Collins, et al v. Morgan Stanley Dean, et al

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________
m 99-41037
_______________
JAMES A. COLLINS, STANLEY L. MASON, CURTIS COLICHER,
GLORIA BAILEY, DANA FLORES, R.L. NELSON, JR.,
ROBERT M. CHISTE, AND DAVID J. ATWOOD,
Plaintiffs-Appellants,
VERSUS
MORGAN STANLEY DEAN WITTER
AND
IAN C.T. PEREIRA,
Defendants-Appellees.
_________________________
Appeal from the United States District Court
for the Southern District of Texas
_________________________
August 31, 2000
Before JOLLY, SMITH, and BARKSDALE,
Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Relying partly on the advice of Morgan
Stanley, later Morgan Stanley Dean Witter &
Co. (“Morgan Stanley”), the board of directors
and stockholders of Allwaste, Inc. (“All-
waste”), voted to merge with Philip Services
Corporation (“Philip”). Each of the plaintiffs
had earned stock options as part of his
compensation while working at Allwaste.
After the merger, Philip announced that it
had filed inaccurate financial statements for

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several years. Upon the announcement, the
stock of the now-merged Philip dropped sig-
nificantly, damaging the value of the employ-
ees’ post-merger options. The option holders
responded by suing Morgan Stanley, claiming
contract breach, misrepresentation, fraud, and
other causes of action.
The district court dismissed for failure to
state a claim. Because we agree that the op-
tion holders cannot, under the facts they have
pleaded, enunciate any cause of action, we
affirm.
I.
By agreement dated February 12, 1997 (the
“Agreement”), Allwaste engaged Morgan
Stanley to evaluate the possible sale of All-
waste. Morgan Stanley would provide advice,
including a financial opinion letter if requested,
to the Allwaste board of directors (the
“Board”). The Agreement provided that
Morgan Stanley had “dut ies solely to All-
waste” and that any advice or opinions
provided by Morgan Stanley could not be
disclosed or referred to publicly without
Morgan Stanley’s consent.
Pursuant to the Agreement, Morgan
Stanley analyzed a proposed merger between
Allwaste and Philip, whereby Allwaste and
Philip would be merged into a new company
to be owned by Philip, and each share of All-
waste common stock would be converted into
0.611 shares of Philip common stock. On
March 5, 1997, Morgan Stanley provided the
Board with a written fairness opinion stating
that, based on the information it had reviewed,
Morgan Stanley believed that the number of
shares of Philip stock to be received for each
share of Allwaste stock was “fair from a
financial point of view to the holders of
Allwaste Common Stock.”
Morgan Stanley, however, “express[ed] no
opinion or recommendation as to how the
holders of Allwaste Common Stock should
vote at the stockholders’ meeting held in con-
nection with the Merger.” The fairness
opinion stated that Morgan Stanley had
“assumed and relied upon without independent
verification the accuracy and completeness of
the information supplied or otherwise made
available to us by [Allwaste] and Philip for the
purposes of this opinion” and that it was
written “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 consent,” except for filings
with the Securities and Exchange Commission.
The opinion was signed by Ian C.T. Pereira,
the Morgan Stanley principal with primary re-
sponsibility for the Allwaste engagement. Ac-
cording to the complaint, Pereira made oral
representations to the Board reiterating the
conclusions of the fairness opinion and told
certain members of the Board that Morgan
Stanley had investigated the management of
Philip and determined that it was “clean.” On
June 30, 1997, Morgan Stanley issued an
additional opinion reaching the same
conclusions.
The shareholders approved the merger.
Each share of Allwaste was converted to
0.611 shares of Philip stock, and each option
to purchase a share of Allwaste stock was con-
verted to an option to purchase 0.611 shares
of Philips stock.
In early 1998, Philip disclosed that it had
filed inaccurate financial statements for several
years. This revelation led to a sharp decrease
in the price of Philip common stock. The
complaint alleged that Morgan Stanley and
Pereira had failed to conduct adequate

