Martin Flumenbaum and Brad S. Karp ()
This month, we discuss DPWN Holdings (USA) v. United Airlines,1 an antitrust case in which the U.S. Court of Appeals for the Second Circuit considered the level of scrutiny to apply, on a motion to dismiss, to allegations of lack of knowledge of a claim otherwise discharged in bankruptcy. The court examined whether DHL, an international express mail and cargo delivery service and a customer of United Airlines, had adequately shown that it was unaware of United’s alleged price-fixing activities until after United’s bankruptcy plan was confirmed, thereby overcoming United’s argument that DHL’s antitrust claim had been discharged in United’s bankruptcy.
In an opinion by Judge Jon O. Newman, joined by Judge Rosemary S. Pooler and Judge Debra Ann Livingston, the court held that the district court had applied the incorrect standard in accepting as true DHL’s allegations that it was not, and could not have been, aware of United’s alleged price-fixing conspiracy in time to present an antitrust claim in United’s bankruptcy proceeding. While the well-pleaded allegations in a plaintiffs’ complaint are presumed to be true on a motion to dismiss, the court refused to accept DHL’s claim that it had not received a meaningful opportunity to bring its antitrust claim before United’s bankruptcy plan was confirmed. The court remanded the case to the district court for further development of the facts, specifying the precise questions the district court must resolve before it could determine whether DHL would be denied due process if its antitrust claim was dismissed.
Antitrust Conspiracy. United was a member of the International Air Transport Association (IATA). In 1993, the U.S. Department of Transportation informed IATA officials that IATA members would not receive immunity for any coordinated implementation of surcharges. IATA officials shared this information with its members. Nevertheless, IATA subsequently adopted such a surcharge.
In August 1996, United entered into an agreement with two other airlines, Lufthansa and Scandinavian Airlines, to provide integrated services. The Transportation Department granted limited antitrust immunity to this alliance, while prohibiting the airlines from “exchang[ing] information, discuss[ing], agree[ing] upon, or coordinat[ing]…on any subject or in any manner that would cause any Party to contravene…any law….”2
As the costs of aviation fuel rose, members of IATA met to consider joint strategies to manage these increases as well as the antitrust risks of any such coordinated moves. IATA approved Resolution 116ss on Aug. 7, 1997, which provided for a fuel surcharge tied to increases in fuel spot prices tracked by IATA’s own fuel price index. The Transportation Department refused to approve this resolution without an economic justification, which the airlines could not provide. In light of this decision, IATA chose not to implement Resolution 116ss.
In late 1999, fuel spot prices increased past the threshold required for a fuel surcharge. On Jan. 28, 2000, IATA re-submitted Resolution 116ss to the DOT in another effort to secure antitrust immunity for surcharges imposed pursuant to the resolution. Before receiving a response from the Transportation Department, however, United informed its competitors that it would impose a surcharge as of Feb. 1, 2000. At the same time, several other airlines also began charging customers this increased rate.
On March 14, 2000, the Transportation Department rejected the application for approval of Resolution 116ss. Following this decision, IATA advised its members that implementation of surcharges pursuant to the resolution “could be regarded as an illegal conspiracy in violation of applicable Competition laws.”3 According to DHL’s complaint, United and other airlines continued to fix fuel charges, occasionally straying from the methodology set forth by Resolution 116ss but still acting in a coordinated manner to increase and preserve profits.
On Feb. 14, 2006, law enforcement officers raided the offices of several airlines, not including United, in connection with the fuel surcharge price-fixing conspiracy. A price-fixing class action was filed against United and other airlines three days later. The U.S. Department of Justice subpoenaed United in June 2006 requesting information regarding the surcharges, but United was never indicted or otherwise involved in the Justice Department’s price-fixing investigation. Ultimately, over 90 class actions were filed regarding the conspiracy, and United settled a majority of these cases. Following a settlement with another airline, DHL obtained access to documents which provided information regarding United’s participation in the scheme on July 5, 2010.
