                                                                United States Court of Appeals
                                                                         Fifth Circuit
                                                                         F I L E D
                                                                          June 29, 2005
                                 In the
                                                                      Charles R. Fulbruge III
                United States Court of Appeals                                Clerk
                         for the Fifth Circuit
                             _______________

                               m 04-10251
                             _______________


                GENERAL ELECTRIC CAPITAL CORPORATION,
                         A DELAWARE CORPORATION,


                                               Plaintiff-Appellant,

                                 VERSUS

                        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,

                                VERSUS

                         ARTHUR ANDERSEN LLP,

                                               Third Party Defendant-
                                               Appellee.
                                   _________________________

                            Appeal from the United States District Court
                                for the Northern District of Texas
                                 __________________________



Before, SMITH, DENNIS, and PRADO,                      administrative services such as facilities
  Circuit Judges.                                      management, the acquisition of malpractice
                                                       insurance, and accounting services.
JERRY E. SMITH, Circuit Judge:
                                                          In February 1999, GECC was approached
   General Electric Capital Corporation                and requested to extend credit to Promedco.
(“GECC”) appeals the dismissal of its                  Before eventually agreeing to make a $20
negligent misrepresentation claim against              million loan, GECC reviewed financial reports
several former directors and officers of               and other documents supplied by Promedco
Promedco Management Company (“Promed-                  management. These documents, inter alia,
co”). Because GECC’s complaint pleads                  represented Promedco’s 1999 earnings before
sufficient allegations to state a claim upon           interest, taxes, depreciation, and amortization
which relief can be granted, we reverse and            (“EBITDA”) to be $44.6 million, when its
remand.                                                financial condition was much more precarious.

                        I.
   GECC’s original complaint alleged that in              By the time GECC sued, it had been
June 2000 it was induced to lend Promedco              revealed by independent auditing that Promed-
$20 million. According to GECC, in deciding            co’s true 1999 EBITDA were much lower (ac-
to enter into the credit agreement, it relied on       cording to GECC’s complaint, as low as $16.2
Promedco’s representations about its financial         million).      GECC alleges that this
condition. GECC further contends that many             overstatement was the result of improper
of these representations were false and/or             internal accounting with respect to several
misleading and that as a result it sustained a         transactions and that
loss of over $12 million.
                                                          the source of the [] financial misstatements
                      A.                                  was the improper treatment given by
    Promedco was a medical services company               Promedco, subject to the oversight and
that managed health care practices in non-                control of the Officers and Directors, to
urban markets. Essentially, Promedco would                various of its internal transactions. This
approach an existing medical practice, acquire            improper treatment formed the basis of
its operating assets (other than real estate),            Promedco’s audited 1999 financial
and employ its personnel (other than the                  statements, its 1999 10K (which was
physicians). Promedco would then manage the               approved by the Officers and Directors),
business aspects of the practices and provide             and other financial materials provided to


