In an order dated September 7, 2010, Bankruptcy Judge Robert D. Drain of the Southern District of New York dismissed, without prejudice, more than 100 adversary proceedings filed by the reorganized debtors (the “Debtors”) in the bankruptcy cases of DPH Holdings Corp. (05-44481 (RDD)) (“Delphi”) for failure to plead sufficient facts to state such claims and to comply with Rule 8 of the Federal Rules of Civil Procedure (the “Federal Rules”).
Heightened Pleading Standard under Twombly and Iqbal
Under Federal Rule 8(a)(2), a complaint must provide “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). In 2007, however, the United States Supreme Court elaborated on the requirements under Rule 8. In Bell Atlantic v. Twombly, 127 S.Ct. 1955 (2007), the Supreme Court replaced the traditional standard that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief as established in Conley v. Gibson, 78 S.Ct. 99 (1957). Instead, the Supreme Court held that a complaint asserting a violation of the Sherman Act must allege enough factual matter to make a complaint plausible on its face. Twombly at 127 S.Ct. 1965. The Court particularly stressed that while factual allegations need not be detailed, they require more than “labels and conclusions, and a formalistic recitation of the elements of a cause of action.” Id. at 1964-1965.
In 2009, the Supreme Court clarified that the Twombly pleading standard applies beyond the scope of antitrust issues and reiterated its applicability to all civil actions. See Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009).
To survive a motion to dismiss, a civil complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a ‘probability requirement,’ but asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are ‘merely consistent with’ a defendants liability, it ‘stops short of the line between possibility and plausibility of ‘entitlement to relief.’ ”
Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (internal citations omitted). The Court also affirmed the Twombly two-pronged approach to deciding motions to dismiss: first, determine what is a factual allegation vis-à-vis a legal conclusion as only factual allegations will be accepted as true; and second, determine whether the factual allegations state a plausible claim for relief. Id., 129 S.Ct. at 1950-1951.
The Delphi decision confirms that the heightened pleading standards under Twombly and Iqbal will be applied in adversary proceedings pending in the Bankruptcy Court. However, at the end of the day, Judge Drain granted Delphi the opportunity to seek leave to amend the original complaints to adhere with this recent United States Supreme Court precedent.
What You Should Do Now
This development highlights litigation strategies frequently overlooked in the avoidance action litigation.
- Plaintiffs need to be more diligent in pleading their causes of action; in particular, when such causes of action seek the avoidance of alleged preferential or fraudulent transfers.
- Defendants need to be aware of this heightened scrutiny now being applied to pleadings in adversary proceedings and not ignore raising deficiencies when responding to an adversary complaint.
Although leave to amend may have been granted in Delphi, other courts may not be as lenient in granting such relief.
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