Collins v. Morgan Stanley Dean Witter

5, 1997, March stock. On Philip common JOLLY, Before SMITH the Board with Stanley provided Morgan BARKSDALE, Judges. Circuit that, stating based opinion written fairness reviewed, Mor- it had SMITH, information Judge: on the E. Circuit JERRY number of that the gan believed Morgan on the advice Relying partly to be received Philip stock shares' of Stanley Dean Wit- Morgan Stanley, later “fair Allwaste stock was share of each the board of (“Morgan Stanley”), &ter Co. hold- of view to the point financial from a Allwaste, and stockholders directors Stock.” Allwaste Common ers of (“Allwaste”), merge voted to Inc. however, “express[ed] Stanley, (“Philip”). Morgan Corporation Philip Services to how recommendation or had earned stock Each of Aluminum, granted.” the holders of Allwaste Common Stock Kaiser & Chem. meeting Shipyards, Sales v. Avondale should vote at the stockholders’ (5th Cir.1982). 1045, 1050 com Merger.” with the held connection plaint liberally construed in fa stated that Stan- plaintiff, pleaded vor of the and all facts upon ley had “assumed and relied complaint the must be taken as true. accuracy and independent verification Bank, Fargo Campbell v. Wells 781 F.2d completeness supplied of the information (5th Cir.1986). 440, 442 The district by to us [All- or otherwise made available may complaint court not dismiss a under Philip purposes and for the of this waste] 12(b)(6) beyond rule “unless it appears that it was written “for the opinion” and plaintiff prove doubt that the can no set information of the Board of Directors of of his claim which support Company only not be used for him Conley would entitle to relief.” v. [Morgan purpose Stan- Gibson, 41, 45-46, 99, 355 78 2 U.S. S.Ct. consent,” ley’s] prior except filings with (1957). L.Ed.2d 80 This strict standard Exchange the Securities and Commission. 12(b)(6) of review under rule has been signed by The Ian Per- C.T. question summarized as follows: “The eira, Morgan Stanley principal therefore is whether in light most primary responsibility for the Allwaste en- every plaintiff favorable to the and with gagement. According complaint, to the behalf, doubt resolved his the com representations Pereira made oral to the plaint any valid claim for relief.” states reiterating Board the conclusions of the 5 CHARLES A. WRIGHT & ARTHUR R. MlL- and told certain members ler, Federal Practioe and Procedure Morgan Stanley of the Board that had (1969). 1357, § at 601 investigated management Philip Lowrey Sys., v. Texas A&M 117 Univ. determined that it was “clean.” On June (5th Cir.1997) (some 242, F.3d 247 citation 30, 1997, Morgan Stanley issued an addi- omitted). information “In order to avoid opinion reaching tional the same conclu- claim, dismissal for failure to a state how- sions. ever, facts, plaintiff plead specific approved merger. shareholders conclusory allegations. not mere willWe Each share of Allwaste was to converted conclusory accept allega- thus not as true stock, Philip 0.611 op- shares and each tions or unwarranted deductions of fact.” purchase tion to a share of Allwaste stock Tuchman v. Corp., DSC Communications to purchase was converted an (5th Cir.1994) (internal 1061, 1067 0.611 shares of stock. Philips citations, quotation ellipses marks and 1998, omitted). early Philip In disclosed that had filed inaccurate financial statements considering a motion to dismiss years. for several This revelation led to a claim, failure to state a district court sharp price Philip decrease com- must limit itself to the contents of the mon stock. complaint alleged that pleadings, including attachments thereto. Morgan Stanley and Pereira had failed to 12(b)(6). Here, in Fed.R.Civ.P. the court adequate investigation conduct of Philip or cluded, review, in its documents attached

to inform of the problems the Board pleadings, not to the to the motion to but ultimately in Philip’s led decline object dismiss. Plaintiffs did not in price plaintiffs’ op- stock and the value of district this inclusion and do not tions. question appeal. it on however, approvingly, note that vari- We

II. ous other have specifically circuits allowed 12(b)(6) A motion to under rule at- “[documents dismiss defendant rarely “is viewed with disfavor and is taches a motion are to dismiss consid-

