Mao-Mso Recovery II, LLC v. State Farm Mut. Auto. Ins. Co.

In the

United States Court of Appeals

For the Seventh Circuit

____________________

Nos. 18-2377 and 18-2463

MAO-MSO RECOVERY II, LLC, et al.,

Plaintiffs-Appellants,

Cross-Appellees,

v.

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY,

Defendant-Appellee,

Cross-Appellant.

APPEAL OF: CHRISTOPHER L. COFFIN, et al.

____________________

Appeals from the United States District Court for the

Central District of Illinois.

No. 17-1541 — Joe Billy McDade, Judge.

____________________

ARGUED JANUARY 14, 2019 — DECIDED AUGUST 15, 2019

____________________

Before WOOD, Chief Judge, and BRENNAN and ST. EVE,

Circuit Judges.

WOOD, Chief Judge. When all the dust is cleared away, this

case is relatively straightforward: we must review a dismissal

for lack of Article III standing and the imposition of sanctions

2 Nos. 18-2377 and 18-2463

under Rule 11. Only the factual backdrop is complex, as it

deals with one aspect of the federal Medicare program. The

Plaintiffs assert that they are assignees of certain private

insurers called Medicare Advantage Organizations, which

provide Medicare benefits. They brought a putative class

action against State Farm Mutual Automobile Insurance

Company in an effort to recover payments State Farm

allegedly should have made to them as reimbursement for

certain medical costs. The district court dismissed the action

with prejudice, although the basis for the dismissal was lack

of standing. In addition, the court imposed sanctions under

Rule 11 of the Federal Rules of Civil Procedure against one of

the plaintiffs, MSP Recovery Claims, Series LLC, and its

attorneys.

Plaintiffs, MAO-MSO Recovery II, LLC; MSP Recovery,

LLC; MSPA Claims 1, LLC; and MSP Recovery Claims, Series

LLC MSP (“Recovery Claims”), appealed. They argue that the

court erred in its standing analysis, and that in any event it

should not have dismissed the case with prejudice. Recovery

Claims and the attorneys (Christopher Coffin, David

Hundley, and Courtney Stidham) appealed the sanctions

order. Finally, State Farm cross-appealed in order to preserve

its alternative argument in favor of affirmance—that the case

should be dismissed on the merits because plaintiffs failed to

state a claim upon which relief can be granted. See Matushkina

v. Nielsen, 877 F.3d 289, 297 (7th Cir. 2017) (noting that “[a]s a

general rule, where a defendant has won dismissal for lack of

standing or some other jurisdictional ground, modifying the

judgment to dismissal on the merits” requires a cross-appeal).

We conclude that the district court erred insofar as it

dismissed plaintiffs’ case with prejudice, when the problem

Nos. 17-3636 and 18-2463 3

was a fundamental lack of Article III standing. But this victory

gets the plaintiffs only so far. The court acted well within its

discretion when it denied plaintiffs a third opportunity to

cure the defects in their pleadings. The court’s order, in

substance, was a jurisdictional dismissal with denial of leave

to amend. So understood, we affirm the judgment and correct

the record to reflect that the dismissal is without prejudice.

We also dismiss State Farm’s cross-appeal. Finally, we find

that the district court exceeded the bounds of its discretion

when it imposed Rule 11 sanctions on Recovery Claims and

its attorneys.

I

Although the issues before us are ultimately procedural,

some background on Medicare is helpful to place them in

context. Medicare is “the federal health insurance program

for people who are 65 or older,” as well as for certain other

groups. See https://www.medicare.gov/what-medicare-

covers/your-medicare-coverage-choices/whats-medicare.

While many Americans receive benefits directly from the

government through Medicare Parts A and B, others receive

their benefits from private entities known as Medicare

Advantage Organizations, pursuant to Medicare Part C.

