COLLINS v. MORGAN STANLEY DEAN WITTER

JERRY E. SMITH, Circuit Judge:

Relying partly on the advice of Morgan Stanley, later Morgan Stanley Dean Witter & Co. ("Morgan Stanley"), the board of directors and stockholders of Allwaste, Inc. ("Allwaste"), voted to merge with Philip Services Corporation ("Philip"). Each of the plaintiffs had earned stock options as part of his compensation while working at Allwaste.

After the merger, Philip announced that it had filed inaccurate financial statements for several years. Upon the announcement, the stock of the now-merged Philip dropped significantly, damaging the value of the employees' post-merger options. The option holders responded by suing Morgan Stanley, claiming contract breach, misrepresentation, fraud, and other causes of action.

The district court dismissed for failure to state a claim. Because we agree that the option holders cannot, under the facts they have pleaded, enunciate any cause of action, we affirm.

I.

By agreement dated February 12, 1997 (the "Agreement"), Allwaste engaged Morgan Stanley to evaluate the possible sale of Allwaste. Morgan Stanley would provide advice, including a financial opinion letter if requested, to the Allwaste board of directors (the "Board"). The Agreement provided that Morgan Stanley had "duties solely to Allwaste" and that any advice or opinions provided by Morgan Stanley could not be disclosed or referred to publicly without Morgan Stanley's consent.

Pursuant to the Agreement, Morgan Stanley analyzed a proposed merger between Allwaste and Philip, whereby Allwaste and Philip would be merged into a new company to be owned by Philip, and each share of Allwaste common stock would be converted into 0.611 shares of Philip common stock. On March 5, 1997, Morgan Stanley provided the Board with a written fairness opinion stating that, based on the information it had reviewed, Morgan Stanley believed that the number of shares of Philip stock to be received for each share of Allwaste stock was "fair from a financial point of view to the holders of Allwaste Common Stock."

Morgan Stanley, however, "express[ed] no opinion or recommendation as to how the holders of Allwaste Common Stock should vote at the stockholders' meeting held in connection with the Merger." The fairness opinion stated that Morgan Stanley had "assumed and relied upon without independent verification the accuracy and completeness of the information supplied or otherwise made available to us by [Allwaste] and Philip for the purposes of this opinion" and that it was written "for the information of the Board of Directors of the Company only and may not be used for any other purpose without [Morgan Stanley's] prior consent," except for filings with the Securities and Exchange Commission.

The opinion was signed by Ian C.T. Pereira, the Morgan Stanley principal with primary responsibility for the Allwaste engagement. According to the complaint, Pereira made oral representations to the Board reiterating the conclusions of the fairness opinion and told certain members of the Board that Morgan Stanley had investigated the management of Philip and determined that it was "clean." On June 30, 1997, Morgan Stanley issued an additional opinion reaching the same conclusions.

The shareholders approved the merger. Each share of Allwaste was converted to 0.611 shares of Philip stock, and each option to purchase a share of Allwaste stock was converted to an option to purchase 0.611 shares of Philips stock.

In early 1998, Philip disclosed that it had filed inaccurate financial statements for several years. This revelation led to a sharp decrease in the price of Philip common stock. The complaint alleged that Morgan Stanley and Pereira had failed to conduct adequate investigation of Philip or to inform the Board of the problems that ultimately led to the decline in Philip's stock price and the value of plaintiffs' options.

II.

Lowrey v. Texas A&M Univ. Sys., 117 F.3d 242, 247 (5th Cir.1997) (some citation information omitted). "In order to avoid dismissal for failure to state a claim, however, a plaintiff must plead specific facts, not mere conclusory allegations. We will thus not accept as true conclusory allegations or unwarranted deductions of fact." Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir.1994) (internal citations, quotation marks and ellipses omitted).

In considering a motion to dismiss for failure to state a claim, a district court must limit itself to the contents of the pleadings, including attachments thereto. FED.R.CIV.P. 12(b)(6). Here, the court included, in its review, documents attached not to the pleadings, but to the motion to dismiss. Plaintiffs did not object in the district court to this inclusion and do not question it on appeal.

