Twombly/Iqbal

A “big picture” summary of Rule 12, even after Twombly and Iqbal, appears at the start of Breton Energy LLC v. Mariner Energy Resources Inc.“Well-pleaded factual allegations may perfectly shield a complaint from dismissal under Rule 12(b)(6), and our inquiry’s ’emphasis on the plausibility of a complaint’s allegations does not give district courts license to look behind those allegations and independently assess the likelihood that the plaintiff will be able to prove them at trial.'”   764 F.3d 394, 396 (5th Cir. 2014) (quoting Harold H. Huggins Realty, Inc. v. FNC, Inc., 634 F.3d 787, 804 n.44 (5th Cir. 2011)).

Supreme Court.  In the 9-0 per curiam opinion of Johnson v. City of Shelby, the Supreme Court reversed the Fifth Circuit’s dismissal of a civil rights claim for failure to cite the applicable statute: “Our decisions in [Twombly and Iqbal] are not in point, for they concern the factual allegations a complaint must contain to survive a motion to dismiss.  A plaintiff, they instruct, must plead facts sufficient to show that her claim has substantive plausibility.  Petitioners’ complaint was not deficient in that regard.  Petitioners stated simply, concisely, and directly events that, they alleged, entitled them to damages from the city.  Having informed the city of the factual basis for their complaint, they were required to do no more to stave off threshold dismissal for want of an adequate statement of their claim.”  135 S. Ct. 346, 347 (2014).  (Here is the pleading at issue.)

Twombly satisfied.  The most recent detailed statement by the Fifth Circuit in this area appears in Richardson v. Axion Logistics, No. 14-30306, ___ F.3d ___ (March 3, 2015). Richardson alleged that his employer terminated him, in violation of Louisiana’s whistleblower statute, for revealing overbilling.  The district court dismissed and the Fifth Circuit reversed.  Applying the Twombly “plausibility” standard, the Court found adequate pleading about his employer’s knowledge of the alleged misconduct, as well as the timeline of events up to his termination.  The pleading itself is available here; the specific paragraphs identified by the Court as to the employer’s knowledge are highlighted in yellow, and those identified about his termination in orange.

A similar analysis appears in Wooten v. McDonald Transit Associates, No. 13-11035, ___ F.3d ___ (June 7, 2015), in the context of reviewing the record in support of a default judgment: “Wooten’s complaint contains the following factual allegations: (1) Wooten is a former employee of McDonald Transit; (2) Wooten was employed by McDonald Transit from 1999 until May 1, 2011; (3) at the time he was fired, Wooten was a Class B mechanic earning $19.50 per hour, plus benefits; (4) in October 2010, Wooten filed an age-discrimination claim with the EEOC, after which McDonald Transit ‘discriminated and retaliated against [Wooten], and created a hostile work environment, until such time
that [Wooten] was constructively discharged on or about May 1, 2011’; and (5) McDonald Transit’s unlawful conduct caused Wooten harm, including damages in the form of lost wages and benefits, mental anguish, and noneconomic damages.  We hold that these allegations, while perhaps less detailed than McDonald Transit would prefer, are nevertheless sufficient to satisfy the low threshold of Rule 8.”  The Court acknowledged that the “complaint could have specified the nature of the discrimination and the retaliation he experienced,” but did not have to do so, comparing the pleading with Form 11 (negligence) in the Federal Rule (a notable citation, since serious commentators have questioned whether those forms are still viable after Twombly and Iqbal.)

The Court has also reversed the Rule 12 dismissal of a claim on an oral contract, in large part because of the role that industry custom played in the plaintiff’s allegations.  Highland Capital Management v. Bank of America, 698 F.3d 202 (5th Cir. 2012).  In  Martin-Janson v. JP Morgan Chase, the Court found that the five specific representations alleged by the plaintiff, from which she sought “discovery to reveal either the draft loan modification agreement that JPMorgan allegedly prepared, or the terms of her promised modification based on the lender’s standard formulae,” could support a promissory estoppel claim that would survive the Statute of Frauds.  No. 12-50380 (July 15, 2013, unpublished).  And, building on the substantive analysis of Bowlby v. City of Aberdeen (discussed infra), the Court noted the importance of pleading the mayor’s alleged motive and specific opportunity to affect land use decisions, helping to overcome a motion to dismiss on immunity grounds.  Jabaray v. City of Allen, No. 12-41054 (Nov. 25, 2013, unpublished).

Twombly not satisfied.  The Court reviewed Twombly and Iqbal in  Merchants & Farmers Bank v. Coxwell, in which the issue was whether the plaintiff pleaded a conversion claim relating to an attorney’s distribution of certain funds in alleged violation of a court order.  The Court noted that while such a claim was cognizable under Mississippi law, and the plaintiff’s pleading might have satisfied Conley v. Gibson, under Twombly:

”The complaint did not specify what court issued the order, when it was issued, or to whom it was directed; the complaint did not describe what the order required and therefore whether the allegation of a violation is plausible or merely fantastical. Further, merely alleging a perfected security interest is insufficient to establish ownership, and the complaint did not describe whether the court order established M&F’s possessory interest in the funds by reducing its claim to judgment.”

No. 13-60368 (Feb. 7, 2014, unpublished) (citing Funk v. Stryker Corp., 631 F.3d 777, 782 (5th Cir. 2011)).