42 U.S.C. § 1395w-21(a). For each Medicare enrollee covered

by a Medicare Advantage Organization, the Organization

receives a per capita reimbursement from the federal

government. The amount of that reimbursement may vary

according to the characteristics of the individual enrollees and

other factors. See In re Avandia Mktg., Sales Practices & Prods.

Liab. Litig., 685 F.3d 353, 364–65 (3d Cir. 2012). The Medical

Advantage Organizations assume the financial risk of

insuring their enrollees. Id.

4 Nos. 18-2377 and 18-2463

One other piece of Medicare vocabulary is important to

this case: the difference between “primary” and “secondary”

payments. When an enrollee is covered directly by the

government (under Medicare Parts A and B), Medicare is

statutorily barred from making payments for medical costs

when an enrollee has benefited or is likely to benefit from

some other insurance or worker’s compensation plan. The

statute mentions such alternative sources of benefits as “a

workmen’s compensation law … or … automobile or liability

insurance policy or plan (including a self-insured plan) or …

no fault insurance.” 42 U.S.C. § 1395y(b)(2)(A)(ii). In such

situations, Medicare is a secondary form of coverage that

applies only to costs not covered by the primary insurance.

But if a primary insurer fails to pay, the government does not

leave the enrollee and her medical providers in the lurch.

Rather, it makes conditional payments to providers and then

seeks reimbursement from the primary insurer. Id.

§ 1395y(b)(2)(B)(i). An analogous provision in Medicare

Part C makes the private Medicare Advantage Organizations

secondary payers where enrollees have some form of primary

coverage. Id. § 1395w-22(a)(4). When the primary insurers fall

down on their responsibilities, Medicare Advantage

Organizations are authorized by statute to pay first and seek

reimbursement later, just as the government may. Id.

Sometimes, however, the primary insurer never

reimburses the secondary payer (be it the government or a

Medicare Advantage Organization) for benefits it should have

provided. In that case, the Medicare Secondary Payer

provisions establish a private right of action that permits some

private plaintiffs to sue for double damages. But the relevant

section of the statute does not specify who may take

advantage of that provision. All it says, without further

Nos. 17-3636 and 18-2463 5

elaboration, is that “[t]here is established a private cause of

action for damages (which shall be in an amount double the

amount otherwise provided) in the case of a primary plan

which fails to provide for primary payment (or appropriate

reimbursement) in accordance with paragraphs (1) and

(2)(A).” Id. § 1395y(b)(3)(A).

The plaintiffs in this case are not themselves Medicare

Advantage Organizations; they assert instead that they are

assignees of claims that originally belonged to such entities.

They argue that Medicare Advantage Organizations are

among the proper plaintiffs that can exercise this private right

of action, and that through the assignments, they stand in the

shoes of those Organizations. The plaintiffs and related

entities have pursued this theory not just in this litigation, but

in several suits throughout the country. See, e.g., MAO-MSO

Recovery II, LLC v. Gov't Employees Ins. Co., No. PWG-17-711,

2018 WL 999920 (D. Md. Feb. 21, 2018); MAO-MSO Recovery

II, LLC v. Am. Family Mut. Ins. Co., No. 17-CV-175-JDP, 2018

WL 835160 (W.D. Wis. Feb. 12, 2018). At the same time as it

granted State Farm’s motion to dismiss the First Amended

Complaint for lack of standing in this case, the district court

agreed with the plaintiffs that the statute does support a

private right of action for Medicare Advantage Organizations.

In that respect, it relied on rulings from the Third and

Eleventh Circuits. See Humana Med. Plan, Inc. v. W. Heritage

Ins. Co., 832 F.3d 1229, 1238 (11th Cir. 2016); In re Avandia

Mktg., Sales Practices & Prods. Liab. Litig., 685 F.3d 353, 355 (3d

Cir. 2012). Although State Farm did not challenge this point

in the district court, it has changed its tune on appeal and now

argues that the private right of action does not extend to

Medicare Advantage Organizations. Those entities, State

Farm contends, must look to contract law for appropriate

6 Nos. 18-2377 and 18-2463

remedies. This dispute is at the heart of State Farm’s cross-

appeal.

