*District Judge of the Northern District of Texas, sitting by designation.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

________________________

NO. 01-21121

________________________

GREAT PLAINS TRUST COMPANY and KORNITZER CAPITAL MANAGEMENT, INC.,

Individually and on Behalf of All Persons Similarly Situated,

Plaintiffs-Appellants,

versus

MORGAN STANLEY DEAN WITTER & CO., DAVID LUMPKINS, and IAN PEREIRA, 

 

 

Defendants-Appellees.

______________________________________________

Appeal from the United States District Court

for the Southern District of Texas

______________________________________________

December 9, 2002 

Before SMITH and BENAVIDES, Circuit Judges, and FITZWATER, District Judge.*

FITZWATER, District Judge: 

We are called upon to decide a second time whether Morgan Stanley Dean Witter & Co.

(“Morgan Stanley”) and its employees can be held liable to third parties for a due diligence

investigation that Morgan Stanley performed and for a fairness opinion that it provided as a financial

advisor to its client, Allwaste, Inc. (“Allwaste”), concerning Allwaste’s proposed merger with Philip

Services Corporation (“Philip”). In Collins v. Morgan Stanley Dean Witter, 224 F.3d 496 (5th Cir.
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2000), we upheld the Fed. R. Civ. P. 12(b)(6) dismissal of a suit by holders of Allwaste stock options

against Morgan Stanleyand one ofits employees, IanC.T. Pereira (“Pereira”). In the present action--

filed in state court and removed to federal court--plaintiffs are Allwaste debenture holders who have

sued not only Morgan Stanley and Pereira, but also Morgan Stanley employee David B.D. Lumpkins

(“Lumpkins”), a Texas citizen. We must decide whether the district court erred in denying plaintiffs’

motion to remand on the ground that Lumpkins had been fraudulentlyjoined and in granting judgment

on the pleadings under Rule 12(c) dismissing their claims. We hold that the district court did not err,

and we affirm.

I

Plaintiffs Great Plains Trust Company and Kornitzer Capital Management, Inc. brought this

putative class action against Morgan Stanley, Lumpkins, and Pereira in Texas state court based on

claims arising fromtheir conduct concerning a proposed merger of Allwaste and Philip. Plaintiffs are

holders of Allwaste convertible debentures who sought to sue on behalf of themselves and certain

other debenture holders. 

Allwaste entered into a letter agreement (“Letter Agreement”) with Morgan Stanley, an

investment banker, to advise it concerning a contemplated transaction in which Allwaste and Philip

would be merged into a new company to be owned by Philip. Allwaste shareholders would receive

Philip common stock in exchange for their shares. Lumpkins, the Managing Director of Morgan

Stanley’s Houston office, sought Allwaste’s business and signed the Letter Agreement on Morgan

Stanley’s behalf. Morgan Stanley agreed to provide Allwaste financial advice and assistance,

including tacticalstrategy, valuation analysis, and assistance in structuring, planning, and negotiating

the transaction. If the merger was consummated, Morgan Stanley would earn a transaction fee of at
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least $3 million. If not, it would likely receive an advisory fee between $100,000 and $200,000. 

The Letter Agreement specified that, at Allwaste’s request, Morgan Stanley would provide

a financial opinion letter to the company’s Board o f Directors concerning the fairness of the

consideration (i.e., the number ofshares of Philip common stock) that Allwaste’s shareholders were

to receive. The Letter Agreement also stated that “Morgan Stanley will act under this letter

agreement as an independent contractor with duties solely to Allwaste.” It provided that “[a]ny

advice or opinions provided by Morgan Stanley may not be disclosed or referred to publicly or to any

third party except in accordance with our prior written consent.”

Morgan Stanley later issued two opinion letters (“Opinion Letters” or, collectively, the

“Fairness Opinion”). On March 5, 1997 Morgan Stanley issued an Opinion Letter in which it opined

that the merger was fair from a financial point of view. It expressed no view or recommendation

concerning whether Allwaste stockholders should approve the merger. Morgan Stanley stated that,

for purposes of its opinion, it had assumed and relied upon, without independent verification, the

accuracy and completeness of information supplied or otherwise made available by Allwaste and

Philip. Like the Letter Agreement, the Fairness Opinion contained a restriction on disclosure of

Morgan Stanley’s opinions. Each letter stated that the opinion was “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 written consent, except that this opinion may be included in its entirety in any filing

made by Allwaste with the Securities and Exchange Commission in connection with the Merger.”

On June 24, 1997 Morgan Stanley issued a second Opinion Letter in which it reached the same

conclusion and set out the same limitations. Pereira, the principal in Morgan Stanley’s Houston office

who was primarily responsible for the Allwaste engagement, signed both letters. 
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Following the merger, Philip revealed that, for several years, itsfinancialstatements had been

inaccurate. The value of Philip’s stock and of the debentures declined sharply. Plaintiffs sued

Morgan Stanley, Lumpkins, and Pereira in Texasstate court for negligence, gross negligence/malice,

negligent misrepresentation, breach of fiduciary duty, fraud, violations ofthe Texas Deceptive Trade

Practices-Consumer Protection Act (“DTPA”), Tex. Bus. & Com. Code Ann. §§ 17.41-17.826

(Vernon 1987 & Supp. 2002), professional negligence, and breach of contract. They alleged that,

in opting not to exercise their right to redeem their debentures for cash upon consummation of the

merger, they and other debenture holders had relied on defendants’ representations concerning the

fairness of the Allwaste-Philip merger; that Morgan Stanley, Lumpkins, and Pereira knew or should

have known that Allwaste would rely on the Opinion Letters and disseminate them to third parties,

who would also rely on their contents, and that Allwaste in fact did so; that defendants failed to

conduct an adequate investigation of Philip or to inform Allwaste of problems that later led to the

decline in Philip’s stock price and the value of their debentures; that Lumpkins had represented to

Allwaste that Morgan Stanley was qualified and experienced in investigating and advising regarding

transactions like the proposed Allwaste-Philip merger and could aid Allwaste in evaluating Philip’s

proposal; and that Morgan Stanley had represented in the Letter Agreement that it would provide

financial advice and assistance concerning the transaction, including defining objectives, formulating

and implementing tactical strategy, perfo rming valuation analysis, and structuring, planning, and

negotiating the transaction. 

Defendantsremoved the case to federal court based on diversity of citizenship. Although the
1

See Manguno v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720, 723 (5th Cir. 2002) (“In

this case, Prudential asserted federaljurisdiction on the basis of diversity jurisdiction, which, in a class

action, requires complete diversity of citizenship of the named parties[.]”).

2The district court, see, e.g., R. 258, and the parties, see, e.g., Appellants Br. at 1; Appellees

Br. at 1, refer to Lumpkins’ residence rather than to his citizenship. It is well settled, however, that

Lumpkins’ citizenship is controlling. See, e.g., Realty Holding Co. v. Donaldson, 268 U.S. 398, 399

(1925). Moreover, we note sua sponte that, in defendants’ notice ofremoval, they alleged Lumpkins’

and Pereira’s residence rather than their citizenship. See R. 41. “It is established that an allegation

of residency does not satisfy the requirement of an allegation of citizenship.” Strain v. Harrelson

Rubber Co., 742 F.2d 888, 889 (5th Cir. 1984) (per curiam). Despite this defect in the notice of

removal, plaintiffs’ complaint properly alleges Lumpkins’ and Pereira’s citizenship. See R. 33.

Accordingly, we need not address whether defendantsshould now be required or permitted to amend

their notice of removal. See D.J. McDuffie v. Old Reliable Fire Ins. Co., 608 F.2d 145, 146-47 (5th

Cir. 1979) (holding that faulty allegations of diversity of citizenship could be cured by amended

petition for removal filed in district court) (citing Firemen’s Ins. Co. v. Robbins Coal Co., 288 F.2d

349, 350 (5th Cir. 1961) (holding that defective allegation of diversity jurisdiction in suit originally

filed in federal district court could be amended in court of appeals)).

3

28 U.S.C. § 1441(b):

Any civil action of which the district courts have original jurisdiction

founded on a claim or right arising under the Constitution, treaties or

laws of the United States shall be removable without regard to the

citizenship or residence of the parties. Any other such action shall be

removable only if none of the parties in interest properly joined and

served as defendants is a citizen of the State in which such action is

brought.

Id.

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relevant parties1are completely diverse, Lumpkinsis a Texas citizen.2 Therefore, under the terms of

28 U.S.C. § 1441(b),3defendants could not remove the case unless plaintiffs had fraudulently joined

Lumpkins as a defendant. 

The district court denied plaintiffs’ remand motion, concluding that Lumpkins had been

fraudulently joined. After it decided the motion, this court decided Collins. We affirmed the

dismissal under Rule 12(b)(6) of a suit by holders of Allwaste stock options against Morgan Stanley
4Defendants styled their motion as a “motion for summary judgment on the pleadings”

(emphasis added). R. 230. The district court accordingly referred to the pleading by the same title

when it decided the motion. Id. at 501. It is clear from the court’s order, however, that it treated

defendants’ motion as brought under Rule 12(c), not Rule 56, and that the district court decided the

motion under the Rule 12(c) standard. Id. at 499-497. (We refer to the record by higher numbers

before lower ones because the district clerk’s office numbered the pages of the record backward.)

