United States Court of Appeals

Fifth Circuit



## FILED

June 29, 2005

Charles R. Fulbruge III

Clerk 

## In the 

# United States Court of Appeals

for the Fifth Circuit

_______________



### m 04-10251

_______________



### G ENERAL 

### E LECTRIC 

### C APITAL 

### C ORPORATION

,

A D ELAWARE C ORPORATION

,



### Plaintiff-Appellant

,

VERSUS



### H. W AYNE 

### P OSEY



### , ET 

### A L



### .,

Defendants,

H. W AYNE 

### P OSEY 

### ; C HARLES 

### W. M C 

### Q UEARY 

### ; R OBERT 

### D. S MITH 

### ; D EBORAH 

### A. J OHNSON 

### ;

D ALE 

### K. E DWARDS 

### ; R OBERT 

### M. S ONTHEIMER 

### ; G REGORY 

### A. W AGONER



### , M.D.;

T HOMAS 

### E. C HANEY



### , M.D.; J AMES 

### F. H ERD



### , M.D.; S ANJEEV 

### K. M EHRA 

### ;

R ICHARD 

### E. R AGSDALE



### ,

Defendants-Appellees,

C HARLES 

### J. B UYSSE



### , M.D.; J ACK 

### W. M C 

### C ASLIN



### ,

DefendantsThird Party PlaintiffsAppellees,

VERSUS



### A RTHUR 

### A NDERSEN 

### LLP,

Third Party DefendantAppellee.2 _________________________

Appeal from the United States District Court

for the Northern District of Texas

__________________________

Before, S MITH , D ENNIS , and P RADO

, Circuit Judges.

J ERRY E. S MITH , Circuit Judge:

General El e ctric Capital Corporati on

(“GECC”) appeals the dismissal of i ts

negligent misre presentation claim against

several former directors and of ficers of

Promedco Management Company (“Promedc o”). Because GECC’s complaint pleads

sufficie nt allegations to state a claim upon

which relief can be granted, we reverse and

remand.

I.

GECC’s original complaint alleged that in

June 2000 it was induced to len d Prom edco

$20 millio n. According to GECC, in deciding

to enter into the credit agreement, it relied on

Promedco’s representations about its financial

condition. GECC further contends that many

of these representation s were false and/or

misleading and that as a result it sus t ained a

loss of over $12 million.

A.

Promedco was a medical services company

t hat managed health care practices in nonurban markets. Essentially, Promedco would

approach an existing medical practice, acquire

its operating assets (other than real estate),

and employ its personnel (other than the

physicians). Promedco would then manage the

business aspects of

t he practices and provide administrative services suc h as facilities

ma n agement, the acquisition of malpractice

insurance, and accounting services.

In February 1999, GECC was approached

and requested to extend credi t to Prom edco.

Bef o re eventually agreeing to make a $20

millio n loan, GECC reviewed financial reports

and other documents supplied by Promedco

management. These documents, i nter alia

, represented Promedco’s 1999 earnings before

interest, taxes, depreciation, and amortization

(“EBITDA”) to be $44.6 millio n, when its

financial condition was much more precarious.

By the time GECC sued, it had been

revealed by independent auditing that Promedco’s true 1999 EBITDA were much lower (according to GECC’s complaint, as low as $16.2

million). GECC alleges that this

overstatement was the result of improper

internal accounting with re spect to several

transactions and that

the source of the [] financial misstatements

was the improper t reatment given by

Promedco, subject to t he oversight and

control of the Officers and Directors, to

various of its internal tra nsactions. This

improper treatment formed the basis of

Promedco’s audited 1999 financial

statements, its 1999 1 0K (which was

approved by the Officers and Directors),

and other financial materials provided to3

and relied upon by GECC in its decision to

[lend Promedco the $20 million].

Less than a year after the loan was made, Promedco filed for Chapter 11 bankruptcy protection, as a consequence of which GECC recovered only some $8 million of the $20 loan.

GECC sued (1) H. Wayne Posey, CEO; and

Robert Smith, CFO; (2) Promedc o’s outsi de

directors 

### SS

Charles J. Buysse, Jr., M.D., E.

T ho mas Chaney, James F. Herd, Jack W.

McCaslin, a nd Richard E. Ragsdale; and (3)

other Promedco executives 

### S S Dale Edwards,

Senior Vice President of Development;

Charles W. McQueary, Senior Vice President

of Operations; Robert M. Sontheimer, Senior

Vice President for Managed Care; Gregory M.

