Opinion ID: 3015384
Heading Depth: 2
Heading Rank: 1

Heading: Federal Pleading Standard

Text: Stanziale insists on appeal that the District Court applied the elevated federal pleading standard controlling shareholder derivative suits.8 We acknowledge some language in the District Court’s opinions that evokes the derivative suit standard, but we think the better reading is that the District Court applied Delaware’s Chancery Rule 8. Applying Chancery Rule 8 in federal court makes some intuitive sense, as the language of Chancery Rule 8 mirrors Rule 8 of the Federal integrally connected, Stanziale expressly appealed both orders, and the directors and officers briefed the issues raised in both orders. Cf. Williams v. Guzzardi, 875 F.2d 46, 49 (3d Cir. 1989) (“We have appellate jurisdiction over orders not specified in the notice of appeal if there is a connection between the specified and unspecified order, the intention to appeal the unspecified order is apparent and the party is not prejudiced and has a full opportunity to brief the issues.”). We consider de novo the grant of a motion to dismiss for failure to state a claim. Wheeler v. Hampton Twp., 399 F.3d 238, 242 (3d Cir. 2005). While denial of a motion for reconsideration is discretionary, where, as here, that denial interprets and applies a legal precept, our review is plenary. Le v. University of Pennsylvania, 321 F.3d 403, 405-06 (3d Cir. 2003). 8 See Fed. R. Civ. P. 23.1 (“The complaint shall . . . allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors . . . and the reasons for the plaintiff’s failure to obtain the action or for not making the effort.”). -13- Rules of Civil Procedure.9 The problem is that Delaware courts interpret Chancery Rule 8 to require pleading facts with specificity. That is not the federal notice pleading standard. Delaware cases are legion requiring specific allegations of fact to support a plaintiff’s demand for relief under Chancery Rule 8. In Grobow v. Perot, the Delaware Supreme Court stated that even under Chancery Rule 12(b)(6) conclusions of fact will be rejected if not supported by allegations of “specific facts.” 539 A.2d at 187 n.6. The Delaware Supreme Court reiterated that maxim in In re Tri-Star Pictures, Inc., Litig., 634 A.2d 319, 326 (Del. 1993), and the Court of Chancery continues routinely to apply it. See, e.g., Crescent/Mach I Partners L.P. v. Turner, 846 A.2d 963, 984 (Del. Ch. 2000). We recognize that the District Court (mistakenly) cited derivative suit pleading cases at times, especially in its first memorandum.10 However, the District Court drew more heavily from Chancery Rule 8 precedents, and it expressly relied on that Rule alone. Reading its opinions as a whole, we think it fairest to take the District Court on its own terms. We conclude that the District Court applied Chancery Rule 8, not Rule 23.1, and then imputed 9 Compare Del. Ch. Ct. R. 8 (“A pleading which sets forth a claim for relief . . . shall contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief . . . .”) with Fed. R. Civ. P. 8 (“A pleading which sets forth a claim for relief . . . shall contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief . . . .”). 10 Citing Aronson v. Lewis, 473 A.2d 805 (Del. 1984), a classic Delaware derivative case, for its pleading standards was such an error, as was citing In re RSL Primecall, Inc., which relied on Aronson. -14- Chancery Rule 8's requirements to Federal Rule of Civil Procedure 8. Delaware courts consider Chancery Rule 8 specificity requirements as consonant with notice pleading, see, e.g., Salomon v. Pathe Communications Corp., 672 A.2d 35, 39 (Del. 1996), but such notice pleading bears scant resemblance to the federal species. For example, we recently rejected an appellee’s argument that a complaint “lacked sufficient factual support” with the terse declaration that “a plaintiff need not plead facts.” Alston v. Parker, 363 F.3d 229, 233 n.6 (3d Cir. 2004). We explained that instead “a plaintiff need only make out a claim upon which relief can be granted. If more facts are necessary to resolve or clarify the disputed issues, the parties may avail themselves of the civil discovery mechanisms under the Federal Rules.” Id. We held that the District Court erred by mandating fact-pleading under Rule 12(b)(6), and we vacated and remanded its decision. As we explained, we merely submitted to the Supreme Court’s reminder in Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 507 U.S. 163 (1993), the essence of which it recently reiterated in Swierkiewicz v. Sorema, 534 U.S. 506, 512 (2002), that the Federal Rules of Civil Procedure “do not require a claimant to set out in detail the facts upon which he bases his claim.” 507 U.S. at 168 (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). The District Court erred by assuming that Delaware’s notice pleading cases are interchangeable with federal notice pleading cases.11 They are not. By requiring Stanziale to allege 11 We take it as a commonplace that under Hanna v. Plumer, 380 U.S. 460 (1965), federal pleading standards apply in federal -15- specific facts, the District Court erroneously preempted discovery on certain claims by imposing a heightened pleading standard not required by Federal Rule of Civil Procedure 8. What should the District Court have required Stanziale to allege? First, regarding facts, the Supreme Court in Swierkiewicz illustrated the “simplicity and brevity” of factual allegations required under Rule 8. The Court endorsed Form 9 of the Federal Rules of Civil Procedure Forms, which sets forth an illustrative complaint of negligence: “On June 1, 1936, in a public highway called Boylston Street in Boston, Massachusetts, defendant negligently drove a motor vehicle against plaintiff who was then crossing said highway.” 