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FOR PUBLICATION
ATTORNEYS FOR APPELLANTS: LEE B. McTURNAN ANNE L. COWGUR KENNETH J. MUNSON McTurnan & Turner Indianapolis, Indiana ATTORNEYS FOR APPELLEES: HENRY J. PRICE RONALD J. WAICUKAUSKI CAROL A. NEMETH Price Waicukauski & Riley LLC Indianapolis, Indiana

IN THE COURT OF APPEALS OF INDIANA
PRICEWATERHOUSECOOPERS, LLP, COOPERS & LYBRAND, LLP, Appellants-Defendants, vs. ) ) ) ) ) ) ) ) ) ) ) )

No. 49A05-0512-CV-719

JAMES D. MASSEY and DENNIS E. MURRAY, SR., Appellees-Plaintiffs.

APPEAL FROM THE MARION SUPERIOR COURT The Honorable John F. Hanley, Judge Cause No. 49D11-0503-CT-11087

February 7, 2007

OPINION - FOR PUBLICATION

KIRSCH, Chief Judge

PricewaterhouseCoopers, LLP (including its predecessor Coopers & Lybrand) ("PwC") brings this interlocutory appeal contending that the trial court erred in denying its motion to dismiss the complaint of James D. Massey and Dennis E. Murray, Sr. (together, "Massey/Murray"), former directors of Conseco, Inc. ("Conseco"). On appeal, PwC raises three issues of which we find the following to be dispositive: whether Massey/Murray's claims are solely derivative in nature such that Massey/Murray have no standing to sue PwC in a direct action. 1 We reverse and remand. FACTS AND PROCEDURAL HISTORY 2 Massey/Murray were longstanding stockholders of Conseco with substantial holdings. From 1994 until 2000, Massey/Murray were members of Conseco's board of directors ("Board") and, while on Conseco's Board, were also part of the Board's audit committee ("Audit Committee"). During that same time period, PwC was Conseco's independent auditor. Massey/Murray participated in Conseco's Directors & Officers Program ("D&O Program"), which allowed directors and officers to borrow money from certain approved financial institutions to finance the acquisition of Conseco stock. The goal of the D&O Program was to "provide important benefits to the company including, as spelled out in the D&O Plans, to ensure the alignment of the interests of the plan participants with the
PwC's other claims of error were that Massey/Murray failed to state a claim for breach of fiduciary duty and failed to properly plead a fraud claim. Because we dismiss Massey/Murray's complaint on the basis of the shareholder standing rule, we need not address these remaining issues. Oral argument was heard on this case on September 28, 2006 in Indianapolis. We commend counsel on the quality of their written and oral advocacy.
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interests of all shareholders and to increase the participants' motivation to manage the company as owners." Appellants' App. at 7. In addition to acquiring shares through the D&O Program, Massey/Murray also purchased thousands of Conseco shares, directly and indirectly, with non-borrowed funds. Conseco's financial difficulties began after its 1998 acquisition of Green Tree Financial Services Corporation--a business that managed the origination, purchase, and sale of loans, some of which consisted of interest-only securities. Following the

acquisition, Massey/Murray, as members of the Board and Audit Committee, routinely received and reviewed PwC's audits of Conseco's public financial statements. PwC also provided Massey/Murray, both orally and in writing, with information about Conseco's financial condition. Massey/Murray contend that, from 1998 through 2000, PwC

misrepresented Conseco's financial condition and that, in reliance on those statements, Massey/Murray purchased and continued to hold Conseco shares. Conseco filed for bankruptcy on December 17, 2002, which left Massey/Murray with worthless shares and owing millions of dollars under the D&O Program. 3 On March 22, 2005, Massey/Murray filed a complaint against PwC claiming: (1) that PwC breached its fiduciary duty to Conseco, its Board, its Audit Committee, and Massey/Murray by making material misrepresentations and omissions with respect to Conseco's cash flow, the value of interest-only securities, and accounting control; and (2) that PwC committed common law fraud by knowingly or recklessly misrepresenting
The complaint refers to Conseco and New Conseco. Appellants' App. at 7. The latter corporation came into existence after the bankruptcy and was Conseco's successor corporation pursuant to an approved bankruptcy reorganization. Because the distinction between these two entities does not impact our holding, we refer to both entities as "Conseco."
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Conseco's value, which Massey/Murray relied on to their detriment. 4 On May 27, 2005, PwC moved to dismiss the complaint on the grounds that: (1) Massey/Murray lacked standing under the shareholder standing rule to bring claims directly against PwC; (2) the breach of fiduciary duty claim was barred by expiration of the two-year statute of limitations; (3) Massey/Murray failed to state a claim for breach of fiduciary or other duty owed to them as shareholders of Conseco; (4) Massey/Murray failed to plead fraud with the particularity required under Trial Rule 9(B); and (5) Massey/Murray failed to state a claim for fraud because the alleged misstatements were not statements of past or existing fact. Appellants' Br. at 2. 5 Following oral argument before the Honorable Magistrate Burnett Caudill, the Honorable Judge John F. Hanley accepted the Magistrate's recommendations and, on September 22, 2005, denied PwC's motion to dismiss without explaining the reason for his ruling. Appellants' App. at 4-5. On November 17, 2005, the issue was certified for appeal pursuant to Ind. Appellate Rule 14(B)(1), and this Court accepted jurisdiction on February 21, 2006. Additional facts will be added as necessary.