                                                   2
   and relied upon by GECC in its decision to                                     B.
   [lend Promedco the $20 million].                           Defendants filed motions to dismiss under
                                                           Federal Rules of Civil Procedure 9(b) and 12-
Less than a year after the loan was made, Pro-             (b)(6), arguing that GECC’s complaint failed
medco filed for Chapter 11 bankruptcy protec-              to allege fraud with the requisite particularity,
tion, as a consequence of which GECC recov-                and in any event, failed to state a claim upon
ered only some $8 million of the $20 loan.                 which relief could be granted. See FED. R.
                                                           CIV. P. 9(b), 12(b)(6). The district court
   GECC sued (1) H. Wayne Posey, CEO; and                  properly dispensed with the rule 9(b) argu-
Robert Smith, CFO; (2) Promedco’s outside                  ment, concluding that GECC had not alleged
directorsSSCharles J. Buysse, Jr., M.D., E.                any fraud claims and thus was not subject to
Thomas Chaney, James F. Herd, Jack W.                      the heightened pleading requirements of rule
McCaslin, and Richard E. Ragsdale; and (3)                 9(b).2
other Promedco executivesSSDale Edwards,
Senior Vice President of Development;                         On the rule 12(b)(6) motion, however, the
Charles W. McQueary, Senior Vice President                 court held that GECC had failed to state a
of Operations; Robert M. Sontheimer, Senior                claim for negligent misrepresentation.
Vice President for Managed Care; Gregory M.                Specifically, the court found that GECC’s
Wagoner, M.D., Senior Vice President for                   pleadings (i.e., the attachment of the Form 10-
Medical Affairs; and Deborah Johnson, Senior               K) contradicted its allegation that the
Vice President of Administration and                       defendants had “failed to exercise reasonable
Secretary to the Board of Directors                        care in obtaining and communicating the
(collectively, the “non-accounting defen-                  information concerning Promedco’s financial
dants”1). GECC attached to its complaint Pro-              condition.” Under article 2.42(c) of the Texas
medco’s 1999 Form 10-K and its attachment,                 Business Corporation Act, officers and di-
the “Report of Independent Public                          rectors are entitled to rely in good faith on the
Accountants,” prepared by Arthur Andersen                  reports of public accountants. See TEX. BUS.
LLP (“Arthur Andersen”). The report states                 CORP. ACT art. 2.42(c).3 Consequently, the
that Arthur Andersen audited Promedco’s
1998 and 1999 financial statements in
                                                              2
accordance with generally accepted accounting                  See 2 JAMES WM. MOORE ET AL., MOORE’S
standards.                                                 FEDERAL PRACTICE § 9.03[1][d], at 9-21 (3d ed.
                                                           2005).
                                                              3
                                                                  Article 2.42(c) provides,
   1
      This moniker, used in the order denying
GECC’s rule 59(e) motion, refers to defendants                    In the discharge of any duty imposed or
Edwards, McQueary, Sontheimer, Wagoner, and                   power conferred upon an officer, of a corpor-
Johnson. Presumably this label is meant to imply              ation the officer may in good faith and ordinary
that these defendants, all officers of Promedco (but          care rely on information, opinions, reports, or
not the CEO or CFO), were not involved in the                 statements, including financial statements and
company’s accounting practices. For the sake of               other financial data, concerning the corporation
consistency, we adopt the same taxonomy, yet we               or another person, that were prepared or pre-
do not take a position on whether the denomination            sented by:
accurately reflects the defendants’ activities.

                                                       3
district court concluded that the reliance on               complaint that it claimed would remedy the
Arthur Andersen’s approval of Promedco’s ac-                pleading defects identified by the district court.
counting methods directly contradicted                      The main difference between the original and
GECC’s allegation that the directors and                    proposed amended complaints is the inclusion
officers had failed to exercise reasonable care.            of allegations that the misrepresentations
                                                            occurred in both audited and unaudited fi-
                                                            nancial information. Specifically, the amended
   Additionally, the court reasoned that                    complaint alleges that GECC relied on errone-
although allegations that the directors and                 ous unaudited documents including an offering
officers should not have relied on the Arthur               memorandum, some documents attached to
Andersen report (e.g., an allegation that they              the Form 10-K, Promedco’s Form 10Q for the
knew the information provided to Arthur                     first quarter of 2000, and a certificate of
Andersen was false) would have been                         compliance. Additionally, GECC alleges that
sufficient to sustain a cause of action, GECC               it relied on a live presentation made by Posey,
made no such allegations. As a matter of law,               Smith, Edwards, and Sontheimer.
therefore, the court concluded that the defen-
dants could not have acted negligently in                       The district court again held that GECC
vouching for the accuracy of the financial                  had failed to state a claim. In a sparsely-
statements provided to GECC. The court                      worded opinion, the court concluded that
dismissed GECC’s claim with prejudice and                   GECC had failed to allege any facts in support
entered a final judgment.                                   of the notion that the defendants did not
                                                            exercise reasonable care. The court also noted
   In response, GECC filed motions to vacate                that the complaint failed to allege sufficient
the judgment and to amend, see FED. R. CIV.                 facts to sustain other elements of a claim for
P. 59(e), 15(a), attaching a proposed amended               negligent misrepresentationSSto-wit, “Plaintiff
                                                            has failed to allege any facts tending to
                                                            demonstrate that the director defendants had a
   (1) one or more other officers or employees              pecuniary interest in the financing transaction
   of the corporation including members of the              at issue, nor has Plaintiff alleged any facts
   board of directors; or                                   tending to demonstrate that the non-ac-
                                                            counting defendants were responsible for the
   (2) legal counsel, public accountants, invest-           alleged misrepresentations.”
   ment bankers, or other persons as to matters the
   officer reasonably believes are within the                                     II.
   person’s professional or expert competence.                                    A.
                                                               We review a dismissal under rule 12(b)(6)
   An officer is not relying in good faith within the
                                                            de novo.       See Bombardier Aerospace
   meaning of this section if the officer has knowl-
   edge concerning the matter in question that
                                                            Employee Welfare Benefits Plan v. Ferrer,
   makes reliance otherwise permitted by this               Poirot & Wansbrough, 354 F.3d 348, 351 (5th
   subsection unwarranted.                                  Cir. 2003). Consequently, we employ the
                                                            same standard as that used by the district
TEX. BUS. CORP. ACT art. 2.42(c). Section                   court: A claim will not be dismissed unless the
2.41(c), furthermore, provides substantially the            plaintiff cannot prove any set of facts in
same protection for directors.