Wagoner, M.D., Senior Vice Pr esident for

Medical Affairs; and Deborah Johnson, Senior

V ice President of Administr ation and

Secretary to the Board of Directors

(collectively, the “non-accounting defendants” 1 ). GECC attached to its complaint Promedco’s 1999 Form 10-K and its attachment,

the “Report of Independent Public

Accounta n ts,” prepared by Arthur Andersen

LLP (“Arthur Andersen”). The report states

t hat Arthur Andersen audited Promedco’s

1998 and 1999 financial sta t ements in

accordance with generally accept ed accounting

standards. B.

Defendants filed motions to dismis s under

Federal Rules of Civil Procedure 9(b) and 12-

(b)(6), arguing that GECC’ s complaint failed

to allege fraud with the requisite particularity,

and in any event, failed to state a claim upon

which relief could be granted. See F ED

. R.

C IV

. P. 9(b), 12(b)(6). The district court

properly dispensed with the rule 9(b) argume nt , concluding that GECC had not alleged

any fraud claims and thus was not subject to

the heightened pleading requirements of rule

9(b). 2

On the rule 12(b)(6) motion, however, the

court held that GECC had failed to state a

claim for negligent misrepresentation.

Specifically, the court found that GECC’s

pleadings ( i.e., the attachment of the Form 10-

K) contrad i cted its allegation that the

defendants had “failed to exercise reasona b le

care in obt aining and communicating the

information concerning Prome d co’s financial

condition.” Under article 2.42(c) of the Texas

Busin e ss Corporati on Act, officers and directors are entitled to rely in good faith on the

reports of public accountants. See T EX

. B US

. C ORP

. A CT art. 2.42(c)

. 3 Consequently, the

1 This moniker, used in the order denying

GECC’s rule 59(e) motion, refe r s to defendants

Edwa rds, McQueary, Sontheimer, Wagoner, and

Johnson. Presumably this label is meant to imply

that these defendants, all officers of Promedco (but

not the CEO or CFO), were not involved in the

company’s accounting practices. For the sake of

consistency, we adopt the same taxonomy, yet we

do not take a position on whether the denomination

accurately reflects the defendants’ activities. 2 See 2 J AMES W M

. M OORE ET AL

., M OORE ’ S

F EDERAL P RACTICE § 9.03[1][d ], at 9-21 (3d ed.

2005).

3 Article 2.42(c) provides,

In the discha

r ge of any duty imposed or

power conferred upon an officer, of a c orporation the officer may in good faith and ordinary

care rely on information , opinions, reports, or

statements, including fina ncial statements and

other financial data, concerning the corporation

or another person, that were prepared or presented by:4

district court co n cluded that the reliance on

Ar thur Andersen’s approval of Promedco’s account ing met hods directly contradicted

GECC’s allegation that t he directors and

officers had failed to exercise reasonable care.

Additionally, the court reasoned that

a lt hough allegations that the directors and

officers sho uld not have relied on the Arthur

A ndersen report ( e.g., an allegation that they

knew the information provided to Arthur

Andersen was false) would have been

sufficient to susta in a cause of action, GECC

made no such allegations. As a matter of law,

therefore, the court concluded that the defendants could not have acted neglig ently in

vouching for the accuracy of the financial

statements provided to GECC. The court

dismi ssed GECC’s claim with prejudice and

entered a final judgment.

In response, GECC filed motions to vacate

the judgment and to amend, see F ED

. R. C IV

. P. 59(e), 15(a), attaching a proposed amended complaint that it claimed would remedy the

pleading defects identified by the district court.

The main di f

ference between the original and

proposed amended complaints is the inclusion

o f allegations that the misrepresentations

occurred in both a udit ed and unaudited financial information. Specifically, the amended

complaint alleges that GECC relied on erroneous unaudited documents including an offering

memorandum, some documents attached to

the Form 10-K, Promedco’s Form 10Q for the

first quarter of 2000, a nd a certificate of

compliance. Additionally, GECC alleges that

it relied on a live presentation made by Posey,

Smith, Edwards, and Sontheimer.

The district court again hel d that GECC

had failed to st a te a claim. In a sparselyw orded opinion, the court concluded tha t

GECC had failed to allege any facts in support

of the no t io n that the defendants did not

exercise reasonable care. The court also noted

that t he complaint failed to allege sufficient

facts to sustain o t her elements of a claim for

negligent misrepresentation 

### SS to-wit

, “Plaint iff

has failed to a llege any facts tending to

demonstrate that the director defendants had a

pecuniary interest in the financing transaction

at issue, nor has P laintiff alleged any facts

tending to demo nstrate that the non-accounting defendants were responsibl e for the

alleged misrepresentations.”

