Richard M. Carlson, Ann M. Looft, Morris Carlson & Hoelscher, P.A., 7380 France Avenue South, Suite 200, Minneapolis, MN 55435 (for respondents Water Street Builders, Ltd., et al.)

Mark E. Greene, Frank A. Janes, Stanke, Greene & Greenstein, Ltd., 17717 Highway 7, Minnetonka, MN 55345 (for respondent North American Mortgage Co.)

Considered and decided by Toussaint, Chief Judge, Schumacher, Judge, and Holtan, Judge.

In appeal C5-97-1976, appellant Coat of Arms, Inc. challenges the dismissal of its mechanic's lien foreclosure, breach of contract, quantum meruit, and fraud claims against respondents, arguing the district court erred in (1) finding contract abandonment and inadequate performance; (2) denying its motion to file a second amended complaint; and (3) denying its discovery motions. We affirm. In the related appeal, C6-98-233, Coat of Arms's counsel, Dale Nathan and Nathan & Associates, challenge the district court's imposition of rule 11 and Minn. Stat. § 549.21 sanctions against them. Because the district court did not adequately follow the Uselman procedural requirements in imposing the sanctions, we reverse. We deny respondents' request for attorney fees and costs on Nathan's sanctions appeal.

Coat of Arms commenced this suit after funds to cover the unpaid balance were not escrowed at the house closing on September 25, 1996. It asserted breach of contract, mechanic's lien foreclosure, and quantum meruit claims against Water Street Builders to recover full payment for the painting services rendered. It also brought fraud claims against the Halpers, Water Street Builders president Loren Brueggemann, and North American Mortgage Company, the Halpers's mortgagee. The district court severed all issues from trial except for Coat of Arms's entitlement to the $15,150 balance on the contract and the mechanic's lien claim. After a bench trial, the district court (1) deemed the mechanic's lien invalid and ordered it dissolved; (2) dismissed all of Coat of Arms's claims with prejudice; and (3) ordered sanctions against Coat of Arms's attorney Dale C. Nathan in the form of attorney fees totaling $21,093.74 and costs.

The district court determined that Coat of Arms was required to return and correct any deficiencies in its work, as itemized on a "punch list," before completion of the contract would occur. It found that Coat of Arms abandoned the contract by flatly refusing to perform under the punch list, view the premises, or even meet with defendants to discuss the deficiencies. The district court also found that Coat of Arms failed to reasonably perform the contract, as evidenced by the multitude of interior and exterior deficiencies in the work performed.

The record supports the district court's finding of contract abandonment. At trial, Brueggemann testified he prepared a handwritten punch list of painting deficiencies the day after Coat of Arms finished painting and sent it to Coat of Arms's president, Terry Kolb. According to Brueggemann, Kolb refused to return because he claimed he was through working on the job and had not been paid in full yet. A Water Street Builders manager also testified that Kolb flatly refused to return to the site to complete the punch list.

Admitting Coat of Arms did not complete the punch list prepared by Brueggemann, Coat of Arms's witnesses testified that Coat of Arms completed an earlier punch list prepared, reviewed, and signed by Barbara Halper. Yet, Coat of Arms failed to introduce any signed punch list at trial and Barbara Halper denied ever preparing or reviewing a punch list. Credibility determinations are within the province of the district court. Snesrud v. Instant Web, Inc., 484 N.W.2d 423, 428 (Minn. App. 1992), review denied (Minn. June 17, 1992). The decision to believe the testimony of Brueggemann, one of Brueggemann's managers, and Barbara Halper over Kolb and two of his employees was within the discretion of the trial court. Engebretson v. Commissioner of Pub. Safety, 395 N.W.2d 98, 100 (Minn. App. 1986). Moreover, we must view the evidence in a light most favorable to the trial court's decision. Salmon v. Wheelabrator Frye, 409 N.W.2d 495, 497 (Minn. 1987).

The record also supports the district court's finding of inadequate performance due to painting deficiencies. Respondents' expert witness attested to numerous deficiencies in Coat of Arms's work. Coat of Arms did not introduce any expert testimony rebutting this evaluation. In addition, the district court, as fact-finder, visited the Halper home during trial to view the deficiencies.

Because the evidence supports the conclusion that Coat of Arms inadequately performed and abandoned the contract, we do not find the district court's findings to be clearly erroneous.