Moreover, defendants recognize in their brief on appeal that Rule 12(c) applies. See Appellees Br.

at 5, 42-43.

Perhaps due to the title defendants gave their motion, plaintiffs mistakenly cite Rule 56(f) to

contend the district court erred by dismissing this case without permitting themto conduct discovery.

See Appellants Br. at 56-57. Rule 56(f) has no relevance, however, when a Rule 12(c) motion is not

converted to a Rule 56 motion. And, as we explain below, the district court’s decision was properly

based on the content of plaintiffs’ complaint, the Letter Agreement, and the Opinion Letters. No

discovery was necessary.

5Although plaintiffs’ operative pleading is their state court “petition”--which is the Texas

procedural term--we will refer to it, as have the parties, as their “complaint.”

6Plaintiffs neither appeal the dismissal of their breach of contract claim nor contend that this

claim defeats defendants’ assertion of fraudulent joinder, and we will not discuss further this cause

of action.

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and Pereira based on allegations of an inadequate investigation of Philip similar to those that plaintiffs

assert here. See Collins, 224 F.3d at 498. Defendants moved under Rule 12(c)4for judgment on the

pleadings. The district court relied in part on Collins as persuasive, although not binding, authority

and dismissed plaintiffs’ complaint.5

Plaintiffs appeal, arguing that defendants failed to establish that Lumpkins was fraudulently

joined and that they did not demonstrate that they were entitled to judgment on the pleadings.6

II

Although we apply somewhat different standards in deciding whether Lumpkins was

fraudulently joined and whether plaintiffs have stated a claim, the jurisprudence issufficiently similar

and the issuessufficientlyinterrelated that we can addressthemtogether. Before turning to the merits

of each asserted cause of action, we will set out the standards of review and the controlling law of
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fraudulent joinder and judgment on the pleadings under Rule 12(c). We will also decide whether, in

making itsrulings, the district court properly considered documents besides plaintiffs’ complaint and

whether we may entertain them on appeal.

A

We review de novo the district court’s order denying plaintiffs’ motion to remand, see

Heritage Bank v. Redcom Laboratories, Inc., 250 F.3d 319, 323 (5thCir. 2001), and its decision that

Lumpkins was fraudulently joined, see Griggs v. State Farm Lloyds, 181 F.3d 694, 699 (5th Cir.

1999). To decide whether a defendant has been fraudulently joined, the district court can employ a

summary judgment-like procedure that allows it to pierce the pleadings and examine affidavits and

deposition testimony for evidence of fraud or the possibility that the plaintiff can state a claim under

state law against a nondiverse defendant. See B., Inc. v. Miller Brewing Co., 663 F.2d 545, 549 n.9

(5th Cir. Unit A Dec. 1981). The district court recognized that it could follow this regimen, but it

did not do so to the fullest extent allowed. Instead, it relied on the allegations of plaintiffs’ complaint

and the contents of the Letter Agreement and the Fairness Opinion.

When the district court fails to apply a summary judgment-like procedure, we normally “are

limited to a review of the allegationsin the complaint.” Hart v. Bayer Corp., 199 F.3d 239, 247 (5th

Cir. 2000). If the facts set out in plaintiffs’ complaint, taken as true and drawing all inferences in the

light most favorable to plaintiffs, at least raise the possibility that they could succeed in establishing

a claim against the in-state defendant, the defendant’s citizenship cannot be disregarded and diversity

jurisdiction is absent. See id. at 247-48. Here, however, the district court also relied on the contents

of the Letter Agreement and the Fairness Opinion. Plaintiffs do not argue that the court erred in

doing so. They relied on them in support of their remand motion, see, e.g., R. 135, attaching a copy
7

See supra note 4 concerning why we refer to the record by higher numbers before lower

ones.

- 8 -

of the Letter Agreement to their motion, id. at 61-59.7 Accordingly, they have waived any error,

assuming arguendo that the district court erred. See, e.g., Edmond v. Collins, 8 F.3d 290, 292 n.5

(5th Cir. 1993) (“On appeal, we do not review issues not briefed.”). We will therefore review the

district court’sfraudulent joinder decision based on the allegations of the complaint and the contents

of the Letter Agreement and the Fairness Opinion.

The removing party carries a heavy burden when attempting to prove fraudulent joinder. See

Cavallini v. State Farm Mut. Auto Ins. Co., 44 F.3d 256, 259 (5th Cir. 1995). “The removing party

must prove that there is absolutely no possibility that the plaintiff will be able to establish a cause of

action against the in-state defendant in state court, or that there has been outright fraud in the

plaintiff’spleading ofjurisdictionalfacts.” Id. (quoting Green v. Amerada Hess Corp., 707 F.2d 201,

205 (5th Cir. 1983)). “After all disputed questions of fact and all ambiguities in the controlling state

law are resolved in favor of the nonremoving party, the court determines whether that party has any

possibility of recovery against the party whose joinder is questioned.” Carriere v. Sears, Roebuck

& Co., 893 F.2d 98, 100 (5th Cir. 1990). “If there is ‘arguably a reasonable basis for predicting that

the state law might impose liability on the factsinvolved,’then there is no fraudulent joinder.” Badon

v. RJR Nabisco Inc., 236 F.3d 282, 286 (5th Cir. 2001) (quoting Jernigan v. Ashland Oil Inc., 989

F.2d 812, 816 (5thCir. 1993)). This possibility, however, must be reasonable, not merely theoretical.

See id. at 286 n.4. 
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B

“We review rule 12(c) dismissals de novo.” Hughes v. Tobacco Inst., Inc., 278 F.3d 417, 420

(5th Cir. 2001) (citing St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 440 n.8 (5th Cir.

2000)). Rule 12(c) provides that “[a]fter the pleadings are closed but within such time as not to delay

the trial, any party may move for judgment on the pleadings.” “A motion brought pursuant to Fed.

R. Civ. P. 12(c) is designed to dispose of cases where the material facts are not in dispute and a

judgment on the merits can be rendered by looking to the substance ofthe pleadings and anyjudicially

noticed facts.” Hebert Abstract Co. v. Touchstone Props., Ltd., 914 F.2d 74, 76 (5th Cir.1990) (per

curiam) (citing 5A Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1367,

at 509-10 (1990)). “[T]he central issue is whether, in the light most favorable to the plaintiff, the

complaint states a valid claim for relief.” Hughes, 278 F.3d at 420 (quoting St. Paul Mercury Ins.

Co., 224 F.3d at 440 n.8). 

“Pleadings should be construed liberally, and judgment on the pleadings is appropriate only

if there are no disputed issues of fact and only questions of law remain.” Id. (citing Voest-Alpine

Trading USA Corp. v. Bank of China, 142 F.3d 887, 891 (5th Cir.1998)). “The [district] court may

dismiss a claim when it is clear that the plaintiff can prove no set of facts in support of his claim that

would entitle him to relief.” Jones v. Greninger, 188 F.3d 322, 324 (5th Cir. 1999) (per curiam)

(citing Fee v. Herndon, 900 F.2d 804, 807 (5th Cir.1990)). “In analyzing the complaint, we will

accept all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff.” Id.

(citing Doe v. Hillsboro Indep. Sch. Dist., 81 F.3d 1395, 1401 (5th Cir. 1996)). We will not,

however, “accept as true conclusory allegations or unwarranted deductions of fact.” Collins, 224
8Rule 12(b)(6) decisions appropriately guide the application of Rule 12(c) because the

standardsfor deciding motions under both rules are the same. See 5AWright & Miller,supra, § 1368

at 591 (Supp. 2002) (“A number of courts have held that the standard to be applied in a Rule 12(c)

motion is identical to that used in a Rule 12(b)(6) motion.” (footnote omitted)).

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F.3d at 498 (addressing Rule 12(b)(6) standard8) (quoting Tuchman v. DSC Comm. Corp., 14 F.3d

1061, 1067 (5th Cir. 1994)). “The issue is not whether the plaintiff will ultimately prevail, but

whether he is entitled to offer evidence to support his claim. Thus, the court should not dismiss the

claim unless the plaintiff would not be entitled to relief under any set of facts or any possible theory

that he could prove consistent with the allegations in the complaint.” Jones, 188 F.3d at 324

(citations omitted).

We have not been consistent in reciting the standard that governsthe documentsthat a district

court may properly consider in deciding a Rule 12(c) motion. In Hughes, for example, we said that

“the district court is confined to the pleadings and must accept all allegations contained therein as

true.” Hughes, 278 F.3d at 420 (emphasis added) (citing St. Paul Ins. Co. v. AFIA Worldwide Ins.

Co., 937 F.2d 274, 279 (5th Cir. 1991)). Hughes follows St. Paul Insurance Co., which concluded

that “[a] court which considers a motion for a . . . 12(c) dismissal must look only at the pleadings[.]”