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3
investigation of Philip or to inform the Board
of the problems that ultimately led to the
decline in Philip’s stock price and the value of
plaintiffs’ options.
II.
A motion to dismiss under rule 12(b)(6)
“is viewed with disfavor and is rarely
granted.” Kaiser Aluminum & Chem.
Sales v. Avondale Shipyards, 677 F.2d
1045, 1050 (5th Cir. 1982). The
complaint must be liberally construed in
favor of the plaintiff, and all facts plead-
ed in the complaint must be taken as
true. Campbell v. Wells Fargo Bank,
781 F.2d 440, 442 (5th Cir. 1986). The
district court may not dismiss a
complaint under rule 12(b)(6) “unless it
appears beyond doubt that the plaintiff
can prove no set of facts in support of
his claim which would entitle him to
relief.” Conley v. Gibson, 355 U.S. 41,
45-46 (1957). This strict standard of
review under rule 12(b)(6) has been
summarized as follows: “The question
therefore is whether in the light most
favorable to the plaintiff and with every
doubt resolved in his behalf, the
complaint states any valid claim for
relief.” 5 CHARLES A. WRIGHT &
ARTHUR R. MILLER, FEDERAL PRACTICE
AND PROCEDURE § 1357, at 601 (1969).
Lowrey v. Texas A&M Univ. Sys., 117 F.3d
242, 247 (5th Cir. 1997) (some citation
information omitted). “In order to avoid
dismissal for failure to state a claim, however,
a plaintiff must plead specific facts, not mere
conclusory allegations. We will thus not
accept as true conclusory allegations or
unwarranted deductions of fact.” Tuchman v.
DSC Communications Corp., 14 F.3d 1061,
1067 (5th Cir. 1994) (internal citations,
quotation marks and ellipses omitted).
In considering a motion to dismiss for fail-
ure to state a claim, a district court must limit
itself to the contents of the pleadings,
including attachments thereto. FED. R. CIV. P.
12(b)(6). Here, the court included, in its re-
view, 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.
We note approvingly, however, that various
other circuits have specifically allowed that
“[d]ocuments that a defendant attaches to a
motion to dismiss are considered part of the
pleadings if they are referred to in the
plaintiff’s complaint and are central to her
claim.” Venture Assocs. Corp. v. Zenith Data
Sys. Corp., 987 F.2d 429, 431 (7th Cir.
1993).1 In so attaching, the defendant merely
assists the plaintiff in establishing the basis of
the suit, and the court in making the
elementary determination of whether a claim
has been stated.
III.
Both sides agree that New York law
controls construction of the Agreement. The
law of New York specifies that only those in
privity of contract or who enjoy an intended
and immediate third-party beneficiary
relationship to a contract may sue thereon2 and
1 See also Branch v. Tunnell, 14 F.3d 449,
453-54 (9th Cir. 1994); Field v. Trump, 850 F.2d
938, 949 (2d Cir. 1988); Sheppard v. Texas Dep’t
of Transp., 158 F.R.D. 592, 595 (E.D. Tex. 1994).
2 See Strauss v. Belle Realty Co., 469 N.Y.S.2d
948, 950 (N.Y. App. Div. 1983) (distinguishing
between intended-and-immediate third-party
beneficiaries, who may sue on a contract, and
(continued...)