499 by reception par- to third if are forcement pleadings part of ered law, then, York plaintiffs complaint ties. Under New referred claim.” Venture Assocs. only entity enjoyed central to her are Board is Sys. Corp., 987 F.2d Zenith Data Corp. v. right Agreement; option- to sue on the Cir.1993).1 attaching, In so 431 precluded doing are holder merely assists the the defendant so. suit, and establishing the basis by respond pointing elementary deter- making the court in Shepard, v. 233 N.Y. 135 to Glanzer stat- whether a claim has been mination of (1922), Corp. N.E. 275 and Ultramares ed. Touche, (1931), N.Y. N.E. former, progeny. their In the III. produce weigher that a court held agree that New York Both sides purchaser produce of the mis- liable Agree construction of law controls though the seller contracted weighed, specifies York ment. The law of New Glanzer, act. 135 N.E. weigher to See or who privity of contract only those moving beyond at 275. the rules of immediate third- enjoy an intended and contract, privity of the court rec- complete a contract beneficiary relationship to party beyond ognized going that it was the ex- “[wjhere and that a may sue thereon2 confines of contract law. plicit negates expressly contract provision [a] provi by third-parties, enforcement imposes duty think a toward We the law controlling.”3 pro Where a clause sion is in the situation buyer as well as seller will that the contracted-for services vides disclosed.... We do not need to here of the directly to and for the benefit run duty in terms of contract or of state contracting party, any relevant third contract, Growing out a privity. of rather will considered incidental parties origin the less an not exclu- has none than intended and immediate.4 sively contractual. Given contract relation, imposed by duty is recounted, As the district nothing prin- There is new here law. opin and the fairness Agreement both the learning that .... It is ancient one ciple under specified ion that the efforts were act, though gratu- even who assumes of and for the benefit taken at the behest thereby subject to itously, may opinion, become of the Board alone. duty carefully, if he acts at meanwhile, only acting en- of negated not expressly Strauss, Tunnell, 449, 469 is to be rendered.” v. formance 1. See also Branch 1994); Trump, 850 Such incidental beneficia- Cir. Field v. N.Y.S.2d at 950. 453-54 Cir.1988); 938, (2d Sheppard v. Tex may F.2d 949 the contract. Id. ries not sue on 592, Dep’t Transp., 595 158 F.R.D. (E.D.Tex.1994). Corp. Fitzpatrick, Const. Jr. 3. Edward B. 446, Suffolk, 525 County 138 A.D.2d Co., Realty 98 A.D.2d 2. See Strauss v. Belle 863, (N.Y.App.Div.1988). N.Y.S.2d 866 948, 424, (N.Y.App.Div. 950 469 N.Y.S.2d 1983) (distinguishing between intended-and- Corp. v. See also Fourth Ocean Putnam Id. beneficiaries, may third-party who immediate 38, Co., Inc., Wrecking 66 N.Y.2d Interstate contract, incidental beneficia on a sue ries, 1, 208, 211-12 N.Y.S.2d 485 N.E.2d not); Cappello may v. Union Carbide who (1985) (setting which circumstances in out 924, Corp., 103 N.Y.S.2d 200 Misc. & Carbon third-party ben- York law finds intended New (N.Y.Sup.Ct.1951) (recognizing 161-62 eficiaries); Investigators Apex & Paradiso v. third-party deriving a a contract suit on Co., 458 N.Y.S.2d Sec. 91 A.D.2d theory exception gen beneficiary as an (holding (N.Y.App.Div.1983) that "it must may only privity sue on rule that those in eral provisions of the con- clearly appear from the contract). beneficiary a incidental is a “An parties to con- thereto intended tract that from the party who derive benefit third alleged third-party a direct benefit on though nei fer performance contract he is of a beneficiary”). per- promisee the one to whom ther the nor examples of Philip propriety all. The most common value of and the duty are cases where action is directed merger hap- board members who person holders; of another or toward his pened option to be principle applies, A like how- property. (2) Morgan Stanley was aware that ever, where action is directed toward the the Allwaste board members con- would controlling governance of conduct. good option sider the holders circumstance is not the character of the determining merge; when whether to consequence, proximity or re- its (3) Morgan Stanley was aware thought purpose in the moteness the Allwaste board did not intend to Constantly the actor.... the bounds of (de- keep the fairness to itself duty enlarged by are knowledge of spite provision specific to the con- prospective use. trary); Glanzer, added). (emphases id. 275-76 (4) Morgan Stanley opin- showed the The new beast that the Glanzer court ion to board members who were also tort, was one of not explicated contract. (though holders hold- nothing enlarge scope Glanzer does specifically allege ers do not power third-party beneficiaries to any option was shown to Ultramares, sue in contract. the first members, who were not board nor that explain words of which that action is “[t]he been); rightfully could have and damages in tort through suffered the (5) holders, Option played op- who as accountants,” misrepresentations of mani- tion no role in merger holders talks or festly cannot do that work either. See thereto, agreement the somehow relied Ultramares, 174 N.E. at 442. Morgan Stanley’s representations. on Meanwhile, if even Glanzer were under- pleadings any These do not amount to explicate a stood to cause of action sound- but the most conclusional claim that an tort,5 ing contract rather than it would oral contract existed Morgan between enlarge grounds not so for suit as to Stanley option and the holders. There is option-holder