Collins v. Morgan Stanley Dean Witter

• Decision Date: 17 August 1999
• Docket Number: No. Civ.A. G-99-052.,Civ.A. G-99-052.
• Citation: 60 F.Supp.2d 614
• Parties: James A. COLLINS, et al. v. MORGAN STANLEY DEAN WITTER and Ian C.T. Pereira.
• Court: U.S. District Court — Southern District of Texas

60 F.Supp.2d 614

James A. COLLINS, et al. v. MORGAN STANLEY DEAN WITTER and Ian C.T. Pereira.

No. Civ.A. G-99-052.

United States District Court, S.D. Texas, Galveston Division.

August 17, 1999.

Patrick Andrew Zummo, Zummo & Perry, Houston, TX, David Burke Harberg, Houston, TX, for plaintiffs.

Robin C Gibbs, Gibbs & Bruns, Houston, TX, Robert Joseph Madden, Gibbs & Bruns, Houston, TX, Kenneth M Kramer, Sherman & Sterling, New York City, for Morgan Stanley Dean Witter, Ian C.T. Pereira, defendants.

David Burke Harberg, Attorney at Law, Houston, TX, for Robert M. Chiste, David J. Atwood, plaintiffs.

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS

KENT, District Judge.

This case arises out of a contract between Morgan Stanley and Allwaste, Inc. ("Allwaste"), pursuant to which Morgan Stanley provided advice to Allwaste concerning a merger with Philip Services Corp. ("Philip"). The case has been brought by holders of stock options (the "Option Holders") in Allwaste, who claim that Morgan Stanley and Pereira gave bad advice, causing Plaintiffs' options to lose value when the price of Philip's stock dropped after the merger. Plaintiffs allege causes of action grounded in contract, negligence, fraud, and breach of fiduciary duty. Now before the Court is Defendants' Motion to Dismiss Plaintiffs' First Amended Complaint, pursuant to Rule 12(b)(6). For the reasons that follow, Defendants' Motion is GRANTED.

I. FACTS

By agreement dated February 12, 1997 (the "Agreement"), Allwaste engaged Morgan Stanley to evaluate the possible sale of Allwaste and other strategic alternatives. The essence of the Agreement was that 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. The merger provided that Allwaste and Philip would be merged into a new company to be owned by Philip, and that 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, which stated that, based on the information it had reviewed, it was Morgan Stanley's opinion 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 expressly 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." It further stated 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 to be included in filings with the Securities and Exchange Commission.

The Fairness Opinion was signed by Pereira, the Morgan Stanley principal with primary responsibility for the Allwaste engagement. According to Plaintiffs' Complaint, Pereira made oral representations to the Board reiterating the conclusions of the Fairness Opinion, and he also allegedly told certain members of the Board that Morgan Stanley had investigated the management of Philip and determined that they were "clean." On June 30, 1997, Morgan Stanley issued an additional fairness opinion, which reached the same conclusions (with the same limitations) as the March 5, 1997 fairness opinion.

The shareholders voted to approve the merger, which was consummated on August 1, 1997. As a result, each share of Allwaste was converted to 0.611 shares of Philip stock. In addition, each option to purchase a share of Allwaste stock was converted to an option to purchase 0.611 shares of Philip 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 for Philip common stock. Plaintiffs' Complaint alleges that Morgan Stanley and Pereira failed to conduct adequate investigation into Philip and failed 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. STANDARD OF REVIEW FOR MOTION TO DISMISS

When considering a Motion to Dismiss for failure to state a claim, the Court accepts as true all well-pleaded allegations in the Complaint, and views them in the light most favorable to the plaintiff. See Malina v. Gonzales, 994 F.2d 1121, 1125 (5th Cir.1993). Such motions should be granted only when it appears without a doubt that a plaintiff can prove no set of facts in support of his claims that would entitle him to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir.1994).

III. ANALYSIS

A. Contract Based Claims

Plaintiffs allege breach of contract and breach of warranty claims against Defendants. As a preliminary matter, the Court notes that the parties disagree as to whether New York or Texas law governs these claims. The Court need not resolve this issue, however, as the applicable law of both states pertaining to contract based claims is substantially identical in relevant part.

