Ashcroft has changed the game with respect to pleadings

As discussed here, an adversary proceeding is essentially a civil complaint filed in the bankruptcy court. There are three parties in a bankruptcy court case who can file an adversary proceeding:  a creditor, the Trustee, or the debtor.  The filing of an adversary proceeding requires the Bankruptcy Judge to make a decision about the issues presented.  When a creditor files an adversary proceeding, it is typically because the creditor believes that a debt owed to the creditor should not be discharged.  An adversary proceeding can also be filed by the Trustee; such cases usually involve allegations that the schedules were not filled out accurately and were intentionally fraudulent. Finally, a debtor may file an adversary proceeding against a creditor. These cases are often initiated to recover damages for a creditor’s actions taken in violation of the U.S. Bankruptcy Code, in violation of the automatic stay or the discharge injunction.

In May 2009, the Supreme Court U.S. handed down Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), a decision which makes it harder for numerous civil plaintiffs to avoid dismissal of claims brought in federal court. Although the facts in Iqbal concern a civil rights claim, the decision also has relevance in the context of bankruptcy adversary proceedings. This is because Iqbal expressly applies to the pleading of each element, including knowledge and intent, of every claim in federal court.

Iqbal arose out of the arrest and detention of Javaid Iqbal, a Muslim Pakistani. Mr. Iqbal filed suit in New York federal district court alleging that federal officials adopted certain policies that unconstitutionally discriminated against him while he was in a special maximum security housing unit. The defendants moved to dismiss for failure to state a claim. In particular, they argued that the complaint did not sufficiently allege that they had a discriminatory purpose in adopting the policies at issue. The district court denied their motion. While an appeal to the Second Circuit Court of Appeals was pending, the Supreme Court decided Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007).  In Twombly, the Court held that (at least in the context of an antitrust suit) a complaint must allege “enough facts to state a claim to relief that is plausible on its face.”  Although the Second Circuit held thatTwombly did not apply to Mr. Iqbal’s discrimination claims – and affirmed the decision of the lower court. – the  U.S. Supreme Court reversed, making four significant holdings: (1) The heightened pleading standards of Twombly apply in all federal civil actions, (2) the heightened pleading standards of  Iqbal/Twombly apply to allegations of all elements of a claim, even when the plaintiff has not alleged fraud; (3) the Iqbal/Twombly standard specifically requires plaintiffs to “plead factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”; and (4) plaintiffs cannot overcome Iqbal and Twombly’s heightened pleading standards through promises that discovery will be limited.

Iqbal is a significant development for civil defendants seeking to dismiss complaints filed in federal court regardless of the type of claim – including, for example, consumer debtors who are facing adversary actions by Trustees or creditors. Iqbal clarifies that Twombly applies to all elements in all federal civil suits, and some attorneys say it adds a distinctly pro-defendant gloss on the Twombly standard.  If you have been served with, or are thinking about filing, an adversary proceeding, talk to an experienced bankruptcy attorney in your jurisdiction.

SEE ALSO:

What Is An Adversary Proceeding and What Does It have To Do With My Bankruptcy?

Drew Broaddus