Thursday, September 12, 2013
The Eighth Circuit's decision last week in Horras v. American Capital Strategies, Ltd. (No. 12-3886), __ F.3d __, 2013 WL 4711389, includes a partial dissent by Judge Colloton that is worth a read for his approach to pleading standards after Iqbal and Twombly. (Hat tip to Ryan Koopmans, who covers the case in this post.) The majority in Horras affirms the district court's dismissal of Horras’s complaint. Judge Colloton dissents as to Horras's claim for breach of fiduciary duty.
Judge Colloton writes that while the Supreme Court's approach to pleading in Iqbal and Twombly is an “important development,” courts “must be careful not to embellish it.” Citing Erickson, Swierkiewicz, Form 11, and articles by Judge, Dean, and chief drafter of the original FRCPs Charles E. Clark, he concludes: “Under the simplified pleading standard of Rule 8(a), I think the complaint here was sufficient to give ACS fair notice of the fiduciary duty claim that Horras has amplified in his briefing.”
Here are some excerpts from Judge Colloton's opinion:
*** The scenario outlined by Horras, if true, states a claim that ACS breached a fiduciary duty by failing to disclose to a minority shareholder that it was entering into a transaction to sell all shares of Auxi to HHC and by failing to account for proceeds obtained based on the purported sale of all company shares.
The majority does not suggest that the Iowa courts would find no breach of duty in that situation, but affirms the dismissal on the ground that Horras did not adequately plead the scenario that he argues. Ante, at 7 n.3. In my view, this conclusion overstates the effect of Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). To be sure, Twombly, 550 U.S. at 561-63, overruled Conley v. Gibson, 335 U.S. 41 (1957), and the old “no set of facts” standard under which virtually any complaint survived a motion to dismiss unless the plaintiff affirmatively pleaded himself out of court. E.g., Thomas v. Farley, 31 F.3d 557, 558-59 (7th Cir. 1994). Twombly makes clear that a plaintiff must plead “more than labels and conclusions,” and “[f]actual allegations must be enough to raise a right to relief above the speculative level.” 550 U.S. at 555. Rule 8(a) requires that there must be “enough facts to state a claim to relief that is plausible on its face.” Id. at 570.
This is an important development, but we must be careful not to embellish it. The Court pointedly reminded us in a summary reversal issued two weeks after Twombly that the federal rules require only notice pleading through “‘a short and plain statement of the claim showing that the pleader is entitled to relief.’” Erickson v. Pardus, 551 U.S. 89, 93 (2007) (quoting Fed. R. Civ. P. 8(a)(2)). “Specific facts are not necessary; the statement need only give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Id. (internal quotation omitted). Iqbal says that Twombly applies to all civil actions, 556 U.S. at 684, but Swierkiewicz v. Sorema, N.A., 534 U.S. 506 (2002), reaffirmed by Twombly, 550 U.S. at 555-56, provides that the simplified notice pleading standard of Rule 8(a) likewise applies to all civil actions (with limited exceptions not applicable here), and “relies on liberal discovery rules and summary judgment motions to define disputed facts and issues and to dispose of unmeritorious claims.” 534 U.S. at 512.
Horras’s complaint alleged that ACS controlled Auxi at the time of its sale in 2007, initiated the sale of Auxi to HHC, and received payment for its shares, but failed to notify Horras of corporate activity affecting his shares or to pay Horras for his shares. The majority’s footnote three deems this pleading insufficient notice of the claim outlined above, because it did not specifically allege that Auxi was closely held (only that it was “a Delaware corporation”) and did not specifically assert that ACS purported to sell “all” shares of Auxi. The complaint was insufficient on this view, because Horras’s Count I on breach of fiduciary duty said only that ACS initiated “corporate activity [a]ffecting his shares,” even though Count II on breach of contract alleged that ACS “represented all shares of Auxi would be sold to HHC.” So the defendant supposedly was not on fair notice that Count I alleged a purported sale of all shares or that Auxi was closely held.
These criticisms of the complaint bring to mind the technical requirements of the code pleading regime that was superseded by the federal rules and the simplified notice pleading approach. See Charles E. Clark, The Influence of Federal Procedural Reform, 13 Law & Contemp. Probs. 144, 154-55 (1948); Charles E. Clark, Simplified Pleading, 2 F.R.D. 456, 458-60 (1943). Since 1948, after all, it has been sufficient to allege a negligence claim in one sentence: “On date, at place, the defendant negligently drove a motor vehicle against the plaintiff.” Fed. R. Civ. P. 84 & App., Form 11. Would the majority say that this “singular allegation” fails to state a claim because it does not specify that the defendant ran through a red light? Under the simplified pleading standard of Rule 8(a), I think the complaint here was sufficient to give ACS fair notice of the fiduciary duty claim that Horras has amplified in his briefing.
The availability of information in this case is asymmetrical. ACS presumably knows what happened in the sale of Auxi shares to HHC; Horras evidently does not know much. The litigation likely would entail simple, relatively inexpensive discovery about the Auxi corporation and the transaction with HHC, after which a motion for summary judgment may well be in order if there is insufficient evidence to support Horras’s theory. But at this early stage of the proceeding, I would reverse the judgment dismissing the fiduciary duty claim and remand for further proceedings.