                                                        4
support of his claim that would entitle him to        that the representation be made by a defendant
relief. Id.                                           in the course of his business, or in a
                                                      transaction in which he has a pecuniary
                      B.                              interest. GECC’s complaint states that the
   The district court predicated its initial          supposed misrepresentations were made “in
dismissal of GECC’s claim on a finding that           connection with a transaction . . . in which the
GECC’s complaint contradicted its allegation          Officers and Directors had a pecuniary
that the defendants acted without reasonable          interest.” Similarly, as to the reasonable care
care. On appeal, however, defendants argue            element, GECC alleges that the defendants
that GECC failed to allege sufficient facts for       “failed to exercise reasonable care in obtaining
any of the required elements of a negligent           the information concerning Promedco’s
misrepresentation claim.                              financial condition.” In the eyes of the
                                                      defendants, these allegations are too
   Under Texas law, a claim for negligent mis-        conclusional to survive a rule 12(b)(6)
representation consists of four elements:             motion.4

   (1) the representation is made by a                   Although the allegations are devoid of
   defendant in the course of his business, or        much factual particularity, they are patently
   in a transaction in which he has a pecuniary       sufficient to state a claim, in terms of the
   interest; (2) the defendant supplies “false        requisite specificity. GECC’s complaint easily
   information” for the guidance of others in         meets the relaxed pleading requirements of
   their business; (3) the defendant did not          Rule 8(a).
   exercise reasonable care or competence in
   o btaining or communicating the                       According to rule 84 of the Federal Rules
   information; and (4) the plaintiff suffers         of Civil Procedure, “[t]he forms contained in
   pecuniary loss by justifiably relying on the       the Appendix of Forms are sufficient under the
   representation.                                    rules and are intended to indicate the simplicity
                                                      and brevity of statement which the rules
Clardy Mfg. Co. v. Marine Midland Bus.                contemplate.” FED. R. CIV. P. 84. A glance at
Loans, Inc., 88 F.3d 347, 357 (5th Cir. 1996).        Form 9 confirms the low bar that rule 8(a)’s
Although the three sets of defendants (the            notice pleading standard sets out. In its
CEO and CFO, the outside directors, and the           example of a complaint for negligence, Form
non-accounting defendants) take somewhat              9 merely contains the simple statement,
differing approaches on appeal, all three             “[D]efendant negligently drove a motor
contend that GECC has generally failed                vehicle against plaintiff . . . .” If such an un-
sufficiently to plead these required elements.

   Specifically, defendants argue that the com-          4
                                                            But see 2 JAMES WM. MOORE, MOORE’S
plaint contains mere conclusional allegations,        F EDERAL PRACTICE § 8.04[2], at 8-24.3 (3d ed.
or “legal conclusions stated as factual con-          2005) (“Pleading conclusory allegations of fact or
clusions.” For example, defendants point to           law is permitted, provided the averments are ‘short
GECC’s allegations with respect to the first          and plain’ and give fair notice to the defending
element of its claim. That element requires           parties of the claim and the grounds alleged in
                                                      support.”).