Plaintiffs’ efforts in the present case foundered, however,

when the district court found that they did not have valid

assignments from any Medicare Advantage Organization that

made unreimbursed payments. Without the link to a proper

Organization that possessed claims to reimbursement, the

court concluded, plaintiffs had no injury for which they could

seek redress on this or any other legal theory. Accordingly, it

ruled, no matter the scope of the private right of action, these

plaintiffs lacked standing to sue. We come to the same

conclusion. We save for another day the question whether a

Medicare Advantage Organization or a proper assignee of its

rights may invoke the Medicare Secondary Payer private right

of action for double damages against a primary insurer.

II

We now turn to the specific defects that the district court

found to be fatal to the plaintiffs’ case. This appeal comes to

us on a dismissal of the plaintiffs’ Second Amended

Complaint. A brief review of the first two iterations of the

complaint sheds some light on what went wrong and why

plaintiffs are entitled to no further amendments.

From the outset of this litigation, the question of standing

has been hotly disputed. Plaintiffs acknowledge that they and

similar organizations have filed a number of suits in which

the initial complaints “did not name any exemplar

beneficiaries or their corresponding assignor [Medicare

Advantage] Plans.” Instead, they “generally alleged the

assignments held by plaintiffs from multiple [Medicare

Advantage Organizations], and alleged plaintiffs’ analysis of

Nos. 17-3636 and 18-2463 7

the data from multiple unreimbursed claims.” This led to

successful defense motions to dismiss for lack of standing: as

the plaintiffs put it, “[g]enerally, the district court rulings on

these early motions were to dismiss the complaints, with

leave to amend, directing some degree of greater specificity.”

When State Farm in this case moved to dismiss the initial

complaint for lack of Article III standing (among other

grounds), the plaintiffs responded by filing an amended

complaint to put more meat on the bone.

The First Amended Complaint fell short, however. It

identified an exemplar beneficiary by initials and a Medicare

Advantage Organization (whose identity was redacted) that

allegedly had made secondary payments, but it provided

little additional information about the underlying claims or

payments. Even after the district court issued a protective

order, plaintiffs still failed to disclose the name of the assignor

Medicare Advantage Organization to State Farm. This time,

in response to State Farm’s motion, the district court

dismissed the complaint for lack of Article III standing. It

found that the plaintiffs could not demonstrate an “injury in

fact” for purposes of Article III standing without more

specificity as to the injuries sustained by the exemplar

beneficiary and the assignor Medicare Advantage

Organization that had allegedly paid the unreimbursed

medical costs. The court gave the plaintiffs another chance to

cure that defect by granting leave to amend.

Plaintiffs took advantage of that opportunity and filed a

Second Amended Complaint. In this iteration, the plaintiffs

chose a new “exemplar beneficiary” (identified by the initials

“R.Y.”) and named the Medicare Advantage Organization

that had made the secondary payments as Health First

8 Nos. 18-2377 and 18-2463

Administrative Plans (“HFAP”). A chain of assignments

transferred HFAP’s alleged right of recovery to Recovery

Claims. The complaint alleged that R.Y. suffered specific

injuries in an accident; that HFAP was the entity that paid

medical costs for R.Y.; that State Farm entered into a

settlement agreement with R.Y.; and that State Farm failed to

reimburse HFAP for the costs HFAP had incurred.

This time, however, there was a new problem: it was not

clear that HFAP qualified as a Medicare Advantage

Organization. After the defendants filed another motion to

dismiss for lack of standing, but before the district court had

arrived at a decision, a district court in Florida ruled in a

related case that HFAP was not a Medicare Advantage

Organization at all. MSP Recovery Claims, Series LLC v. Auto-

Owners Ins. Co., No. 17-23841, 2018 WL 1953861 *5 (S.D. Fla.

