Gen Elec Captl Corp v. Posey, et al

United States Court of Appeals
Fifth Circuit
F I L E D
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,
Defendants-
Third Party Plaintiffs-
Appellees,
VERSUS
ARTHUR ANDERSEN LLP,
Third Party Defendant-
Appellee.

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_________________________
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 (“Promed-
co”). 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’s representations about its financial
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 medical services company
that managed health care practices in non-
urban 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 financial reports
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 condition was much more precarious.
By the time GECC sued, it had been
revealed by independent auditing that Promed-
co’s true 1999 EBITDA were much lower (ac-
cording to GECC’s complaint, as low 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

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and relied upon by GECC in its decision to
[lend Promedco the $20 million].
Less than a year after the loan was made, Pro-
medco filed for Chapter 11 bankruptcy protec-
tion, as a consequence of which GECC recov-
ered only some $8 million of the $20 loan.
GECC sued (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; Gregory M.
Wagoner, M.D., Senior Vice President for
Medical Affairs; and Deborah Johnson, Senior
Vice President of Administration and
Secretary to the Board of Directors
(collectively, the “non-accounting defen-
dants”1). GECC attached to its complaint Pro-
medco’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
accordance with generally accepted 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) argu-
ment, 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 di-
rectors 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 corpor-
ation 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 pre-
sented by:

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district court concluded that the reliance on
Arthur Andersen’s approval of Promedco’s ac-
counting 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 defen-
dants 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 defects identified by the 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 fi-
nancial information. Specifically, the amended
complaint alleges that GECC relied on errone-
ous unaudited documents including an offering
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 sparsely-
worded opinion, the court concluded that
GECC had failed to allege any facts in 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-ac-
counting 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, invest-
ment 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 knowl-
edge 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.

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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 Texas law, a claim for negligent mis-
representation 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 com-
plaint contains mere conclusional allegations,
or “legal conclusions stated as factual con-
clusions.” 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 un-
4 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.”).

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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 de-
fendant 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 actual fraud, plaintiffs must
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 stan-
dards contained in rules 8 and 9 is elucidating.
At oral argument, counsel for the non-
accounting defendants challenged whether
GECC had adequately alleged the involvement
of those defendants in providing any allegedly
misleading information. Confronting the oral
presentation to GECC, at which the non-
accounting 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 prayer for further particularity begs the
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, although GECC’s complaint contains
minimal factual particularity, 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.). In-
deed, the mere fact that allegations can be char-
acterized as “conclusional” will not, alone, suffice
to make them insufficient. “[T]he fact that a com-
plaint 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. (quoting Brownlee 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.

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which, it believes misrepresentations were
made; alleges that 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, GECC contends that the protec-
tion 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 regis-
tration 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
of this exception, noting that the plaintiff is not
required to “plead statements in anticipation of
affirmative defenses.” Id. at 513.
GECC also points to In re Enron Corp. Se-
curities, 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 fact-
specific 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 Sect ion 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 them-
selves in the protection of the Texas statute at
this early stage of the proceedings. Article

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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)8 negate 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 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 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, 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, and this
matter is REMANDED for further
proceedings.
8 Documents attached to a complaint are con-
sidered 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).

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