St. Paul Ins. Co., 937 F.2d at 279 (emphasis added). In Hebert, however, we held that the district

court “look[s] to the substance of the pleadings and any judicially noticed facts.” Hebert, 914 F.2d

at 76 (emphasis added). In Voest-Alpine we stated that the district court could consider documents

attached to the complaint “because these documents thereby [become] part of [the] pleadings.” See

Voest-Alpine, 142 F.3d at 891 n.4. By contrast, in Gutierrez v. City of San Antonio, 139 F.3d 441,

444 n.1. (5th Cir. 1998), we held that a motion had been converted to a Rule 12(c) motion because

materials outside the pleadings had been attached to the motion. And in Hager v. NationsBank N.A.,
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167 F.3d 245, 247 (5th Cir. 1999), we reached a similar conclusion, holding that “[t]he district court

explicitly relied on NationsBank’s affidavit, as well as on documents attached to Hager’s complaint,

in its opinion dismissing Hager’s claims for failing to exhaust, thus converting the 12(b)(6) motion

into a 12(c) motion.”

We need not attempt to reconcile our Rule 12(c) decisionstoday. As noted, the district court

relied on plaintiffs’ complaint, the Letter Agreement, and the Fairness Opinion. Plaintiffs referred to

parts of these documentsin their complaint. See, e.g., Compl. ¶¶ 21, 23, 29, 30. They also relied on

them in their reply and objections to defendants’ motion for judgment on the pleadings. See, e.g., R.

454, 447. Although they did not, as in Voest-Alpine, physically attach them to their complaint, we

can take into account the contents of the Letter Agreement and the Opinion Letters on appeal.

Plaintiffs did not dispute in the district court, and do not contest on appeal, the contents of the

documents. They rely on them in at least some respects to support their claims. Nor do they argue

that the district court erred in basing its decision on the contents of the Letter Agreement and the

Fairness Opinion. Plaintiffs have thus waived any argument that the district court erred in considering

these documents in addition to the complaint. See Edmond, 8 F.3d at 292 n.5; Collins, 224 F.3d at

498-99 (Rule 12(b)(6) decision) (“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. 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.” (citation omitted)).
9Plaintiffs also assert counts for punitive damages, id. ¶¶ 122-123, and attorney’s fees, id. ¶¶

124-125.

10The adopted portions are unspecified because in each count plaintiffs incorporate

“Paragraphs 1 through ____ above,” but they neglect to fill in the blank. See, e.g., ¶¶ 69, 74, 80, 89,

96, 104, 110, and 115.

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C

Plaintiffs have structured their 126-paragraph complaint by setting out in the first 68

paragraphstheir allegations concerning the parties, Compl. ¶¶ 1-5, jurisdiction and venue, id. ¶¶ 6-7,

factual allegations common to all counts, id. ¶¶ 8-58, and class action allegations, id. ¶¶ 59-68,9

followed by allegationsin eight substantive countsthat adopt unspecified portions10 of the preceding

paragraphs, id. ¶¶ 69-121. Accordingly, in addition to the allegations of each specific count under

consideration, we will review the common factual assertions to determine whether there is any

possibility that plaintiffs can recover against Lumpkins and whether they have stated a valid claim for

relief under any theory against defendants.

III

We consider together plaintiffs’ claims for negligence, gross negligence/malice, and

professional negligence. 

A

“Under Texaslaw, negligence consists of four essential elements: (1) a legal duty owed to the

plaintiff by the defendant; (2) a breach o f that duty; (3) an actual injury to the plaintiff; and (4) a

showing that the breach was the proximate cause of the injury.” Gutierrez v. Excel Corp., 106 F.3d

683, 687 (5th Cir. 1997) (citing Skipper v. United States, 1 F.3d 349, 352 (5th Cir. 1993)). Gross

negligence has two requirements: “(1) viewed objectively from the standpoint of the actor, the act
11Plaintiffs also maintain that they have learned through discoveryin anotherlawsuit factsthat

undercut the district court’s conclusions concerning Lumpkins’ lack of individual involvement.

Although plaintiffs have included in their record excerpts the materials they cite in support of this

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or omission must involve an extreme degree of risk, considering the probability and magnitude of the

potential harm to others, and (2) the actor must have actual, subjective awareness of the risk

involved, but nevertheless proceed with conscious indifference to the rights, safety, or welfare of

others.” Henderson v. Norfolk Southern Corp., 55 F.3d 1066, 1070 (5th Cir. 1995) (quoting

Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 23 (Tex. 1994)). To establish liability for professional

negligence, the plaintiffmust show the existence of a duty, a breach of that duty, and damages arising

from the breach. See Banc One Capital Partners Corp. v. Kneipper, 67 F.3d 1187, 1198 (5th Cir.

1995) (addressing legal malpractice). “The threshold inquiry in a negligence case is duty.” Greater

Houston Transp. Co. v. Phillips, 801 S.W.2d 523, 525 (Tex. 1990) (citing El Chico Corp. v. Poole,

732 S.W.2d 306, 311 (Tex. 1987)).

The district court held that Lumpkins had been fraudulently joined because plaintiffs had not

pleaded allegationsthatshowed that he owed an individual duty to the debenture holdersindependent

of the one that Morgan Stanley allegedly assumed when it entered into the Letter Agreement.

Plaintiffs contend the district court erred because, under Texas law, a corporate officer can be held

liable individually for a corporation’stortious conduct if he knowingly participates in the conduct or

has actual or constructive knowledge of it. They maintain that the complaint alleges that Lumpkins

personally participated in the tortious conduct, and that it is reasonable to infer that he would have

benefited monetarily from consummation of the merger and therefore had reason to be personally

involved in Morgan Stanley’s negligent due diligence. Plaintiffs contend there is at least a possibility

that plaintiffs have stated a claim against Lumpkins.11
assertion, they have not identified where these documents are included in the record on appeal, see

Appellants Br. at 29-30 & 30 n. 10, the excerpt pages do not contain the numbering normally

reflected on documents that are part of the record, and we have not located them in our review of

the record. We therefore decline to consider them. See In re GHR Energy Corp., 791 F.2d 1200,

1201-02 (5th Cir. 1986) (per curiam) (“[T]his court is barred from considering filings outside the

record on appeal, and attachments to briefs do not suffice.”) (citations omitted)).

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The district court correctly concluded that plaintiffs have no possibility of recovering against

Lumpkins based on their negligence causes of action. In Texas, individual liability for corporate

negligence “arises only when [an] officer or agent owes an independent duty of reasonable care to

the injured party apart fromthe employer’s duty.” See Leitch v. Hornby, 935 S.W.2d 114, 117 (Tex.

1996). Plaintiffs do not allege that Lumpkins participated in any specific conduct other than

soliciting, on Morgan Stanley’s behalf, an engagement to investigate and advise Allwaste regarding

the Philip offer; representing that Morgan Stanley was qualified and experienced in investigating and

advising in such transactions and would be able to aid Allwaste in evaluating the merits, advisability,

and fairness of the proposal; and signing the Letter Agreement as Managing Director on behalf of

Morgan Stanley, under which it agreed to provide Allwaste a wide array of financial advice and

assistance concerning the proposed Philip transaction. See Compl. ¶¶ 20-21. Plaintiffs do not

attempt to predicate negligence liability on this conduct, and they have not pleaded factsthat, viewed

favorably, show that Lumpkins owed any relevant independent duty to them.

Plaintiffs aver that defendants are liable for negligence because they breached a duty to

conduct a thorough due diligence investigation of Philip’s sale offer; to determine Philip’s financial

condition; to investigate the background, integrity, experience, and qualifications of Philip’s officers

and directors; to provide financial advice regarding the proposed Allwaste-Philip merger; and to

assess the potential impact of the proposed sale on, among others, the debenture holders. Compl.
12After ¶ 21, Lumpkins reappears only to the extent he is included among the collective

“defendants” referred to in a substantive claim. 

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¶ 70. They allege that this was gross negligence and/or malice. Id. ¶ 78. Plaintiffs assert that

defendants engaged in professional negligence by failing to conform their conduct to the generally

recognized and accepted practices and standards of their profession by not conducting a thorough

and accurate investigation of Philip’s sale offer; by not thoroughly and accurately assessing Philip’s

financial condition; by disseminating misleading information regarding Philip and its financial

condition; and by not thoroughly and accurately assessing the background, integrity, experience, and

qualifications of Philip’s officers and directors. Id. ¶ 112. These are allegations that relate to acts

or omissions after contract solicitation and formation. The pleading is structured so that Lumpkins

simply drops out of the picture after he obtains Allwaste’s business and signs the Letter Agreement

on Morgan Stanley’s behalf.12

Because there is no possibility that plaintiffs can recover against Lumpkins for negligence,

gross negligence/malice, or professional negligence, the district court did not err in holding that he

had been fraudulently joined in these claims.

