Collins v. Morgan Stanley Dean Witter

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT
_______________

m 99-41037
_______________

JAMES A. COLLINS, STANLEY L. MASON, CURTIS COLICHER,
GLORIA BAILEY, DANA FLORES, R.L. NELSON, JR.,
ROBERT M. CHISTE, AND DAVID J. ATWOOD,

Plaintiffs-Appellants,

VERSUS

MORGAN STANLEY DEAN WITTER
AND
IAN C.T. PEREIRA,

Defendants-Appellees.

_________________________

Appeal from the United States District Court
for the Southern District of Texas
_________________________

August 31, 2000

Before JOLLY, SMITH, and BARKSDALE, and stockholders of Allwaste, Inc. (“All-
Circuit Judges. waste”), voted to merge with Philip Services
Corporation (“Philip”). Each of the plaintiffs
JERRY E. SMITH, Circuit Judge: had earned stock options as part of his
compensation while working at Allwaste.
Relying partly on the advice of Morgan
Stanley, later Morgan Stanley Dean Witter & After the merger, Philip announced that it
Co. (“Morgan Stanley”), the board of directors had filed inaccurate financial statements for
several years. Upon the announcement, the Morgan Stanley, however, “express[ed] no
stock of the now-merged Philip dropped sig- opinion or recommendation as to how the
nificantly, damaging the value of the employ- holders of Allwaste Common Stock should
ees’ post-merger options. The option holders vote at the stockholders’ meeting held in con-
responded by suing Morgan Stanley, claiming nection with the Merger.” The fairness
contract breach, misrepresentation, fraud, and opinion stated that Morgan Stanley had
other causes of action. “assumed and relied upon without independent
verification the accuracy and completeness of
The district court dismissed for failure to the information supplied or otherwise made
state a claim. Because we agree that the op- available to us by [Allwaste] and Philip for the
tion holders cannot, under the facts they have purposes of this opinion” and that it was
pleaded, enunciate any cause of action, we written “for the information of the Board of
affirm. Directors of the Company only and may not be
used for any other purpose without [Morgan
I. Stanley’s] prior consent,” except for filings
By agreement dated February 12, 1997 (the with the Securities and Exchange Commission.
“Agreement”), Allwaste engaged Morgan
Stanley to evaluate the possible sale of All- The opinion was signed by Ian C.T. Pereira,
waste. Morgan Stanley would provide advice, the Morgan Stanley principal with primary re-
including a financial opinion letter if requested, sponsibility for the Allwaste engagement. Ac-
to the Allwaste board of directors (the cording to the complaint, Pereira made oral
“Board”). The Agreement provided that representations to the Board reiterating the
Morgan Stanley had “dut ies solely to All- conclusions of the fairness opinion and told
waste” and that any advice or opinions certain members of the Board that Morgan
provided by Morgan Stanley could not be Stanley had investigated the management of
disclosed or referred to publicly without Philip and determined that it was “clean.” On
Morgan Stanley’s consent. June 30, 1997, Morgan Stanley issued an
additional opinion reaching the same
Pursuant to the Agreement, Morgan conclusions.
Stanley analyzed a proposed merger between
Allwaste and Philip, whereby Allwaste and The shareholders approved the merger.
Philip would be merged into a new company Each share of Allwaste was converted to
to be owned by Philip, and each share of All- 0.611 shares of Philip stock, and each option
waste common stock would be converted into to purchase a share of Allwaste stock was con-
0.611 shares of Philip common stock. On verted to an option to purchase 0.611 shares
March 5, 1997, Morgan Stanley provided the of Philips stock.
Board with a written fairness opinion stating
that, based on the information it had reviewed, In early 1998, Philip disclosed that it had
Morgan Stanley believed that the number of filed inaccurate financial statements for several
shares of Philip stock to be received for each years. This revelation led to a sharp decrease
share of Allwaste stock was “fair from a in the price of Philip common stock. The
financial point of view to the holders of complaint alleged that Morgan Stanley and
Allwaste Common Stock.” Pereira had failed to conduct adequate

