                     IN THE COURT OF APPEALS OF IOWA

                                     No. 12-1985
                                 Filed July 30, 2014

CITY OF BURLINGTON, IOWA,
      Plaintiff-Appellee,

vs.

S.G. CONSTRUCTION CO., INC.,
      Defendant-Appellant.
________________________________________________________________

       Appeal from the Iowa District Court for Des Moines County, Cynthia

Danielson, Judge.



       A general contractor appeals the denial of its request for sanctions against

the City of Burlington and its attorneys. AFFIRMED.



       James A. Hales of Law Offices of James A. Hales, P.L.L.C., Burlington, for

appellant.

       W. Scott Power and Brent Ruther of Aspelmeier, Fisch, Power, Engberg &

Helling, P.L.C., Burlington, for appellee.



       Considered by Vaitheswaran, P.J., and Tabor and Bower, JJ.
                                             2



TABOR, J.

           This appeal raises the question whether a city or its attorneys should be

sanctioned under Iowa Rule of Civil Procedure 1.413(1) for filing a lawsuit

against a general contractor—before attempting to mediate the city’s claim—

when the standard construction contract entered by the parties required

mediation as a condition precedent to instituting legal proceedings. The district

court denied a request by S.G. Construction for sanctions, finding the attorneys

for the City of Burlington did not bring the suit for a malicious or improper

purpose. In the same ruling, the court found a question of material fact regarding

S.G.’s waiver of its right to mediate. Finding no abuse of discretion in the court’s

denial of sanctions, we affirm.

I.         BACKGROUND FACTS AND PROCEEDINGS

           In October 2004, the City entered into a contract with S.G. Construction to

design and construct a geothermal heating and cooling system for the public

library.      The project was substantially completed in November 2006.                  In

November 2010, the system developed a crack resulting in the leaking of all

liquid, including a twenty percent glycol solution.1 The librarian notified S.G. of

the problem and S.G. contacted its subcontractors to make the repairs in January

2011, pursuant to the contract’s five-year warranty.            But the glycol was not

replaced because of disagreements about responsibility for the rupture. The

library reported eventually spending nearly $24,000 to replace the lost glycol

solution.


1
 During a hearing before the district court, the city attorney described the glycol solution
as serving the same purpose for the geothermal system as anti-freeze in a car radiator.
                                         3



       In December 2011, the city attorney sent a letter addressed to S.G. and

two subcontractors demanding payment of $24,000 for the glycol replacement

and other costs. The city attorney received no response to that letter.

       On May 8, 2012, the city attorney filed a breach of contract and breach of

warranty action against S.G. to compensate the library for damages sustained as

a result of the leak in its geothermal system. Following the filing, the parties

communicated with each other. S.G.’s attorney sent a letter to the city attorney

on May 16, 2012, asserting commencement of the litigation was “premature” as

their contract required the parties to undertake mediation as a condition

precedent to the “institution of legal or equitable proceedings.” S.G. requested

that the City dismiss the lawsuit.

       Two days later, the city attorney responded, writing:

              [Y[our suggestion to take this matter to mediation is an
       excellent one, especially in view of the amount involved. Because
       of the statute of limitations issue, I will not agree to dismissing the
       lawsuit now on file unless S.G., and perhaps the two
       subcontractors, execute a document waiving each entity’s right to
       impose a statute of limitations defense in the event the matter
       eventually ends up in litigation. In the alternative, and perhaps
       more practical, you could simply enter an appearance on behalf of
       S.G. and we could mutually agree to a court approved stay of the
       proceedings until we have had a chance to explore other dispute
       resolution options.

       On May 22, 2012, S.G.’s attorney responded by suggesting the name of a

mediator, but reiterating the company’s demand the City dismiss the lawsuit so it

would not be able to create “some sort of leverage or other strategic advantage”

in the mediation. S.G.’s attorney stated he did not understand the City’s basis for

requesting a waiver of any statute of limitations defense, asserting the City was
                                          4



not facing any kind of deadline for filing its suit. The city attorney wrote back on

May 31, 2012, again expressing the City’s willingness to engage in “some form of

alternative dispute resolution” but refusing to dismiss the lawsuit.

       On June 15, 2012, the City filed a notice of intent to file a written

application for default based on S.G.’s failure to respond to the initial petition. On

June 26, 2012, S.G. responded with a motion to dismiss for failure to state a

claim and for sanctions against the City and/or its attorneys for violating the

contract terms by initiating legal proceedings before mediating the claim. S.G.

requested the sanctions take the form of reasonable attorney fees as

reimbursement for responding to the petition. The City resisted the dismissal

motion and request for sanctions on July 9, 2012.