B

The district court dismissed plaintiffs’ negligence claims under Rule 12(c) on the ground that

they arose solely from Morgan Stanley’s negligent performance of the Letter Agreement and that

MorganStanleyhad no independent legaldutyapart fromits contractualobligationsto Allwaste. The

court concluded that plaintiffs could not recover for professional malpractice because such a claim

could not be brought absent a professionalrelationship based on an agreement to provide professional

services, and Morgan Stanley did not agree to provide professionalservicesto the debenture holders.
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Plaintiffs concede that the negligent failure to perform a contractual duty normally does not

support a separate tort cause of action. They maintain, however, that a tort claim may also arise

where the same conduct would lead to liability independent of the contract. Plaintiffs rely on Texas

cases that impose tort liability on parties who voluntarily undertake actions for the benefit of other

parties, but fail to exercise reasonable care, resulting in injury to their persons or property. They

argue that, viewed favorably, the complaint shows that defendants voluntarily undertook a due

diligence investigation of Philip for the benefit of Allwaste’s stockholders and other investors and

thereby assumed a duty to exercise reasonable care in doing so. Plaintiffs also maintain that

defendants owed them a duty under general negligence principles, and that Texas would recognize

that defendants had a duty to conduct an adequate due diligence investigation.

We reject plaintiffs’ arguments. Although plaintiffs contend in their brief that they have

pleaded that “defendants voluntarily undertook their ‘due diligence’ investigation of Philip for the

benefit of Allwaste’sstockholders and other investors,” Appellants Br. at 50, they conspicuously fail

to cite any place in their complaint that advancessuch an allegation concerning the debenture holders.

See id.; Appellants Rep. Br. at 17-18. The closest they come to asserting that defendants acted on

behalf of someone other than Allwaste, its Board of Directors, officers, and shareholders is their

allegation that defendants knew or should have known that Allwaste would and did disseminate the

Fairness Opinion and related information concerning the due diligence investigation to third parties,

such as the debenture holders. See Compl. ¶¶ 31, 32, 54, 55. Plaintiffs do not aver, however, that

defendants voluntarily undertook a due diligence investigation for the benefit of the debenture

holders. Instead, they make the conclusory assertion that defendants owed the debenture holders

such a duty. See id. ¶¶ 70, 75. Absent from their pleading is any allegation of facts that shows how
13Even if we assume that plaintiffs assert in support of their professional negligence cause of

action that defendants’ dutyarose under generallyrecognized and accepted professionalpractices and

standards, see id. ¶ 111, they do not now rely on this basis to establish a duty running from

defendants to the debenture holders. They mention professional standards only in asserting that

Texas would recognize a duty under general negligence principles. See Appellants Br. at 51.

14Nor did plaintiffsadvance this argument in support oftheir motion to remand. SeeR. 67-66.

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this duty arose--i.e., that defendants voluntarilyundertook to act on behalf ofthe debenture holders.13

In a complaint that otherwise relies on documents that explicitly provide that Morgan Stanley

rendered services only to the client who hired it, this omission is not a mere technicality. The Letter

Agreement states that Morgan Stanley would act “with duties solely to Allwaste.” Except for

Securities and Exchange Commission (“SEC”) filings byAllwaste in connection with the merger, the

Letter Agreement and the Opinion Letters also restricted Allwaste’s disclosure and use ofthe opinion

without Morgan Stanley’s prior written consent. Given these limitations, it was obligatory for

plaintiffsto allege factsthat, viewed favorably to them, would permit the conclusion that defendants

acted for the benefit of the debenture holders.

Plaintiffs’ other basis for alleging a duty is also insufficient. They contend that Texas would

recognize under general negligence principles that defendants owed them a duty of reasonable care.

Their argument in the district court in support of their negligence claims is set out at pages 19

through 21 of their reply and objections to defendants’ Rule 12(c) motion. R. 440-438. They did

not rely below on the contention they now advance, and we hold that the argument is waived. See

Vogel v. Veneman, 276 F.3d 729, 733 (5th Cir 2002) (“We find that the [appellants] are precluded

from raising this argument because they failed to make it before the district court. Except in cases

of‘extraordinarycircumstances,’ we do not considerissuesraised for the first time on appeal.” (citing

N. Alamo Water Supply Corp. v. City of San Juan, 90 F.3d 910, 916 (5th Cir.1996)).14
15See Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). Erie principles apply because removal

jurisdiction is based on diversity of citizenship.

- 18 -

Even if plaintiffshad preserved this argument below, we would reject it either aslacking merit

or on the basis that they are essentially asking a federal court in an Erie context15 to extend Texas

law. Citing the factors set out in Greater Houston Transportation Co., plaintiffs argue that Texas

would consider the enormousrisk of monetary lossto plaintiffs, the foreseeability and likelihood that

they would be injured by a feeble due diligence investigation, and the lack of social utility to

defendants’ reckless conduct and hold that defendants owed a duty to plaintiffs to use reasonable

care. Greater Houston Transportation Co. does not support the conclusion that Texas would

recognize a duty in a case like the present one. In that case, the Texas Supreme Court declined to

recognize a duty of a cab company to warn its drivers not to carry guns. Greater Houston Transp.

Co., 801 S.W.2d at 527. Plaintiffs are necessarily relying on the factors discussed in that decision to

argue that Texas would recognize a common law duty under the facts that they have pleaded in this

case. See Appellants Rep. Br. at 18 (“Given the degree of risk, the foreseeability and likelihood of

harm, and the lack of social utility to allowing investment bankers t o shirk their responsibilities,

defendants should be held responsible for failing to use reasonable care.”). They do not point to a

court decision that indicates that, in a contractual setting, Texas would impose a duty on someone

who did not undertake to act voluntarily for another. Federal courts in Erie cases do not “create or

modify” state law. Associated Int’l Ins. Co. v. Blythe, 286 F.3d 780, 783 (5th Cir. 2002) (quoting

United Parcel Serv., Inc. v. Weben Indus., Inc., 794 F.2d 1005 1008 (5th Cir. 1986)). Because

plaintiffs have failed to demonstrate that defendants owed them a duty to act with reasonable care,

the district court did not err in holding that they cannot recover on their claims for negligence, gross
- 19 -

negligence/malice, or professional negligence.

IV

We turn next to plaintiffs’ cause of action for negligent misrepresentation, considering

together whether Lumpkins was fraudulently joined and whether defendants were entitled to

judgment on the pleadings.

A

To recover under Texaslaw for negligent misrepresentation, plaintiffsmust prove that (1) the

defendant made a representation in the course of his business, or in a transaction in which he had a

pecuniary interest, (2) the defendant supplied false information for the guidance of others in their

business, (3) the defendant did not exercise reasonable care or competence in obtaining or

communicating the information, and (4) the plaintiffsuffered pecuniary loss by justifiably relying on

the representation. First Nat’l Bank of Durant v. Trans Terra Corp. Int’l, 142 F.3d 802, 809 (5th

Cir. 1998) (citing Fed. Land Bank Ass’n v. Sloane, 825 S.W.2d 439, 442 (Tex. 1991)). 

The district court held on several groundsthat plaintiffs could not recover fromLumpkinsfor

negligent misrepresentation. “When the judgment of the district court is correct, it may be affirmed

on appealfor reasons other than those given or relied on below.” Terrell v. Univ. of Tex. Sys. Police,

792 F.2d 1360, 1362 n.3 (5th Cir. 1986). Accordingly, if the district court correctly granted

judgment on the pleadings dismissing plaintiffs’ claim for negligent misrepresentation against all

defendants, we can affirm its conclusion that Lumpkins was fraudulently joined.

The district court granted defendants’ motion for judgment on the pleadings on the ground

that the debenture holders did not fall within the limited group of persons for whose benefit and

guidance the information was provided. The court held inter alia that thisinformation was intended
16When the negligent misrepresentation paragraphs of the complaint are considered together

with the predicate allegations, it is clear that plaintiffs rely in their complaint only on this

representation. Plaintiffs allege in ¶ 81 that, “[a]s set forth above, defendants made false and material

oral and written representations to plaintiffsregarding their ‘due diligence’ investigation; Philip and

its financial condition; the merits, advisability, and fairness of Philip’s sale offer; and the integrity,

experience, and qualifications of Philip’s officers and directors.” Compl. ¶ 81. Of these alleged

representations, only those pertaining to defendants’ due diligence investigation could conceivably

have beenmade during the time period whenLumpkins was allegedlyinvolved inobtainingAllwaste’s

business and signing the Letter Agreement. The only misrepresentation attributable to Lumpkins is

found in ¶ 20. 

- 20 -

for the Allwaste Board, and it concluded that, even if Morgan Stanley had known that the

shareholders of Allwaste would receive the information and use it to decide how to vote on the

proposed merger, it did not appear that the opinion was intended to benefit the debenture holders or

to guide their actions, because the Fairness Opinion did not relate to the debenture holders and did

not purport to be an independent audit. Plaintiffs maintain that defendants had reason to expect that

the debenture holders would rely on defendants’ representations.

B

The “Restatement (Second) of Torts § 552 requires that a plaintiff claiming negligent

misrepresentation be the person, or a member of a ‘limited group’ of persons, for whose benefit and

guidance the defendant either intends to supply the information or knows that the recipient intends

to supply it.” Scottish Heritable Trust, PLC v. Peat Marwick Main &Co., 81 F.3d 606, 612 (5thCir.

1996) (Texaslaw). Plaintiffs assert that Lumpkins “represented to Allwaste that Morgan Stanley was

qualified and experienced in investigating and advising regarding such transactions, andwould be able

to aid Allwaste in evaluating the merits, advisability, and fairness of the Philip’s proposal.” Compl.