Bankruptcy Proceeding. On Dec. 9, 2002, United filed a petition for bankruptcy under Chapter 11 of the Bankruptcy Code. United identified DHL as a potential creditor in its claims notification procedures, noting that DHL held more than 20 disputed claims, none of which was an antitrust price-fixing claim. Additionally, United provided DHL with actual notice of the bankruptcy proceeding. United’s reorganization plan was confirmed by the bankruptcy court on Jan. 20, 2006, and went into effect on Feb. 1, 2006. The plan included, pursuant to 11 U.S.C. §1141(d), a blanket discharge of all claims and causes of action, “known or unknown,” “of any nature whatsoever” against United arising before the confirmation date.4 Following full administration of the bankruptcy estate, a final decree was entered on Dec. 8, 2009.
In its complaint, filed on Feb. 4, 2011, DHL alleged that United was a member of a conspiracy among airlines to fix the price of air cargo shipments in violation of section 1 of the Sherman Act. DHL asserted that it became aware of United’s part in the conspiracy when it obtained access to confidential documents after July 5, 2010, and that it “did not and could not have discovered the injuries it sustained as a result of [United]‘s illegal activity until after July 5, 2010.”5 United filed a motion to dismiss based in part on the argument that DHL’s antitrust claim was discharged in United’s bankruptcy proceeding.
On May 18, 2012, U.S. District Judge John Gleeson denied United’s motion to dismiss. The district court accepted as true DHL’s allegations that it lacked knowledge of United’s membership in the conspiracy, holding that “[i]t is undisputed for purposes of this motion that DHL could not have discovered United’s alleged antitrust violations until after confirmation of the plan.”6 Accordingly, the court held that DHL’s claim against United had not been discharged in the bankruptcy proceeding because DHL did not have sufficient knowledge of the claim, and therefore would be denied due process if its claim was considered discharged. The district court certified its ruling for interlocutory appeal, and the Second Circuit granted United’s petition for an interlocutory appeal of this decision.
The Second Circuit’s Decision
The court began its decision by reviewing the relevant provisions and policy goals of the Bankruptcy Code. The court noted that “[t]he discharge of pre-confirmation claims ‘operates as an injunction against the commencement or continuation of an action,’”7 and provides debtors with a “‘fresh start’ to permit their continued operation free of pre-bankruptcy debts.”8 The court discussed the competing principle that a claimant is denied due process if it does not receive adequate notice of both the existence of the bankruptcy proceeding and the nature of the claims subject to discharge. Accordingly, courts will not find that a claim was discharged in bankruptcy if the claimant did not receive adequate notice of both of the above. In determining the adequacy of notice, courts apply a “reasonableness” standard and examine “what the debtor or the claimant knew about the claim or, with reasonable diligence, should have known.”9
The court acknowledged that in the typical situation, a debtor will know to whom it owes money, and likewise a claimant will know who owes it money. But the situation becomes more complicated when the claim at issue arises out of the debtor’s alleged violation of law, where neither the debtor nor the claimant may be aware of the debtor’s violation.
Considering the policy behind the Sherman Act—that of promoting competition—the court focused its attention on the clash between the goals of the two statutes. The court reviewed its ruling in a similar case, involving a conflict between the Bankruptcy Code and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).10 In In re Chateaugay Corp., the court noted that “it will sometimes be appropriate to permit the ‘fresh start’ policy to override the policy of the statute alleged to be violated.”11
The court then examined DHL’s claim that it could not have discovered United’s alleged violations until after confirmation of the reorganization plan. The court expressed puzzlement over the district court’s finding that this allegation was “undisputed,” because United had in fact disputed this claim. While on a motion to dismiss, courts are to accept as true all well-pleaded allegations in a complaint, the court found that “that principle does not apply to general allegations that are contradicted ‘by more specific allegations in the Complaint.’”12 In support of this finding, the court considered the implications of Ashcroft v. Iqbal, pointing to the Supreme Court’s classification of a plaintiff’s allegations on a motion to dismiss as “not entitled to be assumed true.”13
The court then catalogued the various instances in DHL’s complaint which belied its allegation that it could not have known of United’s antitrust violations prior to confirmation of the bankruptcy plan. The court pointed to DHL’s allegations that United, along with other members of the IATA, adopted Resolution 116ss; the allegation that the airlines implemented the resolution; the allegations that the airlines raised fuel surcharges in concert pursuant to the resolution; the allegation that the surcharges increased at a greater rate than the price of fuel; and the allegations that these increases occurred in a coordinated manner. The court also discussed the class action filed against United in February 2006, shortly after the bankruptcy plan was confirmed, and noted that as a member of the putative class in that case, DHL could have filed a late claim in the bankruptcy proceeding or moved to amend the reorganization plan.
