Collins v. Morgan Stanley Dean Witter

Decision Date31 August 2000
Docket NumberNo. 99-41037,99-41037
Citation224 F.3d 496
Parties(5th Cir. 2000) 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, v. Morgan Stanley Dean Witter and Ian C.T. Pereira, Defendants-Appellees
CourtU.S. Court of Appeals — Fifth Circuit

Appeal from the United States District Court for the Southern District of Texas

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. ("Allwaste"), 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 several years. Upon the announcement, the stock of the now-merged Philip dropped significantly, damaging the value of the employees' 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 option holders cannot, under the facts they have pleaded, enunciate any cause of action, we affirm.


By agreement dated February 12, 1997 (the "Agreement"), Allwaste engaged Morgan Stanley to evaluate the possible sale of Allwaste. 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 "duties solely to Allwaste" 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 Allwaste 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 connection 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 responsibility for the Allwaste engagement. According 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 converted 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 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.


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 pleaded 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 failure 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 review, 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.


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 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 produce mis-weighed, though the seller contracted 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.

Glanzer, id. at 275-76 (emphases added).

The new beast that the Glazner court explicated was one of tort, not contract. Glazner 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 accountants," manifestly cannot do that work either. 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...

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