Koch v. Koch Industries, 85-1636-C.

• Decision Date: 11 June 1992
• Docket Number: No. 85-1636-C.,85-1636-C.
• Citation: 798 F. Supp. 1525
• Court: U.S. District Court — District of Kansas
• Parties: William I. KOCH, et al., Plaintiffs, v. KOCH INDUSTRIES, et al., Defendants.

798 F. Supp. 1525

William I. KOCH, et al., Plaintiffs, v. KOCH INDUSTRIES, et al., Defendants.

No. 85-1636-C.

United States District Court, D. Kansas.

June 11, 1992.

COPYRIGHT MATERIAL OMITTED

Clifford L. Malone, Adams, Jones, Robinson & Malone, Harry L. Najim, Najim & Baker, Wichita, Kan., Ralph I. Miller, Frank L. Hill, Gregory S.C. Huffman, Dallas, Tex., Joseph F. Ryan, Lyne, Woodworth & Evarts, Boston, Mass., Abraham D. Sofaer, John M. Townsend, Norman C. Kleinberg, Michael E. Salzman, Hughes, Hubbard & Reed, Washington, D.C., Jerome G. Shapiro, Robert J. Sisk, Steven A. Hammond, Nicolas Swerdloff, Hughes, Hubbard & Reed, Russell E. Brooks, Milbank, Tweed, Hadley & McCloy, New York City, Stephen M. Joseph, Joseph, Robison & Anderson, P.A., Wichita, Kan., Michael Paul Kirschner, Hastie & Kirschner, Oklahoma City, Okl., for plaintiffs.

James M. Armstrong, Robert L. Howard, Foulston & Siefkin, Wichita, Kan., for defendants.

MEMORANDUM AND ORDER

CROW, District Judge.

The case comes before the court on the defendants' motion to disqualify the law firm of Hughes, Hubbard & Reed ("HH & R") from representing any of the plaintiffs in this action. (Dk. 446). On January 27, 1992, HH & R entered its appearance in this case on behalf of the plaintiffs William I. Koch, Oxbow Energy, Inc., Spring Creek Art Foundation, and Northern Trust Co. (Dk. 416). On the same day, four members of HH & R firm, Abraham D. Sofaer, John M. Townsend, Norman C. Kleinberg, and Michael E. Salzman, moved for admission pro hac vice. (Dk. 417). The court granted these attorneys permission to practice before this court in their representation of the plaintiffs. (Dk. 442). HH & R opposes the defendants' motion to disqualify.

In their motion, defendants characterize HH & R's prior representation as "intimate" and wide-ranging involvement in defendants' affairs. HH & R's continued representation of plaintiff, in defendants' opinion, would constitute a "blatant breach" of HH & R's ethical duties of loyalty and confidentiality owed to them as former clients.

HH & R denies that its representation of certain plaintiffs in this suit is an ethical violation requiring disqualification. Specifically, HH & R maintains that KII could not reasonably expect in 1969 through sometime in 1976 that any information imparted to HH & R would be kept from William Koch who was serving then on the Board of Directors and as an officer in KII and several of its subsidiary corporations. Moreover, HH & R fails to see any substantial relationship between the present suit and the matters surrounding its representation of KII more than fifteen years ago.

An evidentiary hearing was held on May 20 and 21, 1992. The defendants presented the testimony of Donald Cordes. The plaintiffs called David Tillinghast, a former partner at HH & R and the supervising attorney or account executive of the legal work done for KII from 1972 through 1976. The parties agreed on nine pages of stipulations with fifteen exhibits in support. Additional exhibits were admitted at hearing.¹ Having heard the closing arguments and reviewed the parties' final written submissions, the court issues for the purpose of deciding this motion only its findings and conclusions as required by Fullmer v. Harper, 517 F.2d 20, 21-22 (10th Cir.1975).

FINDINGS OF FACT

1. HH & R, a New York law firm, served as principal outside counsel to KII on various matters beginning in 1969 and continuing until sometime in 1976. Management for KII regularly contacted HH & R for legal advice on a wide array of subjects, including financing transactions, regulatory issues, maritime law, tax advice and planning, corporate reorganizations, stock recapitalization, and general corporate matters. HH & R delivered to KII at least thirteen transfer file cases of documents relating to HH & R's former representation of KII. While HH & R may not have been KII's only outside counsel during this period, the nature and scope of HH & R's representation suggests that HH & R functioned in many ways as general counsel to KII.

2. KII was, and continues to be, a privately held corporation with most shares owned by members of the Koch family. For this reason, HH & R's work required attention to the individual interests of the Koch family. In that regard, HH & R directly advised Charles Koch, David Koch, William Koch, and their mother, Mary Koch, on estate and tax planning matters, including the creation and maintenance of private charitable foundations.