As a preliminary matter we note that Massey/Murray brought a diversity action in the Federal District Court for the Southern District of Indiana raising comparable claims against Merrill Lynch, i.e., that the plaintiffs suffered damages because they "purchased and/or retained large amounts of Conseco stock (which has since become worthless) based upon Merrill Lynch's alleged misrepresentations." Massey v. Merrill Lynch & Co., 464 F.3d 642, 644 (7th Cir. 2006). The complaint against Merrill Lynch was dismissed with prejudice after the District Court found "that the plaintiffs' claims were based solely on the diminution of Conseco's stock value and, as a result, their claims were derivative in nature--i.e., could be brought only on behalf of Conseco itself and therefore could not support a direct action brought individually by the plaintiffs." Id. at 645. On appeal, the Seventh Circuit, applying Indiana law, affirmed the District Court's decision. Id. at 651. The record before us does not contain a copy of PwC's motion to dismiss. Therefore, we cite to the grounds for dismissal set forth in the Appellants' Brief.
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DISCUSSION AND DECISION PwC contends that the trial court erred in denying its motion to dismiss Massey/Murray's complaint. The standard of review of a trial court's grant or denial of a motion to dismiss for failure to state a claim is de novo. Paniaguas v. Endor, Inc., 847 N.E.2d 967, 969 (Ind. Ct. App. 2006), trans. denied; Sims v. Beamer, 757 N.E.2d 1021, 1024 (Ind. Ct. App. 2001). A 12(B)(6) motion tests the legal sufficiency of a claim, not the facts supporting it. 6 Brown v. Delaney, 840 N.E.2d 6, 8 (Ind. Ct. App. 2005);

Marcuccilli v. Ken Corp., 766 N.E.2d 444, 448 (Ind. Ct. App. 2002). On review, we view the complaint in the light most favorable to the non-moving party, drawing every reasonable inference in favor of that party. Brown, 840 N.E.2d at 8; Marcuccilli, 766 N.E.2d at 448. We stand in the shoes of the trial court and must determine if the trial court erred in its application of the law. Brown, 840 N.E.2d at 8. We may sustain the trial court's ruling if we can affirm on any basis found in the record. Id. When filing a complaint, "[t]he plaintiff is required to provide a `clear and concise statement that will put the defendants on notice as to what has taken place and the theory that the plaintiff plans to pursue.'" Godby v. Whitehead, 837 N.E.2d 146, 149 (Ind. Ct. App. 2005), trans. denied (quoting Donahue v. St. Joseph County, 720 N.E.2d 1236, 1239 (Ind. Ct. App. 1999)). Dismissal of a complaint is proper if it is apparent that the facts alleged in the complaint are incapable of supporting relief under any set of circumstances. Id.; Donahue, 720 N.E.2d at 1239. In making this determination, we
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In the absence of a copy of the motion to dismiss, we accept the parties' statement that the applicable standard of review is that for a motion to dismiss pursuant to Indiana Trial Rule 12(B)(6). Appellants' Br. at 8; Appellees' Br. at 7-8.

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look only to the complaint and may not resort to any other evidence in the record. Brown, 840 N.E.2d at 8. PwC contends that Massey/Murray lacked standing to bring this suit. The United States Supreme Court has explained that standing has two related components: the federal constitutional requirement of Article III and nonconstitutional prudential considerations. Franchise Tax Bd. of Cal. v. Alcan Aluminium Ltd., 493 U.S. 331, 335, 110 S. Ct. 661, 664 (1990). PwC does not raise federal constitutional considerations; instead, it argues that Massey/Murray do not have standing to bring the suit under the prudential consideration of the shareholder standing rule. While the term "shareholder standing rule" does not appear in any published Indiana cases, the United States Supreme Court has explained: [T]he rule is a longstanding equitable restriction that generally prohibits shareholders from initiating actions to enforce the rights of the corporation unless the corporation's management has refused to pursue the same action for reasons other than good-faith business judgment. Id. at 336. (citations omitted). Without using that term, Indiana courts have recognized this well-established general rule of corporate law that shareholders of a corporation may not bring actions in their own name to redress an injury to the corporation. Knauf Fiber Glass, GMBh v. Stein, 622 N.E.2d 163, 165 (Ind. 1993); Speedway Realty Co. v. Grasshoff Realty Corp., 248 Ind. 6, 9, 216 N.E.2d 845, 846 (Ind. 1966) ("It is fundamental that every action must be prosecuted in the name of the real party in interest." (quotation and citation omitted)); Barth v. Barth, 693 N.E.2d 954, 957 (Ind. Ct. App. 1998), trans. denied. The rationale for this rule is twofold.

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First, if a shareholder sues for money damages for injury to the corporation, there is a concern that the corporation itself could still sue and inflict double punishment on the defendant. Meanwhile, the shareholder has received money that is really owed to the corporation. Second, there is a concern that the real party's interests will not be taken into account if that party is not represented in the action. The shareholder and the corporation may have different interests and goals in litigation, and the shareholder could act in ways that harm the corporation, even if unintentionally. Huffman v. Office of Envtl. Adjudication, 811 N.E.2d 806, 814 (Ind. 2004). In general, a shareholder may bring a derivative action or a direct action. A derivative action is one brought by a shareholder in the name or right of a corporation to redress an injury sustained by, or to enforce a duty owed to, the corporation. 2

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