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4
that “[w]here a provision in [a] contract
expressly negates enforcement by third-parties,
that provision is controlling.”3 Where a clause
provides that the contracted-for services will
run directly to and for the benefit of the other
contracting party, any relevant third parties
will be considered incidental rather than
intended and immediate.4
As the district court recounted, both 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. Under New York law, then, the
Board is the only entity that enjoyed the right
to sue on the Agreement; the option-holder
plaintiffs are precluded from doing so.
The option holders respond by pointing to
Glanzer v. Shepard, 135 N.E. 275 (N.Y.
1922), and Ultramares Corp. v. Touche, 174
N.E. 441 (N.Y. 1931), and their progeny. In
the former, the court held that a produce
weigher was liable to the purchaser of the pro-
duce mis-weighed, though the seller contract-
ed with the weigher to act. See Glazner, 135
N.E. at 275. In moving beyond the rules of
complete privity of contract, the court
recognized that it was going beyond the
explicit confines of contract law.
We think the law imposes a duty toward
buyer as well as seller in the situation
here disclosed. . . . We do not need to
state the duty in terms of contract or of
privity. Growing out of a contract, it
has none the less an origin not
exclusively contractual. Given the
contract and the relation, the duty is
imposed by law. There is nothing new
here in principle. . . . It is ancient
learning that one who assumes to act,
even though gratuitously, may thereby
become subject to the duty of acting
carefully, if he acts at all. The most
common examples of such a duty are
cases where action is directed toward
the person of another or his property. A
like principle applies, however, where
action is directed toward the governance
of conduct. The controlling
circumstance is not the character of the
consequence, but its proximity or
remoteness in the thought and purpose
of the actor. . . . Constantly the bounds
of duty are enlarged by knowledge of a
prospective use.
2(...continued)
incidental beneficiaries, who may not); Cappello v.
Union Carbide & Carbon Corp., 103 N.Y.S.2d
157, 161-62 (N.Y. Sup. Ct. 1951) (recognizing
suit on a contract deriving from a third-party ben-
eficiary theory as an exception to the general rule
that only those in privity may sue on a contract).
“An incidental beneficiary is a third party who may
derive benefit from the performance of a contract
though he is neither the promisee nor the one to
whom performance is to be rendered.” Strauss,
469 N.Y.S.2d at 950. Such incidental beneficiaries
may not sue on the contract. Id.
3 Edward B. Fitzpatrick, Jr. Const. Corp. v.
County of Suffolk, 525 N.Y.S.2d 863, 866 (N.Y.
App. Div. 1988).
4 Id. See also Fourth Ocean Putnam Corp. v.
Interstate Wrecking Co., Inc., 485 N.E.2d 208,
211-12 (N.Y. 1985) (setting out circumstances in
which New York law finds intended third-party
beneficiaries); Paradiso v. Apex Investigators &
Sec. Co., 458 N.Y.S.2d 234, 235 (N.Y. App. Div.
1983) (holding that “it must clearly appear from
the provisions of the contract that the parties
thereto intended to confer a direct benefit on the
alleged third-party beneficiary”).

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5
Glanzer, id. at 275-76 (emphases added).
The new beast that the Glazner court ex-
plicated was one of tort, not contract. Glaz-
ner does nothing to enlarge the scope of the
power of third-party beneficiaries to sue in
contract. Ultramares, the first words of which
explain that “[t]he action is in tort for damages
suffered through the misrepresentations of ac-
countants,” manifestly cannot do that work ei-
ther. See Ultramares, 174 N.E. at 442.
Meanwhile, even if Glazner were
understood to explicate a cause of action
sounding in contract rather than tort,5 it would
not so enlarge the grounds for suit as to
include the option-holder plaintiffs. Unlike the
produce weigher in Glazner, Morgan Stanley
protected itself with explicit language
describing the class of beneficiaries of its
efforts: the Board, solely. As noted above,
such contractual limitations are honored by the
law of New York.
The district court, therefore, rightly
concluded that the option-holder plaintiffs may
not sue on the Agreement in contract as third-
party beneficiaries. To support a claim of con-
tract breach (or the related breach-of-warranty
claim), then, the plaintiffs must have pleaded
the existence of a valid oral contract. Instead,
however, they pleaded, inter alia, that
(1) Morgan Stanley employees
made representations about the integrity
and value of Philip and the propriety of
merger to board members who
happened to be option holders;
(2) Morgan Stanley was aware that
the Allwaste board members would con-
sider the good of the option holders
when determining whether to merge;
(3) Morgan Stanley was aware that
the Allwaste board did not intend to
keep the fairness opinion to itself
(despite a specific provision to the
contrary);
(4) Morgan Stanley showed the
opinion to board members who were
also option holders (though the option
holders do not specifically allege that the
opinion was shown to any option
holders who were not board members,
nor that it rightfully could have been);
and
(5) Option holders, who played as
option holders no role in merger talks or
the agreement thereto, somehow relied
on Morgan Stanley’s representations.
These pleadings do not amount to any but
the most conclusional claim that an oral
contract existed between Morgan Stanley and
the option holders. There is no suggestion of
a meeting of the minds between option holders
as such and Morgan Stanley and no assertion
of consideration. Because the option holders
are not, as a matter of law, third-party
beneficiaries of the Agreement and
meaningfully pleaded no oral contract running
between Morgan Stanley and themselves, they
cannot state any claim sounding in contract.
5 See Glazner, 135 N.E. at 277, wherein the
court delphically mused that
[w]e state the defendant’s obligation, there-
fore, in terms, not of contract merely, but of
duty. Other forms of statement are possible.
They involve, at most, a change of
emphasis. . . . If we fix our gaze upon that
aspect, we shall stress the element of
contract . . . .