include plaintiffs. Un- suggestion meeting no of a of the minds Glanzer, produce weigher like the Mor- option between holders as such and Mor- gan Stanley protected explicit itself with gan Stanley and no assertion of consider- language describing the of class beneficia- not, option ation. Because the holders are Board, solely. ries of its efforts: As law, as a third-party matter of beneficia- above, noted contractual limitations ries of the Agreement meaningfully and by are honored the law of New York. pleaded no oral running contract between court, therefore, rightly The district con- themselves, Morgan Stanley they and can- option-holder cluded that not state claim sounding in contract. may Agreement not sue on the in contract third-party support as beneficiaries. To IV. (or claim of contract the related breach then, claim), breach-of-warranty plain- applied The district court Texas pleaded tiffs must have the existence of a claims; law to the remainder of the nei Instead, however, valid oral contract. party ther challenges this choice-of-law alia, they pleaded, inter that option decision. The holders alleged a va (1)Morgan Stanley employees riety professional made tortious claims: mis representations integrity representation, about the negligent misrepresenta- Glanzer, involve, most, 5. They See N.E. at change wherein the ble. delphically mused that emphasis.... gaze upon If we fix our that obligation, aspect, state the defendant's [w]e there- we shall stress the element of con- fore, terms, merely, not of contract but of tract. ... duty. possi- Other forms statement are Stanley’s representations Morgan lied on and, “recklessness” tion, generally, fraud merger in favor casting his vote negligence.”6 Whatever “gross that, misrepresentations, he for the however, characterization, of these each rigorous ac- a more have demanded would necessary element one shares torts merg- opposed have counting or would holders, they under option so, but because Nelson er. This they cannot demonstrate: pleaded, member rather vote as a Board cast his mis- Stanley’s alleged Morgan relied on holder, likewise relied he option than an representations.7 member, a Board only capacity in his as action.8 One requires Reliance action, option an he took no because something. doing predicate as a relies holder, reb- have occasioned that would however, holders, played option anee.9 They neither merger. effecting role by reliance It is this lack of Board, it, nor ratified as did the authorized this case distinguishes holders that it, the shareholders. as did As we have by plaintiffs. cited others comprises they “justifiable reliance explained, not aver that do (1) in fact Nelson re- two elements: relied; rather, claim (a) a limited by person or one of negligence gross Findings or of recklessness persons whose benefit and group of merely exemplary, than rather allow would supply the informa- guidance he intends underlying damages were the compensatory, recipient intends to tion or knows reasons For misrepresentation tort found. it; supply See, address, e.g., Cook Con- it cannot be. we (b) upon through it in a trans- reliance Larson, sultants, 700 S.W.2d Inc. v. the information that he action intends n.r.e.). writ ref'd (Tex.App.—Dallas recipient so in- or influence knows that charged option holders also substantially similar transac- or tends They fiduciary duty. breach of tion. however, made, nothing most conclu- but the Trust, PLC v. Peat Marwick Scottish Heritable Stanley owed that averments sional 606, Co., Cir. 611-12 & Main Moreover, they duty. make fiduciary a Fraud, meanwhile, them added). 1996) (emphases defend, than appeal rather on no effort allege requires that the reassert, fiduciary a merely position their that (1) representation was a material that therefore, cannot, They false; relationship (3) made; existed. (2) that it was appealed meaningfully to have understood be when made or false speaker knew was they If of action. recklessly of this cause the dismissal speaker made it that the so, positive of action the cause a properly knowledge done truth and as any had assertion; (4) do reason as it with the in- for the same made would have failed that he by upon the other it be claims. tention that acted the other tort (5) party acted in reliance party; Texas, misrepre- liability it; (6) damage. for upon accountant 7. In Paso, (Second) of 847 Bank El follows the Restatement Co. sentation T.O. Boot v. of 218, (Tex.1992) Torts, part: (emphasis add- provides in the relevant 222 which S.W.2d ed). Negligently Supplied § 552. Information for the Guidance Others See, Rumfield, 324 S.W.2d e.g., 8. v. Rumfield who, (1) of his busi- 1959, in course One 304, writ (Tex.Civ.App. 306 n.r.e.), —Amarillo ness, any employment, or in profession fraud, or wherein, in the context ref’d pecuni- which he has a transaction in other only materi- is explained "[n]ot the court interest, supplies ary rep- false information deceitful ality resentation, an essential element business guidance in their party others the transactions, the defrauded pecu- liability for subject to by is his reason of act have been induced to justifiable by niary caused to them their verity loss the statement” upon reliance added). if he fails upon information, (emphasis reliance competence in care or exercise reasonable end, option-holder communicating until the the informa- 9. Consistent obtaining or distinguish be- able to were plaintiffs never tion. (3), Board members’ (2) tween Nelson’s other Except in Subsection as stated and their (1) the Board members actions as is limited liability stated Subsection as holders. actions loss suffered 502 (2) information;