2
investigation of Philip or to inform the Board quotation marks and ellipses omitted).
of the problems that ultimately led to the
decline in Philip’s stock price and the value of In considering a motion to dismiss for fail-
plaintiffs’ options. ure to state a claim, a district court must limit
itself to the contents of the pleadings,
II. including attachments thereto. FED. R. CIV. P.
A motion to dismiss under rule 12(b)(6) 12(b)(6). Here, the court included, in its re-
“is viewed with disfavor and is rarely view, documents attached not to the pleadings,
granted.” Kaiser Aluminum & Chem. but to the motion to dismiss. Plaintiffs did not
Sales v. Avondale Shipyards, 677 F.2d object in the district court to this inclusion and
1045, 1050 (5th Cir. 1982). The do not question it on appeal.
complaint must be liberally construed in
favor of the plaintiff, and all facts plead- We note approvingly, however, that various
ed in the complaint must be taken as other circuits have specifically allowed that
true. Campbell v. Wells Fargo Bank, “[d]ocuments that a defendant attaches to a
781 F.2d 440, 442 (5th Cir. 1986). The motion to dismiss are considered part of the
district court may not dismiss a pleadings if they are referred to in the
complaint under rule 12(b)(6) “unless it plaintiff’s complaint and are central to her
appears beyond doubt that the plaintiff claim.” Venture Assocs. Corp. v. Zenith Data
can prove no set of facts in support of Sys. Corp., 987 F.2d 429, 431 (7th Cir.
his claim which would entitle him to 1993).1 In so attaching, the defendant merely
relief.” Conley v. Gibson, 355 U.S. 41, assists the plaintiff in establishing the basis of
45-46 (1957). This strict standard of the suit, and the court in making the
review under rule 12(b)(6) has been elementary determination of whether a claim
summarized as follows: “The question has been stated.
therefore is whether in the light most
favorable to the plaintiff and with every III.
doubt resolved in his behalf, the Both sides agree that New York law
complaint states any valid claim for controls construction of the Agreement. The
relief.” 5 CHARLES A. WRIGHT & law of New York specifies that only those in
ARTHUR R. MILLER, FEDERAL PRACTICE privity of contract or who enjoy an intended
AND PROCEDURE § 1357, at 601 (1969). and immediate third-party beneficiary
relationship to a contract may sue thereon2 and
Lowrey v. Texas A&M Univ. Sys., 117 F.3d
242, 247 (5th Cir. 1997) (some citation 1
information omitted). “In order to avoid See also Branch v. Tunnell, 14 F.3d 449,
dismissal for failure to state a claim, however, 453-54 (9th Cir. 1994); Field v. Trump, 850 F.2d
938, 949 (2d Cir. 1988); Sheppard v. Texas Dep’t
a plaintiff must plead specific facts, not mere
of Transp., 158 F.R.D. 592, 595 (E.D. Tex. 1994).
conclusory allegations. We will thus not
accept as true conclusory allegations or 2
See Strauss v. Belle Realty Co., 469 N.Y.S.2d
unwarranted deductions of fact.” Tuchman v. 948, 950 (N.Y. App. Div. 1983) (distinguishing
DSC Communications Corp., 14 F.3d 1061, between intended-and-immediate third-party
1067 (5th Cir. 1994) (internal citations, beneficiaries, who may sue on a contract, and
(continued...)

3
that “[w]here a provision in [a] contract Board is the only entity that enjoyed the right
expressly negates enforcement by third-parties, to sue on the Agreement; the option-holder
that provision is controlling.”3 Where a clause plaintiffs are precluded from doing so.
provides that the contracted-for services will
run directly to and for the benefit of the other The option holders respond by pointing to
contracting party, any relevant third parties Glanzer v. Shepard, 135 N.E. 275 (N.Y.
will be considered incidental rather than 1922), and Ultramares Corp. v. Touche, 174
intended and immediate.4 N.E. 441 (N.Y. 1931), and their progeny. In
the former, the court held that a produce
As the district court recounted, both the weigher was liable to the purchaser of the pro-
Agreement and the fairness opinion specified duce mis-weighed, though the seller contract-
that the efforts were undertaken at the behest ed with the weigher to act. See Glazner, 135
of and for the benefit of the Board alone. The N.E. at 275. In moving beyond the rules of
fairness opinion, meanwhile, expressly negated complete privity of contract, the court
not only enforcement by but reception to third recognized that it was going beyond the
parties. Under New York law, then, the explicit confines of contract law.