Apr. 25, 2018) (“Auto-Owners”). The Florida court took judicial

notice of the fact that HFAP does not appear on the list

maintained by the Centers for Medicare & Medicaid Services

of Medicare Advantage Organizations. Id. Instead, HFAP is an

entity that had contracted with a Medicare Advantage

Organization—a closely linked entity by the name of Health

First Health Plans—to provide a range of administrative,

financial, and strategic-planning services. The two entities

(Health First Administrative Plans and Health First Health

Plans) shared very similar names, a holding company, and a

Chief Operating Officer, Michael Keeler. But crucially, in the

Florida court’s view, only Health First Health contracted

directly with the government and qualified as a Medicare

Advantage Organization for purposes of the private right of

action that the plaintiffs were asserting. Accordingly, the

Florida court found that HFAP did not have any recovery

rights to assign, even assuming plaintiffs were correct about

Nos. 17-3636 and 18-2463 9

the private right of action: any such claims belonged only to

Health First Health.

Only one of the plaintiffs in this case—Recovery Claims—

was a party to Auto-Owners. Nonetheless, the overlap was

enough to matter. As in this case, the plaintiffs in Auto-Owners

argued that whatever the proper characterization of HFAP

might have been, its service contract with Health First Health

meant that it could pursue Health First Health’s legal claims

or assign them away. The Florida court rejected that

contention, ruling that “a contract for services is not an

assignment of rights,” and thus “HFAP [could] not assign

rights to Plaintiff that were not assigned to it in the first place.”

Id. This left the Florida plaintiffs without any rights to enforce.

Similarly, in this litigation, the district court thought, the only

purported assignment that could confer standing on any of

the plaintiffs was one from HFAP to Recovery Claims.

State Farm brought Auto-Owners to the attention of the

district court the day after it was issued. The next day, the

district court entered a Text Order directing the plaintiffs to

explain why this litigation should not be dismissed on the

same grounds.

The plaintiffs complied with that order. Their response

first argued that Auto-Owners was wrongly decided for two

reasons: (1) HFAP does qualify as a Medicare Advantage

Organization for purposes of the private right of action; and

(2) the agreement between Health First Health and HFAP

granted HFAP the power to enforce Health First Health’s

legal rights as its agent, making the agreement the equivalent

of an assignment. In a decision issued on May 25, 2018, the

district court rejected both points.

10 Nos. 18-2377 and 18-2463

The court was particularly bothered by what it saw as a

bombshell: the revelation in the plaintiffs’ response that

Health First Health, which had never been mentioned in the

Central Illinois case, not HFAP, was the entity that paid the

unreimbursed medical costs. This fact contradicted earlier

filings that identified HFAP as the payer with reimbursement

rights. If that was true, the district court thought, then HFAP

(whatever its status) never incurred any injury and so had no

rights that it could assign. The court also reasoned that in light

of this development, there was no need to decide, as the

Florida court had, whether HFAP was a qualifying Medicare

Advantage Organization. It was Health First Health that paid

the unreimbursed bills, but the plaintiffs had an assignment

only from HFAP. Only if Health First Health’s service contract

with HFAP also assigned HFAP its legal rights could the case

have a leg to stand on. And on this point, the district court

agreed fully with its Florida counterpart: it emphasized,

contrary to the plaintiffs’ arguments, that a document

creating an agency relationship and one effecting an

assignment of rights are two entirely different things.

Accordingly, the district court dismissed the case on this

ground alone. “Assuming HFAP is [a Medicare Advantage

Organization], Plaintiffs still need to satisfy Article-III

standing requirements, and this they cannot do.”

Up to this point, we agree with the district court’s

disposition of the case. Nothing in the agreement between

Health First Health and HFAP suggests that Health First

Health was assigning away any of its rights. Without such an

assignment, HFAP’s own assignment to plaintiff Recovery

Claims conveyed nothing, and thus the plaintiffs had no

rights to enforce and no standing to sue. As we note when we

reach the sanctions portion of this appeal, additional

Nos. 17-3636 and 18-2463 11

information later came to the district court’s attention, but

that new information could not have affected the court’s order

of May 25.

