Great Plains Trust v. Morgan Stanley Dean Witter

Decision Date09 December 2002
Docket NumberNo. 01-21121.,01-21121.
Citation313 F.3d 305
PartiesGREAT PLAINS TRUST COMPANY and Kornitzer Capital Management, Inc., Individually and on Behalf of All Persons Similarly Situated, Plaintiffs-Appellants, v. MORGAN STANLEY DEAN WITTER & CO., David Lumpkins, and Ian Pereira, Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Christopher S. Shank, Brenda G. Hamilton (argued), Shank & Hamilton, Kansas City, MO, Randall O. Sorrels, Abraham, Watkins, Nichols, Sorrels, Matthews & Friend, Houston, TX, for Plaintiffs-Appellants.

Kenneth M. Kramer, Richard F. Schwed (argued), Sandra Y. Nishikawa, Shearman & Sterling, New York City, for Defendants-Appellees.

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

Before SMITH and BENAVIDES, Circuit Judges, and FITZWATER, District Judge.*

FITZWATER, District Judge:

We are called upon to decide a second time whether Morgan Stanley Dean Witter & Co. ("Morgan Stanley") and its employees can be held liable to third parties for a due diligence investigation that Morgan Stanley performed and for a fairness opinion that it provided as a financial advisor to its client, Allwaste, Inc. ("Allwaste"), concerning Allwaste's proposed merger with Philip Services Corporation ("Philip"). In Collins v. Morgan Stanley Dean Witter, 224 F.3d 496 (5th Cir.2000), we upheld the Fed.R.Civ.P. 12(b)(6) dismissal of a suit by holders of Allwaste stock options against Morgan Stanley and one of its employees, Ian C.T. Pereira ("Pereira"). In the present action — filed in state court and removed to federal courtplaintiffs are Allwaste debenture holders who have sued not only Morgan Stanley and Pereira, but also Morgan Stanley employee David B.D. Lumpkins ("Lumpkins"), a Texas citizen. We must decide whether the district court erred in denying plaintiffs' motion to remand on the ground that Lumpkins had been fraudulently joined and in granting judgment on the pleadings under Rule 12(c) dismissing their claims. We hold that the district court did not err, and we affirm.

I

Plaintiffs Great Plains Trust Company and Kornitzer Capital Management, Inc. brought this putative class action against Morgan Stanley, Lumpkins, and Pereira in Texas state court based on claims arising from their conduct concerning a proposed merger of Allwaste and Philip. Plaintiffs are holders of Allwaste convertible debentures who sought to sue on behalf of themselves and certain other debenture holders.

Allwaste entered into a letter agreement ("Letter Agreement") with Morgan Stanley, an investment banker, to advise it concerning a contemplated transaction in which Allwaste and Philip would be merged into a new company to be owned by Philip. Allwaste shareholders would receive Philip common stock in exchange for their shares. Lumpkins, the Managing Director of Morgan Stanley's Houston office, sought Allwaste's business and signed the Letter Agreement on Morgan Stanley's behalf. Morgan Stanley agreed to provide Allwaste financial advice and assistance, including tactical strategy, valuation analysis, and assistance in structuring, planning, and negotiating the transaction. If the merger was consummated, Morgan Stanley would earn a transaction fee of at least $3 million. If not, it would likely receive an advisory fee between $100,000 and $200,000.

The Letter Agreement specified that, at Allwaste's request, Morgan Stanley would provide a financial opinion letter to the company's Board of Directors concerning the fairness of the consideration (i.e., the number of shares of Philip common stock) that Allwaste's shareholders were to receive. The Letter Agreement also stated that "Morgan Stanley will act under this letter agreement as an independent contractor with duties solely to Allwaste." It provided that "[a]ny advice or opinions 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."

Morgan Stanley later issued two opinion letters ("Opinion Letters" or, collectively, the "Fairness Opinion"). On March 5, 1997 Morgan Stanley issued an Opinion Letter in which it opined that the merger was fair from a financial point of view. It expressed no view or recommendation concerning whether Allwaste stockholders should approve the merger. Morgan Stanley stated that, for purposes of its opinion, it had assumed and relied upon, without independent verification, the accuracy and completeness of information supplied or otherwise made available by Allwaste and Philip. Like the Letter Agreement, the Fairness Opinion contained a restriction on disclosure of Morgan Stanley's opinions. Each letter stated that the opinion was "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 written consent, except that this opinion may be included in its entirety in any filing made by Allwaste with the Securities and Exchange Commission in connection with the Merger." On June 24, 1997 Morgan Stanley issued a second Opinion Letter in which it reached the same conclusion and set out the same limitations. Pereira, the principal in Morgan Stanley's Houston office who was primarily responsible for the Allwaste engagement, signed both letters.

