Summary of a Recent
Judicial Development in
Bankruptcy

Plaintiffs' Claims Properly Dismissed After Failing to Meet
Pleading Requirements of the Fed. R. Civ. P.

M. Sean Brister
National AgLaw Center Research Associate

Summary of Decision

In Pappas v. Bank of America Corp., Nos. 07-4103-cv(L), 07-4093-cv, 2009 WL 382602 (2d Cir. Feb. 17, 2009) , the United States Court of Appeals for the Second Circuit affirmed the district court's dismissal of plaintiffs' claims and denial of an opportunity to file a third amended complaint, agreeing with the lower court that the pleadings failed to meet the minimum requirements of Federal Rules of Civil Procedure 8 and 9 and that plaintiffs should have realized the deficiencies before filing the original complaints.

Background

The plaintiffs were successors to bankrupt subsidiaries of international dairy conglomerate Parmalat S.p.A. (Parmalat), which filed for bankruptcy protection in Italy in 2003. In re Parmalat Secs. Litig., 501 F. Supp. 2d 560, 563 (S.D.N.Y. 2007). The subsidiaries were completely financially dependent on their parent company, Parmalat. Id. The predecessors to the plaintiffs alleged that they incurred substantial debt and entered into a fraudulent sale-leaseback transaction whereby they sold their assets to a third-party and then leased them back based upon the fraudulent representations of the defendants. Id. The defendants were all banks or accounting firms alleged to have assisted Parmalat in concealing its true financial health. Id. The plaintiffs alleged that the parent company looted the profits of the subsidiaries, including the proceeds of the sale-leaseback transaction, and that the subsidiaries would not have entered into the debt or sale-leaseback transaction but for the concealment of the true financial health of the parent company by the defendants. Id.

The defendants moved to dismiss the claims against them based upon Fed. R. Civ. P. 12(b)(6). Pappas, 2009 WL 382602 at *1. The district court granted the motions and further denied the plaintiffs' request to file a third amended complaint. Id. An appeal was taken. Id.

Arguments

The plaintiffs argued that the district court erred in applying the pleading standards contained in the rules of civil procedure. Id. In addition, the plaintiffs argued that their pleadings sufficiently plead injury, fraudulent intent, vicarious liability, and damages resulting from defendants' conduct. Id. Finally, the plaintiffs argued that the district court abused its discretion by not allowing them to file a third amended complaint. Id.

Analysis and Holdings

The court found that the plaintiffs failed to allege that all but one of the defendants even knew of the plaintiffs or the alleged fraudulent transactions. Id. Only one defendant was alleged to know of the plaintiff, and the plaintiff failed to assert that that defendant was knowledgeable of the fraud or that its conduct was reasonably foreseeable to lead to the loss of the plaintiffs' assets. Id. The court therefore affirmed the dismissal of the plaintiffs' claims against the defendants. Id.

The court also ruled that the district court did not abuse its discretion when it refused to allow a third amended complaint, stating that it "agree[d] with Judge Kaplan that the problems with the [second amended complaint] 'should have been apparent to the plaintiffs even before they filed their original complaints'" in these "dubious cases." Id. at *2 (quoting In re Parmalat Sec. Litig., 1:04-md-01653-LAKHBP, at 3 (S.D.N.Y. Sept. 4, 2007)). The court affirmed all of the district court's rulings and concurred with its reasoning in its "careful and thoughtful opinion." Id.

The case was decided on February 17, 2009.