       The district court held a hearing on S.G.’s motion to dismiss on July 16,

2012, and denied the motion by order the same day.

       S.G. filed an answer to the petition on July 24, 2012. That same day, S.G.

filed a motion for summary judgment and renewed its request for sanctions

against the City and its attorneys. The City resisted. The court held a hearing on

the summary judgment motion on September 4, 2012.

       On October 5, 2012, the district court denied summary judgment, finding

“an issue of material fact with regard to whether the defendant waived its right to

mediate as a condition precedent; that is whether the defendant was at fault for

not allowing an alternative dispute resolution method to go forward.” The court

also denied S.G.’s request for sanctions, concluding “the plaintiff did not engage

in any malicious conduct with the intent to put the defendant at a disadvantage,
                                           5



waste judicial resources, or bring the suit for an improper purpose in violation of

Iowa Rule of Civil Procedure 1.413(1).”

        The court stayed the proceedings on October 29, 2012.              S.G. sought

permission to bring an interlocutory challenge to the denial of summary judgment

and sanctions. The supreme court granted interlocutory appeal on March 1,

2013.    On April 22, 2013, the City dismissed the underlying action with

prejudice.2 The supreme court transferred the remaining question concerning

the propriety of sanctions under rule 1.413(1) to our court.3

II.     SCOPE AND STANDARDS OF REVIEW

        Iowa appellate courts have adopted a deferential scope of review in

sanction cases. Weigel v. Weigel, 467 N.W.2d 277, 279 (Iowa 1991). We review

the district court’s decision whether to impose sanctions for abuse of discretion.

Barnhill v. Iowa Dist. Ct., 765 N.W.2d 267, 272 (Iowa 2009). While our review is

for abuse of discretion, we still may correct erroneous applications of the law. Id.

If the pleading is signed in violation of rule 1.413, the court is required to impose

an appropriate sanction. Id. We will be bound by the district court’s denial of

sanctions if that decision is supported by substantial evidence. Id.

        To decide if a pleading is sanctionable, we examine the facts at the time

the party filed the pleading.     Weigel, 467 N.W.2d at 280–81. We apply the

standard of a reasonably competent attorney admitted to practice before the


2
  The city asserts in a footnote to its appellee’s brief that the dismissal was “purely a
business decision” by the library board. That information is outside the record and not
properly before us. We do not consider the reason for the dismissal as relevant to the
resolution of this appeal.
3
  Iowa courts retain jurisdiction to impose sanctions even after a voluntary dismissal.
See Lawson v. Kurtzhals, 792 N.W.2d 251, 260 n.4 (Iowa 2010).
                                            6



district court. Everly v. Knoxville Cmty. Sch. Dist., 774 N.W.2d 488, 493 (Iowa

2009). This test is objective, measured by all the circumstances. Id. As rule

1.413 is based on Federal Rule of Civil Procedure 11, we look at federal

decisions applying rule 11 for guidance. Barnhill, 765 N.W.2d at 273.

III.   ANALYSIS

       S.G. argues sanctions against the City4 are mandatory under rule 1.413

because the city attorneys knew the library’s contract for the geothermal system

required mediation of claims before starting legal proceedings, but they did not

wait to file suit. S.G. asks for sanctions in the amount of $6175 to cover its

litigation costs. Because S.G.’s sanctions claim is part and parcel of the City’s

alleged non-compliance with the mediation requirement of the contract, we turn

first to those provisions.

       A. The Contract Clauses

       S.G. and the library entered a construction contract on a standard form of

agreement drafted by the American Institute of Architects (AIA).5 The mediation

provision stated:

       4.5.1 Any Claim arising out of or related to the Contract, except
       Claims relating to aesthetic effect . . . shall, after initial decision by
       the Architect or 30 days after submission of the Claim to the
       Architect, be subject to mediation as a condition precedent to



4
  When we refer to sanctions against the City, we intend the reference to include the city
attorneys because S.G.’s request for sanctions incorporates both counsel and the
represented party as mentioned in rule 1.413.
5
  Parties engaging in construction projects commonly use form contracts drafted by the
AIA. See PIH Beaverton, LLC v. Super One, Inc., 323 P.3d 961, 967 (Or. 2014); see
also Travelers Cas. & Sur. Co. of America, Inc. v. Long Bay Mgmt., 792 N.E.2d 1013,
1017 n.13 (Mass. App. Ct. 2003) (referring to AIA form documents as “scripture in the
construction industry”).
                                          7



       arbitration or the institution of legal or equitable proceedings by
       either party.

