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

_______________

GENERAL ELECTRIC CAPITAL CORPORATION,

A DELAWARE CORPORATION,

Plaintiff-Appellant,

VERSUS

H. WAYNE POSEY, ET AL.,

Defendants,

H. WAYNE POSEY; CHARLES W. MCQUEARY; ROBERT D. SMITH; DEBORAH A. JOHNSON;

DALE K. EDWARDS; ROBERT M. SONTHEIMER; GREGORY A. WAGONER, M.D.;

THOMAS E. CHANEY, M.D.; JAMES F. HERD, M.D.; SANJEEV K. MEHRA;

RICHARD E. RAGSDALE,

Defendants-Appellees,

CHARLES J. BUYSSE, M.D.; JACK W. MCCASLIN,

DefendantsThird Party PlaintiffsAppellees,

VERSUS

ARTHUR ANDERSEN LLP,

Third Party DefendantAppellee.
2

_________________________

Appeal from the United States District Court

for the Northern District of Texas

__________________________

Before, SMITH, DENNIS, and PRADO,

Circuit Judges.

JERRY E. SMITH, Circuit Judge:

General Electric Capital Corporation

(“GECC”) appeals the dismissal of its

negligent misrepresentation claim against

several former directors and officers of

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

sufficient 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 lend Promedco

$20 million. According to GECC, in deciding

to enter into the credit agreement, it relied on

Promedco’srepresentations about itsfinancial

condition. GECC further contends that many

of these representations were false and/or

misleading and that as a result it sustained a

loss of over $12 million.

A.

Promedco was a medicalservices company

that 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 the practices and provide

administrative services such as facilities

management, the acquisition of malpractice

insurance, and accounting services.

In February 1999, GECC was approached

and requested to extend credit to Promedco.

Before eventually agreeing to make a $20

million loan, GECC reviewed financialreports

and other documents supplied by Promedco

management. These documents, inter alia,

represented Promedco’s 1999 earnings before

interest, taxes, depreciation, and amortization

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

financial conditionwasmuchmore precarious.

By the time GECC sued, it had been

revealed byindependent auditing that Promedco’strue 1999 EBITDA were much lower (according to GECC’s complaint, aslow as $16.2

million). GECC alleges that this

overstatement was the result of improper

internal accounting with respect to several

transactions and that

the source of the [] financial misstatements

was the improper treatment given by

Promedco, subject to the oversight and

control of the Officers and Directors, to

various of its internal transactions. This

improper treatment formed the basis of

Promedco’s audited 1999 financial

statements, its 1999 10K (which was

approved by the Officers and Directors),

and other financial materials provided to
3

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.

GECCsued (1) H. Wayne Posey, CEO; and

Robert Smith, CFO; (2) Promedco’s outside

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

Thomas Chaney, James F. Herd, Jack W.

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

other Promedco executivesSSDale Edwards,

Senior Vice President of Development;

Charles W. McQueary, Senior Vice President

of Operations; Robert M. Sontheimer, Senior

Vice President for Managed Care; GregoryM.

Wagoner, M.D., Senior Vice President for

MedicalAffairs; and Deborah Johnson, Senior

Vice President of Administration 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

Accountants,” prepared by Arthur Andersen

LLP (“Arthur Andersen”). The report states

that Arthur Andersen audited Promedco’s

1998 and 1999 financial statements in

accordancewithgenerallyaccepted accounting

standards.

B.

Defendants filed motions to dismiss 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 FED. R.

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

properly dispensed with the rule 9(b) argument, 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) contradicted its allegation that the

defendants had “failed to exercise reasonable

care in obtaining and communicating the

information concerning Promedco’s financial

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

Business Corporation Act, officers and directors are entitled to rely in good faith on the

reports of public accountants. See TEX. BUS.

CORP. ACT art. 2.42(c).

3

 Consequently, the

1 This moniker, used in the order denying

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

Edwards, 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 JAMES WM. MOORE ET AL., MOORE’S

FEDERAL PRACTICE § 9.03[1][d], at 9-21 (3d ed.

2005).

3

 Article 2.42(c) provides,

 In the discharge of any duty imposed or

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

care rely on information, opinions, reports, or

statements, including financial statements and

other financial data, concerning the corporation

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

district court concluded that the reliance on

Arthur Andersen’s approval of Promedco’s accounting methods directly contradicted

GECC’s allegation that the directors and

officers had failed to exercise reasonable care.

