Court Opinion

ID: 4426033
Source: CourtListenerOpinion
Date Created: 2019-08-15 21:00:22.819808+00
Date Added: 2024-06-11T14:52:54.616004
License: Public Domain

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.