203 F.3d 1202 (10th Cir. 2000), 98-3223, Koch v. Koch Industries Inc.

Docket Nº:98-3223
Citation:203 F.3d 1202
Party Name:WILLIAM I. KOCH; OXBOW ENERGY, INC.; L. B. SIMMONS ENERGY, INC., doing business as Rocket Oil Company; SPRING CREEK ART FOUNDATION INC.; GAY A. ROANE; ANN ALSPAUGH; THE NORTHERN TRUST COMPANY, as trustee; PAUL ANTHONY ANDRES COX; HOLLY A.A.C. FARABEE; RONALD W. BORDERS; FREDERICK R. KOCH; THE FIDUCIARY TRUST COMPANY INTERNATIONAL, Plaintiffs-Appell
Case Date:February 14, 2000
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit
 
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203 F.3d 1202 (10th Cir. 2000)

WILLIAM I. KOCH; OXBOW ENERGY, INC.; L. B. SIMMONS ENERGY, INC., doing business as Rocket Oil Company; SPRING CREEK ART FOUNDATION INC.; GAY A. ROANE; ANN ALSPAUGH; THE NORTHERN TRUST COMPANY, as trustee; PAUL ANTHONY ANDRES COX; HOLLY A.A.C. FARABEE; RONALD W. BORDERS; FREDERICK R. KOCH; THE FIDUCIARY TRUST COMPANY INTERNATIONAL, Plaintiffs-Appellants,

and

UNITED STATES TRUST COMPANY OF NEW YORK, as trustee; MARJORIE SIMMONS GRAY, as trustee; MARJORIE L. SIMMONS, as trustee; NATIONSBANK N.A., co-trustee of the Louis Howard Andres Cox Trusts B & D, Plaintiffs,

v.

KOCH INDUSTRIES, INC.; CHARLES G. KOCH; STERLING V. VARNER; DAVID H. KOCH; DONALD L. CORDES; THOMAS M. CAREY, Defendants-Appellees.

No. 98-3223

United States Court of Appeals, Tenth Circuit

February 14, 2000

Appeal from the United States District Court for the District of Kansas. D.C. No. 85-1636

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Arthur R. Miller, Cambridge, Massachusetts, (Fred H. Bartlit, Jr., Donald E. Scott, Ellen A. Cirangle, Ryan D. Downs, Glen E. Summers, of Bartlit, Beck, Herman, Palenchar & Scott, Denver, Colorado, Attorneys for Plaintiffs-Appellants William I. Koch, Oxbow Energy, Inc., Northern Trust Company and Spring Creek Art Foundation; Harry L. Najim, of Najim Law Offices, Wichita, Kansas; Russell E. Brooks, Eugene F. Farabaugh, of Milbank, Tweed, Hadley & McCloy, New York, New York, Attorneys for Plaintiffs-Appellants Frederick R. Koch and The Fiduciary Trust Company International; Gregory S. C. Huffman, L. James Berglund, II, Christopher L. Barnes, of Thompson & Knight, P.C., Dallas, Texas, Attorneys for Plaintiffs-Appellants L. B. Simmons Energy, Inc. d/b/a Rocket Oil Company, Gay A. Roane, Ann Alspaugh, Paul Cox, Holly Farabee and Ronald Borders, with him on the briefs).

Robert L. Howard, of Foulston & Siefkin L.L.P., Wichita, Kansas (James M. Armstrong, James D. Oliver, and Timothy B. Mustaine with him on the briefs) for Appellees.

Before EBEL , McWILLIAMS , and MURPHY, Circuit Judges.

MURPHY, Circuit Judge.

I. INTRODUCTION

In June of 1983, a group of Koch Industries, Inc. ("KII") stockholders entered into a Stock Purchase Agreement ("SPA") with KII. Under the SPA, the selling stockholders (the "Plaintiffs"), who owned 47.8% of KII stock, received $200 per share, a total value of approximately $1.1 billion. Two years later, the Plaintiffs sued KII and individual KII officers (the "Defendants"), claiming the Defendants misrepresented and omitted material facts during the negotiation of the SPA, which resulted in the Plaintiffs' undervaluation of KII stock. Thirteen years later, the case finally went to trial. Following an eleven week trial, a jury returned a verdict in favor of the Defendants. The Plaintiffs now appeal a host of district court rulings, made both prior to and during trial.

Specifically, the Plaintiffs challenge the district court's summary judgment ruling; its construction, application, and unwillingness to vary the terms of the pretrial order; various evidentiary rulings; jury instructions on state law claims; the district court's restrictions on the Plaintiffs' fraud claims; its limitation of damages; and, generally the trial court's administration of this litigation. With the exception of the district court's jury instructions on two fraud claims premised on Texas state law, this court affirms the judgment of the district court.