Coat of Arms argues the district court abused its discretion by denying its motion to add additional fraud claims against the Halpers and Brueggemann in a second amended complaint. We disagree. As counsel contended at oral argument, the additional fraud claims pertained to the Halpers's and Brueggemann's credibility. As such, the claims had no substantive relevance in the lawsuit. Moreover, Coat of Arms was not prejudiced by their exclusion because it was free to inject credibility issues into the lawsuit without amending the complaint; if a proper foundation was present, Coat of Arms could have introduced evidence of fraud on cross-examination. Accordingly, we do not find the district court abused its discretion in denying Coat of Arms's motion to file a second amended complaint.

Coat of Arms contends that the trial court abused its discretion by not compelling Water Street Builders to identify all persons who provided labor and materials to the house and to produce time cards of its employees. We disagree. The district court denied Coat of Arms's motion unless Coat of Arms narrowed its inquiry. Coat of Arms did not do so. Coat of Arms now argues that the district court should have compelled respondents to identify all subcontractors that performed work after June 28, 1996. Coat of Arms did not suggest this narrower request to the district court when the court questioned it about its remaining discovery requests. Furthermore, with respect to the time cards, the district court granted Coat of Arms's discovery request when it ordered Water Street Builders to produce the relevant time cards. Given the district court's wide latitude in directing discovery, we do not find that the district court abused its discretion in partially denying Coat of Arms's motion to compel.

The purpose of sanctions under both Minn. Stat. § 549.21 and rule 11 is "to deter baseless litigation, frivolous claims, harassment and other `unnecessary delay or needless increase in the cost of litigation.'" Spicer, Watson & Carp v. Minnesota Lawyers Mut. Ins. Co., 502 N.W.2d 400, 405 (Minn. App. 1993) (citing Minn. Stat. § 549.21, subd. 2), review denied (Minn. Sept. 30, 1993); Uselman v. Uselman, 464 N.W.2d.2d 130, 142 (Minn. 1990). Even though conduct may be sanctionable, the district court must follow minimum procedural safeguards before awarding fees under Minn. Stat. § 549.21 or rule 11, including early notice of the possibility of sanctions and the opportunity to respond in a formal hearing. Spicer, Watson & Carp, 502 N.W.2d at 405 (holding Uselman requirements apply to section 549.21).

Although Nathan's conduct might have warranted sanctions, we find the Uselman procedural requirements were not satisfied in this case. First, Uselman requires the district court to give clear notice of an attorney's sanctionable behavior such that the attorney can modify that behavior. 464 N.W.2d at 143. The only express notice Nathan received from the district court was a letter, in which the court stated that it had taken the sanctions issue "under advisement" and was

totally comfortable in issuing an order, sua sponte, for sanctions if [it found] inappropriate use of pleadings and procedures so as to protract what is otherwise a relatively simple lawsuit.

This notice did not reasonably indicate to Nathan the behavior the court found objectionable or that sanctions would be forthcoming if Nathan did not desist.

In addition, the district court waited until after the end of trial to impose the sanctions. Under Uselman, the consideration or imposition of sanctions at the conclusion of litigation is permissible only in very unusual circumstances. Id. at 143. A proper sanction is assessed at the time the sanction can deter litigation abuse. Id. Admittedly, the district court imposed sanctions for Nathan's bad faith conduct throughout the entire trial, particularly the manner in which he protracted the litigation to delay, harass, and secure excessive legal fees. Nevertheless, the district court cited several instances of sanctionable conduct that occurred during pretrial, including counsel's initial and continuing refusal to meet with the homeowners or the contractor to discuss their claims of deficient workmanship, and his unwillingness to engage in good faith discussions designed to expedite the mechanic's lien portion of the lawsuit or resolve it altogether. The district court could have thus notified Nathan of its intention to sanction before the conclusion of trial. Accordingly, the sanctions were an abuse of discretion and we reverse the sanctions order against Nathan and his law firm.

The judgment against Coat of Arms in appeal C5-97-1976 is affirmed, the sanctions award in appeal C6-98-233 is reversed, and respondents' request for attorney fees and costs in appeal C6-98-233 is denied.

Appeal C5-97-1976 affirmed; appeal C6-98-233 reversed.

^*Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. art. VI, § 10.

[1] Repealed by Minn. Laws 1997, ch. 213, art. 2, § 6.