We part ways with the district court only with respect to

the bottom line. The decision that plaintiffs lacked Article III

standing is one of jurisdictional significance: it means that the

court had no authority to resolve the case. See, e.g., Spokeo, Inc.

v. Robins, 136 S. Ct. 1540, 1547 (2016). And that is why the

court erred by dismissing the case “with prejudice.” See, e.g.,

T.W. and M.W. v. Brophy, 124 F.3d 893, 898 (7th Cir. 1997)

(“[W]hen a suit is dismissed for want of subject-matter

jurisdiction, that is, because the court has no power to resolve

the case on the merits even if the parties are content to have it

do so, it is error to make the dismissal with prejudice”).

If a complaint fails to include enough allegations to

support Article III standing for the plaintiffs, the court has

only two options: it can either dismiss the complaint with

leave to amend, or it can dismiss the case for want of

jurisdiction and hence without prejudice. The Federal Rules

of Civil Procedure allow for one amendment as of right and

direct district courts “freely [to] give leave [for further

amendments] when justice so requires.” FED. R. CIV. P. 15(a).

But after the first round of amendments, the court has the

discretion to deny leave to amend. If, after amendments, the

jurisdictional problem persists, then the only option left is a

dismissal without prejudice.

A dismissal for lack of jurisdiction without leave to amend

is not the same thing as a dismissal with prejudice. A

dismissal with prejudice is a ruling on the merits, because it

carries with it a preclusive effect that prevents the plaintiffs

from relitigating—in any court, ever again—any claim

12 Nos. 18-2377 and 18-2463

encompassed by the suit. We have emphasized this

distinction before. See, e.g., Murray v. Conseco, Inc., 467 F.3d

602, 605 (7th Cir. 2006) (“‘No jurisdiction’ and ‘with prejudice’

are mutually exclusive.’ A court that lacks subject matter

jurisdiction cannot dismiss a case with prejudice.”); Okoro v.

Bohman, 164 F.3d 1059, 1063 (7th Cir. 1999) (“[A] judgment on

the merits precludes relitigation of any ground within the

compass of the suit, while a jurisdictional dismissal precludes

only the relitigation of the ground of that dismissal.”).

If plaintiffs believe they have satisfied the standing

requirements of a proper state-court forum—requirements

that may differ from those used by the federal courts—they

may try their luck in state court. Or, if they later believe they

can demonstrate that they have suffered an injury in fact after

all, perhaps on the basis of a different assignment or exemplar

claim, they can present these claims against the same

defendant in a new federal suit (assuming of course that no

independent barrier, such as the statute of limitations, exists).

Indeed, in a case brought by these plaintiffs against the same

defendant and before the same district judge—which the

court called “a putative class action with slightly different

facts, but consisting of virtually identical allegations under

the law”—these plaintiffs did successfully demonstrate

standing and survived a motion to dismiss. MAO-MSO

Recovery II, LLC v. State Farm Mut. Auto. Ins. Co. (“State Farm

I”), No. 17-cv-01537, 2018 WL 3420796 at *1, *7 (C.D. Ill. July

13, 2018).

None of these later developments, however, means that

the district court was required to let this lawsuit continue. The

court did not abuse its discretion by saying “enough is

enough.” It observed that “Plaintiffs have been given a few

Nos. 17-3636 and 18-2463 13

chances to demonstrate this Court has jurisdiction.” This suit,

the judge thought, had run its course. Indeed, in a footnote

explaining its dismissal “with prejudice,” the court cited

Arreola v. Godinez, 546 F.3d 788, 796 (7th Cir. 2008) for the

unassailable proposition that district courts “have broad

discretion to deny leave to amend where there is undue delay,

bad faith, dilatory motive, repeated failure to cure

deficiencies, undue prejudice to the defendants, or where the

amendment would be futile.” (Emphasis added). The only

problem was thus the court’s use of the phrase “with

prejudice” to signal that it would permit no more

amendments.