We think the law imposes a duty toward
2
(...continued) buyer as well as seller in the situation
incidental beneficiaries, who may not); Cappello v. here disclosed. . . . We do not need to
Union Carbide & Carbon Corp., 103 N.Y.S.2d state the duty in terms of contract or of
157, 161-62 (N.Y. Sup. Ct. 1951) (recognizing privity. Growing out of a contract, it
suit on a contract deriving from a third-party ben- has none the less an origin not
eficiary theory as an exception to the general rule exclusively contractual. Given the
that only those in privity may sue on a contract).
contract and the relation, the duty is
“An incidental beneficiary is a third party who may
imposed by law. There is nothing new
derive benefit from the performance of a contract
though he is neither the promisee nor the one to here in principle. . . . It is ancient
whom performance is to be rendered.” Strauss, learning that one who assumes to act,
469 N.Y.S.2d at 950. Such incidental beneficiaries even though gratuitously, may thereby
may not sue on the contract. Id. become subject to the duty of acting
carefully, if he acts at all. The most
3
Edward B. Fitzpatrick, Jr. Const. Corp. v. common examples of such a duty are
County of Suffolk, 525 N.Y.S.2d 863, 866 (N.Y. cases where action is directed toward
App. Div. 1988). the person of another or his property. A
4
like principle applies, however, where
Id. See also Fourth Ocean Putnam Corp. v. action is directed toward the governance
Interstate Wrecking Co., Inc., 485 N.E.2d 208,
of conduct. The controlling
211-12 (N.Y. 1985) (setting out circumstances in
which New York law finds intended third-party
circumstance is not the character of the
beneficiaries); Paradiso v. Apex Investigators & consequence, but its proximity or
Sec. Co., 458 N.Y.S.2d 234, 235 (N.Y. App. Div. remoteness in the thought and purpose
1983) (holding that “it must clearly appear from of the actor. . . . Constantly the bounds
the provisions of the contract that the parties of duty are enlarged by knowledge of a
thereto intended to confer a direct benefit on the prospective use.
alleged third-party beneficiary”).

4
Glanzer, id. at 275-76 (emphases added). (1) Morgan Stanley employees
made representations about the integrity
The new beast that the Glazner court ex- and value of Philip and the propriety of
plicated was one of tort, not contract. Glaz- merger to board members who
ner does nothing to enlarge the scope of the happened to be option holders;
power of third-party beneficiaries to sue in
contract. Ultramares, the first words of which (2) Morgan Stanley was aware that
explain that “[t]he action is in tort for damages the Allwaste board members would con-
suffered through the misrepresentations of ac- sider the good of the option holders
countants,” manifestly cannot do that work ei- when determining whether to merge;
ther. See Ultramares, 174 N.E. at 442.
(3) Morgan Stanley was aware that
Meanwhile, even if Glazner were the Allwaste board did not intend to
understood to explicate a cause of action keep the fairness opinion to itself
sounding in contract rather than tort,5 it would (despite a specific provision to the
not so enlarge the grounds for suit as to contrary);
include the option-holder plaintiffs. Unlike the
produce weigher in Glazner, Morgan Stanley (4) Morgan Stanley showed the
protected itself with explicit language opinion to board members who were
describing the class of beneficiaries of its also option holders (though the option
efforts: the Board, solely. As noted above, holders do not specifically allege that the
such contractual limitations are honored by the opinion was shown to any option
law of New York. holders who were not board members,
nor that it rightfully could have been);
The district court, therefore, rightly and
concluded that the option-holder plaintiffs may
not sue on the Agreement in contract as third- (5) Option holders, who played as
party beneficiaries. To support a claim of con- option holders no role in merger talks or
tract breach (or the related breach-of-warranty the agreement thereto, somehow relied
claim), then, the plaintiffs must have pleaded on Morgan Stanley’s representations.
the existence of a valid oral contract. Instead,
however, they pleaded, inter alia, that These pleadings do not amount to any but
the most conclusional claim that an oral
contract existed between Morgan Stanley and
5
the option holders. There is no suggestion of
See Glazner, 135 N.E. at 277, wherein the a meeting of the minds between option holders
court delphically mused that
as such and Morgan Stanley and no assertion
[w]e state the defendant’s obligation, there-
of consideration. Because the option holders
fore, in terms, not of contract merely, but of are not, as a matter of law, third-party
duty. Other forms of statement are possible. beneficiaries of the Agreement and
They involve, at most, a change of meaningfully pleaded no oral contract running
emphasis. . . . If we fix our gaze upon that between Morgan Stanley and themselves, they
aspect, we shall stress the element of cannot state any claim sounding in contract.
contract . . . .