Two other recent cases have found pleadings inadequate under Twombly Patrick v. Wal-Mart rejected a claim of bad-faith handling of insurance claims.  681 F.3d 614 (5th Cir. 2012).  Bowlby v. City of Aberdeen rejected an equal protection claim about the handling of a permit to operate a snow cone stand.   Both opinions identify specific matters that the Court felt the inadequate pleadings should have addressed.  681 F.3d 215 (5th Cir. 2012).

While largely unique to the securities context, Owens v. Jastrow describes several impermissible inferences of scienter: “Considered holistically, plaintiffs’ allegations of knowledge of Guaranty’s undercapitalization, a large misstatement, red flags, and ignorance of internal warnings, do not raise a strong inference of severe recklessness that is equally as likely as the competing inference that [Defendants] negligently relief on the AAA ratings and believed that Guaranty’s internal models were accurate.”  No. 13-10928, ___ F.3d ___ (June 12, 2015).

Several cases about mortgage servicing have addressed Twombly issues:

  • Dismissal affirmed – inadequate facts. This allegation does not satisfy Twombly as to the intent requirement of the Texas fraudulent lien statute: “the transactions by the Defendants jointly and severally were designed to defraud the Plaintiff out of her property.” The Fifth Circuit found that “this allegation is, at most, a legal conclusion that [Defendant Law Firm] acted with the requisite intent; it lacks any ‘factual content’ that would ‘allow[] the court to draw the reasonable inference that the intent element was met.”  Trang v. Taylor Bean & Whitaker Mortgage Corp., No. 14-5028 (Jan. 7, 2015, unpublished).
  • Dismissal affirmed — missing elements.  Estes sued JP Morgan Chase, alleging violations of the Texas Constitution with respect to a home equity loan.  The Fifth Circuit affirmed dismissal on a basic ground: “Estes’s complaint fails to allege any connection between himself and JPMC except that Estes ‘notified [JPMC] that the original promissory note had not been returned,’ and that ‘[m]ore than 60 days have passed since plaintiff notified [JMPC] of its failure to cancel and return the promissory note.’  Considering the allegations in Estes’s complaint, and taking those allegations as true, Estes has not alleged that JPMC possessed the Note at the relevant time. He also has not alleged that he made payments to JPMC, nor has he alleged any other facts from which the Court could reasonably infer that the Note was made payable to “bearer” or to JPMC, as the definition of “holder” set forth in Tex. Bus. & Com. Code § 1.201 requires.”  Estes v. JP Morgan Chase Bank, N.A., No. 14-51103 (May 20, 2015, unpublished).
  • Dismissal affirmed — missing element.  After initially holding that the borrowers’ complaint survived a Twombly challenge as to whether the “grossly inadequate sales price” element of a wrongful foreclosure claim had been properly pleaded, the Fifth Circuit reversed field and issued a revised opinion that affirms dismissal: “We agree with the district court that Plaintiffs’ wrongful foreclosure claim should be dismissed, but for a different reason—Plaintiff’s abandoned the claim on appeal. In challenging the district court’s dismissal, Plaintiffs did not argue that their wrongful foreclosure claim should survive because they adequately pleaded a grossly inadequate sales price. They only argued that the claim should survive because they need not plead that element at all. However, our precedent requires this element in all but a specific category of cases that does not include the instant case.”   Guajardo v. JP Morgan Chase, No. 13-51025 (March 10, 2015).
  • Dismissal reversed — plausible allegation of prior breach.  The district court dismissed a borrower’s breach of contract claim against a mortgage servicer because the borrower was in substantial arrears, and “as a general principle . . . an individual in breach cannot bring a cause of action for breach against another contracting party.”  The Fifth Circuit reversed, finding that the borrower had alleged plausible claims that the servicer breached first; specially, that “the misapplication of [the borrrower’s] payments to an escrow account, resulting in default . . . constituted a material breach,” and that “Chase’s rejection of her mortgage payments, even if not a material  breach, rendered performance impossible and that, as a result, any subsequent breach does not bar her claim.” Peters v. JP Morgan Chase, No. 13-50157 (Jan. 23, 2015, unpublished).  The actual pleading is available here, the key averment appears in paragaph 8: “According to the information received from the bank, Defendant believes Plaintiff is over $50,000 in arrears. According to the accounting done by Plaintiff, Plaintiff only owes $31, 437.30. Only $15,000 of this amount is on past due payments. Plaintiff believes that the disparity between the two figures is due to the fact that Chase has misapplied her payments under the mortgage to escrow fund, thereby causing her to be in default under the mortgage.”

Defenses.  A district court within the Fifth Circuit, applying prior Circuit precedent, has concluded that Twombly and Iqbal do not apply to the pleading of defenses.  See EEOC v. Courtesy Buildings (N.D. Tex. Jan. 21, 2011) (“Given that the requirement in Rule 8(a) to show entitlement to relief is essential to the holdings of Iqbal and Twombly . . . , and considering that this requirement does not appear in Rule 8(b) and (c), the court declines in today’s case, and in the absence of complete briefing and guidance from the Fifth Circuit or the Supreme Court, to extend the Iqbal and Twombly plausibility standard to the pleading of affirmative defenses.”).

Other issues.  A pre-Twombly case of note, General Electric Capital Corp. v. Posey, 415 F.3d 391 (5th Cir. 2005), distinguishes between the requirements of Rule 8 and Rule 9(b) in the context of negligent misrepresentation claims.  In Garrison Realty LP v. Fouse Architecture & Interiors, PC,  No. 12-40764 (Oct. 21, 2013, unpublished), the Court noted a meaningful distinction between pleading that an offset was a complete bar to plaintiff’s recovery, as opposed to pleading that it was a bar “in whole or in part.”