On this understanding of the district court’s order, we find

no abuse of discretion in its decision to dismiss on standing

grounds and to refuse further amendments. While it is true

that the plaintiffs had not previously had a chance to address

the HFAP/Health First Health mix-up, they were on notice

from the outset that the issue of standing would be front and

center. If they were going to hang their hat on a single

“exemplar” after two unsuccessful attempts, it was important

to get it right on the third try. The district court’s frustration

at their failure to do so was understandable. And the court

was entitled to give little weight to their plea for another

round of pleading, since their memorandum included

nothing beyond a request for “leave to allege additional

exemplar beneficiaries,” without naming them or providing

any reason for the district court to believe that the fourth time

would be the charm. Denying leave to amend under such

circumstances was well within the district court’s discretion.

See James Cape & Sons Co. v. PCC Const. Co., 453 F.3d 396, 400–

01 (7th Cir. 2006) (finding that lack of specificity in proposed

amendments justified denial of leave to amend).

14 Nos. 18-2377 and 18-2463

III

In the same order that dismissed the Second Amended

Complaint, the district court also ordered the plaintiffs to

show cause why they should not be sanctioned for their

earlier filings, which wrongly identified HFAP as the payer of

the relevant medical costs. We address the substance of the

sanctions issue below. Here we note that the plaintiffs’

response to the order to show cause contained materials

relevant to standing and the merits, including (1) a

declaration attesting to many additional exemplars that could

be alleged; (2) a purported “nunc pro tunc” or retroactive

assignment from Health First Health to one of the plaintiffs,

intended to cure the defect identified by the court; and (3) a

declaration from Michael Keeler, the Chief Operating Officer

of Health First Health and HFAP, explaining the relationship

between the two entities and putting on the record that he had

always intended to assign rights from Health First Health to

the plaintiffs. On appeal, the plaintiffs argue that in light of

this new evidence, the district court abused its discretion

when it refused further amendments.

We need not decide whether any of these documents

might have been enough to call into question the district

court’s dismissal without leave to amend, because the court

did not have any of this evidence in front of it when it issued

the dismissal order. The time to provide this information was

in response to the defendants’ motion to dismiss or in the

supplemental response to the district court’s Text Order

regarding Auto-Owners. A post-dismissal filing in response to

an order to show cause was too little, too late. And to make

matters worse, the plaintiffs never filed a motion for

reconsideration or relief from judgment. None of the

Nos. 17-3636 and 18-2463 15

information provided to the district court after the dismissal

required it to revive the suit.

Because we agree that the district court was without

jurisdiction to address the merits of the case, that means we

are, too. Accordingly, we also dismiss State Farm’s cross-

appeal arguing for a dismissal on the merits.

IV

Finally, we must decide whether Rule 11 sanctions against

plaintiff Recovery Claims and three of its attorneys were

proper. We review the district court’s decision to impose

sanctions for abuse of discretion. Cooter & Gell v. Hartmax

Corporation, 496 U.S. 384, 405 (1990). When we apply that

standard, however, we must bear in mind that “[a] district

court would necessarily abuse its discretion if it based its

ruling on an erroneous view of the law or on a clearly

erroneous assessment of the evidence.” Id. See also Equal

Employment Opportunity Comm'n v. CVS Pharmacy, Inc., 907

F.3d 968, 973 (7th Cir. 2018) (explaining the Rule 11 abuse-of-

discretion standard as clarified in Cooter & Gell).