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6
IV.
The district court applied Texas law to the
remainder of the claims; neither party
challenges this choice-of-law decision. The
option holders alleged a variety of tortious
claims: professional misrepresentation,
negligent misrepresentation, fraud and,
generally, “recklessness” and “gross negli-
gence.”6 Whatever the characterization,
however, each of these torts shares one
necessary element that the option holders,
under the facts they pleaded, cannot
demonstrate: that they relied on Morgan
Stanley’s alleged misrepresentations.7
6 Findings of recklessness or gross negligence
would allow exemplary, rather than merely
compensatory, damages were the underlying tort
of misrepresentation found. For reasons we ad-
dress, it cannot be. See, e.g., Cook Consultants,
Inc. v. Larson, 700 S.W.2d 231, 239 (Tex.
App.SSDallas 1985, writ ref’d n.r.e.).
The option holders also charged Morgan
Stanley with breach of fiduciary duty. They made,
however, nothing but the most conclusional
averments that Morgan Stanley owed them a
fiduciary duty. Moreover, they make no effort on
appeal to defend, rather than merely reassert, their
position that a fiduciary relationship existed. They
cannot, therefore, be understood meaningfully to
have appealed the dismissal of this cause of action.
If they had properly done so, the cause of action
would have failed for the same reason as do the
other tort claims.
7 In Texas, accountant liability for
misrepresentation follows the Restatement
(Second) of Torts, “which provides in the relevant
part:
§ 552. Information Negligently Supplied
for the Guidance of Others
(continued...)
7(...continued)
(1) One who, in the course of his
business, profession or employment, or in
any other transaction in which he has a
pecuniary interest, supplies false
information for the guidance of others in
their business transactions, is subject to
liability for pecuniary loss caused to them
by their justifiable reliance upon the
information, if he fails to exercise
reasonable care or competence in obtaining
or communicating the information.
(2) Except as stated in Subsection (3),
the liability stated in Subsection (1) is
limited to loss suffered
(a) by the person or one of a limited
group of persons for whose benefit and
guidance he intends to supply the
information or knows that the recipient
intends to supply it; and
(b) through reliance upon it in a
transaction that he intends the information to
influence or knows that the recipient so
intends or in a substantially similar
transaction.
Scottish Heritable Trust, PLC v. Peat Marwick
Main & Co., 81 F.3d 606, 611-12 (5th Cir. 1996)
(emphases added). Fraud, meanwhile, requires that
the plaintiff allege
(1) that a material representation was made;
(2) that it was false; (3) that the speaker
knew it was false when made or that the
speaker made it recklessly without any
knowledge of the truth and as a positive
assertion; (4) that he made it with the
intention that it be acted upon by the other
party; (5) that the party acted in reliance
upon it; and (6) damage.
(continued...)