                                                  5
detailed allegation will suffice, so must                        The juxtaposition of the two pleading stan-
GECC’s. The example in Form 9 does not                       dards contained in rules 8 and 9 is elucidating.
even parse the negligence allegation into                    At oral argument, counsel for the non-
separate elementsSS e.g., the allegation could               accounting defendants challenged whether
say, “Defendant owed a duty of reasonable                    GECC had adequately alleged the involvement
care and breached that duty by not exercising                of those defendants in providing any allegedly
reasonable care in the manner in which he                    misleading information. Confronting the oral
operated his vehicle.”5                                      presentation to GECC, at which the non-
                                                             accounting defendants were allegedly present,
   Rule 8(a)(2) merely requires that a plaintiff             counsel conceded that his clients’ presence
recite a “short and plain statement of the claim             was pleaded, but “they never tell us what was
showing that the pleader is entitled to relief.              saidSSwhat was said that was falseSSor even
FED. R. CIV. P. 8(a)(2).                                     any kind of detail for us to be able to discern
                                                             what facts are being alleged.”
   Such a statement must simply ‘give the de-
   fendant fair notice of what the plaintiff’s                  This prayer for further particularity begs the
   claim is and the grounds upon which it                    question: What more particularity would the
   rests.’ This simplified notice pleading                   defendants deem required to comply with the
   standard relies on liberal discovery rules                rule 9(b) requirement of pleading with
   and summary judgment motions to define                    particularity? Surely, requiring plaintiffs to
   disputed facts and issues and to dispose of               plead the particular allegedly false statements
   unmeritorious claims.”                                    made at a specific meeting is out of keeping
                                                             with the generally lenient standards of our
Swierkiewicz v. Sorema N.A., 534 U.S. 506,                   notice pleading regime.7
512 (2002) (quoting Conley v. Gibson, 355
U.S. 41, 47 (1957)). Other than in the                          Here, although GECC’s complaint contains
situations expressly enumerated in rule 9(b),                minimal factual particularity, its allegations are
e.g., allegations of actual fraud, plaintiffs must           at least as detailed as those in Form 9. As
satisfy only the minimal requirements of rule                noted above, GECC points out the relevant
8(a). See FED. R. CIV. 8(a)(2), 9(b).6                       documents in which, and presentations at


   5
     Indeed, parsing the allegations into elements           § 8.04[1], at 8-24. Instead, “the test is whether the
has never been required. See 2 JAMES WM.                     complaint ‘outline[s] or adumbrate[s]’ a violation
MOORE ET AL., MOORE’S FEDERAL PRACTICE                       of the statute, [common law theory] of recovery or
§ 8.04[1], at 8-24 to 8-24.1 (3d ed. 2005).                  constitutional provision on which the plaintiff relies
                                                             . . . and connects the violation to the named
   6
     See also id. § 8.02[1], at 8-8 (“[T]he general          defendants.” Id. (quoting Brownlee v. Conine, 957
pleading principles of Rule 8 continue to apply to           F.2d 353, 354 (7th Cir. 1992)) (brackets and
every other aspect of pleadings not specifically             ellipses in original).
covered by special pleading requirements.). In-
                                                                7
deed, the mere fact that allegations can be char-                Indeed, under rule 9(b), even for allegations of
acterized as “conclusional” will not, alone, suffice         fraud, “not every alleged misrepresentation need
to make them insufficient. “[T]he fact that a com-           []appear in the pleadings” Id. § 9.03[1][a], at 9-
plaint is ‘conclusory’ is at automatically fatal.” Id.       17.