¶ 20.16 They allege that Morgan Stanley, through Pereira, reported to Allwaste that Morgan Stanley

had fullyperformed its due diligence, that itsthorough investigationrevealed no concerns about Philip
17They also assert that defendantsshould have known that such distribution would occur, see

Compl. ¶ 31, but this allegation is inapposite under the controlling Restatement standard.

18Plaintiffs also allege in ¶¶ 54 and 55 that defendants knew or should have known that

unspecified information theywere communicating “directly or indirectly to the public, the Debenture

holders, and other interested parties” would be relied on or would impact the market. Id. ¶¶ 54, 55.

- 21 -

that were sufficient to threaten or call into question the proposed sale or merger, and that Philip’s

upper-level management was “clean.” Id. ¶¶ 25-28. Plaintiffs posit that Morgan Stanley issued the

Fairness Opinion, in which it opined that the proposed Allwaste-Philip merger wasfair. Id. ¶¶ 29-30.

They aver that all defendants knew that Allwaste would disseminate the Letter Opinions and related

information concerning their due diligence investigation to third parties, such as the Allwaste

shareholders and debenture holders, id. ¶ 31;17 that Allwaste did, in fact, distribute such information,

id. ¶ 32; that defendants made false and material oral and written misrepresentations to plaintiffs

regarding their due diligence investigation, Philip and its financial condition, the merits, advisability,

and fairness of the sale offer, and the integrity, experience, and qualifications of Philip’s officers and

directors, id. ¶ 81; and that defendants supplied false information for unspecified “others” in the

course of their business, id. ¶ 83.18 

The district court did not err in dismissing plaintiffs’ negligent misrepresentation cause of

action, because plaintiffs failed to plead sufficient facts to permit the conclusion that they were the

persons, or one of a limited group of persons, for whose benefit and guidance defendants intended

to supply the information or knew that Allwaste intended to supply it. The debenture holders did not

have authority to approve or disapprove the merger. The Letter Agreement stated that Morgan

Stanley owed duties solely to Allwaste, and the Letter Agreement and Opinion Letters were

addressed to the Board and explicitly restricted the universe of those who could rely on the Fairness
- 22 -

Opinion. “[B]oth 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.” Collins, 224 F.3d at 499.

Confronted with documents that confined Morgan St anley’s role and restricted distribution of its

opinion, plaintiffs were required to do more than posit conclusory assertions concerning what

defendants intended and about their knowledge concerning Allwaste’s intent to supply information

to the debenture holders. Cf. id. at 500 (holding that pleadings that alleged only “the most

conclusional claim that an oral contract existed” did not state claim). In the context of this case, they

were obligated to allege facts that, viewed favorably to them, permitted the finding that defendants

intended to provide information to the debenture holders, or knew that Allwaste intended to supply

the informationto debenture holders, despite the expresslimitations provided intheLetter Agreement

and Opinion Letters. That is, they were required to plead facts sufficient to permit the reasonable

inference that defendants intended to disseminate information to the debenture holders despite the

terms of Morgan Stanley’s contractual arrangement with Allwaste, or the inference that defendants

knew that Allwaste would disregard the Letter Agreement’s explicit restrictions on disclosure of the

Fairness Opinion. 

Plaintiffs have not pleaded their negligent misrepresentation claimasrequired, and the district

court did not err in dismissing it or in concluding that Lumpkins had been fraudulently joined.
19In their reply brief, plaintiffsrely solely on thislast premise to establish a breach of fiduciary

duty claim against Lumpkins. See Appellants Rep. Br. at 29.

- 23 -

V

We now consider plaintiffs’ cause of action for breach of fiduciary duty. 

A

The district court held that Lumpkins could not be held liable for breach of fiduciary duty

because he had no confidential relationship with the debenture holders that could give rise to an

informal fiduciary relationship under Texas law. A fiduciary duty is not lightly created. Kline v.

O’Quinn, 874 S.W.2d 776, 786 (Tex. App.--Houston [14th Dist.] 1994, writ denied). “A party

asserting breach of a fiduciary duty must establish the existence of a confidential or similar

relationship giving rise to a fiduciary duty.” FCLT Loans, L.P. v. Estate of Bracher, ___ S.W.3d

___, 2002 WL 31319725, at *6 (Tex. App.--Houston [14th Dist.] 2002, no pet. h.) (on rehearing).

Plaintiffs argue that Texas law creates a fiduciary relationship when a party is under a duty

to act for or give advice for the benefit of another on a matter within the scope of the relation; that

a formal relationship is unnecessary; that principles of equity may play a role in determining the

existence of a relationship; that the existence of a relationship is usually a question of fact; and that

they adequately allege in ¶ 90 of their complaint the basis for such a claim against Lumpkins.

Plaintiffs also cite the district court’s suggestion in a footnote in its memorandum and order that, in

certain circumstances (which the court held need not be considered because of the limited role

Lumpkins played in the merger), Lumpkins could be jointly liable for breach of fiduciary duty if he

knowingly participated in such a breach committed by Morgan Stanley or the Allwaste Board of

Directors, assuming they were fiduciaries of the debenture holders.19
- 24 -

The district court did not err in holding that there was no possibility that plaintiffs could

recover against Lumpkins for breach of fiduciary duty. In ¶ 90 of their complaint, which is the part

they cite on appeal as adequately asserting their claim against Lumpkins, plaintiffs allege:

Defendants owed plaintiffsfiduciaryduties because ofplaintiffs’status

as Debenture holders. They owed fiduciary duties because they had

or should have had superior knowledge regarding Philip and the

merits, advisability, and fairness of the proposed sale, and the

background, integrity, experience, and qualifications of Philip’s

officers and directors, but they misled plaintiffs, through inaccurate

statements or omissions of material facts, regarding Philip and the

merits, advisability, and fairness of the proposed sale. Moreover,

defendants owed plaintiffs a fiduciary duty to act for or give advice for

the benefit of plaintiffs upon matters within the scope oftheir relation.

Compl. ¶ 90. The allegations of this paragraph, when viewed as part of the entire complaint, are

inadequate. 

The specific predicate allegations ofthe complaint do not suggest that Lumpkins played a part

in thistransaction after he obtained Allwaste’s business and signed the Letter Agreement on Morgan

Stanley’s behalf. See supra § III(A). The conclusory assertions in ¶ 90 about the duty that

defendants supposedly owed refers to knowledge about matters and conduct that could only have

arisen thereafter. The district court correctly concluded that plaintiffs had failed to allege a

relationship between Lumpkins and the debenture holders that could give rise to a fiduciary duty.

Plaintiffs also seize upon the possibility, which the district court raised sua sponte and then

rejected in a footnote, that Lumpkins could be jointly liable with Morgan Stanley or the Allwaste

Board if he knowingly participated in their breach of a duty to a fiduciary. The district court correctly

held that plaintiffs did not plead that Lumpkins participated in the investigation or preparation of the

Opinion Letters and that, asframed in the complaint, he played a limited role in the merger and could
- 25 -

not have participated in any alleged breach of fiduciary duty. The court therefore did not err in

holding that Lumpkins had been fraudulently joined in plaintiffs’ claim for breach of fiduciary duty.

B

The district court also dismissed this cause of action against all defendants. Plaintiffs’

argument on appeal consists of three sentences. See Appellants Br. at 52. They contend the district

court erred in dismissing their claim based on their unilateral and unreasonable reliance on the

Fairness Opinion; that the court failed to adhere to the proper standard when analyzing the facts

concerning the reliance issues; and that, because the determination of a fiduciary relationship is based

on equitable principles and is primarily fact-based, plaintiffs should have been permitted to take

discovery. Id. We will not consider an argument that has been inadequately briefed. Rutherford v.

HarrisCounty, Tex., 197 F.3d 173, 193 (5thCir. 1999) (holding that “[q]uestions posed for appellate

review but inadequately briefed are considered abandoned.” (quoting Dardar v. Lafourche Realty

Co., 985 F.2d 824, 831 (5th Cir.1993)). Because plaintiffs’ arguments fail to comply with the

minimum standards necessary to permit review, we affirm the dismissal of their breach of fiduciary

duty claim under Rule 12(c).

VI

Plaintiffs also sue defendants for fraud.

A

To maintain a fraud cause of action against Lumpkins under Texas law, plaintiffs must

establish that he (1) made a material representation, (2) that was false when made, (3) he knew the

representation was false, or made it recklessly without knowledge of its truth and as a positive

assertion, (4) he made the representation with the intent that plaintiffs should act upon it, and (5)
- 26 -

plaintiffs acted in reliance upon it and suffered injury as a result. Beijing Metals & Minerals

Imp./Exp. Corp. v. Am. Bus. Ctr. Inc., 993 F.2d 1178, 1185 (5thCir. 1993) (Texaslaw). The district

court held inter alia that plaintiffs could not recover against Lumpkins because plaintiffs failed to

show that he intended that they rely on his statements regarding Morgan Stanley’s experience and

abilities. Plaintiffs maintain that they have made a sufficient showing that they justifiably relied on

Lumpkins’ representations regarding Morgan Stanley’s qualifications and intent to perform the due

diligence investigation. They also contend they have alleged that Lumpkins made representations that

he knew would be communicated to the debenture holders and others, thereby satisfying the

requirement of Ernst & Young L.L.P. v. Pacific Mutual Life Insurance Co., 51 S.W.3d 573 (Tex.