Following the merger, Philip revealed that, for several years, its financial statements had been inaccurate. The value of Philip's stock and of the debentures declined sharply. Plaintiffs sued Morgan Stanley, Lumpkins, and Pereira in Texas state court for negligence, gross negligence/malice, negligent misrepresentation, breach of fiduciary duty, fraud, violations of the Texas Deceptive Trade Practices-Consumer Protection Act ("DTPA"), Tex. Bus. & Com.Code Ann. §§ 17.41-17.826 (Vernon 1987 & Supp.2002), professional negligence, and breach of contract. They alleged that, in opting not to exercise their right to redeem their debentures for cash upon consummation of the merger, they and other debenture holders had relied on defendants' representations concerning the fairness of the Allwaste-Philip merger; that Morgan Stanley, Lumpkins, and Pereira knew or should have known that Allwaste would rely on the Opinion Letters and disseminate them to third parties, who would also rely on their contents, and that Allwaste in fact did so; that defendants failed to conduct an adequate investigation of Philip or to inform Allwaste of problems that later led to the decline in Philip's stock price and the value of their debentures; that Lumpkins had represented to Allwaste that Morgan Stanley was qualified and experienced in investigating and advising regarding transactions like the proposed Allwaste-Philip merger and could aid Allwaste in evaluating Philip's proposal; and that Morgan Stanley had represented in the Letter Agreement that it would provide financial advice and assistance concerning the transaction, including defining objectives, formulating and implementing tactical strategy, performing valuation analysis, and structuring, planning, and negotiating the transaction.

Defendants removed the case to federal court based on diversity of citizenship. Although the relevant parties1 are completely diverse, Lumpkins is a Texas citizen.2 Therefore, under the terms of 28 U.S.C. § 1441(b),3 defendants could not remove the case unless plaintiffs had fraudulently joined Lumpkins as a defendant.

The district court denied plaintiffs' remand motion, concluding that Lumpkins had been fraudulently joined. After it decided the motion, this court decided Collins. We affirmed the dismissal under Rule 12(b)(6) of a suit by holders of Allwaste stock options against Morgan Stanley and Pereira based on allegations of an inadequate investigation of Philip similar to those that plaintiffs assert here. See Collins, 224 F.3d at 498. Defendants moved under Rule 12(c)4 for judgment on the pleadings. The district court relied in part on Collins as persuasive, although not binding, authority and dismissed plaintiffs' complaint.5

Plaintiffs appeal, arguing that defendants failed to establish that Lumpkins was fraudulently joined and that they did not demonstrate that they were entitled to judgment on the pleadings.6

II

Although we apply somewhat different standards in deciding whether Lumpkins was fraudulently joined and whether plaintiffs have stated a claim, the jurisprudence is sufficiently similar and the issues sufficiently interrelated that we can address them together. Before turning to the merits of each asserted cause of action, we will set out the standards of review and the controlling law of fraudulent joinder and judgment on the pleadings under Rule 12(c). We will also decide whether, in making its rulings, the district court properly considered documents besides plaintiffs' complaint and whether we may entertain them on appeal.

A

We review de novo the district court's order denying plaintiffs' motion to remand, see Heritage Bank v. Redcom Laboratories, Inc., 250 F.3d 319, 323 (5th Cir.2001), and its decision that Lumpkins was fraudulently joined, see Griggs v. State Farm Lloyds, 181 F.3d 694, 699 (5th Cir. 1999). To decide whether a defendant has been fraudulently joined, the district court can employ a summary judgment-like procedure that allows it to pierce the pleadings and examine affidavits and deposition testimony for evidence of fraud or the possibility that the plaintiff can state a claim under state law against a nondiverse defendant. See B., Inc. v. Miller Brewing Co., 663 F.2d 545, 549 n. 9 (5th Cir. Unit A Dec.1981). The district court recognized that it could follow this regimen, but it did not do so to the fullest extent allowed. Instead, it relied on the allegations of plaintiffs' complaint and the contents of the Letter Agreement and the Fairness Opinion.

When the district court fails to apply a summary judgment-like procedure, we normall...

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