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7
Reliance requires action.8 One relies as a
predicate to doing something. The option
holders, however, played no role in effecting
the merger. They neither authorized it, as did
the Board, nor ratified it, as did the
shareholders.
The option holders do not aver that they
relied; rather, they claim that Nelson relied on
Morgan Stanley’s representations in casting his
vote in favor of merger and that, but for the
misrepresentations, he would have demanded
a more rigorous accounting or would have op-
posed the merger. This may be so, but
because Nelson cast his vote as a Board
member rather than an option holder, he
likewise relied only in his capacity as a Board
member, because he took no action, as an
option holder, that would have occasioned
reliance.9
It is this lack of reliance by the option hold-
ers that distinguishes this case from others cit-
ed by the plaintiffs. As we have explained,
“justifiable reliance comprises two elements:
(1) the plaintiff must in fact rely on the
information; and (2) the reliance must be
reasonable.” Scottish Heritable Trust, 81 F.3d
at 615. In Scottish Heritable Trust, the
plaintiffs actually relied on the representations
of the defendant-accountants by buying a
controlling interest in the company that the
defendant-accountants had audited. See id. at
608.
In Cook Consultants, Inc. v. Larson, 700
S.W. 2d 231, 233 (Tex. App.SSDallas 1985,
writ ref’d n.r.e.), a surveyor surveyed a home
for a homebuilder, and erred. The property
was sold to Larson, whose home loan was
predicated in part on the guarantees of proper
title contained within the property record. Id.
She eventually prevailed against the surveyor,
because without the misrepresentations includ-
ed within his survey, she would not have pur-
chased the house, because she would not have
been able to secure a home loan. See id. at
237. In other words, though proximate cause
was slightly attenuated, Larson relied on the
survey in deciding to buy.
Finally, in Blue Bell, Inc. v. Peat, Marwick,
Mitchell & Co., 715 S.W.2d 408, 410 (Tex.
App.SSDallas 1986, writ ref’d n.r.e.), the
plaintiffs relied on the accountant’s
representations of a trade partner’s financial
fitness in deciding to issue a line of credit.
But for the representations, plaintiffs would
not have made the credit available and would
not have lost it when its trade partner failed to
repay. See id. at 413.
The option holders’ tort claims fail because
they cannot aver the first element of justifiable
reliance: They did not rely on Morgan
Stanley’s alleged misrepresentations to do
anything, because they were not authorized to
7(...continued)
T.O. Stanley Boot Co. v. Bank of El Paso, 847
S.W.2d 218, 222 (Tex. 1992) (emphasis added).
8 See, e.g., Rumfield v. Rumfield, 324 S.W.2d
304, 306 (Tex. Civ. App.SSAmarillo 1959, writ
ref’d n.r.e.), wherein, in the context of fraud, the
court explained that “[n]ot only is materiality an
essential element of the deceitful representation,
but the defrauded party must have been induced to
act by reason of his reliance upon the verity of the
statement” (emphasis added).
9 Consistent until the end, the option-holder
plaintiffs never were able to distinguish between
Nelson's and other Board members’ actions as
members of the Board and their actions as option
holders.

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8
act. It does not matter, therefore, that they
managed to plead that Morgan Stanley in fact
knew that they, as option holders, would be
informed of the fairness letter or even that
Morgan Stanley intended them to be so
informed. Nothing about Morgan Stanley’s
motivations can change the fact that the option
holders played no role in the merger
proceedings.
V.
Having addressed the issues raised on ap-
peal, we now fulfill our supervisory role over
the district courts10 by turning to an
inappropriate instruction contained in the
district court’s opinion. At the end of the
order granting the motion to dismiss, the court
forbade the parties
to file [anything] further regarding the
issues addressed in this Order, including
motions to reconsider and the like,
unless supported by compelling new
evidence not available at the time of the
instant submissions. Instead, plaintiffs
are instructed to seek any further relief
to which they may feel they are entitled,
on any matter herein addressed, from
the United States Court of Appeals for
the Fifth Circuit, as may be appropriate
in due course.
We notice that the district judge in this mat-
ter, like some other district judges in this cir-
cuit, has the custom of usually, or even always,
prohibiting litigants from filing motions for re-
consideration or relief, such as those
contemplated by FED. R. CIV. P. 59 and 60.
No judge has that authority.
Accordingly, we direct the judge in this
case, and others in this circuit, to entertain
post-judgment motions as contemplated by the
rules. Moreover, the district courts must care-
fully consider each such motion on its merits,
without begrudging any party who wishes to
avail himself of the opportunity to present such
motions in accordance with the rules of
procedure and with the standards of
professional conduct.
AFFIRMED.
10 See, e.g., Bryan v. United States, 492 F.2d
775, 780 (5th Cir. 1974) (en banc).

