Section looks at pleading standard in bankruptcy

By Roberta M. Gubbins

Legal News

"Two Supreme Court decisions that are important to those of us who practice in adversarial bankruptcy proceedings are Twombly (Bell Atlantic Corp. v. Twombly) and Iqbal (Ashcroft v Iqbal)," said Andrew Gerdes, speaker at the Bankruptcy Section meeting held at the State Bar of Michigan in Lansing this fall.

"All the 'stuff' you learned in Civ Pro (Civil Procedure) comes back into play with these decisions," Gerdes said.

In the past, he explained, the standard for pleadings was "a complaint wouldn't be dismissed for failure to state a claim unless it was clear beyond a doubt that the plaintiff could prove no set of facts in support of his claim."

This was an easy standard to reach and assumed "you had some level of belief that the defendant had done something wrong."

Twombly, an anti-trust case, set the "plausibility" standard. The plaintiff's, Gerdes explained, alleged that Incumbent Local Exchange Carriers (the 'baby bells' created with the break-up of AT&T) conspired to keep other carriers out of their service areas. There was no direct evidence of a conspiracy, the defendants were relying on ILEC's behavior.

The Federal District Court dismissed the case for failure to state a claim. The Supreme Court agreed, stating "that you must allege enough facts to show that your claim is plausible--that is the key term--that it is a plausible claim for relief. They found the plausibility standard in Rule 8 (a)(2)"

The court said "it's not probability, you don't have to show it's more probable that you're going to succeed; you just have to show that it is plausible. The facts you allege have to show that you're entitled to the relief you are seeking."

Gerdes thinks that now "you have to allege something that will push it over the line--that the standard is close to probability."

After Twombly, courts were unsure whether the plausibility standard applied only to antitrust cases or was to be applied to all civil cases. Iqbal settled the matter.

Iqbal, a criminal defendant, sued the government alleging that his civil rights were violated when he was held as a person "of high importance" to the September 11 investigation. The Attorney General and FBI Director moved to dismiss the complaint for failure to state a claim for relief. The lower court denied the motion. The Court of Appeal agreed concluding that Twombly called for a "flexible plausibility standard."

The Supreme Court reversed.

The court "stated that the plausibility standard applies to all civil cases and that '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.'

"Now," said Gerdes, "we know that the rules are in play and under Iqbal you can't ask for limited discovery to find some facts to support your case, you have to have the facts first."

In bankruptcy, he explained, there is a short statute of limitations. "you only have 60 days to find the facts to support your claim," which may not be enough time to get all the information needed.

Gerdes, who represents trustees suing for fraudulent transfers, said, for example, a problem can arise over the question of whether debtor Jack's transfer of his 1980 mint condition Jaguar to his brother was constructive or actual fraud. There are many questions and 60 days may not be enough time to get the answers.

"Trustees," he said, "have argued that they are third parties to matter and should be allowed a relaxed standard. Some courts agree saying 'you (trustee) do not have the information in your possession--you are relying on outsiders for the information.'"

Other courts say 'no' trustees can't be allowed leeway and must follow the same standards as other parties.

The end result said Gerdes, is that it is "unclear what is needed to show plausiblity. When are there enough facts to" be plausible?

"The answer will be found over time. It is not an insurmountable hurdle, it is just a challenge."

The Bankruptcy Section meets monthly. For more information on times and topics, contact Steve Feigelson, the chairperson, at

Published: Wed, Dec 26, 2012