534 U.S. at 513 n.7. Notably, this example provides a few facts; the claim does not merely state that “defendant negligently injured plaintiff.” The lesson, as we take it, is that supporting facts should be alleged, but only those necessary to provide the defendant fair notice of the plaintiff’s claim and the “grounds upon which it rests.” Conley, 355 U.S. at 47. That proposition is not inimical to our teaching in Alston that facts need not be pleaded. A plaintiff should plead basic facts, such as they are, for those are “the court. See Ingersoll-Rand Fin. Corp., 921 F.2d 497, 501 (3d Cir. 1990) (“Since [plaintiff’s] action was brought in federal court, the Federal Rules of Civil Procedure govern the sufficiency of the pleadings.”); Gibbs v. Carnival Cruise Lines, 314 F.3d 125 (3d Cir. 2002) (noting that under Hanna “federal courts apply on-point Federal Rules of Civil Procedure instead of state procedural practices”). See also 5B C HARLES A LAN W RIGHT & A RTHUR R. M ILLER, F EDERAL P RACTICE AND P ROCEDURE § 1357 (3d ed. 2004) (“Federal law governs whether a complaint in a federal court action states a claim for relief with the requisite particularity.”). -16- grounds” upon which the plaintiff’s claim rests. Even at the pleading stage, a defendant deserves fair notice of the general factual background for the plaintiff’s claims. Id. But, as we explained in Alston and reiterate today, a plaintiff will not be thrown out of court on a Rule 12(b)(6) motion for lack of detailed facts. To say that a plaintiff’s claim appears factually weak is not to say that he states no claim. That truism is particularly obvious where, as here, a defendant’s motion to dismiss articulates the plaintiff’s claims that supposedly lack factual support. See Alston, 363 F.3d at 234. To hold otherwise would be effectively to transform Rule 12(b)(6) motions into multi-purpose summary judgment vehicles. That we will not do. Second, Stanziale must plead around the business judgment rule. In Delaware, the business judgment rule is a presumption that directors act in good faith, on an informed basis, honestly believing that their action is in the best interests of the company. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).12 Generally speaking, we will not rely on an affirmative defense such as the business judgment rule to trigger dismissal of a complaint under Rule 12(b)(6). See In re Adams Golf Inc. Sec. Litig., 381 F.3d 267, 277 (3d Cir. 2000). A complaint may be dismissed under Rule 12(b)(6) where an unanswered affirmative defense appears on its face, however. ALA, Inc. v. 12 The parties on appeal treat both directors and officers as comparable fiduciaries, and they appear to be correct in doing so. See Arnold v. Soc’y for Savings Bancorp, Inc., 678 A.2d 533, 539 (Del. 1996) (“Fiduciary duties are owed by the directors and officers to the corporation and its stockholders.”). Unless stated otherwise, we therefore will assume for the purposes of this case that theories of liability against corporate directors apply equally to corporate officers. -17- CCAIR, Inc., 29 F.3d 855, 859 (3d Cir. 1994). Stanziale’s Amended Complaint declares that the business judgment rule does not vitiate any of his claims. He thus must plead that he overcomes the presumption created by that rule – that Tower Air’s directors and officers acted in good faith and on an informed basis. In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 286 (Del. Ch. 2003). Overcoming the presumptions of the business judgment rule on the merits is a near-Herculean task. Delaware courts have said that it may be accomplished by showing either irrationality or inattention. A plaintiff may overcome the presumption that directors and officers acted in good faith by establishing that a decision was so egregious as to constitute corporate waste. Gagliardi v. Trifoods Int’l, Inc., 683 A.2d 1049, 1053 (Del. Ch. 1996) (Allen, Ch.). The burden here is to show irrationality: a plaintiff must demonstrate that no reasonable business person could possibly authorize the action in good faith. Id. at 1054. Put positively, the decision must go so far beyond the bounds of reasonable business judgment that its only explanation is bad faith. Parnes v. Bally Entm’t Corp., 722 A.2d 1243, 1246 (Del. 1999) (en banc). Alternatively, a plaintiff may overcome the presumption that directors and officers acted on an informed basis by establishing that a decision was the product of an irrational process or that directors failed to establish an information and reporting system reasonably designed to provide the senior management and the board with information regarding the corporation’s legal compliance and business performance, resulting in liability. In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967-70 -18- (Del. Ch. 1996) (Allen, Ch.).13 Viewing these methods along a different axis, action may lead to liability where the action or the process that led to it were irrational; inaction may lead to liability where no red flag monitoring system is installed and non-compliance with applicable legal standards results.