January 25, 2011 Articles

Seventh Circuit Iqbal Case Summaries

This is a selection of recent cases decided in the Seventh Circuit relating to the Iqbal v. Ashcroft ruling.

By Angela S. Fetcher

Since the Iqbal decision was handed down, there have been several issues on which different circuits, and different district courts within the same circuit, have differed in their interpretations of the requirements of Iqbal’s pleading standards. One of those areas where a split of authority can already be seen is the applicability of the Iqbal pleading standards to affirmative defenses. Courts in the Seventh Circuit appear to be siding with those courts that hold that Iqbal pleading standards do apply to affirmative defenses, although their treatment of those affirmative defenses under Iqbal appears to differ. For instance, in In re Mission Bay Ski & Bike, Inc., Nos. 07 B 20870 & 08 A 55, 2009 Bankr. LEXIS 2495 (Bankr. N.D. Ill. Sept. 9, 2009), the bankruptcy trustee sued First American Bank for fraudulent transfer and other claims. Id. at *3. The bank asserted several affirmative defenses in summary fashion, i.e., “the trustee’s claims are precluded, in whole or in part, by the doctrine of estoppel.” See id. at *17. For this reason, the plaintiff moved to strike the affirmative defenses. The court held that Iqbal and its standards apply to affirmative defenses because affirmative defenses must comply with Rule 8 of the Federal Rules of Civil Procedure. Id. at *15–16. The court held that the summary affirmative defenses asserted by the defendant were mere legal conclusions without facts to demonstrate their plausibility and struck the affirmative defenses with leave to amend. Id.at *17. And in Bank of Montreal v. SK Foods, LLC, No. 09 C 3479, 2009 U.S. Dist. LEXIS 106577 (N.D. Ill. Nov. 13, 2009), the plaintiff sued the defendant to collect on debts guaranteed by the defendant after debtors defaulted. Id. at *2. As in the above case, the defendant filed an answer containing, among others, an affirmative defense of breach of the implied covenant of good faith and fair dealing, which the plaintiff moved to dismiss for lack of plausibility under Iqbal. Id.at *10. The court found that Iqbal is applicable to affirmative defenses, citing to a California federal decision. Id. at *11 (citing CTF Dev., Inc. v. Penta Hospitality, LLC, No. 09 C 02429 WHA, 2009 U.S. Dist. LEXIS 99538, AT *8 (N.D. Cal. Oct. 26, 2009). With regard to the specific affirmative defense at issue, the court recognized that the affirmative defense’s allegations, which contained many factual allegations, could mean that the plaintiff acted in a manner equally consistent with lawful behavior and stated that the allegations were “somewhat implausible.” Id. at *11.  However, the court denied the motion to dismiss, stating that “striking the good-faith affirmative defense at this early stage is inappropriate.” Id.

Another portion of the Iqbal decision that is being decided differently by the courts is the level of factual detail needed to maintain a complaint under Iqbal’s pleading standards. Two different methods are illustrated here—one by the Seventh Circuit and one by a district court. In Walton v. Walker, No. 09-2617, 2010 U.S. App. LEXIS 2338 (7th Cir. Feb. 3, 2010) the plaintiff appealed the dismissal of his 82-page complaint for failing to meet the pleading standards of Iqbal. Id.at *1–3.  The Seventh Circuit affirmed the district court’s dismissal under Iqbal of the plaintiff’s claims that 24 people conspired to falsely arrest and convict him, claims the district court claimed were based on “paranoid fantasy.” Id. at *2. It held that not only were the plaintiff’s claims “threadbare recitals of the elements of a cause of action,” which was found insufficient under Iqbal, but that because Iqbal allowed the district court to rely on judicial experience and common sense in its determination, the district court was allowed to rely on its familiarity of the plaintiff’s prior meritless litigation in determining whether to dismiss his claims. Id. at *3-4.

However, in Kuryakyn Holdings, Inc. v. Just In Time Distribution Co., No. 09-cv-702-bbc, 2010 U.S. Dist. LEXIS 22977 (W.D. Wis. March 11, 2010), the plaintiff sued the defendant, claiming that the defendant sold motorcycle accessory designs and related products to a third party without first offering the plaintiff the right of first refusal to purchase them as required under the parties’ contract. Id.at *1–5.  The defendant sought to have the court refuse to consider the plaintiff’s breach-of-contract and unjust-enrichment claims when determining whether to dismiss the case under the first-to-file rule, claiming that under Iqbal and Twombly, these claims were “inconceivable” and “particularly suspect.” Id. at *11. The court declined, holding that plausibility is not akin to probability and that a claim is not implausible under Iqbal because the allegations in it are “fanciful,” or “def[y] reason or rest[] on assertions contrary to the received [sic] wisdom of common experience.” Id.at *13. In so holding, the court stated that “[e]ven if defendant is correct that plaintiff’s allegations are unlikely or that it is illogical to think plaintiff would redesign products without ceasing royalty payments to defendant, plaintiff’s claims are not implausible under Iqbal and Twombly because they (1) are specific and (2) address the critical elements of the claims.” Id. at *13–14. Therefore, the court considered the claims in its first-to-file rule analysis. Id. at *14.

Angela S. Fetcher is a member at Stoll Keenon Ogden PLLC's Louisville, Kentucky office.


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