Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings LLC: Delaware Supreme Court Holds that the Governing Pleading Standard in Delaware to Survive a Motion to Dismiss is Reasonable Conceivability

October 31, 2011

Publication| Corporate Transactions| Corporate & Chancery Litigation

In Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings LLC, No. 595, 2010 (Del. Aug. 18, 2011), the Delaware Supreme Court declined to address whether the “plausibility” standards set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009) should be applied in Delaware, and instead unanimously held that until the Delaware Supreme 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.’” 

Central Mortgage Company (“CMC”) brought this action against Morgan Stanley Mortgage Capital Holdings LLC (“Morgan Stanley”) after certain mortgages for which CMC purchased servicing rights from Morgan Stanley began to fall delinquent during the early financial crisis in 2007. CMC made a variety of claims, and the Court of Chancery dismissed those claims with prejudice, except for two breach of contract claims, which the Court dismissed without prejudice. As to those claims, the Court of Chancery determined that CMC failed to follow the requirements of the notice provision of the master contract by failing to provide Morgan Stanley adequate notice of the alleged breaches and an opportunity to cure. In dismissing these claims, the Court of Chancery cited the Twombly-Iqbal plausibility standard. 

The Supreme Court noted that since Twombly was decided in 2007, the Court of Chancery has, on various occasions, cited with approval the “plausibility” standard. Prior to this case, however, the Delaware Supreme Court had not addressed the appropriate pleading standard since it reaffirmed the “conceivability” standard in 2002. Because the issue had not been briefed by either party, the Supreme Court declined to use this case as a vehicle to make a final determination on whetherTwombly-Iqbal should apply in Delaware. Instead, it made clear that until it (or the legislature) decides otherwise, the standard in Delaware is “conceivability.” 

The Court explained that Delaware’s “conceivability” standard is “more akin to possibility.” The federal “plausibility” standard, by contrast, falls somewhere between mere “possibility” but short of “probability.” Under Delaware’s “minimal” pleading standard “a trial court should accept all well-pleaded facts as true, accept even vague allegations in the Complaint as ‘well-pleaded’ if they provide the defendant notice of the claim, draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof.” 

The Supreme Court determined that under the conceivability standard, it was sufficient that the complaint alleged that CMC did provide prompt notice with specific grounds for breach. By deciding that CMC did not provide adequate notice, reasoned the Supreme Court, the trial court inappropriately shifted the burden, holding CMC to a higher pleading standard than required. The Supreme Court made clear, however, that it was not making a judgment on the substantive adequacy of the notice or whether the notice provided could survive a motion for summary judgment.

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