       The following provision stated:

       4.5.2 The parties shall endeavor to resolve their Claims by
       mediation which, unless the parties mutually agree otherwise, shall
       be in accordance with the Construction Industry Mediation Rules of
       the American Arbitration Association currently in effect. Request
       for mediation shall be filed in writing with the other party to the
       Contract and with the American Arbitration Association. The
       request may be made concurrently with the filing of a demand for
       arbitration but, in such event, mediation shall proceed in advance of
       arbitration or legal or equitable proceedings, which shall be stayed
       pending mediation for a period of 60 days from the date of filing,
       unless stayed for a longer period by agreement of the parties or
       court order.

       Paragraph 4.5.1 establishes mediation of a claim as a condition that must

occur before a legal proceeding is initiated. But paragraph 4.5.2 contemplates a

situation where a legal proceeding, once initiated, may be stayed pending

completion of mediation.

       In this case, neither party requested mediation and the parties did not

engage in any form of alternative dispute resolution before the city initiated the

lawsuit. S.G. argues on appeal “it is axiomatic that the condition precedent must

be satisfied before litigation is commenced.”      Because the condition was not

satisfied before the city filed suit, S.G. contends sanctions are required.

       The district court acknowledged: “[T]he contract clearly makes mediation a

condition precedent before a party may file suit in court.” But the court then

introduced the concept of waiver: “[U]nless the defendant waived the right to

enforce this condition precedent by not allowing mediation to go forward, the

parties must attend mediation and arbitration before this Court may hear the
                                           8



case.”     In denying S.G.’s motion for summary judgment, the court decided

“viewing the facts in the light most favorable to the non-moving party,” that an

issue of material fact existed whether S.G. waived its right to mediation as a

condition precedent to the City filing suit.6

         S.G. bristles at the notion it waived its right to mediate by not responding

to the city’s December 2011 communication: “[T]he demand letter contains no

mention of mediation and a lack of a response by S.G. is not evidence of any

actual intention to relinquish the right to have the dispute mediated prior to a

lawsuit being filed.”

         Because the city dismissed the underlying suit, we are not called to decide

if the district court was correct in denying the summary judgment motion. But we

do find the court’s reasoning on the waiver issue to be a useful backdrop as we

assess whether the city attorneys performed with reasonable competence in

filing the petition for breach of contract and warranty before attempting to

mediate the library’s claims against S.G. At this point, the analysis must move to

the civil procedure rule governing sanctions.

         B. Iowa Rule of Civil Procedure 1.413

         In addition to denying summary judgment, the district court ruled the City

did not violate rule 1.413. That rule states in pertinent part:

         Counsel’s signature to every motion, pleading, or other paper shall
         be deemed a certificate that: counsel has read the motion,
         pleading, or other paper; that to the best of counsel’s knowledge,
         information, and belief, formed after reasonable inquiry, it is well


6
  In its resistance to the motion for summary judgment, the City asserted S.G. waived its
right to demand mediation or arbitration by ignoring the City’s pre-suit demand letter of
December 19, 2011.
                                          9



       grounded in fact and is warranted by existing law or a good faith
       argument for the extension, modification, or reversal of existing law;
       and that it is not interposed for any improper purpose, such as to
       harass or cause an unnecessary delay or needless increase in the
       cost of litigation. . . . If a motion, pleading, or other paper is signed
       in violation of this rule, the court, upon motion or upon its own
       initiative, shall impose upon the person who signed it, a
       represented party, or both, an appropriate sanction, which may
       include an order to pay the other party or parties the amount of the
       reasonable expenses incurred because of the filing of the motion,
       pleading, or other paper, including a reasonable attorney fee.

Iowa R. Civ. P. 1.413.

       The rule aims to discourage parties and counsel from filing frivolous suits

and to otherwise deter misuse of pleadings.          Hearity v. Iowa Dist. Ct., 440

N.W.2d 860, 864 (Iowa 1989). As such, sanctions serve the primary purpose of

deterrence and not compensation. Rowedder v. Anderson, 814 N.W.2d 585, 589

(Iowa 2012). “The improper purpose clause seeks to eliminate tactics that divert

attention from the relevant issues, waste time, and serve to trivialize the

adjudicatory process.” Hearity, 440 N.W.2d at 866 (internal quotations omitted).

We may find a violation of the rule even if counsel did not act with bad faith or

malice. Barnhill, 765 N.W.2d at 273. Litigation abuse caused by negligence or

professional incompetence is also cause for sanction. Id.