5
 IV.
The district court applied Texas law to the
7
remainder of the claims; neither party (...continued)
challenges this choice-of-law decision. The (1) One who, in the course of his
option holders alleged a variety of tortious business, profession or employment, or in
claims: professional misrepresentation, any other transaction in which he has a
negligent misrepresentation, fraud and, pecuniary interest, supplies false
generally, “recklessness” and “gross negli- information for the guidance of others in
their business transactions, is subject to
gence.”6 Whatever the characterization,
liability for pecuniary loss caused to them
however, each of these torts shares one
by their justifiable reliance upon the
necessary element that the option holders, information, if he fails to exercise
under the facts they pleaded, cannot reasonable care or competence in obtaining
demonstrate: that they relied on Morgan or communicating the information.
Stanley’s alleged misrepresentations.7
(2) Except as stated in Subsection (3),
the liability stated in Subsection (1) is
6 limited to loss suffered
Findings of recklessness or gross negligence
would allow exemplary, rather than merely
compensatory, damages were the underlying tort (a) by the person or one of a limited
of misrepresentation found. For reasons we ad- group of persons for whose benefit and
dress, it cannot be. See, e.g., Cook Consultants, guidance he intends to supply the
Inc. v. Larson, 700 S.W.2d 231, 239 (Tex. information or knows that the recipient
App.SSDallas 1985, writ ref’d n.r.e.). intends to supply it; and

The option holders also charged Morgan (b) through reliance upon it in a
Stanley with breach of fiduciary duty. They made, transaction that he intends the information to
however, nothing but the most conclusional influence or knows that the recipient so
averments that Morgan Stanley owed them a intends or in a substantially similar
fiduciary duty. Moreover, they make no effort on transaction.
appeal to defend, rather than merely reassert, their
position that a fiduciary relationship existed. They Scottish Heritable Trust, PLC v. Peat Marwick
cannot, therefore, be understood meaningfully to Main & Co., 81 F.3d 606, 611-12 (5th Cir. 1996)
have appealed the dismissal of this cause of action. (emphases added). Fraud, meanwhile, requires that
If they had properly done so, the cause of action the plaintiff allege
would have failed for the same reason as do the
other tort claims. (1) that a material representation was made;
(2) that it was false; (3) that the speaker
7
In Texas, accountant liability for knew it was false when made or that the
misrepresentation follows the Restatement speaker made it recklessly without any
(Second) of Torts, “which provides in the relevant knowledge of the truth and as a positive
part: assertion; (4) that he made it with the
intention that it be acted upon by the other
§ 552. Information Negligently Supplied party; (5) that the party acted in reliance
for the Guidance of Others upon it; and (6) damage.

(continued...) (continued...)