A

Rule 11 requires that attorneys certify “to the best of [their]

knowledge, information, and belief, formed after an inquiry

reasonable under the circumstances” that their filings have

adequate foundation in fact and law and lack an “improper

purpose.” FED. R. CIV. P. 11. Because the district court

appeared to base its sanctions order on counsel’s lack of

candor—i.e. filing documents with the court in bad faith —

and a failure to undertake an objectively reasonable inquiry,

we address both grounds. See Mars Steel Corp. v. Cont'l Bank

16 Nos. 18-2377 and 18-2463

N.A., 880 F.2d 928, 930 (7th Cir. 1989) (recognizing that Rule

11 embodies both an objective and a subjective standard,

prohibiting both “frivolousness on the objective side” and

“bad faith on the subjective side.”)

At this stage of the case, the district court had the benefit

of the plaintiffs’ response to the order to show cause, in which

they filed the additional materials mentioned above. Those

submissions are relevant to the Rule 11 analysis.

We begin with the finding of bad faith or “lack of candor.”

We are hard-pressed to see any indication of intentional

misrepresentation in this confused and confusing record.

None of the counsel for Recovery Claims—the only party that

was sanctioned—entered an appearance in the Florida Auto-

Owners litigation. As far as the record shows, the first time

these attorneys learned of the Auto-Owners decision was when

State Farm brought the case to the attention of the district

court here. We also agree with the plaintiffs that, contrary to

the district court’s finding, there is no basis in the record for

the conclusion that these attorneys knew anything about the

HFAP/Health First Health distinction until they saw the Text

Order. (The district court seemed to derive its conclusion

from what it understood to be the plaintiffs’ “admis[sion] that

[they] knew there were multiple ‘Health First’ entities and

that HFAP did not actually pay R.Y.’s medical expenses … .”

But the cited portion of plaintiffs’ response to the Text Order

does not support that conclusion, and plaintiffs disclaim ever

having made such an admission.) Without knowledge of the

HFAP/Health First Health distinction, most of the supposed

misrepresentations in the earlier filings regarding HFAP’s

status as a Medicare Advantage Organization or as the payer

of R.Y.’s medical bills look more like honest mistakes. The

Nos. 17-3636 and 18-2463 17

same goes for any misunderstanding about the nature of the

assignment.

The district court also appears to have found that

counsel’s submissions after the Text Order was issued

demonstrated a lack of candor inasmuch as they did not

immediately admit (1) the inaccuracies in their earlier

pleadings and (2) that fatal nature of the mix-up uncovered in

Auto-Owners. This also goes too far. In light of the evidence

the plaintiffs submitted to the district court on the Rule 11

point, it is understandable why they had maintained that

there was a colorable reading of the underlying assignment

that would give effect to Keeler’s unquestioned intent, i.e., to

assign Health First Health’s rights to plaintiff Recovery

Claims. And as the district court eventually acknowledged in

its order imposing sanctions, there was “some debate” on the

question whether HFAP might qualify as a Medicare

Advantage Organization (an issue that ultimately proved

immaterial but that was relevant to the claimed accuracy of

the earlier filings). True, the plaintiffs may have understated

the scope of the problem in their response to the Text Order,

and they may have erred by pursuing a legal argument that

stretched agency theory too far. They also should have

brought their supporting materials before the district judge at

the same time as they filed their response to the Text Order.

But in the absence of either affirmative representations or

material omissions in the response to the Text Order, what we

are left with is an aggressive litigation strategy with a

colorable (if strained) basis in law and fact, rather than a lack

of candor. That is not sanctionable conduct.

The district court also had other grounds for imposing

sanctions: carelessness and inattentiveness. As we have

18 Nos. 18-2377 and 18-2463

emphasized repeatedly, an ‘empty head but a pure heart is no

defense.’” U.S. Bank Nat. Ass'n, N.D. v. Sullivan-Moore, 406

F.3d 465, 470 (7th Cir. 2005) (quoting Chambers v. Am. Trans

Air, Inc., 17 F.3d 998, 1006 (7th Cir. 1994)). Because Rule 11

imposes on attorneys a duty to conduct an “inquiry

reasonable under the circumstances” before they attest to

“knowledge, information, and belief” supporting their filings,

even honest mistakes can be sanctionable. The district court

found that the attorneys in this case failed to live up to that

duty.