2001), that a person can be liable for a fraudulent misrepresentation made to one whomhe hasreason

to expect to act or to refrain from acting in reliance upon the misrepresentation. See id. at 580.

We conclude that the district court did not err in holding that Lumpkins had been fraudulently

joined in plaintiffs’ fraud claim. The only misrepresentation specifically attributable to Lumpkins is

found in ¶ 20 of the complaint. There plaintiffs allege that “Lumpkins represented to Allwaste that

Morgan Stanley was qualified and experienced in investigating and advising regarding such

transactions, and would be able to aid Allwaste in evaluating the merits, advisability, and fairness of

the Philip’s proposal.” Compl. ¶ 20 (emphasis added). Plaintiffs’ contention that they reasonably

relied on Lumpkins’representations does not address whether he intended that the debenture holders

rely or had reason to expect that they would. 

Their assertion that Lumpkins made misrepresentations with knowledge that they would be

communicated to the debenture holdersis not found in the complaint. Plaintiffs support this argument

by citing ¶¶ 20, 21, 54, and 55 of their pleading. See Appellants Br. at 32. As we have noted, ¶ 20
20Paragraph 21 asserts:

Morgan Stanley and Allwaste entered into a letter agreement dated

February 12, 1997 regarding Morgan Stanley’s services with respect

to Philip’s proposal. David Lumpkins executed the letter agreement

as Managing Director on behalf of Morgan Stanley. Pursuant to that

letter agreement, Morgan Stanley was engaged to provide a wideranging array of “financial advice and assistance in connection with

this transaction [involving Philip and Allwaste], including advice and

assistance with respect to defining objectives, formulating and

implementing a tactical strategy, performing valuation analysis, and

structuring, planning and negotiating the transaction.” Morgan

Stanley also agreed that “[u]pon your request, and at no additional

expense, we will render a financial opinion letter in accordance with

our customary practice with respect to the consideration to be

received in the transaction.”

(brackets in original).

21Paragraph 54 states:

Defendants knew, or should have known, that the information they

were communicating directlyor indirectlyto the public, the Debenture

holders, and other interested parties would be relied upon by the

public, the Debenture holders, and other interested parties in making

decisions and determining how to act with respect to their interest in

Allwaste, including, but not limited to, whether to redeem or convert

the Debentures and, if so, when such action should be taken.

Paragraph 55 alleges:

Defendants knew, or should have known, that the information they

were communicating directlyor indirectlyto the public, the Debenture

holders, and other interested parties would impact the market, and

that the impact on the market would be considered by the public, the

Debenture holders, and other interested parties in making decisions

and determining how to act with respect to their interest in Allwaste,

including, but not limited to, whether to redeem or convert the

Debentures and, if so, when such action should be taken.

- 27 -

addresses what Lumpkins represented to Allwaste. Paragraph 21 concerns Morgan Stanley’s

obligations under the Letter Agreement.20 Paragraphs 54 and 5521 simply aver in conclusory terms
- 28 -

that defendants knew or should have known that unspecified “information that they were

communicating directly or indirectly to the public, the Debenture holders, and other interested

parties” would be relied on or would impact the market. Id. ¶¶ 54, 55. These paragraphs do not

specificallyallege that Lumpkinsintended or had reason to expect that hisrepresentationsto Allwaste

would influence the debenture holders. They in fact make no explicit reference to Lumpkins or to

Allwaste. Even construing the complaint liberally, as we must, to read such an allegation into ¶¶ 54

and 55, it would be necessary to infer that nondescript “information” that defendants communicated

included Lumpkins’ pre-engagement representations to Allwaste about Morgan Stanley’s

qualifications and experience. And we would also be required to deduce that the “indirect”

communications to the debenture holders encompassed Lumpkins’ statements to Allwaste. These

inferences and deductions are unwarranted. We therefore reject plaintiffs’ reliance on conclusory

assertions to maintain that Lumpkins committed fraud by making statements to Allwaste, in the

context of soliciting its business, with the intent or expectation of inducing plaintiffs to act or to

refrain from acting with respect to their debentures. 

The district court did not err in holding that plaintiffs had no possibility of recovering against

Lumpkins for fraud.

B

The district court held inter alia that defendants were entitled to judgment dismissing

plaintiffs’fraud claim because, even assuming that Morgan Stanley expected the Fairness Opinion to

reach plaintiffs, it did not appear that defendants could have expected that plaintiffs would act upon

the opinion. Plaintiffs contend on several grounds that the district court erred. They maintain, in

relevant part, that they satisfied their obligation to plead that defendants had reason to expect that
22Plaintiffs allege in ¶ 100 that they “did, in fact, rely upon such information both before and

after the proposed merger occurred in making decisions and determining how to act with respect to

their interest in Allwaste, including, but not limited to, whether to redeem or convert the Debentures

and, if so, when such action should be taken.”

- 29 -

plaintiffs would rely on the Fairness Opinion.

The district court did not err. Among the elements of fraud is the requirement that the

fraudfeasor make a representation with the intent that the plaintiff act upon it. See Beijing Metals,

993 F.2d at 1185. Texas does not require that there be privity between the alleged target of the fraud

and the fraudfeasor. A defendant can be held liable for fraud when he makes a misrepresentation that

he intends to reach a third person and induce reliance. Ernst &Young, 51 S.W.3d at 578 (“Thus, we

have held that a misrepresentation made through an intermediary is actionable if it is intended to

influence a third person’s conduct.”). For liability to arise on this basis, however, “the claimant’s

reliance must be ‘especially likely’ and justifiable, and the transaction sued upon must be the type the

defendant contemplated.” Id. at 580. The “standard requires more than mere foreseeability.” Id.

It istherefore insufficient for a plaintiffto allege “what is commonly ‘known’ or ‘expected,’” because

“even an obvious risk that a third person will rely on a representation is not enough to impose

liability.” Id. at 581.

We hold that plaintiffs have not stated a claim for fraud. Plaintiffs allege in ¶¶ 29 and 30 that

Morgan Stanley issued two Letter Opinions in which it opined that the proposed merger was fair.

They addressin one paragraph of their fraud claim the issue of defendants’ intent to induce plaintiffs’

reliance. Plaintiffs advance in ¶ 99 the conclusory assertion that “Defendants knew or should have

known that plaintiffs were relying on defendants’ false representations and omissions.” Compl. ¶

99.22 The predicate factual allegations of the complaint that appear to relate to this assertion are ¶¶
23Plaintiffs allege in ¶ 31 that “Defendants knew or should have known that Allwaste would

rely on and disseminate these ‘fairness opinions’ and related information concerning their ‘due

diligence’investigation theyundertook regarding Philip, its offer, and itsmanagement to third parties,

such asthe Allwaste shareholders and the Debenture holders.” Compl. ¶ 31 (emphasis added). They

do not allege, however, that defendants expected that the debenture holders would rely on the

information.

- 30 -

54 and 55, which we have addressed above concerning the fraud claim against Lumpkins. See supra

note 21.23 Even if we read these paragraphs more leniently than we did when considering the fraud

claim against Lumpkins, and hold that they can be construed to include communication of the

Fairness Opinion to the debenture holders, the allegations do not adequately aver that plaintiffs’

reliance was especiallylikelyand justifiable. In each paragraph, plaintiffs assert that defendants knew,

or should have known, that the information they were communicating directly or indirectly to the

debenture holders would be relied on in making decisions and determining how to act. These

allegations at most assert what was foreseeable to defendants, not that reliance by the debenture

holders was especially likely and justifiable. Assertions of this type are inadequate, as illustrated by

the Texas Supreme Court’s decision last year in Ernst & Young.

Ernst & Young decided whether an accounting firm could be held liable to a plaintiff for

making fraudulent misrepresentations in an audit report that the plaintiff had relied on in deciding to

purchase a corporation’s notes. Ernst &Young, 51 S.W.3d at 574-75. Pacific Mutual Life Insurance

Company (“Pacific”) purchased notes ofInterFirst Corporation (“InterFirst”) after InterFirst merged

withRepublicBankCorporation (“RepublicBank”). Pacific alleged that, in acquiring the notes, it had

relied on an audit report concerning RepublicBank’s financial statements prepared by Ernst &

Young’s predecessor (“Ernst & Young”). Ernst & Young audited RepublicBank’s financial

statements and gave an unqualified opinion that the statements fairly presented the bank’s financial
- 31 -

position. With Ernst & Young’s consent, RepublicBank incorporated the audit report and the audited

financialstatement inseveraldocuments, including publicly-available reports to shareholders and SEC

filings (proxies, prospectuses, and registration statements). Id. at 575-76. After reviewing public

information relating to the InterFirst-RepublicBank merger, including the merger prospectuses,

Pacific decided that the InterFirst notes were a good investment because they would be backed by

the merged bank. Id. at 576. Shortly after Pacific made the purchase, the merged entity, First

RepublicBank Corporation (“First RepublicBank”), filed for bankruptcy. Pacific sued Ernst &

Young, among others, alleging that the audit opinion contained misrepresentations and that the

financialstatements did not accuratelyreflectRepublicBank’sfinancialcondition. It also asserted that

Ernst & Young had violated cert ain accounting standards. Ernst & Young moved for summary

judgment, in part on the ground that it did not specifically intend for Pacific to rely on representations

made in the audit report when making its decision to buy the InterFirst notes. Id.