Additionally, the court reasoned that

although allegations that the directors and

officers should not have relied on the Arthur

Andersen report (e.g., an allegation that they

knew the information provided to Arthur

Andersen was false) would have been

sufficient to sustain 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 negligently in

vouching for the accuracy of the financial

statements provided to GECC. The court

dismissed GECC’s claim with prejudice and

entered a final judgment.

In response, GECC filed motions to vacate

the judgment and to amend, see FED. R. CIV.

P. 59(e), 15(a), attaching a proposed amended

complaint that it claimed would remedy the

pleading defectsidentified bythe district court.

The main difference between the original and

proposed amended complaints is the inclusion

of allegations that the misrepresentations

occurred in both audited and unaudited financial information. Specifically, the amended

complaint allegesthat GECC relied on erroneous unaudited documentsincluding anoffering

memorandum, some documents attached to

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

first quarter of 2000, and 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 held that GECC

had failed to state a claim. In a sparselyworded opinion, the court concluded that

GECC had failed to allege any factsin support

of the notion that the defendants did not

exercise reasonable care. The court also noted

that the complaint failed to allege sufficient

facts to sustain other elements of a claim for

negligent misrepresentationSSto-wit, “Plaintiff

has failed to allege any facts tending to

demonstrate that the director defendants had a

pecuniary interest in the financing transaction

at issue, nor has Plaintiff alleged any facts

tending to demonstrate that the non-accounting defendants were responsible for the

alleged misrepresentations.”

II.

A.

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

de novo. See 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 used by the district

court: A claim will not be dismissed unless the

plaintiff cannot prove 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 accountants, investment bankers, or other persons as to matters the

officer reasonably believes are within 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 question that

makes reliance otherwise permitted by this

subsection unwarranted.

TEX. BUS. CORP. ACT 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 predicated its initial

dismissal of GECC’s claim on a finding that

GECC’s complaint contradicted its allegation

that the defendants acted without reasonable

care. On appeal, however, defendants argue

that GECC failed to allege sufficient facts for

any of the required elements of a negligent

misrepresentation claim. 

Under Texaslaw, a claimfor negligent misrepresentation consists of four elements:

(1) the representation is made by a

defendant in the course of his business, or

in a transaction in which he has a pecuniary

interest; (2) the defendant supplies “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 plaintiff suffers

pecuniary loss by justifiably 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 of defendants (the

CEO and CFO, the outside directors, and the

non-accounting defendants) take somewhat

differing approaches 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 allegations,

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

GECC’s allegations with respect to the first

element of its claim. That element requires

that the representation be made by a defendant

in the course of his business, or in a

transaction in which he has a pecuniary

interest. GECC’s complaint states that the

supposed 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 defendants

“failed to exercise reasonable care in obtaining

the information concerning Promedco’s

financial condition.” In the eyes of the

defendants, these allegations are too

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

motion.4

Although the allegations 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 simplicity

and brevity of statement which the rules

contemplate.” FED.R.CIV. P. 84. A glance at

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

notice pleading standard sets out. In its

example of a complaint for negligence, Form

9 merely contains the simple statement,

“[D]efendant negligently drove a motor

vehicle against plaintiff . . . .” If such an un4 But see 2 JAMES WM. MOORE, MOORE’S

FEDERAL PRACTICE § 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 defending

parties of the claim and the grounds alleged in

support.”).
6

detailed allegation will suffice, so must

GECC’s. The example in Form 9 does not

even parse the negligence allegation into

separate elementsSS e.g., the allegation could

say, “Defendant owed a duty of reasonable

care and breached that duty by not exercising

reasonable care in the manner in which he

operated his vehicle.”5

Rule 8(a)(2) merely requires that a plaintiff

recite a “short and plain statement of the claim

showing that the pleader is entitled to relief.

FED. R. CIV. P. 8(a)(2). 

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

claim is and the grounds upon which it

rests.’ This simplified notice pleading

standard 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 (1957)). Other than in the

situations expressly enumerated in rule 9(b),

e.g., allegations of actualfraud, plaintiffsmust

satisfy only the minimal requirements of rule

8(a). See FED. R. CIV. 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 whether

GECChad adequatelyalleged the involvement

of those defendants in providing any allegedly

misleading information. Confronting the oral

presentation 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

saidSSwhat was said that was falseSSor even

any kind of detail for us to be able to discern

what facts are being alleged.”