While recognizing the principle that mere parallel conduct is insufficient to show a violation of the antitrust laws, the court held that the information of which DHL was or could have been aware regarding the conspiracy in advance of confirmation of the bankruptcy plan undermined DHL’s allegation that it lacked sufficient knowledge of United’s alleged antitrust violation. The court differentiated between facts sufficient to plead a claim outside of bankruptcy and those sufficient to file a claim in a bankruptcy proceeding, implying that while DHL may not have had facts sufficient to file an independent complaint at the bankruptcy stage, it could have asserted the known allegations in United’s bankruptcy proceeding in order to preserve its claim. The court found that the facts identified by the court indicating DHL’s awareness of its claim “bear importantly on the ultimate issue whether DHL was denied due process by lack of specific notice from United of an antitrust claim.”14
The court concluded by noting that it found DHL’s allegations of lack of knowledge dubious. But, recognizing that an ultimate determination of DHL’s knowledge should be made by the district court, the court remanded the matter. The court specified precisely what facts the district court must determine on remand: “what aspects of United’s alleged price-fixing conduct were known by DHL, or reasonably ascertainable, prior to plan confirmation, whether the allegations of the class action complaint were sufficient to alert DHL to its antitrust claim, and whether a post-confirmation claim would have been entertained.”15 The court also held that if the district court ultimately found that DHL lacked sufficient knowledge, the court should then consider whether United knew or should have known of DHL’s potential antitrust claim. The court noted that the district court must resolve these factual questions before a determination of whether DHL had been denied due process could be undertaken.
The decision in DPWN Holdings is significant for its scrutiny of a plaintiff’s allegations on a motion to dismiss. It is noteworthy that the Second Circuit was unwilling to accept as true the general allegations in the plaintiff’s complaint, and instead closely examined the validity of these allegations in the context of the full complaint. In the future, defendants may rely on DPWN Holdings not only for the limited purpose of arguing that a plaintiff was sufficiently aware of a claim such that the claim was discharged in bankruptcy, but more broadly to undermine allegations in a motion to dismiss that may be contradicted by other facts within the complaint.
Martin Flumenbaum and Brad S. Karp are members of Paul, Weiss, Rifkind, Wharton & Garrison. Genevieve Hanft, a litigation associate at the firm, assisted in the preparation of this article.
1. No. 12-4867-cv, __ F.3d __, 2014 WL 1244184 (2d Cir. March 27, 2014).
3. Id. at *3.
4. Id. at *4.
5. Id. at *4.
7. 11 U.S.C. §524(a)(2).
8. 2014 WL 1244184, at *5.
9. Id. at *5.
10. 42 U.S.C. §9601.
11. 944 F.2d 997, 1002 (2d Cir. 1991).
12. 2014 WL 1244184, at *6. (citing Hirsch v. Arthur Andersen, 72 F.3d 1085, 1095 (2d Cir. 1995); Barberan v. Nationpoint, 706 F.Supp.2d 408, 424 (S.D.N.Y. 2010); In re Livent, Inc. Noteholders Sec. Litig., 151 F.Supp.2d 371, 405 (S.D.N.Y. 2001)).
13. Id. (citing Ashcroft v. Iqbal, 556 U.S. 662, 681 (2009)).
14. Id. at *6.
15. Id. at *7.