II.

A.

We review a dismissal under rule 12(b)(6)

de novo

. S ee Bombardier Aerospace

Employee Welfare Benefits Plan v. Ferrer,

Poirot & Wansbrough

, 354 F.3d 348, 351 (5th

Cir. 2003). Consequently, we employ the

same standard as that use d by the district

court: A claim will not be dismissed unless the

plaint iff cannot pro ve any set of facts in (1) one or more other officers or employees

of the corporation including members of the

board of directors; or

(2) legal counsel, public accou ntants, investment bankers, or other persons as to matters the

officer reasonably believes are wit hin the

person’s professional or expert competence.

An officer is not relying in good faith within the

meaning of this section if the officer has knowledge concerning the matter in que stion that

makes reliance otherwise perm i tted by this

subsection unwarranted.

T EX

. B US

. C ORP

. A CT art. 2.42(c). Section

2.41(c), furthermore, provides substantially the

same protection for directors.5

support of his claim that would entitle him to

relief. Id.

B.

The district court pre dicated its initial

dismissal of GECC’s claim on a finding t hat

GECC’s complaint contradicted its allegation

that the defendants acted without reasonable

c are. On appeal, however, defendants argue

that GECC failed to allege sufficient facts for

any of the required elements of a negligent

misrepresentation claim.

Under Texas law, a claim for negligent misrepresentation consists of four elements:

(1) the represen t at ion is made by a

defendant in the course of his bu siness, or

in a transaction in which he has a pecuniary

interest; (2) the defe ndant supplies “false

information” for the guidance of others in

their business; (3) the defendant did not

exercise reasonable care or competenc e in

o btaining or communicating t he

information; and (4) th e plaintiff suffers

pecuniary loss by just ifia

bly relying on the

representation.

Clardy Mfg. Co. v. Marine Midland Bus.

Loans, Inc.

, 88 F.3d 347, 357 (5th Cir. 1996).

Although the three sets o f defendants (the

CEO and CFO, the outside directors, and the

non-accounting defendants) take somewhat

differing a pproaches on appeal, all three

contend that GECC has generally failed

sufficiently to plead these required elements.

Specifically, defendants argue that the complaint contains mere conclusional all egations,

o r “legal conclusions stated as factual conclusions.” For example, defendants point to

GECC’s allegations with respec t to the fi rst

e lement of its claim. That element requires that the representation be made by a defendant

in the c o urse of his business, or in a

transaction in which

he has a pecuniary

interest. GECC’s complaint states that the

suppos e d misrepresentations were made “in

connection with a transaction

. . . in which the

Officers and Directors had a pecuniary

interest.” Similarly, as to the reasonable care

element, GECC alleges that the defend a nts

“failed to exercise reasonable care in obtaining

the information concerning Promedco’s

financial condition.” In the eyes of the

defendants, these allegati ons are too

conclusional to survive a rule 12(b)(6)

motion. 4

Although the allega t ions are devoid of

much factual particularity, they are patently

sufficient to state a claim, in terms of the

requisite specificity. GECC’s complaint easily

meets the relaxed pleading requirements of

Rule 8(a).

According to rule 84 of the Federal Rules

of Civil Procedure, “[t]he forms contained in

the Appendix of Forms are sufficient under the

rules and are intended to indicate the simplicit y

and brevity of statement which the rules

contemplate.” F E D

. R. C IV

. P. 84. A glance at

Form 9 confirms the lo w bar that rule 8(a)’s

notice pleading standar d sets out. In i ts

example of a complaint for negligence, Form

9 merely contains the simple stateme n t,

“[D]efendant negligently drove a m otor

veh icle against plaintiff . . . .” If such an un4 But see 2 J AMES W M

. M OORE

, M OORE ’ S

F EDERAL P RACTICE § 8.04[2], at 8-24.3 (3d ed

. 2005) (“Pleading conclusory allegations of fact or

law is permitted, provided the averments are ‘short

and plain’ and give fair notice to the defen ding

parties of the claim and the grounds allege d in

support.”).6

detailed allegation will suffice , so must

GECC ’ s. The example in Form 9 does not

even parse the negligence a llegation into

separate elements 

### SS e.g., the allegation could

say, “Defendant owed a duty of reasonable

care and breached that duty by not exercising

reasonable care i n t he manner in which he

operated his vehicle.” 5

Rule 8(a)(2) merely requires that a plaint iff

recite a “short and plain statement of the claim

showing that the pleader is entitled to relief.