                                                         6
which, it believes misrepresentations were                care. The court concluded that the plaintiff
made; alleges that defendants were responsible            need not allege that the defendant fell outside
for or authorized them, and asserts that in               of this exception, noting that the plaintiff is not
doing so they did not exercise reasonable care.           required to “plead statements in anticipation of
Under the lenient standard of notice pleading,            affirmative defenses.” Id. at 513.
such a “short and plain statement of the claim”
is sufficient. See FED. R. CIV. P. 8(a).                      GECC also points to In re Enron Corp. Se-
                                                          curities, Derivative & ERISA Litigation, 258
                        C.                                F. Supp. 2d 576, 640 (S.D. Tex. 2003).
    The initial dismissal of GECC’s claims, as            There, outside directors of Enron claimed, in
discussed above, was based on the Texas                   their motion to dismiss, that their reliance on
Business Corporation Act, which entitles                  Arthur Andersen’s audit opinions insulated
officers and directors to rely in good faith on           them from liability under § 11 of the Securities
the reports of accountants. See TEX. BUS.                 Act of 1933, 15 U.S.C. 577k. The court,
CORP. ACT arts. 2.41(c), 2.42(c). According               however, concluded that the director’s
to the district court, in light of the statute, “It       reliance, and the good faith thereof, were fact-
is hard to envision that officers and directors           specific determinations that could not be
might have exercised greater care than                    resolved on a motion to dismiss. Id.
ensuring that the financial statements used to
represent their company’s financial conditions               In response, the non-accounting defendants
and the underlying accounting principles upon             point to an analogous Delaware statute. In
which they were based have been approved by               that state, as in Texas, directors are entitled to
independent accounting experts.”                          rely in good faith on the opinions rendered
                                                          within the realm of expertise of the person
   On appeal, GECC contends that the protec-              giving the advice. Construing this Delaware
tion afforded by the Texas statute must be                statute in Brehm v. Eisner, 746 A.2d 244, 261
pleaded as an affirmative defense and is not an           (Del. 2000), the court indicated that the
appropriate ground on which to dismiss a                  pleading burden is on the plaintiff to allege
claim on a rule 12(b)(6) motion. In support of            such facts as would make reliance on the
this argument, GECC points to analogous                   expert opinion unreasonable. After holding
provisions contained in federal securities laws           that the plaintiffs must rebut the presumption
and the cases applying them.                              of good faith reliance, the court noted, “That
                                                          is not to say, however, that a rebuttal of the
    For instance, in Griffin v. Paine Webber,             presumption of proper reliance on the expert
Inc., 84 F. Supp. 2d 508, 512-13 (S.D.N.Y.                under Sect ion 141(e) cannot be pleaded in a
2000), investors brought a claim under § 12 of            properly framed complaint setting forth
the Securities Act of 1933 alleging false regis-          particularized facts creating reason to believe
tration and prospectus claims. See 15 U.S.C.              that the Old Board’s conduct was grossly
§ 771(a)(2). Section 12, however, also                    negligent.”
contains an exception for those who submitted
a false registration or prospectus because they              The instant defendants cannot cloak them-
did not or could not know of the falsity or               selves in the protection of the Texas statute at
omission despite the exercise of reasonable               this early stage of the proceedings. Article


                                                      7
2.42(c) affords protection for the reliance on                  The district court’s initial dismissal of
the opinions of public accountants where that                GECC’s claim, though well intentioned, was in
reliance is “in good faith and ordinary care.”               error. The parties further dispute whether
TEX. BUS. CORP. ACT art. 2.42(c). Perhaps                    GECC should have been allowed to amend its
GECC’s pleadings (specifically, the                          complaint. In light of our decision that it was
attachments thereto)8 negate any allegation                  a mistake to dismiss the original complaint, we
that the defendants did not act with reasonable              need not reach that question.
care. Our inquiry, however, does not end
there. For the protection of the Texas statute                  The judgment is REVERSED, and this
to attach, the reliance on an accountant’s                   matter is REMANDED for further
opinion must be in good faith.                               proceedings.

    The attachment of the Form 10K to
GECC’s complaint does nothing to
demonstrate the defendants’ good faith.
Although the Brehm court concluded that a
Delaware statute conferred a presumption of
good faith, no such presumption is apparent on
the face of the Texas statute, and we decline to
devise one by judicial fiat. A showing that the
reliance was taken in good faith must be made
by defendants in support of an affirmative
defense based on the statute. If they are able
to make such an uncontroverted showing after
GECC has had a chance to conduct discovery,
summary judgment will be appropriate.9 At
this early stage, however, termination of
GECC’s suit is premature.



   8
      Documents attached to a complaint are con-
sidered part of the plaintiff’s pleadings. See FED.
R. CIV. P. 10(c); Centers v. Centennial Mortgage,
Inc., 398 F.3d 930, 933 (7th Cir. 2005) (quoting 5
CHARLES A. WRIGHT & ARTHUR R. MILLER,
FEDERAL PRACTICE AND PROCEDURE: CIVIL 2D §
1327, at 766 (1990) (“[A] plaintiff may plead
himself out of court by attaching documents to the
complaint that indicate that he or she is not entitled
to judgment.”).
   9
     See 2 JAMES WM. MOORE ET AL., M OORE’S
FEDERAL PRACTICE § 8.02[2], at 8-8.1 to 8-9 (3d
ed. 2005).

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