rely played on the the reli- merger pro- role ance must be reasonable.” Scottish Heri- ceedings. Trust,

table 81 F.3d at 615. In Scottish Trust, plaintiffs actually Heritable re- V. representations lied on the of the defen- Having addressed the issues raised on by buying controlling dant-accountants a appeal, we now fulfill our supervisory role company interest in the the defen- over the by turning district courts10 to an had audited. See at dant-accountants id. inappropriate instruction contained 608. district court’s opinion. At the end of the Consultants, Larson, In Inc. v. Cook 700 dismiss, order granting the motion to 1985, (Tex.App. S.W.2d —Dallas parties court forbade the n.r.e.), surveyor surveyed writ refd [anything] to file further regarding the homebuilder, home for a and erred. The Order, issues addressed this including Larson, property was sold to whose home like, motions to reconsider and the un- loan predicated part guaran- was on the by supported compelling less evi- new proper tees of title contained within the dence not available at the time of the property eventually pre- record. Id. She Instead, plaintiffs instant submissions. against surveyor, vailed because with- any are instructed to seek further relief misrepresentations out the included within entitled, they may to which feel are survey, purchased his she would not have addressed, on matter herein house, because she would not have the United States Appeals Court of been able loan. to secure home See id. Circuit, Fifth appropriate words, though proximate 237. in due course. attenuated, cause slightly Larson re- survey lied on the in deciding buy. We notice that the judge district Bell, Peat, Finally, in Blue Inc. Mar matter, this like some judges other district wick, Co., Mitchell & 715 S.W.2d circuit, in this has the usually, custom of or n.r.e.), (Tex.App. writ refd always, even prohibiting litigants from fil — Dallas relied on the accountant’s relief, ing motions for reconsideration or representations partner’s of a trade finan contemplated by as those Fed. cial fitness in deciding to issue a line judge of R.CrvP. No has that representations, credit. But for plain authority. tiffs would not have made the credit avail Accordingly, we direct in judge the this able and would not have lost it when its case, circuit, and in others this to entertain partner repay. trade failed to id. at See post-judgment contemplated by motions as 413. Moreover, the rules. the district courts option The holders’ tort claims fail be- carefully must consider each such motion they cause cannot aver the first element of merits, on its begrudging any par- justifiable They rely reliance: did not on ty who wishes to avail op- himself of the Morgan Stanley’s alleged misrepresenta- portunity present to such motions in accor- anything, they tions to do because were procedure dance with the rules and with matter, not authorized to act. It does not professional the standards of conduct. therefore, they managed plead to AFFIRMED. Morgan Stanley they, in fact knew holders, option would be informed of the BARKSDALE, RHESA HAWKINS Morgan letter or even that Stan- Judge, Circuit dissenting part: ley intended them to be so informed. Nothing Stanley’s part I Morgan opinion, about motiva- concur V. of the con- can change tions fact that option cerning supervisory the the our role. See, States, (5th Cir.1974) (en banc). e.g., Bryan v. United 492 F.2d corpo- concerning and liability contracts part