II. BACKGROUND

A. Factual Background

The subject of this dispute, KII, is the second largest privately-held corporation in the United States. Based in Wichita, Kansas, KII owns an array of energy-related operations in the United States and Canada. Specifically, KII's assets include oil refineries, service stations, pipelines, coal mines, oil and gas exploration properties and processing plants, and a fleet of trucks. KII also owns numerous ranches and several hundred Chrysler dealerships.

Originally named the Rock Island Oil and Refining Company, KII was founded by Fred C. Koch, the father of plaintiffs William and Frederick Koch and defendants Charles and David Koch. Fred Koch launched the company after World War II, when his mentor, L.B. Simmons, sold a refinery and several pipelines to Fred. In exchange, L.B. Simmons received stock

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and cash and he soon purchased additional shares of Rock Island Oil and Refining.

L.B. Simmons' stock eventually passed individually and in trust to the following plaintiffs: Gay Roane, Holly Farabee, and Ronald Borders (the "Texas Plaintiffs"), Ann Alspaugh, Paul Cox, and L.B. Simmons Energy, Inc. (collectively, the "Simmons Family"1). For decades, the Simmons Family elected a director to KII's Board of Directors. Those members of the Simmons family involved in the instant suit are cousins to the four Koch brothers.

In 1966 and 1967, Fred Koch gave all his common shares of KII stock to trusts created for his four sons, granting equal shares to plaintiff William and defendants Charles and David, but a lesser amount to plaintiff Frederick. When Fred Koch died in 1967, Charles succeeded his father as a director and chief executive officer of KII, positions he retains today. David went to work for KII in 1970 and presently serves as an executive vice-president and a director. William joined KII full-time in 1974, becoming vice president of corporate development five years later and continuously serving as a director from 1967 to 1983. Frederick, however, displayed substantially less interest in the company; he was never a KII employee and did not place a representative on the board until March of 1981.

In 1980, a dispute erupted over the management of KII, pitting William, Frederick and the Simmons Family against Charles and David. During this contentious power struggle, Charles and David purchased the 4 % of KII stock owned by Howard Marshall III, the son of director J. Howard Marshall II. As a result, the voting percentage of stock retained by William, Frederick and the Simmons Family stood at 47.8 %, while Charles, David and the family of J. Howard Marshall II controlled 49.7 %, with employees and others owning the balance. In addition, the Board voted to terminate William's employment at KII.

At that point, KII began negotiating with William, Frederick and the Simmons Family either to buy back some or all of their stock or to take KII public and have the now dissident shareholders sell their stock on the public market. Both sides then retained law firms and investment banking companies to represent them in the negotiations. On behalf of the dissident shareholders, the investment banking firm Goldman Sachs undertook an extensive valuation study of KII, beginning in the spring of 1982.

These efforts culminated in the June 1983 SPA. Signed by all parties on June 4, 1983, the SPA provided that William, Frederick and the Simmons Family would sell their shares of KII common stock back to the company for $200 per share. In addition, the selling shareholders received their pro rata interests in an offshore oil concession. The SPA contained two relevant warranties by KII: The first provided that all KII financial statements disclosed to the selling shareholders had fairly presented KII's financial condition and were prepared in accordance with generally accepted accounting principles. The second warranty promised that since December 31, 1982, the Defendants had provided all information "which if fully disclosed might materially affect the valuation of [KII] stock . . . ."

B. Procedural Background

In June of 1985, two years after signing the SPA, the selling shareholders filed suit, claiming the Defendants had misrepresented or failed to disclose material facts which, if properly provided, would have increased the Plaintiffs' valuation of KII stock at the time of the SPA. Specifically, the complaint detailed three alleged misrepresentations concerning KII's oil and gas properties in the Persian Gulf, Utah, and North Dakota and further alleged a general scheme to conceal the true value of KII stock. The Plaintiffs asserted federal

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claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, and state claims for breach of fiduciary duty, breach of warranty, and fraud. They requested actual damages of over $2 billion. The Defendants named in the action were KII; Charles and David Koch; Sterling Varner, the president and a director of KII; Tom Carey, KII's vice president of finance; and Donald Cordes, KII's vice president of legal affairs.

On November 5, 1986, the district court granted summary judgment in favor of the Defendants on the Persian Gulf and Utah claims, but denied summary judgment on the North Dakota claim. The district court also determined the Plaintiffs' allegation of a general scheme to conceal the value of stock failed to meet the particularity requirement of Rule 9(b) of the Federal Rules of Civil Procedure. After several failed attempts to bring the excluded claims before other fora,2 in 1989 the Plaintiffs persuaded the district court to grant them leave to amend their complaint, adding both general and specific allegations of fraudulent accounting policies and practices. Based on this amended complaint, the Plaintiffs then sought broad discovery from several non-parties, requests which a magistrate judge and the district court strictly limited.

In 1993, the district court closed discovery. The Defendants then filed a motion for summary judgment on all of the remaining claims. On July...

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