We note approvingly, however, that various other circuits have specifically allowed that "[d]ocuments that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to her claim." Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir.1993).1 In so attaching, the defendant merely assists the plaintiff in establishing the basis of the suit, and the court in making the elementary determination of whether a claim has been stated.

III.

Both sides agree that New York law controls construction of the Agreement. The law of New York specifies that only those in privity of contract or who enjoy an intended and immediate third-party beneficiary relationship to a contract may sue thereon2 and that "[w]here a provision in [a] contract expressly negates enforcement by third-parties, that provision is controlling."3 Where a clause provides that the contracted-for services will run directly to and for the benefit of the other contracting party, any relevant third parties will be considered incidental rather than intended and immediate.4

As the district court recounted, both the Agreement and the fairness opinion specified that the efforts were undertaken at the behest of and for the benefit of the Board alone. The fairness opinion, meanwhile, expressly negated not only enforcement by but reception to third parties. Under New York law, then, the Board is the only entity that enjoyed the right to sue on the Agreement; the option-holder plaintiffs are precluded from doing so.

The option holders respond by pointing to Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275 (1922), and Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931), and their progeny. In the former, the court held that a produce weigher was liable to the purchaser of the produce mis-weighed, though the seller contracted with the weigher to act. See Glanzer, 135 N.E. at 275. In moving beyond the rules of complete privity of contract, the court recognized that it was going beyond the explicit confines of contract law.

Glanzer, id. at 275-76 (emphases added).

The new beast that the Glanzer court explicated was one of tort, not contract. Glanzer does nothing to enlarge the scope of the power of third-party beneficiaries to sue in contract. Ultramares, the first words of which explain that "[t]he action is in tort for damages suffered through the misrepresentations of accountants," manifestly cannot do that work either. See Ultramares, 174 N.E. at 442.

Meanwhile, even if Glanzer were understood to explicate a cause of action sounding in contract rather than tort,5 it would not so enlarge the grounds for suit as to include the option-holder plaintiffs. Unlike the produce weigher in Glanzer, Morgan Stanley protected itself with explicit language describing the class of beneficiaries of its efforts: the Board, solely. As noted above, such contractual limitations are honored by the law of New York.

The district court, therefore, rightly concluded that the option-holder plaintiffs may not sue on the Agreement in contract as third-party beneficiaries. To support a claim of contract breach (or the related breach-of-warranty claim), then, the plaintiffs must have pleaded 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 the option holders. There is no suggestion of a meeting of the minds between option holders as such and Morgan Stanley and no assertion of consideration. Because the option holders are not, as a matter of law, third-party beneficiaries of the Agreement and meaningfully pleaded no oral contract running between Morgan Stanley and themselves, they cannot state any claim sounding in contract.

IV.

The district court applied Texas law to the remainder of the claims; neither party challenges this choice-of-law decision. The option holders alleged a variety of tortious claims: professional misrepresentation, negligent misrepresentation, fraud and, generally, "recklessness" and "gross negligence."6 Whatever the characterization, however, each of these torts shares one necessary element that the option holders, under the facts they pleaded, cannot demonstrate: that they relied on Morgan Stanley's alleged misrepresentations.7

Reliance requires action.8 One relies as a predicate to doing something. The option holders, however, played no role in effecting the merger. They neither authorized it, as did the Board, nor ratified it, as did the shareholders.

The option holders do not aver that they relied; rather, they claim that Nelson relied on Morgan Stanley's representations in casting his vote in favor of merger and that, but for the misrepresentations, he would have demanded a more rigorous accounting or would have opposed the merger. This may be so, but because Nelson cast his vote as a Board member rather than an option holder, he likewise relied only in his capacity as a Board member, because he took no action, as an option holder, that would have occasioned reliance.9

It is this lack of reliance by the option holders that distinguishes this case from others cited by the plaintiffs. As we have explained, "justifiable reliance comprises two elements: (1) the plaintiff must in fact rely on the information; and (2) the reliance must be reasonable." Scottish Heritable Trust, 81 F.3d at 615. In Scottish Heritable Trust, the plaintiffs actually relied on the representations of the defendant-accountants by buying a controlling interest in the company that the defendant-accountants had audited. See id. at 608.