And, in the discussion I concur rate actions. doc- reviewing court’s the district about II. to, in, not attached referenced uments majority disregards the example, For is that discussion because complaint, the op- importance of stock quite unique objected neither Plaintiffs dictum. helpful As at Allwaste. described tions n ap- to, challenged on nor court in district Nelson, Allwaste’s complaint, in such engaging district court’s peal, the founder, chairman, signifi- of a holder therefore, is not before review; point employ- made the options, cant number note, opinion properly us, as the except to plan incentive the bedrock ee stock that was followed. does, procedure corporation. of the But, agree I cannot because that Mor- also fails to note majority entitling them prove no set can second fairness Stanley issued gan of facts dissent recovery, respectfully I must Nelson’s insistence that only upon being affirmed. action’s dismissal of Phil- thorough review a more conduct in reliance on It ip’s management. 12(b)(6) exacting standard an Rule is it had Stanley’s representation Morgan “The majority recites: As indeed. that Nelson investigation conducted complaint may not dismiss district directors/option holders rec- and the 12(b)(6) be appears ‘unless it rule under merger Philip. In ommended prove plaintiff can doubt that the yond Stanley’s other-words, Morgan because claim which support of his set of facts members/option board misrepresentation, Lowrey v. him to relief”. entitle would and encour- merger, holders voted for 242, 247 Sys., Univ. Texas A&M to do the same. aged shareholders Gibson, Cir.1997) (quoting Conley Further, complaint states: 99, 2 41, 45-46, L.Ed.2d 78 S.Ct. 355 U.S. added). although requested (1957)) opinion, The fairness (emphasis board, was rendered by the Allwaste statement, introductory majority’s of All- part benefit wholly or .the cannot, under option holders “the option holders. shareholders and waste’s pleaded, have enunciate aware Moreover, Stanley was Morgan added), is an (emphasis of action” cause did not intend Allwaste board that the above-dis- erroneous statement and, itself keep the fairness ruling followed in procedure cussed plain- indeed, shown to opinion was motion. failure-to-state-claim on shareholders tiff Nelson .other Moreover, statement .sets this erroneous fact, it is opinion. for the the tone so it be used. and intended that knew majority’s tenor of characteristic added.) com- allegation This (Emphasis conclusions. § 552 of the claim under ports with stage proceed at this Dismissal because, (Second) Torts Restatement complaint correctly “[t]he [tjhe in- board] “kn[ew]. plain- liberally construed favor supply” the information to. tende[ed] com pleaded all tijf[s], and facts holders. Lowrey, true”. be taken as plaint must the merits prejudged has majority (citation omitted; empha at 247 F.3d the com- light In the of this action. added). But, controlling conclusion sis I allegations, .unique specific plaint’s claim, state a because cannot respectfully dissent. act”, ignores “they were not authorized complaint. in the well-pleaded purposes least for allegations Those —at 12(b)(6) dismissal —reflect Rule avoiding limiting rules to the usual

exceptions notes majority premature. ings is as true that accept point, this we

Case Details

Case Name: Collins v. Morgan Stanley Dean Witter

Court Name: Court of Appeals for the Fifth Circuit

Date Published: Aug 31, 2000

Citation: 224 F.3d 496

Docket Number: 99-41037

Court Abbreviation: 5th Cir.