3. After 1976, HH & R did not represent KII or any Koch family members until December of 1991, when it undertook its representation of William Koch and two corporate entities owned by him, Oxbow Energy, Inc. and Spring Creek Art Foundation, Inc., in this case. HH & R had no role in negotiating, drafting, or executing the Stock Purchase and Sale Agreement, dated June 4, 1983.

4. In October of 1982, William I. Koch and other shareholders filed an action against KII and its management alleging breach of fiduciary duties and fraud. This court was assigned the case. In connection with the settlement of that lawsuit in 1983, the parties entered into the Stock Purchase and Sale Agreement of June 4, 1983. By the terms of the settlement, the plaintiffs sold their shares of KII and dismissed the lawsuit. The present case was filed in June of 1985 by this group of selling shareholders, and they alleged their stock was sold at a price less than its true value because of fraudulent misrepresentations and misconduct and breaches of certain warranties contained within the stock sale agreement. The case was assigned also to this court. Over the seven-year history of this second case, the court has become quite familiar with the allegations and issues of the parties. After deciding several motions to amend and motions for review and in watching the discovery process, the court appreciates that the plaintiffs consider the allegations and issues relevant to their claims to encompass many more facts and circumstances than are alleged in the current second amended complaint (Dk. 180).

5. At least from 1969 and continuing past 1976, William Koch, Charles Koch, and David Koch were the largest shareholders of KII. William Koch was a member of KII's board of directors during this same period.

6. On November 4, 1988, William Koch filed an affidavit, Exhibit 16, in support of plaintiffs' motion to file a second amended complaint (Dk. 144). He avers therein that KII, at the direction of KII's management, in particular Charles Koch, engaged in unethical practices as early as the 1960s. For example, he avers that Charles Koch and KII fraudulently acquired the Atlas Petroleum stock of a Mr. Vosco resulting in an adverse judgment against KII. In the plaintiffs' proposed second amended complaint, plaintiffs refer to the Vosko litigation as evidence of a pattern of racketeering activity and allege that it was a "fraudulent scheme perpetrated by KII" and "conceived by defendant Charles Koch and participated in by defendants Varner and Carey." Even though the court denied plaintiffs' leave to include their RICO claim, Mr. Vosko's name appears on William Koch's witness list filed February 28, 1992. In its representation of KII, HH & R was in a position to acquire confidential information relating to the Vosko litigation that is connected or related to the instant case.

(A portion of the order has been deleted as subject to the protective order.)

7. Also in his affidavit, William Koch avers that KII and Charles Koch by their attitudes and actions have disregarded the rights of minority shareholders. William Koch cites as one example the "force out" of minority shareholders in Great Northern Refining Company. Confidential information could have been imparted to HH & R about this transaction, as it gave legal advice to KII about the acquisition of minority interests in the successor company of Great Northern Refining.

(A portion of the order has been deleted as subject to the protective order.)

8. Again in his affidavit, William Koch asserts that there were ongoing criminal investigations of KII by the Internal Revenue Service ("IRS") from 1970 to 1980. HH & R was very much involved with a contested proceeding before the IRS in the early 1970s.

(A portion of the order has been deleted as subject to the protective order.)

9. In William Koch's affidavit at page four and in ¶ 67(c) of the plaintiffs' second amended complaint (Dk. 180), it is alleged that Charles Koch in March of 1980 misrepresented to William Koch that KII's exposure to the Department of Energy ("DOE") for fines was $1.2 billion. The complaint goes on to allege that no computer tape existed confirming this exposure, that Charles Koch knew there was no such exposure, and that the matter was eventually settled with the DOE for $14 million. HH & R represented KII in certain federal regulatory matters before the DOE and these matters appear to be related to the regulations and conduct upon which the fines were based.

(A portion of the order has been deleted as subject to the protective order.)

10. At ¶ 56(a) of their second amended complaint (Dk. 180), the plaintiffs allege that Charles Koch fraudulently misrepresented to William Koch in May and June of 1978 and again in October of 1979 the legal requirement for William Koch's charitable foundation to sell certain KII stock. The defendant Cordes allegedly advised Charles Koch that the applicable law required this sale. In its estate planning services for KII and the Koch family members, HH & R developed the original plan for creating and maintaining the charitable foundations.

(A portion of the order has been deleted as subject to the protective order.)

11. In the plaintiffs' memorandum in opposition (Dk. 70) to the defendants' motion to dismiss and for summary judgment, the plaintiffs alleged that they could not find on the 1982 and 1983 financial statements any disclosure of Koch Oil, S.A. or its asset...