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9
RHESA HAWKINS BARKSDALE, Circuit
Judge, dissenting in part:
I concur in part V. of the opinion,
concerning our supervisory role.
And, I concur in the discussion in part II.
about the district court’s reviewing documents
referenced in, but not attached to, the
complaint, because that discussion is helpful
dictum. Plaintiffs neither objected in district
court to, nor challenged on appeal, the district
court’s engaging in such review; therefore,
the point is not before us, except to note, as
the opinion properly does, the procedure that
was followed.
But, because I cannot agree plaintiffs can
prove no set of facts entitling them to
recovery, I must respectfully dissent from the
action’s dismissal being affirmed.
Rule 12(b)(6) is an exacting standard
indeed. As the majority recites: “The district
court may not dismiss a complaint under rule
12(b)(6) ‘unless it appears beyond doubt that

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the plaintiff can prove no set of facts in
support of his claim which would entitle him to
relief’”. Lowrey v. Texas A & M Univ. Sys.,
117 F.3d 242, 247 (5th Cir. 1997) (quoting
Conley v. Gibson, 355 U.S. 41, 45-46 (1957))
(emphasis added).
The majority’s introductory statement, that
“the option holders cannot, under the facts
they have pleaded, enunciate any cause of
action” (emphasis added), is an erroneous
statement of the above-discussed procedure to
be followed in ruling on the failure-to-state-
claim motion. Moreover, this erroneous
statement sets the tone for the opinion. In
fact, it is characteristic of the tenor of the
majority’s conclusions.
Dismissal at this stage of the proceedings is
premature. The majority notes correctly that
“[t]he complaint must be liberally construed in
favor of the plaintiff[s], and all facts pleaded
in the complaint must be taken as true”.
Lowrey, 117 F.3d at 247 (citation omitted;
emphasis added). But, the controlling
conclusion that plaintiffs cannot state a claim,
because “they were not authorized to act”,
ignores the well-pleaded facts in the
complaint. Those allegations — at least for
purposes of avoiding Rule 12(b)(6) dismissal
— reflect exceptions to the usual limiting rules
of liability concerning contracts and corporate
actions.
For example, the majority disregards the
quite unique importance of stock options at
Allwaste. As described in the complaint,
plaintiff Nelson, Allwaste’s founder, chairman,
and holder of a significant number of options,
made the employee stock option incentive plan
the bedrock of the corporation.
The majority also fails to note that Morgan
Stanley issued the second fairness opinion only
upon Nelson’s insistence that it conduct a
more thorough review of Philip’s management.
It was in reliance on Morgan Stanley’s
representation it had conducted such

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investigation that Nelson and the other
directors/option holders recommended the
merger with Philip. In other words, because of
Morgan Stanley’s misrepresentation, board
members/option holders voted for the merger,
and encouraged shareholders to do the same.
Further, the complaint states:
The fairness opinion, although
requested by the Allwaste
board, was rendered wholly or
in part for the benefit of
Allwaste’s shareholders and
option holders. Moreover,
Morgan Stanley was aware
that the Allwaste board did not
intend to keep the fairness
opinion to itself and, indeed,
the opinion was shown to
plaintiff Nelson and other
shareholders and option
holders and Morgan Stanley
knew and intended that it be so
used.
(Emphasis added.) This allegation comports
with the claim under § 552 of the Restatement
(Second) of Torts because, at this point, we
must accept as true that Morgan Stanley
“kn[ew] [the board] intende[ed] to supply” the
information in the fairness opinion to the
option holders.
The majority has prejudged the merits of
this action. In the light of the complaint’s
specific and unique allegations, I respectfully
dissent.

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