F ED

. R. C IV

. P. 8(a)(2)

.

Such a statement must simply ‘give the defendant fair notice of what the plaint iff’s

claim is and the gro unds upon which it

rests.’ This simplified notice pleading

stand a rd relies on liberal discovery rules

and summary judgment motions to define

disputed facts and issues and to dispose of

unmeritorious claims.”

Swierkiewicz v. Sorema N.A.

, 534 U.S. 506,

512 (2002) (quoting Conley v. Gibson

, 355

U.S. 41, 47 (195 7)). Other than in the

situations expressly

enumerated in rule 9(b),

e.g., allegations of actual fraud, plaint iffs must

satisfy only

the minimal requirements of rule

8(a). See F ED

. R. C IV

. 8(a)(2), 9(b). 6 The juxtaposition of the two pleading standards contained in rules 8 and 9 is elucidating.

At oral argument, counsel for the nonaccounting defendants challenged w h ether

GECC had adequately alleged the involvement

of those defendants in providing any allegedly

misleading information. Confronting the oral

pres e ntation to GECC, at which the nonaccounting defendants were allegedly present,

counsel conceded that his clients’ presence

was pleaded, but “they never tell us what was

said 

### SS what was said that was false 

### S S or even

any kind o f detail for us to be able to discern

what facts are being alleged.”

This prayer for further particularity begs the

q u estion: What more particularity would the

defendants deem required to comply with the

rule 9(b) requirement o f pleading with

particularity? Surely, requiring plaintiffs t o

plead the particular allegedly false statements

made at a specific meeting is out of keeping

with the generally lenient s t andards of our

notice pleading regime. 7

Here, although GECC’s complaint contains

minimal factual particularity, its allegations are

at least as detailed as those in F orm 9. As

noted above, GECC points out t he relevant

document s in which, and presentations at

5 Indeed, parsing the allegations into elements

h as never been required. S ee 2 J AMES W M

. M OORE ET AL

., M OORE ’ S F EDERAL P RACTICE

§ 8.04[1], at 8-24 to 8-24.1 (3d ed. 2005).

6 See also id. § 8.02[1], at 8-8 (“[T]he general

pleading principles of Rule 8 continue to apply to

every other aspect of pleadin gs not specifically

covered by special pleading requirements.). Indeed, the mere fact that alleg ations can be characterized as “conclusional” will not, alone, suffice

to make them insufficient. “[T]he fact that a complaint is ‘conclusory’ is at automatically fatal.” I d. § 8.04[1], at 8-24. Instead, “the test is whether the

complaint ‘outline[s] or adumbrate[s]’ a violation

of the statute, [common law theory] of recovery or

constitutional pro vision on which the plaintiff relies

. . . and connects the violation to the named

defendants.” I

d. (quoting Brownlee v. Conine

, 957

F.2d 353, 354 (7th Cir. 1992)) (brack e ts and

ellipses in original).

7 Indeed, under rule 9(b), even for allegations of

fraud, “not every alleged misrepresentation need

[]appear in the pleadings” I d. § 9.03[1][a], at 9-

17.7

which, it believe s misrepresentations were

made; alleges that defendants were responsible

for or authorized them, and assert s that in

doing so they did not exercise reasonable care.

Under the lenient standard of notice pleading,

such a “short and plain statement of the claim”

is sufficient. See F ED

. R. C IV

. P. 8(a).

C.

The init ial dismissal of GECC’s claims, as

discussed above, was based o n the Texas

Business Corporati on Act, which entitles

officers and directors to rely in good faith on

the reports of

accountants. S ee T EX

. B US

. C ORP

. A CT arts. 2.41( c), 2.42(c). According

to the district court, in light of the statute, “It

is hard to envision that officers and di rectors

might have exerc ised greater care than

ensurin g t hat the financial statements used to

represent their company’s financial conditions

and the underlying accounting principles upon

which they were based have been approved by

independent accounting experts.”

On appeal, GECC contends that the protection afforded by the T e xas statute must be

pleaded as an affirmative defense and is not an

appropriate ground on which to dismiss a

claim on a rule 12(b)(6) motion. In support of

this argument, GEC C poi nts to anal ogous

provisions contained in federal securities laws

and the cases applying them.

