On March 16, 2010, the U.S. Bankruptcy Court for the Eastern District of Michigan (which covers Detroit, Bay City, and Flint) announced on its website that the next meeting of the Debtor/Creditors’ Rights Committee of the Business Law Section of the State Bar will include an educational program on Bankruptcy Pleading Standards after the U.S. Supreme Court rulings in Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal, including a critique of a typical preference/fraudulent transfer complaint. The Honorable Phillip J. Shefferly, Chief Judge for the Eastern District of Michigan, will lead the presentation, according to the Court’s notice which is available here.

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 escape 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, including former Attorney General John Ashcroft and FBI Director Robert Mueller, adopted certain policies that unconstitutionally discriminated against him while he was in a special maximum security housing unit. Ashcroft and Mueller moved to dismiss for failure to state a claim. In particular, they argued that Mr. Iqbal ’ s complaint did not sufficiently allege that they had a discriminatory purpose in adopting the policies at issue. The district court denied their motion. While appeal to the Second Circuit Court of Appeals was pending, the Supreme Court decided Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007), which 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. ” The Second Circuit held that Twombly did not apply to Iqbal ’ s discrimination claims and affirmed the lower court ’ s decision. The Supreme Court reversed. In reaching this result, Justice Kennedy’ s majority opinion contains 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 evade Iqbal/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 no matter what 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.

The Michigan State Bar Business Law Section’s May 18, 2010 meeting in Southfield will explore the implications of this holding for bankruptcy adversary proceedings, particularly avoidance actions by Trustees.

-Drew Broaddus