This prayerforfurther particularitybegsthe

question: What more particularity would the

defendants deem required to comply with the

rule 9(b) requirement of pleading with

particularity? Surely, requiring plaintiffs to

plead the particular allegedly false statements

made at a specific meeting is out of keeping

with the generally lenient standards of our

notice pleading regime.7

Here, althoughGECC’s complaint contains

minimalfactualparticularity, its allegations are

at least as detailed as those in Form 9. As

noted above, GECC points out the relevant

documents in which, and presentations at

5

Indeed, parsing the allegations into elements

has never been required. See 2 JAMES WM.

MOORE ET AL., MOORE’S FEDERAL PRACTICE

§ 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 pleadings not specifically

covered by special pleading requirements.). Indeed, the mere fact that allegations 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.” Id.

§ 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 provision on which the plaintiff relies

. . . and connects the violation to the named

defendants.” Id. (quotingBrownlee v.Conine, 957

F.2d 353, 354 (7th Cir. 1992)) (brackets and

ellipses in original).

7

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

fraud, “not every alleged misrepresentation need

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

17.
7

which, it believes misrepresentations were

made; allegesthat defendants were responsible

for or authorized them, and asserts 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 FED. R. CIV. P. 8(a).

C.

The initial dismissal of GECC’s claims, as

discussed above, was based on the Texas

Business Corporation Act, which entitles

officers and directors to rely in good faith on

the reports of accountants. See TEX. BUS.

CORP. ACT 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 directors

might have exercised greater care than

ensuring that 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, GECCcontendsthat the protection afforded by the Texas 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, GECC points to analogous

provisions contained in federal securities laws

and the cases applying them. 

For instance, in Griffin 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.

§ 771(a)(2). Section 12, however, also

contains an exception for those who submitted

a false registration or prospectus because they

did not or could not know of the falsity or

omission despite the exercise of reasonable

care. The court concluded that the plaintiff

need not allege that the defendant fell outside

ofthis exception, noting that the plaintiffis not

required to “plead statementsin anticipation of

affirmative defenses.” Id. at 513. 

GECC also pointsto In re Enron Corp. Securities, Derivative & ERISA Litigation, 258

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

There, outside directors of Enron claimed, in

their motion to dismiss, that their reliance on

Arthur Andersen’s audit opinions insulated

them from liability under § 11 of the Securities

Act of 1933, 15 U.S.C. 577k. The court,

however, concluded that the director’s

reliance, and the good faith thereof, were factspecific determinations 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

within 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

pleading burden is on the plaintiff to allege

such facts as would make reliance on the

expert opinion unreasonable. After holding

that the plaintiffs must rebut the presumption

of good faith reliance, the court noted, “That

is not to say, however, that a rebuttal of the

presumption of proper reliance on the expert

under Section 141(e) cannot be pleaded in a

properly framed complaint setting forth

particularized facts creating reason to believe

that the Old Board’s conduct was grossly

negligent.” 

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

this early stage of the proceedings. Article
8

2.42(c) affords protection for the reliance on

the opinions of public accountants where that

reliance is “in good faith and ordinary care.”

TEX. BUS. CORP. ACT art. 2.42(c). Perhaps

GECC’s pleadings (specifically, the

attachments thereto)8negate any allegation

that the defendants did not act with reasonable

care. Our inquiry, however, does not 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 nothing to

demonstrate the defendants’ good faith.

Although the Brehm court concluded that a

Delaware statute conferred a presumption of

good faith, no such presumption is apparent on

the face ofthe Texasstatute, 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 affirmative

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 early stage, however, termination of

GECC’s suit is premature.

The district court’s initial dismissal of

GECC’s claim, thoughwellintentioned, wasin

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 dismissthe original complaint, we

need not reach that question.

The judgment is REVERSED, and this

matter is REMANDED for further

proceedings.

8 Documents attached to a complaint are considered part of the plaintiff’s pleadings. See FED.

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

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

CHARLES A. WRIGHT & ARTHUR R. MILLER,

FEDERAL PRACTICE AND PROCEDURE:CIVIL 2D §

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 JAMES WM. MOORE ET AL., MOORE’S

FEDERAL PRACTICE § 8.02[2], at 8-8.1 to 8-9 (3d

ed. 2005).