Delaware Supreme Court Reverses Chancery Court, Cites “Conceivability” Standard for 12(b)(6) Motions. In Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC (No. 595, 2010, Del. Supr. Aug. 18, 2011), the Delaware Supreme Court, sitting en banc, reversed the Chancery Court's dismissal of claims alleging breach of contract and breach of the implied covenant of good faith and fair dealing. The case arose of out plaintiff Central Mortgage Company's (CMC) purchases of servicing rights on mortgage loans sold by Morgan Stanley. According to Morgan Stanley, these loans were to be sold to Fannie Mae and Freddie Mac, and CMC alleged that Morgan Stanley had made assurances that its due diligence satisfied the agencies' underwriting criteria. The Master Agreement between CMC and Morgan Stanley provided that within 60 days of discovery or notice to Morgan Stanley of a breach of representations or warranties that materially and adversely affected CMC's servicing rights related to any particular loan, Morgan Stanley was required to cure the breach, or, at CMC's option, repurchase CMC's servicing rights. After Morgan Stanley ceased its repurchases, CMC sued, alleging that Morgan Stanley had breached the Master Agreement and violated the covenant of good faith and fair dealing. The Chancery Court dismissed the breach of contract claim without prejudice, holding that CMC had failed to provide proper notice pursuant to the Master Agreement. According to the Chancery Court, the exhibits attached to CMC's complaint could not constitute notice, since they gave no chance to cure. In addition, forwarding agency files for non-complaint loans to Morgan Stanley did not constitute notice because CMC did not specify the representations or warranties allegedly breached. The Chancery Court also held that the implied covenant of good faith and fair dealing claim was duplicative of the contract claims and dismissed the claim with prejudice. 

In reversing the Chancery Court, the Delaware Supreme Court noted that the United States Supreme Court, in Ashcroft v. Iqbal (2009), had determined that to survive a motion to dismiss in a federal court, the complaint must contain sufficient factual matter that accepted as true would state a claim to relief that is plausible on its face. The Delaware Supreme Court emphasized that Delaware has not yet adopted the Iqbal standard and that to survive a motion to dismiss, the plaintiff must stated a claim that is "provable under any reasonably conceivable set of circumstances." Under this standard, CMC's allegations that it provided adequate notice were sufficient to survive Morgan Stanley's motion to dismiss. The Delaware Supreme Court also held that CMC's allegations that Morgan Stanley had made false representations regarding its due diligence practices did not serve as the basis for the breach of contract claim and could therefore serve as an independent basis for the implied covenant claim. Accordingly, the Chancery Court's dismissal with prejudice was reversed as well.  Link to Supreme Court opinion: http://courts.delaware.gov/opinions/download.aspx?ID=159390.  Link to Chancery Court opinion:  http://courts.delaware.gov/opinions/download.aspx?ID=142310.