District Court Erroneously Applies Iqbal and Twombly: Seventh Circuit | Practical Law

District Court Erroneously Applies Iqbal and Twombly: Seventh Circuit | Practical Law

In Firestone Financial Corp. v. Meyer, the US Court of Appeals for the Seventh Circuit reversed the district court's grant of a motion to dismiss and related summary judgment motion because of the district court's failure to correctly apply the standards for dismissal under Federal Rule of Civil Procedure (FRCP) 12(b)(6) and the US Supreme Court's decisions in Ashcroft v. Iqbal and Bell Atlantic Corp. v. Twombly.

District Court Erroneously Applies Iqbal and Twombly: Seventh Circuit

Practical Law Legal Update w-000-5150 (Approx. 4 pages)

District Court Erroneously Applies Iqbal and Twombly: Seventh Circuit

by Practical Law Litigation
Published on 11 Aug 2015 • USA (National/Federal)
In Firestone Financial Corp. v. Meyer, the US Court of Appeals for the Seventh Circuit reversed the district court's grant of a motion to dismiss and related summary judgment motion because of the district court's failure to correctly apply the standards for dismissal under Federal Rule of Civil Procedure (FRCP) 12(b)(6) and the US Supreme Court's decisions in Ashcroft v. Iqbal and Bell Atlantic Corp. v. Twombly.
On August 10, 2015, in Firestone Financial Corp. v. Meyer, the US Court of Appeals for the Seventh Circuit reversed the district court's grant of a motion to dismiss and related summary judgment motion because of the district court's failure to correctly apply the standards for dismissal under FRCP 12(b)(6) and the US Supreme Court's decisions in Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (No. 14-3075, (7th Cir. Aug. 10, 2015)).
Firestone Financial Corporation filed a lawsuit against JHM Equipment Leasing Company, its owner, John Meyer, and two of Meyer's other companies for defaulting on a series of loans and to collect on the debt. The defendants filed an answer denying the breach of contract and asserting a counterclaim of promissory estoppel and affirmative defenses. They alleged that Firestone promised to create a $500,000 line of credit to fund future equipment purchases, which induced the defendants to purchase equipment that they would not otherwise have purchased. The defendants further alleged that when Firestone reneged on its promise, the defendants were unable to pay for its purchased equipment.
Firestone moved to dismiss the defendants' counterclaim under FRCP 12(b)(6), arguing it was implausible that Firestone would make a handshake deal to loan half a million dollars to a startup business to be secured after the fact. Shortly thereafter, defense counsel withdrew, and defendants failed to obtain substitute counsel. The defendants did not respond to the motion to dismiss. Firestone then moved for default judgment against the corporate defendants for failure to have legal counsel, as required for corporations under Illinois law. The district court granted the motion and entered default judgment against the three corporate defendants, but did not address the defendants' counterclaim.
During a subsequent status hearing, the court granted Firestone's motion to dismiss and dismissed the defendants' counterclaim on the grounds that it was facially implausible. The district court also later granted Firestone's motion for summary judgment on a breach of guaranty claim against Meyer without specifically discussing the affirmative defenses raised by Meyer. Two of Meyer's defenses were based on the same facts as the dismissed counterclaim, and Firestone therefore argued on summary judgment that they were barred because of the court's earlier dismissal of the counterclaim as implausible. Meyer appealed the district court's rulings.
The Seventh Circuit reversed the district court's opinion and found in Meyer's favor. With respect to the motion to dismiss, the Seventh Circuit held that:
  • Although a party generally forfeits an argument or issue not raised in response to a motion to dismiss, Meyer's failure to respond did not waive his right to appeal the legal theory on which the district court based its decision.
  • Meyer could appeal based on the limited argument that the court's reason for dismissing his counterclaim was wrong (that is, the counterclaim was not facially implausible).
  • The district court:
    • failed to treat Meyer's well-pleaded allegations as true; and
    • erroneously applied Twombly and Iqbal, under which the relevant question is not whether a complaint's factual allegations are true. Rather, it is whether the complaint contains sufficient factual matter which, accepted as true, states a plausible claim for relief on its face (see Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570)).
  • Accepting Meyer's allegations as true, his allegations were sufficient to state a plausible claim of promissory estoppel.
Regarding the district court's improper grant of summary judgment to Firestone, the Seventh Circuit held that:
  • The district court's oral rulings and order made only conclusory remarks regarding why it was granting summary judgment to Firestone.
  • The district court failed to explain why it thought that Meyer's two affirmative defenses arising out of the same facts as the counterclaim were insufficient to preclude summary judgment. However, the only possible basis for its decision to grant summary judgment despite these defenses was Firestone's sole contention on summary judgment that the defenses were barred by the court's earlier dismissal of Meyer's counterclaim. For the district court to have granted summary judgment on any other ground, it would have had to give notice to Meyer under Seventh Circuit law.
  • Because the district court erred in dismissing Meyer's counterclaim as facially implausible, it also erred in rejecting the affirmative defenses based on the same facts as the counterclaim on summary judgment.