The Texas Supreme Court held that Pacific could not recover against Ernst & Young for

fraud because Pacific had not met the reason-to-expect standard for determining whether Ernst &

Young had intended to induce Pacific’s reliance on the audit report. Id. at 580. Pacific introduced

summary judgment evidence that Ernst & Young knew that investorsin allsecurities backed by First

RepublicBank would rely upon the information in the audit report; that it was known and expected

by public accounting firms like Ernst & Young that documents like the prospectuses and proxy

materials were widely disseminated throughout the investment community and that investors relied

upon information from these materials when evaluating investments in securities the subject entity

backs; that investors like Pacific commonly relied on representations made in SEC-filed documents

in evaluating securities backed byan entity; and that Ernst & Young’s contention that it did not intend
- 32 -

Pacific to rely on the audit report in buying the InterFirst notes was contrary to commonly accepted

and firmly established practices in the investment community. Id. at 580-81. The Texas Supreme

Court reversed the court of appeals’ conclusion that this evidence was sufficient to raise a fact issue

whether Ernst & Young had reason to expect Pacific’sreliance on the audit report in deciding to buy

the InterFirst notes. Id. at 581. The court reasoned that Pacific’s affidavits spoke in terms of what

was commonly “known” or “expected” in the investment community, “[b]ut even an obviousrisk that

a third person willrely on a representation is not enough to impose liability.” Id. Although “[g]eneral

industry practice or knowledge may establish a basis for foreseeability to show negligence, . . . it is

not probative of fraudulent intent.” Id. Instead, “[t]o prove that an alleged fraudfeasor had reason

to expect reliance, ‘[t]he maker of the misrepresentation must have information that would lead a

reasonable man to conclude that there is an especial likelihood that it will reach those persons and

will influence their conduct. There must be something in the situation known to the makerthat would

lead a reaso nable man to govern his conduct on the assumption that this will occur. If he has the

information, the maker is subject to liability under the rule stated here.” Id. (quoting Restatement

(Second) of Torts § 531 cmt. d (1977) (emphasisin original)). The court held that Pacific’s evidence

of the generalized industry practice or understanding was insufficient to show that Ernst & Young

possessed information of an especial likelihood that investors like Pacific would rely on Ernst &

Young’sstatementsin the merger-related prospectusesin purchasing securitiesInterFirst had issued

years earlier. Id.

If anything, the allegations of the complaint in this case are weaker than the evidence found

inadequate in Ernst & Young. The Letter Agreement and the Fairness Opinion cabined the persons

to whom the Fairness Opinion was direct ed--the Allwaste Board and shareholders. The Letter
24Plaintiffs cite in their brief evidence from another lawsuit in which Allwaste’s Board

Chairman testified that there was a “good possibility” that the Board’s determination that the merger

was in the best interests of the company “would get to the debenture holders” and that it was

“probably correct” that there was “a special likelihood that this information would get to the

debenture holders.” See Appellants Br. at 12 n. 5 & 41 n.12. They maintain that pages from the

witness’ deposition in that case were attached to their reply and objectionsto defendants’ motion for

judgment on the pleadings. Id. at 12 n. 5. Even if we assume that this evidence is sufficient to cure

the defects we have identified, the district court, in ruling on the motion for judgment on the

pleadings, declined to consider any document other than plaintiffs’ complaint, the Letter Agreement,

and the Fairness Opinion. See R. 498. Plaintiffs have not asserted before us that the district court

erred in this respect. Accordingly, they may not rely on the contents of these documents to shore up

their defective complaint.

- 33 -

Agreement explicitly provided that “[a]ny advice or opinions provided by Morgan Stanley may not

be disclosed or referred to publicly or to any third party except in accordance with our prior written

consent.” Like the Letter Agreement, the Opinion Letters contained a restriction that they were “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 written consent, except that this opinion may be included

in its entirety in any filing made by Allwaste with the Securities and Exchange Commission in

connection with the Merger.” Plaintiffs were therefore obligated to do more than posit conclusory

assertions in an attempt to broaden the class of intended recipients. Faced with these limitations,

plaintiffs were required to plead facts that, viewed favorably to them, permitted the conclusion that

defendants knew the Fairness Opinion was not in fact only for the information of Allwaste’s Board,

and that defendants were aware of facts that would lead a reasonable person to conclude that there

was an especial likelihood that the Fairness Opinion would reach the debenture holders and influence

their conduct. Under Ernst &Young, the allegations had to amount to more than mere assertionsthat

defendants knew or should have known that plaintiffs would rely on the Fairness Opinion in deciding

whether to redeem their debentures.24
- 34 -

Plaintiffs also rely on § 536 of the Restatement (Second) of Torts (1977) to establish that

defendants can be liable for fraud. “Under this section, one who complies with a statutory filing

requirement is presumed to have reason to expect that the information will reach and influence the

class of persons the statute is designed to protect.” Ernst & Young, 51 S.W.3d at 581 (citing § 536

cmt. c). Even assuming that § 536 can carry the load that plaintiffs assign to it, see id. at 582

(“Because section 536 effectively alleviates a claimant’s burden to show intent to induce reliance in

fraud actions, it should be applied narrowly if at all.”), this argument is a makeweight that is found

in plaintiffs’ briefs on appeal. They have not included in their complaint the factual allegations that

would support such a theory, and we decline to consider it. 

According to the Letter Agreement, Morgan Stanley authorized Allwaste to disclose the

Opinion Letters to the SEC in any filing made by Allwaste with the SEC. Plaintiffs do not allege that

Morgan Stanley was itself complying with a statutory filing requirement. Under Rule 12(c), we

assess whether plaintiffs would be entitled to relief under any set of facts or any possible theory that

they could prove “consistent with the allegations in the complaint.” Jones, 188 F.3d at 324. We

decline to allow plaintiffsto rely on the contents of their appellate brief as a surrogate for allegations

that are missing from their complaint.

To the extent that plaintiffsrely on defendants’ knowledge that the Fairness Opinion would

be publicly available once filed with the SEC, their argument fares no better. Ernst & Young

specifically held inadequate to meet the required standard evidence that investors commonly relied

on representations made in SEC filings. The allegations of reliance in plaintiffs’ complaint are limited

to ¶¶ 99, 54, and 55, which aver nothing that would permit the reasonable inference that there was

an especial likelihood that debenture holders would rely on Allwaste’s SEC filings. 
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Accordingly, we hold that the district court did not err in granting judgment on the pleadings

as to plaintiffs’ fraud cause of action.

VII

We turn finally to plaintiffs’ DTPA claim.

A

To recover under the DTPA, plaintiffs must prove that they are consumers, that defendants

engaged in a false, misleading, or deceptive act, and the act constituted a producing cause of their

damages. See Doe v. Boys Club, 907 S.W.2d 472, 478 (Tex. 1995); Tex. Bus. & Com. Code Ann.

§ 17.50(a)(1) (Vernon Supp. 2002). “A consumer is an individual who ‘seeks or acquires by

purchase or lease, any goods or services.’” Nast v. State Farm Fire and Cas. Co., 82 S.W.3d 114,

122 (Tex. App.--San Antonio 2002, no pet. h.) (quoting Tex. Bus. & Com. Code Ann. § 17.45(4)

(Vernon Supp. 2002)). “Whether or not a plaintiff is a consumer is a question of law, unless there

is a dispute concerning factual issuesthat create consumerstatus.” Id. (citing Lukasik v. San Antonio

Blue Haven Pools, Inc., 21 S.W.3d 394, 401 (Tex. App.--San Antonio 2000, no pet.)). 

The district court held inter alia that the debenture holders were not “consumers” under the

DTPA because they did not acquire goods or services from Morgan Stanley or Lumpkins since they

were neither parties to, nor third-party beneficiaries of, the Allwaste-Morgan Stanley Letter

Agreement. Plaintiffs contend the district court erroneously imposed a privity requirement between

them and Lumpkins or Morgan Stanley.

Plaintiffs’ argument is based on a misunderstanding ofthe district court’s decision. The court

held that plaintiffs did not acquire services from Lumpkins or Morgan Stanley because the contract

forservices was betweenMorganStanleyandAllwaste and the debenture holders were neither parties
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to, nor third party beneficiaries of, that agreement. The court did not conclude that contractual

privity was necessary; it simply looked at the legal arrangement under which Morgan Stanley

provided services and held that the debenture holders were not part of that arrangement. Although

it expressed in contractual terms the absence of allegations that plaintiffs had sought or acquired

services from Lumpkins, it did not mistakenly erect a privity bar.