It is one thing to lose on a point, however, and another to

urge something so ill-founded that it is sanctionable.

Although the standard for abuse of discretion is demanding,

we conclude that the district court stepped over the

boundaries of its discretion in imposing sanctions on the basis

of carelessness or inattention. Again, the exhibits the plaintiffs

filed in response to the order to show cause are instructive.

The affidavit from Keeler demonstrates that Health First

Administrative Plans (HFAP) and Health First Health Plans

shared more than very similar names, a holding company,

and a common COO; they were, for many purposes, almost

indistinguishable to any external party dealing with them. As

Keeler averred, “[Health First Health] acts through myself

and its other corporate officers, but it has no employees …

[Health First Health] takes no action except through HFAP’s

agents and employees.” Affidavit of Michael Keeler, June 1,

2018 at 1–2. To make matters more confusing, at least

according to plaintiffs’ allegations, HFAP did business under

the name “Health First Health Plans.” And even if Health

First Health was the entity from whose assets the beneficiary

was paid—meaning it possessed the reimbursement rights—

plaintiffs point out that “the act of payment would not

Nos. 17-3636 and 18-2463 19

unreasonably or inaccurately be attributed to HFAP, which

carried out all acts on behalf of [Health First Health].”

Without getting further into the weeds, it suffices to say

that this corporate arrangement was not just complex, but so

freighted with overlapping names and functions that a mix-

up was, at the end of the day, understandable. The district

court did “not accept that Health First’s ‘corporate structure’

was too confusing to warrant the misstatements in the Second

Amended Complaint.” Respectfully, the district court

reached its conclusion about the straightforward nature of the

corporate arrangement while it was looking at it with the

benefit of hindsight. The court did not give adequate weight

to the plaintiffs’ additional evidence, nor did it consider

carefully enough what the attorneys knew and when they

knew it. (How could the details of this structure have been

apparent at a time when the attorneys were unaware that

there was a second “Health First” entity?) Sanctions against

the attorneys for Recovery Claims were not warranted on this

record.

B

The sanctions against plaintiff Recovery Claims must also

be reversed. As discussed, we find that none of the actions or

omissions of its counsel in this case amounted to sanctionable

conduct. The district court did not point to any conduct by

Recovery Claims itself, rather than its agents, that would

independently allow us to sustain the imposition of sanctions.

Unlike its counsel, Recovery Claims did have some

knowledge of the Florida litigation. But we detect nothing

improper in the two-day lapse between the Auto-Owners

decision on April 25, 2018, and the district court’s Text Order

on April 27, especially given the factual and legal arguments

20 Nos. 18-2377 and 18-2463

that plaintiffs might have wished to develop in response. It is

true that there was a 14-day hiatus between Keeler’s affidavit

in the Auto-Owners case, which explained the HFAP/Health

First Health ownership structure, and the day the district

court learned of the ruling that the Florida district judge made

as a result. Nonetheless, we conclude that it is too much of a

stretch to sanction plaintiff Recovery Claims for failing to

recognize the implications of an affidavit filed in one case,

without the benefit of any dispositive ruling on the issue, for

a completely different case being litigated by a separate team

of attorneys. As far as we can tell, the sanctions against

Recovery Claims must rise or fall with the sanctions against

its attorneys. And so they fall.

Plaintiffs and their counsel have been punished for their

missteps: the case was dismissed without leave to amend, and

we affirm that dismissal today. But sanctions are a step too

far.

IV

We AFFIRM the district court’s dismissal without leave to

amend, but we modify it to be a dismissal without prejudice.

We REVERSE the entry of sanctions against MSP Recovery

Claims, Series LLC, and its counsel in this case. State Farm’s

cross-appeal is DISMISSED. Each party will bear its own costs

on appeal.