6
 “justifiable reliance comprises two elements:
8
Reliance requires action. One relies as a (1) the plaintiff must in fact rely on the
predicate to doing something. The option information; and (2) the reliance must be
holders, however, played no role in effecting reasonable.” Scottish Heritable Trust, 81 F.3d
the merger. They neither authorized it, as did at 615. In Scottish Heritable Trust, the
the Board, nor ratified it, as did the plaintiffs actually relied on the representations
shareholders. of the defendant-accountants by buying a
controlling interest in the company that the
The option holders do not aver that they defendant-accountants had audited. See id. at
relied; rather, they claim that Nelson relied on 608.
Morgan Stanley’s representations in casting his
vote in favor of merger and that, but for the In Cook Consultants, Inc. v. Larson, 700
misrepresentations, he would have demanded S.W. 2d 231, 233 (Tex. App.SSDallas 1985,
a more rigorous accounting or would have op- writ ref’d n.r.e.), a surveyor surveyed a home
posed the merger. This may be so, but for a homebuilder, and erred. The property
because Nelson cast his vote as a Board was sold to Larson, whose home loan was
member rather than an option holder, he predicated in part on the guarantees of proper
likewise relied only in his capacity as a Board title contained within the property record. Id.
member, because he took no action, as an She eventually prevailed against the surveyor,
option holder, that would have occasioned because without the misrepresentations includ-
reliance.9 ed within his survey, she would not have pur-
chased the house, because she would not have
It is this lack of reliance by the option hold- been able to secure a home loan. See id. at
ers that distinguishes this case from others cit- 237. In other words, though proximate cause
ed by the plaintiffs. As we have explained, was slightly attenuated, Larson relied on the
survey in deciding to buy.

7
(...continued) Finally, in Blue Bell, Inc. v. Peat, Marwick,
T.O. Stanley Boot Co. v. Bank of El Paso, 847 Mitchell & Co., 715 S.W.2d 408, 410 (Tex.
S.W.2d 218, 222 (Tex. 1992) (emphasis added). App.SSDallas 1986, writ ref’d n.r.e.), the
plaintiffs relied on the accountant’s
8
See, e.g., Rumfield v. Rumfield, 324 S.W.2d representations of a trade partner’s financial
304, 306 (Tex. Civ. App.SSAmarillo 1959, writ fitness in deciding to issue a line of credit.
ref’d n.r.e.), wherein, in the context of fraud, the But for the representations, plaintiffs would
court explained that “[n]ot only is materiality an not have made the credit available and would
essential element of the deceitful representation, not have lost it when its trade partner failed to
but the defrauded party must have been induced to repay. See id. at 413.
act by reason of his reliance upon the verity of the
statement” (emphasis added).
The option holders’ tort claims fail because
9
Consistent until the end, the option-holder they cannot aver the first element of justifiable
plaintiffs never were able to distinguish between reliance: They did not rely on Morgan
Nelson's and other Board members’ actions as Stanley’s alleged misrepresentations to do
members of the Board and their actions as option anything, because they were not authorized to
holders.

7
act. It does not matter, therefore, that they Accordingly, we direct the judge in this
managed to plead that Morgan Stanley in fact case, and others in this circuit, to entertain
knew that they, as option holders, would be post-judgment motions as contemplated by the
informed of the fairness letter or even that rules. Moreover, the district courts must care-
Morgan Stanley intended them to be so fully consider each such motion on its merits,
informed. Nothing about Morgan Stanley’s without begrudging any party who wishes to
motivations can change the fact that the option avail himself of the opportunity to present such
holders played no role in the merger motions in accordance with the rules of
proceedings. procedure and with the standards of
professional conduct.
V.
Having addressed the issues raised on ap- AFFIRMED.
peal, we now fulfill our supervisory role over
the district courts10 by turning to an
inappropriate instruction contained in the
district court’s opinion. At the end of the
order granting the motion to dismiss, the court
forbade the parties

to file [anything] further regarding the
issues addressed in this Order, including
motions to reconsider and the like,
unless supported by compelling new
evidence not available at the time of the
instant submissions. Instead, plaintiffs
are instructed to seek any further relief
to which they may feel they are entitled,
on any matter herein addressed, from
the United States Court of Appeals for
the Fifth Circuit, as may be appropriate
in due course.