       In deciding if an attorney has acted with reasonable competence, we will

consider the amount of time available to investigate the facts and research the

legal issues, the complexity of the issues, the plausibility of the claims asserted,

the clarity or ambiguity of existing case law, and the extent to which facts may

not have been readily available to the attorney signing the filing. Id.
                                        10



       The concern here is not the city attorneys’ investigation of the facts of

S.G.’s alleged breach of contract or warranty. Instead, S.G. is critical of their

legal interpretation of the mediation clause in the AIA form contract. S.G. argues

the city attorneys understood the implications of requiring mediation as a

condition precedent, but nevertheless prematurely filed suit to command an

upper hand in the dispute resolution process.

       The City counters that sanctions are not appropriate because its petition

for breach of contract and warranty claims was “well grounded in fact and

warranted by existing law.” The City also invokes the Iowa Arbitration Act as an

antibody to sanctions. It contends Iowa Code section 679A.2 (2011) “anticipates

that where two parties have a contractual dispute relating to a contract containing

a mandatory arbitration clause, that one party may file suit without demanding

arbitration and the other party may or may not exercise its right to demand

arbitration.”

       We are skeptical about the City’s reliance on the Iowa Arbitration Act, at

least under the circumstances at issue here.       The City has not established

chapter 679A would trump the contract provisions requiring mediation as a

condition precedent to either litigation or arbitration, especially where neither

party demanded arbitration. Accordingly, we do not consider the city’s citation to

that chapter as contributing to the reasonableness of the decision to file suit

before attempting to mediate the glycol dispute.

       But we do believe that a reasonably competent attorney could have

viewed S.G.’s silence in the face of the city’s demand letter as a potential waiver
                                              11



of the right to mediate. The December 19, 2011, letter—while not mentioning

mediation or any other form of alternative dispute resolution—did assert the city

attorneys advised their client “that should a final, informal settlement of this

matter not be negotiated, the next step is to file a formal lawsuit.” It would have

been best practice for the City to ask for mediation specifically or remind S.G. of

the conditions required under the contract in that demand letter; but we do not

believe the failure to do so warrants imposition of sanctions.

       The district court found enough evidence to allow the waiver issue to

proceed to a fact finder. The court also stated: “[I]f the fact finder determines that

the defendant did not waive its right to mediation, then it will be appropriate for

this Court to retain jurisdiction and stay the case,” pending the satisfaction of the

contract’s conditions precedent.7 The language in Article 4.5.2 suggests, at least

in some circumstances, such a stay would be appropriate pending mediation. If

it is appropriate to stay the legal proceedings while the parties mediate the claim,

the original filing of the suit before mediation does not signal the kind of legal

incompetence or gamesmanship that would violate rule 1.413.

       Even if dismissal was the appropriate remedy pending mediation, we are

not convinced the City’s original filing of the lawsuit violated rule 1.413. Iowa

does not have case law interpreting the mediation language in the AIA form



7
  Jurisdictions are split on the proper course of action when a suit is filed without fulfilling
the condition precedent of alternative dispute resolution. Compare Tattoo Art, Inc. v. Tat
Int’l, 711 F. Supp. 2d 645, 651 (E.D. Va. 2010) (finding dismissal was warranted when
party failed to mediate a dispute pursuant to a contract making mediation a condition
precedent to filing a lawsuit) with Halim v. Great Gatsby’s Auction Gallery, Inc., 516 F.3d
557, 561 (7th Cir. 2008) (finding proper course of action when a party seeks to invoke an
arbitration clause is to stay the proceedings rather than to dismiss outright).
                                         12



contract. Accordingly, the city attorneys did not have precedent to guide them on

what a party needed to do to request mediation or what constituted waiver of the

right to mediate. Indeed, S.G. contends in its routing statement that this case

presents an issue of first impression concerning the enforcement of the

mediation clause.

       The district court determined the City did not engage in malicious conduct

with the intent to place S.G. at a disadvantage or to waste judicial resources.

That determination rested upon and was informed by the court’s familiarity with

the case, the parties, and the attorneys—a familiarity we do not share. See

O’Connell v. Champion Int’l. Corp., 812 F.2d 393, 395 (8th Cir. 1987) (finding trial

court’s determination deserved “substantial deference”).         “The imposition of

sanctions is a serious matter and should be approached with circumspection.”

Id. The district court’s decision to deny sanctions was “not so far out of bounds

as to justify our coming to a different conclusion at the appellate level.” See id.

       AFFIRMED.