In Cook Consultants, Inc. v. Larson, 700 S.W.2d 231, 233 (Tex.App.-Dallas 1985, writ ref'd n.r.e.), a surveyor surveyed a home for a homebuilder, and erred. The property was sold to Larson, whose home loan was predicated in part on the guarantees of proper title contained within the property record. Id. She eventually prevailed against the surveyor, because without the misrepresentations included within his survey, she would not have purchased the house, because she would not have been able to secure a home loan. See id. at 237. In other words, though proximate cause was slightly attenuated, Larson relied on the survey in deciding to buy.

Finally, in Blue Bell, Inc. v. Peat, Marwick, Mitchell & Co., 715 S.W.2d 408, 410 (Tex.App.-Dallas 1986, writ ref'd n.r.e.), the plaintiffs relied on the accountant's representations of a trade partner's financial fitness in deciding to issue a line of credit. But for the representations, plaintiffs would not have made the credit available and would not have lost it when its trade partner failed to repay. See id. at 413.

The option holders' tort claims fail because they cannot aver the first element of justifiable reliance: They did not rely on Morgan Stanley's alleged misrepresentations to do anything, because they were not authorized to act. It does not matter, therefore, that they managed to plead that Morgan Stanley in fact knew that they, as option holders, would be informed of the fairness letter or even that Morgan Stanley intended them to be so informed. Nothing about Morgan Stanley's motivations can change the fact that the option holders played no role in the merger proceedings.

V.

Having addressed the issues raised on appeal, 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

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

Accordingly, we direct the judge in this case, and others in this circuit, to entertain post-judgment motions as contemplated by the rules. Moreover, the district courts must carefully consider each such motion on its merits, without begrudging any party who wishes to avail himself of the opportunity to present such motions in accordance with the rules of procedure and with the standards of professional conduct.

AFFIRMED.

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 the plaintiff can prove no set of facts in support of his claim which would entitle him to relief'". Lowrey v. Texas A&M Univ. Sys., 117 F.3d 242, 247 (5th Cir.1997) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)) (emphasis added).

The majority's introductory statement, that "the option holders cannot, under the facts they have pleaded, enunciate any cause of action" (emphasis added), is an erroneous statement of the above-discussed procedure to be followed in ruling on the failure-to-state-claim motion. Moreover, this erroneous statement sets the tone for the opinion. In fact, it is characteristic of the tenor of the majority's conclusions.

Dismissal at this stage of the proceedings is premature. The majority notes correctly that "[t]he complaint must be liberally construed in favor of the plaintiff[s], and all facts pleaded in the complaint must be taken as true". Lowrey, 117 F.3d at 247 (citation omitted; emphasis added). But, the controlling conclusion that plaintiffs cannot state a claim, because "they were not authorized to act", ignores the well-pleaded facts in the complaint. Those allegations—at least for purposes of avoiding Rule 12(b)(6) dismissal—reflect exceptions to the usual limiting rules of liability concerning contracts and corporate actions.

For example, the majority disregards the quite unique importance of stock options at Allwaste. As described in the complaint, plaintiff Nelson, Allwaste's founder, chairman, and holder of a significant number of options, made the employee stock option incentive plan the bedrock of the corporation.

The majority also fails to note that Morgan Stanley issued the second fairness opinion only upon Nelson's insistence that it conduct a more thorough review of Philip's management. It was in reliance on Morgan Stanley's representation it had conducted such investigation that Nelson and the other directors/option holders recommended the merger with Philip. In other words, because of Morgan Stanley's misrepresentation, board members/option holders voted for the merger, and encouraged shareholders to do the same.

Further, the complaint states:

(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 information in the fairness opinion to the option holders.

The majority has prejudged the merits of this action. In the light of the complaint's specific and unique allegations, I respectfully dissent.