In order to maintain a breach of contract or breach of warranty cause of action under Texas or New York law, a plaintiff must be either in privity of contract with the defendant or a plaintiff must be a third party beneficiary of the contract at issue. See Suffolk County v. Long Island Lighting Co., 728 F.2d 52 (2d Cir. 1984); Mandell v. Hamman Oil and Refining Co., 822 S.W.2d 153, 161 (Tex. App. — Houston [1st Dist.] 1991, writ denied) (citing Hellenic Inv., Inc. v. Kroger Co., 766 S.W.2d 861, 864-65 (Tex.App. — Houston [1st Dist.] 1989, no writ), Major Inv., Inc. v. De Castillo, 673 S.W.2d 276, 279 (Tex.App. — Corpus Christi 1984, writ ref'd n.r.e.)). As Plaintiffs were not contracting parties, they can only state a contractual claim if they fall within the category of intended beneficiaries. Under New York law, "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." Paradiso v. Apex Investigators & Sec. Co., 91 A.D.2d 929, 458 N.Y.S.2d 234, 235 (1983) (quotation marks and citation omitted). Similarly, under Texas law, a contract will not be interpreted as having been made for the benefit of a third party unless it clearly appears that was the intention of the parties to the contract, and any doubt is resolved against a finding that the party was intended to be a third party beneficiary. Texas Bank & Trust Co. v. Lone Star Life Ins. Co., 565 S.W.2d 353, 357 (Tex.Civ.App. — Tyler 1978, no writ).

In the instant case, the Agreement between Allwaste and Morgan Stanley makes no reference to the Option Holders and shows no intent to confer a benefit on them. To the contrary, the Agreement states that Morgan Stanley is to "evaluate strategic alternatives for the Company." (Emphasis added). It anticipates that advice, including a fairness opinion, will be provided to Allwaste, through its Board, in order to guide the Board's decision whether to go forward with the Merger. It expressly states that Morgan Stanley will act "with duties solely to Allwaste", and that "any opinions or advice provided by Morgan Stanley may not be disclosed or referred to publicly or to any third party except in accordance with our prior written consent." The Fairness Opinion, addressed solely to the Board, contains similar provisions and expressly states that it is "for the information of the Board of Directors of the Company only and may not be used for any other purpose without prior consent ..." In essence, rather than showing a clear intent to confer a benefit on the Option Holders, the language of the Agreement and Fairness Opinion shows a clear intent not to create third party beneficiaries. See Goldberg v. R.J. Longo Const. Co., Inc., 54 F.3d 243, 247 (5th Cir.1995) (summary judgment for defendant was proper where intended beneficiaries were explicitly identified and plaintiff was not among them); Edward B. Fitzpatrick Jr. Constr. Corp. v. Suffolk County, 138 A.D.2d 446, 525 N.Y.S.2d 863, 866 (1988) (dismissal of plaintiff's complaint was proper on third-party beneficiary claim where contract stated that services would run directly to other contracting party). The Option Holders, who were neither named in the Agreement or Fairness Opinion nor entitled to vote on the Merger, were at most incidental beneficiaries of the Agreement and therefore are not entitled to bring contract based claims. See Merrimack Mutual Fire Ins. Co. v. Allied Fairbanks Bank, 678 S.W.2d 574, 577 (Tex.App. — Houston [14th Dist.] 1984, writ ref'd n.r.e.); M.E. Sandlie Trust v. Pioneer Nat'l Title Ins. Co., 648 S.W.2d 761, 762 (Tex.App. — Corpus Christi 1983, no writ) (holding that one who is benefitted incidentally by performance of a contract may not seek enforcement of the contract). Accordingly, Defendants' Motion to Dismiss Plaintiffs' breach of contract and breach of warranty claims is hereby GRANTED, and those claims are DISMISSED WITH PREJUDICE.

B. Negligence Based Claims

Plaintiffs allege causes of action for "Professional Negligence" and "Negligent Misrepresentation." Defendants assume, solely for the purpose of their Motion and without waiving their right to raise the issue...