For instanc e, in G riffin v. Paine Webber,

Inc.

, 84 F. Supp. 2d 508, 512-13 (S.D.N.Y.

2000), investors brought a claim under § 12 of

the Securities Act of 1933 alleging false registration and prospectus claims. See 15 U.S.C.

§ 7 71(a)(2). Section 12, however, also

contains an exception for those who submitted

a false registration or prospectus because they

did not or co u ld not know of the falsity or

omission despite the exercise o f reasonable care. The court concluded that t he plaintiff

need not allege that the defendant fell outside

of this exception, noting that the plaint iff is not

required to “plead statements in anticipation of

affirmative defenses.” Id. at 513.

GECC also points to In re Enron Corp. Securities, Derivative & ERISA Litigation

, 2 5 8

F. Supp. 2d 576, 640 (S.D. Tex. 2003).

There, outside director s o f Enron claimed, in

their motion to dismiss, that t heir reliance on

Arthur Andersen’s audit opinions ins u lated

them from liabilit

y under § 11 of the Securities

Act of 1933, 15 U.S.C. 5 77k. The court,

however, conclu d ed that the director’s

reliance, and the good faith thereof, were factspecific determin at ions that could not be

resolved on a motion to dismiss. Id.

In response, the non-accounting defendants

point to an analogous Delaware statute. In

that state, as in Texas, directors are entitled to

rely in good faith on the opinions rendered

w it hin the realm of expertise of the person

giving the advice. Construing this Delaware

statute in Brehm v. Eisner

, 746 A.2d 244, 261

(Del. 2000), the court indicated that the

plead ing burden is on the plaintiff to allege

such facts as would make reliance on the

expert opin io n unreasonable. After holding

that the plaintif

f s must rebut the presumption

of good faith reliance, the co u rt noted, “That

is not to say , however, that a rebuttal of t he

presumption of proper reliance on th e expert

under Sect ion 141(e) cannot be pleaded in a

properly framed co mplaint setting forth

particularized facts creating reason to believe

t hat the Old Board’s conduct was grossly

negligent.”

The instant defendants cannot cloak themselves in the protecti on of the Texas statute at

this early stage of the proceedings . Article8

2.4 2 (c) affords protecti on for the reliance on

the opinions of public accountants where that

reliance is “ in good faith an d o rdinary care

. ”

T EX

. B US

. C ORP

. A CT art. 2 .42(c). Perhaps

GECC’s pleadings (specifically, the

attachments thereto) 8 negate any allega tion

that the defendants did not act with reasonable

care. Our inquiry, however, does no t end

there. For the protection of the Texas statute

to attach, the reliance on an accountant’s

opinion must be in good faith.

The attachment of the Form 10K to

GECC’s complaint does nothi ng to

demonstrate the defendants’ go o d faith.

Although the Brehm court concluded that a

Delaware statute conferred a presumption of

good faith, no such presumption is apparent on

the face of the Texas statute, and we decline to

devise one by judicial fiat. A showing that the

reliance was taken in good faith must be made

by defendants in support of an affirma t ive

defense based on the statute. If they are able

to make such an uncontroverted showing after

GECC has had a chance to conduct discovery,

summary judgment will

be appropriate. 9 At

this ear ly stage, however, termination of

GECC’s suit is premature. The district cou rt ’s initial dismissal of

GECC’s claim, though well intentioned, was in

error. The parties further dispute whether

GECC should have been allowed to amend its

complaint. In light of our decision that it was

a mistake to dismiss the original complaint, we

need not reach that question.

The judgment is REVERSED, a nd t his

matter is REMANDED for further

proceedings.

8 Document s attached to a complaint are considered part of the plaintiff’s pleadings. See F ED

. R. C IV

. P. 10(c); Centers v. Centennial Mortgage,

Inc.

, 398 F.3d 930, 933 (7th Cir. 2005) (quoting 5

C HARLES A. W RIGHT & A RTHUR R. M I LLER

, F EDERAL P RACTICE AND P ROCEDURE : C IVIL 2 D §

1327, at 766 (1990) (“[A] plaintiff may plead

himself out of court by attaching documents to the

complaint that indicate that he or she is not entitled

to judgment.”).

9 See 2 J AMES W M

. M OORE ET AL

., M OORE ’ S

F EDERAL P RACTICE § 8.02[2], at 8-8.1 to 8-9 (3d

ed. 2005).