Opinion ID: 38583
Heading Depth: 2
Heading Rank: 1

Heading: was the improper treatment given by

Text: Promedco was a medical services company Promedco, subject to the oversight and that managed health care practices in non- control of the Officers and Directors, to urban markets. Essentially, Promedco would various of its internal transactions. This approach an existing medical practice, acquire improper treatment formed the basis of its operating assets (other than real estate), Promedco’s audited 1999 financial and employ its personnel (other than the statements, its 1999 10K (which was physicians). Promedco would then manage the approved by the Officers and Directors), business aspects of the practices and provide and other financial materials provided to 2 and relied upon by GECC in its decision to B. [lend Promedco the $20 million]. Defendants filed motions to dismiss under Federal Rules of Civil Procedure 9(b) and 12- Less than a year after the loan was made, Pro- (b)(6), arguing that GECC’s complaint failed medco filed for Chapter 11 bankruptcy protec- to allege fraud with the requisite particularity, tion, as a consequence of which GECC recov- and in any event, failed to state a claim upon ered only some $8 million of the $20 loan. which relief could be granted. See FED. R. CIV. P. 9(b), 12(b)(6). The district court GECC sued (1) H. Wayne Posey, CEO; and properly dispensed with the rule 9(b) arguRobert Smith, CFO; (2) Promedco’s outside ment, concluding that GECC had not alleged directorsSSCharles J. Buysse, Jr., M.D., E. any fraud claims and thus was not subject to Thomas Chaney, James F. Herd, Jack W. the heightened pleading requirements of rule McCaslin, and Richard E. Ragsdale; and (3) 9(b).2 other Promedco executivesSSDale Edwards, Senior Vice President of Development; On the rule 12(b)(6) motion, however, the Charles W. McQueary, Senior Vice President court held that GECC had failed to state a of Operations; Robert M. Sontheimer, Senior claim for negligent misrepresentation. Vice President for Managed Care; Gregory M. Specifically, the court found that GECC’s Wagoner, M.D., Senior Vice President for pleadings (i.e., the attachment of the Form 10Medical Affairs; and Deborah Johnson, Senior K) contradicted its allegation that the Vice President of Administration and defendants had “failed to exercise reasonable Secretary to the Board of Directors care in obtaining and communicating the (collectively, the “non-accounting defen- information concerning Promedco’s financial dants”1). GECC attached to its complaint Pro- condition.” Under article 2.42(c) of the Texas medco’s 1999 Form 10-K and its attachment, Business Corporation Act, officers and dithe “Report of Independent Public rectors are entitled to rely in good faith on the Accountants,” prepared by Arthur Andersen reports of public accountants. See TEX. BUS. LLP (“Arthur Andersen”). The report states CORP. ACT art. 2.42(c).3 Consequently, the that Arthur Andersen audited Promedco’s 1998 and 1999 financial statements in 2 accordance with generally accepted accounting See 2 JAMES WM. MOORE ET AL., MOORE’S standards. FEDERAL PRACTICE § 9.03[1][d], at 9-21 (3d ed. 2005). 3 Article 2.42(c) provides, 1 This moniker, used in the order denying GECC’s rule 59(e) motion, refers to defendants In the discharge of any duty imposed or Edwards, McQueary, Sontheimer, Wagoner, and power conferred upon an officer, of a corporJohnson. Presumably this label is meant to imply ation the officer may in good faith and ordinary that these defendants, all officers of Promedco (but care rely on information, opinions, reports, or not the CEO or CFO), were not involved in the statements, including financial statements and company’s accounting practices. For the sake of other financial data, concerning the corporation consistency, we adopt the same taxonomy, yet we or another person, that were prepared or predo not take a position on whether the denomination sented by: accurately reflects the defendants’ activities. 3 district court concluded that the reliance on complaint that it claimed would remedy the Arthur Andersen’s approval of Promedco’s ac- pleading defects identified by the district court. counting methods directly contradicted The main difference between the original and GECC’s allegation that the directors and proposed amended complaints is the inclusion officers had failed to exercise reasonable care. of allegations that the misrepresentations occurred in both audited and unaudited fi- nancial information. Specifically, the amended Additionally, the court reasoned that complaint alleges that GECC relied on erronealthough allegations that the directors and ous unaudited documents including an offering officers should not have relied on the Arthur memorandum, some documents attached to Andersen report (e.g., an allegation that they the Form 10-K, Promedco’s Form 10Q for the knew the information provided to Arthur first quarter of 2000, and a certificate of Andersen was false) would have been compliance. Additionally, GECC alleges that sufficient to sustain a cause of action, GECC it relied on a live presentation made by Posey, made no such allegations. As a matter of law, Smith, Edwards, and Sontheimer. therefore, the court concluded that the defen- dants could not have acted negligently in The district court again held that GECC vouching for the accuracy of the financial had failed to state a claim. In a sparselystatements provided to GECC. The court worded opinion, the court concluded that dismissed GECC’s claim with prejudice and GECC had failed to allege any facts in support entered a final judgment. of the notion that the defendants did not exercise reasonable care. The court also noted In response, GECC filed motions to vacate that the complaint failed to allege sufficient the judgment and to amend, see FED. R. CIV. facts to sustain other elements of a claim for P. 59(e), 15(a), attaching a proposed amended negligent misrepresentationSSto-wit, “Plaintiff has failed to allege any facts tending to demonstrate that the director defendants had a (1) one or more other officers or employees pecuniary interest in the financing transaction of the corporation including members of the at issue, nor has Plaintiff alleged any facts board of directors; or tending to demonstrate that the non-accounting defendants were responsible for the (2) legal counsel, public accountants, invest- alleged misrepresentations.” ment bankers, or other persons as to matters the officer reasonably believes are within the II. person’s professional or expert competence. A. We review a dismissal under rule 12(b)(6) An officer is not relying in good faith within the de novo. See Bombardier Aerospace meaning of this section if the officer has knowl- edge concerning the matter in question that Employee Welfare Benefits Plan v. Ferrer, makes reliance otherwise permitted by this Poirot & Wansbrough, 354 F.3d 348, 351 (5th subsection unwarranted. Cir. 2003). Consequently, we employ the same standard as that used by the district TEX. BUS. CORP. ACT art. 2.42(c). Section court: A claim will not be dismissed unless the 2.41(c), furthermore, provides substantially the plaintiff cannot prove any set of facts in same protection for directors. 4 support of his claim that would entitle him to that the representation be made by a defendant relief. Id. in the course of his business, or in a transaction in which he has a pecuniary