Delaware Supreme Court Declines to Follow Federal Twombly Standard for Motions to Dismiss

Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings, LLC, No. 595-2010 (Del. Supr. Aug. 18, 2011), read Delaware Supreme Court’s en banc opinion here.

Issue Addressed

Whether Delaware should adopt the more stringent standard for motions to dismiss announced in the U.S. Supreme Court’s Twombly and Iqbal opinions.

Short Answer: No. (At least not now).

Why This Decision is Important

Delaware litigators will have no doubt about the standard to apply in a Rule 12(b)(6) motion to dismiss in Delaware now that Delaware’s highest court has spoken on this topic. Before today, however, in the absence of the clarity that this opinion brings, I have written on this blog several times over the last few years about whether the Delaware Court of Chancery had adopted the standard announced by the U.S. Supreme Court opinion in Twombly in 2007 and Iqbal in 2009, for motions to dismiss, in light of the Delaware Rules of Civil Procedure being based on the Federal Rules of Civil Procedure. See, e.g., here. See also compilation of posts about Delaware cases referring to Twombly here.

In the course of posting summaries of all the key Chancery decisions for this blog, I have watched closely for any post-Twombly decisions that may have “announced Delaware’s adoption of the Twombly standard”. Instead of announcements, which were not presented with that type of moniker, I have highlighted recent Chancery decisions here and here that have applied the Twombly standard–but as noted in the summary of a Chancery decision here, at least one Chancery decision this year did not apply the Twombly standard, so I can safely state that Twombly was not uniformly applied as the applicable standard in all Chancery decisions. See cases listed in footnote 14 of this opinion and the Court’s observation in accompanying text that: [only] “various members  of the Court of Chancery have cited …” the Twombly case with approval when adjudicating motions to dismiss.

Brief Overview of Background

The plaintiff in this case, CMC, is a mortgage servicing company that purchased the right to service pooled loans from Morgan Stanley. CMC brought breach of contract claims and related claims based on allegations, for example, that Morgan Stanley misrepresented the quality of the loans that were sold to it. The Court of Chancery dismissed the breach of contract claims without prejudice and dismissed the other claims with prejudice. CMC appealed all dismissals.

Highlights of Legal Analysis

  • The Court explained that:

We have not yet had occasion to address the impact, if any, that the United States Supreme Court’s holdings in Twombly and Iqbal should have on the Delaware standard.

  • This decision would not be the occasion to address that issue, however, because as the Court reasoned:

We decline to use this case as the vehicle to address whether the Twombly-Iqbal holdings affect our governing standard, considering that the parties have not fully and fairly litigated the issue before either the Vice Chancellor or this Court. Instead we emphasize that, until the Court decides otherwise or a change is duly effected through the Civil Rules process, the governing pleading standard in Delaware to survive a motion to dismiss is reasonable “conceivability.”

  • Delaware’s High Court reversed Chancery’s dismissal of the breach of contract claims because instead of determining whether CMC’s complaint “stated a claim that is provable under any reasonably conceivable set of circumstances”, the trial court decided on a substantive basis whether notice was provided in a manner that complied with the applicable contractual requirements.