General Elec. Capital Corp. v. Posey

Decision Date29 June 2005
Docket NumberNo. 04-10251.,04-10251.
PartiesGENERAL ELECTRIC CAPITAL CORPORATION, a Delaware Corporation, Plaintiff-Appellant, v. 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, v. Arthur Andersen LLP, Third Party Defendant-Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

John Joseph Dawson (argued), Colleen Ann Lomax, Robert E. Miles, Quarles, Brady, Streich & Lang, Phoenix, AZ, for Plaintiff-Appellant.

Jeffrey Robert Seckel (argued), Steven H. Thomas, McQuire, Craddock & Strother, Dallas, TX, for Posey and Smith.

Oscar Rey Rodriguez (argued), Karl G. Dial, Fulbright & Jaworski, Dallas, TX, for

McQueary, Edwards, Sontheimer and Wagoner.

Steven K. DeWolf, Todd R. Hixon, Bellinger & DeWolf, Dallas, TX, for Johnson.

John Wilson Wright, McDonald Sanders, Fort Worth, TX, for Buysse and McCaslin.

Stephen L. Tatum (argued), Cantey & Hanger, Fort Worth, TX, for Chaney, Herd and Ragsdale.

G. Douglas Kilday, Graves, Dougherty, Hearon & Moody, Austin, TX, for Arthur Anderson LLP.

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 ("Promedco"). Because GECC's complaint pleads sufficient allegations to state a claim upon which relief can be granted, we reverse and remand.


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.


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 Promedco's true 1999 EBITDA were much lower (according 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 and relied upon by GECC in its decision to [lend Promedco the $20 million].

Less than a year after the loan was made, Promedco filed for Chapter 11 bankruptcy protection, as a consequence of which GECC recovered only some $8 million of the $20 loan.

GECC sued (1) H. Wayne Posey, CEO; and Robert Smith, CFO; (2) Promedco's outside directors—Charles J. Buysse, Jr., M.D., E. Thomas Chaney, James F. Herd, Jack W. McCaslin, and Richard E. Ragsdale; and (3) other Promedco executives— Dale 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 defendants"1). GECC attached to its complaint Promedco'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.


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) argument, 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 directors 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 district court concluded that the reliance on Arthur Andersen's approval of Promedco's accounting 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 defendants 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 financial information. Specifically, the amended complaint alleges that GECC relied on erroneous 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 misrepresentation—to-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-accounting defendants were responsible for the alleged misrepresentations."


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 support of his claim that would entitle him to relief. Id.


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 misrepresentation 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...

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