We notice that the district judge in this mat-
ter, like some other district judges in this cir-
cuit, has the custom of usually, or even always,
prohibiting litigants from filing motions for re-
consideration or relief, such as those
contemplated by FED. R. CIV. P. 59 and 60.
No judge has that authority.

10
See, e.g., Bryan v. United States, 492 F.2d
775, 780 (5th Cir. 1974) (en banc).

8
 RHESA HAWKINS BARKSDALE, Circuit
Judge, dissenting in part:

I concur in part V. of the opinion,

concerning our supervisory role.

And, I concur in the discussion in part II.

about the district court’s reviewing documents

referenced in, but not attached to, the

complaint, because that discussion is helpful

dictum. Plaintiffs neither objected in district

court to, nor challenged on appeal, the district

court’s engaging in such review; therefore,

the point is not before us, except to note, as

the opinion properly does, the procedure that

was followed.

But, because I cannot agree plaintiffs can

prove no set of facts entitling them to

recovery, I must respectfully dissent from the

action’s dismissal being affirmed.

Rule 12(b)(6) is an exacting standard

indeed. As the majority recites: “The district

court may not dismiss a complaint under rule

12(b)(6) ‘unless it appears beyond doubt that

9
the plaintiff can prove no set of facts in emphasis added). But, the controlling

support of his claim which would entitle him to conclusion that plaintiffs cannot state a claim,

relief’”. Lowrey v. Texas A & M Univ. Sys., because “they were not authorized to act”,

117 F.3d 242, 247 (5th Cir. 1997) (quoting ignores the well-pleaded facts in the

Conley v. Gibson, 355 U.S. 41, 45-46 (1957)) complaint. Those allegations — at least for

(emphasis added). purposes of avoiding Rule 12(b)(6) dismissal

The majority’s introductory statement, that — reflect exceptions to the usual limiting rules

“the option holders cannot, under the facts of liability concerning contracts and corporate

they have pleaded, enunciate any cause of actions.

action” (emphasis added), is an erroneous For example, the majority disregards the

statement of the above-discussed procedure to quite unique importance of stock options at

be followed in ruling on the failure-to-state- Allwaste. As described in the complaint,

claim motion. Moreover, this erroneous plaintiff Nelson, Allwaste’s founder, chairman,

statement sets the tone for the opinion. In and holder of a significant number of options,

fact, it is characteristic of the tenor of the made the employee stock option incentive plan

majority’s conclusions. the bedrock of the corporation.

Dismissal at this stage of the proceedings is The majority also fails to note that Morgan

premature. The majority notes correctly that Stanley issued the second fairness opinion only

“[t]he complaint must be liberally construed in upon Nelson’s insistence that it conduct a

favor of the plaintiff[s], and all facts pleaded more thorough review of Philip’s management.

in the complaint must be taken as true”. It was in reliance on Morgan Stanley’s

Lowrey, 117 F.3d at 247 (citation omitted; representation it had conducted such

10
investigation that Nelson and the other information in the fairness opinion to the

directors/option holders recommended the option holders.

merger with Philip. In other words, because of The majority has prejudged the merits of

Morgan Stanley’s misrepresentation, board this action. In the light of the complaint’s

members/option holders voted for the merger, specific and unique allegations, I respectfully

and encouraged shareholders to do the same. dissent.

Further, the complaint states:

The fairness opinion, although
requested by the Allwaste
board, was rendered wholly or
in part for the benefit of
Allwaste’s shareholders and
option holders. Moreover,
Morgan Stanley was aware
that the Allwaste board did not
intend to keep the fairness
opinion to itself and, indeed,
the opinion was shown to
plaintiff Nelson and other
shareholders and option
holders and Morgan Stanley
knew and intended that it be so
used.

(Emphasis added.) This allegation comports

with the claim under § 552 of the Restatement

(Second) of Torts because, at this point, we

must accept as true that Morgan Stanley

“kn[ew] [the board] intende[ed] to supply” the

11