B

The district court held inter alia that defendants were ent itled to judgment dismissing

plaintiffs’ DTPA claim because the debenture holders could not qualify as consumers since they did

not seek or acquire services from Morgan Stanley and Allwaste did not acquire them with the intent

to benefit the debenture holders. Plaintiffs argue that they are consumers because the Allwaste Board

intended that Morgan Stanley’sservices would benefit the Allwaste stockholders, and that “whether

the Board’sintent extended further is an issue offact.” Appellants Br. at 53. They maintain that they

submitted evidence that the Allwaste Board knew this information was disseminated to debenture

holders, that the Board sought to aid stockholdersinmaking decisions, and that it knew the debenture

holders would receive the same information. Therefore, they assert that it is logical to conclude that

the Board intended the debenture holders to benefit from this information and make decisions upon

it as well.

Plaintiffs’ argument fundamentally misunderstands the nature of defendants’ Rule 12(c)

motion. The issue whether the Allwaste Board acquired services from Morgan Stanley with the intent

to benefit the debenture holders is not one of fact, it is a question of pleading adequacy: whether

plaintiffs have alleged in non-conclusory terms that Allwaste acquired Morgan Stanley’s services

regarding the Allwaste-Philip merger with the intent to benefit the debenture holders. The answer
25We held in Badon:

Plaintiffs appear to argue that any mere theoretical possibility of

recovery under local law--no matter how remote or fanciful--suffices

to preclude removal. We reject this contention. As the cited

authorities reflect, there must at least be arguably a reasonable basis

for predicting that state law would allow recoveryin order to preclude

a finding of fraudulent joinder.

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to this question is that plaintiffs have not adequately pleaded this essential predicate. Neither the

DTPA paragraphs, see Compl. ¶¶ 104-109, nor the underlying factual allegations of the complaint,

address this matter. In fact , ¶ 22 asserts that “Allwaste retained Morgan Stanley as investment

bankers to represent it in the sale discussions and, among other things, render an opinion as to

whether the sale offer was fair[.]” Id. ¶ 22 (emphasis added). At most, the complaint avers that

defendants knew that Allwaste would and did disseminate the Fairness Opinion and related due

diligence information to the debenture holders, see id. ¶¶ 31-32, not that Allwaste acquired the

services from Morgan Stanley with the intent to benefit the debenture holders.

The district court did not err in dismissing plaintiffs’ DTPA cause of action.

VIII

Although we have subjected plaintiffs’ complaint to careful scrutiny, this opinion does not

stand for undue formalism in pleading or contradict the intent and spirit of Rule 8(a) and (e)(1). It

does, however, emphasize that pleadings matter when fraudulent joinder and Rule 12(c) issues are

decided. When a court addresses fraudulent joinder and determines whether there is any possibility

that a plaintiff will be able to establish a cause of action against the in-state defendant, it looks for a

reasonable possibility--not merely a theoretical one--that the plaintiff can establish a claim. See

Badon, 236 F.3d at 286 n.4.25 This standard necessarily requires an evaluation of the allegations of
Id. (emphasis in original).

26Of course, when a summary judgment-like procedure is used, the court examines more than

the complaint. As we have explained, the district court did not fully follow that procedure in this

case.

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the state court complaint,26 because it is by referring to this pleading that a court assesses whether

a reasonable theory, or merely a theoretical one, has been asserted. Regarding judgment on the

pleadings, when a court decides whether beyond doubt a plaintiff cannot recover as a matter of law,

the content of the complaint is critical. This is so because the question to be decided--whether the

plaintiff would be “entitled to relief under any set of facts or any possible theory that he could prove

consistent with the allegations in the complaint,” Jones, 188 F.3d at 324 (emphasis added)--is

tethered to the averments.

Moreover, we are confident that, as plaintiffs have pleaded their complaint, Texas law does

not intend for defendants to be liable to the debenture holders. Texas has adopted standards that are

designed to restrict the universe of persons who are merely peripheral to a legal relationship but are

permitted to sue for wrongdoing committed within that relationship. Like other jurisdictions, Texas

is concerned by “the potential for ‘unlimited liability,’” Ernst &Young, 51 S.W.3d at 580, that could

call partiesto account for conduct intended only to affect another participant in the legalrelationship.

Texas thus limns the group of potential plaintiffs without barring claims that can be brought both

logically and justly. It does so in the context of negligence liability by restricting the class of persons

who are owed a duty. Negligent misrepresentation liability is limited to persons, or a limited group

of persons, for whose benefit and guidance a person intendsto supply information or knows that the

recipient intends to supply it. Breach of fiduciary duty claims are restricted to a group of plaintiffs

who can establish the existence of a confidential or similar relationship that gives rise to a fiduciary
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duty. Fraud requires that the plaintiff prove that the maker of the misrepresentation had information

that would lead him to conclude that there was an especial likelihood that it would reach another

person and influence that person’s conduct. And under the DTPA, a plaintiff must be a consumer,

that is, one who seeks or acquires, by purchase or lease, any goods or services. These limitations are

essentially akin to, if they are not in fact, elements of the claims that must be properly pleaded. We

do not impose a heightened pleading standard. But, considering the constraints on claims by

individuals peripheral to a legal relationship between other parties, we conclude that plaintiffs must

plead facts that, viewed favorably, demonstrate that they fall within the circumscribed class of

individuals eligible to bring a claim. 

If our decision upholding dismissal of this lawsuit at the pleading stage appears somewhat

hard, we stress that the complaint could have been drafted to withstand dismissal had there been

underlying factsto support the claims. Moreover, it is not unusual for plaintiffs who oppose a motion

to dismiss to request leave to amend in the event the motion is granted. Although the denial of such

a motion may not be an abuse of discretion, see, e.g., Herrmann Holdings Ltd. v. Lucent

Technologies Inc., 302 F.3d 552, 567 (5th Cir. 2002) (upholding denial of leave to amend where

plaintiffs had already filed original complaint and two amended complaints), our cases support the

premise that “[g]ranting leave to amend is especially appropriate . . . when the trial court has

dismissed the complaint for failure to state a claim[,]” Griggs v. Hinds Junior College, 563 F.2d 179,

180 (5th Cir. 1977) (per curiam) (addressing Rule 12(b)(6) dismissal). In view of the consequences

of dismissal on the complaint alone, and the pull to decide cases on the merits rather than on the

sufficiencyof pleadings, district courts often afford plaintiffs at least one opportunity to cure pleading

deficiencies before dismissing a case, unless it is clear that the defects are incurable or the plaintiffs
27Plaintiffs’ counsel stated:

I don’t believe that we filed a separate motion for leave to amend, but

in the context and in the briefs of the motion on the motion for

judgment on the pleadings, I do recall that it was specifically

suggested that we would like the opportunity to do that if the court

was inclined to grant the motion on the basis of the complaint as it

currently existed. Because we do feel that . . . allegations, if they’re

not currently in the complaint, could certainly in good faith be set

forth. So I do think that that issue was before the district court.

Although no amended complaint was ever actuallygiven to the district

court, I believe we were waiting to get a thumbs up from the court to

do that, if the court desired us to do so.

28In their reply brief in support of their motion to remand, plaintiffs stated that they

“reserve[d] the right to amend their Petition to assert breach of contract claims based upon the

existence of an implied or oral contract.” R. 134. As we explain supra at note 6, plaintiffs have not

appealed the dismissal of their breach of contract claim, so this assertion would be irrelevant even if

plaintiffs had advanced it in response to defendants’ motion for judgment on the pleadings. They also

asserted that, following remand to state court and discovery concerning their claims against

Lumpkins, “plaintiffs can amend their pleadings, if necessary.” Id. at 133. This statement pertains

to amending their complaint in state court and is not a request for leave to amend in the district court.

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advise the court that they are unwilling or unable to amend in a manner that will avoid dismissal. 

We inquired of the parties during oral argument whether plaintiffs had sought leave to amend

in the district court. Plaintiffs’ counsel stated that plaintiffs had not filed a separate motion for leave

to amend, but, in the context of the motion briefing, they had “specifically suggested that [they]

would like the opportunity to [amend] if the court wasinclined to grant the motion of the basis ofthe

complaint asit currently existed.”27 We have carefully studied the record and found in plaintiffs’ reply

and objections to defendants’ motion for judgment only a narrow assertion that “plaintiffsshould be

given the opportunity to amend their Complaint.” R. 442 n.3. This contention was made, however,

in the alternative in a footnote, in the limited context of plaintiffs’ fraud claim.28 The only general

request we have located is a procedurally inapposite one under Rule 56(f) for delay until plaintiffs
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could conduct discovery. See id. at 429-428. Nor have plaintiffs assigned as error on appeal the

district court’s failure to allow them to amend their complaint. Thus even had plaintiffs moved for

and been denied leave to amend, they would have waived any error on this basis by failing to raise

the issue in their brief on appeal. See, e.g., In re Tex. Mtg. Servs. Corp.,761 F.2d 1068, 1073-74 (5th

Cir. 1985) (collecting authorities).

* * *

The district court did not err in concluding that Lumpkins was fraudulently joined and that

defendants were entitled to judgment on the pleadings. Accordingly, the judgment is

AFFIRMED.