Koch v. Koch Industries, Inc.
| Decision Date | 14 January 1998 |
| Docket Number | No. 85-1636-SAC.,85-1636-SAC. |
| Citation | 996 F.Supp. 1273 |
| Parties | William I. KOCH, et al., Plaintiffs, v. KOCH INDUSTRIES, INC., et al., Defendants. |
| Court | U.S. District Court — District of Kansas |
Clifford L. Malone, Adams, Jones, Robinson & Malone, Harry L. Najim, Najim Law Offices, Wichita, KS, John T. Hickey, Jr, Alex Dimitrief, Kirkland & Ellis, Chicago, IL, Joseph F. Ryan, Lyne, Woodworth & Evarts, Boston, MA, Fred H. Bartlit, Jr, Bartlit, Beck, Herman, Palenchar & Scott, Chicago, IL, Donald E. Scott, Bartlit, Beck, Herman, Palenchar & Scott, Denver, CO, Gregory S. C. Huffman, Thompson & Knight, Dallas, TX, Russell E. Brooks, Milbank, Tweed, Hadley & McCloy, New York, NY, Stephen M. Joseph, Redmond & Nazar, L.L.P., Wichita, KS, Michael Paul Kirschner, Lee & Kirschner, P.L.L.C., Oklahoma City, OK, for Plaintiffs.
James M. Armstrong, Robert L. Howard, Timothy B. Mustaine, Foulston & Siefkin L.L.P., Wichita, KS, Donald L. Cordes, Koch Industries, Inc., Wichita, KS, for Defendants.
The case comes before the court on the defendant's brief as to questions of law for determination in advance of trial (Dk.645), the plaintiff's motion for leave to file surreply (Dk.652), the Simmons plaintiffs' motion for leave to file surreply (Dk.653), and the parties proposed pretrial order. The court recently asked the parties to brief certain outstanding issues of law raised in the parties' proposed pretrial order.1 The court grants the plaintiffs' requests to file surreplies and further considers the defendants' objections and response to those surreplies.
The defendants argue that through admitted facts the plaintiffs have proclaimed their reliance on the warranties of the June 1983 Stock Purchase Agreement ("SPA") to the exclusion of any actionable reliance on the defendants' disclosures and omissions.2 According to the defendants, the SPA warranties were the result of the plaintiffs not trusting the defendants and not believing that the defendants had disclosed all material information. The defendants argue this is established as a matter of law by several circumstances admitted by the plaintiffs in different pleadings.
The defendants argue that the following pleadings, filings and testimony evidence the plaintiffs' admitted mistrust of the defendants. In the 1982 case, the plaintiffs alleged, inter alia, that the defendants in breach of their fiduciary duties had withheld information from the Board of Directors and otherwise acted unlawfully and fraudulently so as to pressure "stockholders to sell their stock to the Company at a fraction of its actual value." (Dk.645, Ex. A.) Even though the defendants had proposed to settle the 1982 lawsuit by buying the plaintiffs' shares for more than the appraised value given by the plaintiffs' investment bankers who had investigated Koch Industries Incorporated, ("KII"), and even though the plaintiffs were being advised by financial advisers and experienced lawyers, the plaintiffs remained suspicious to the point of insisting upon certain warranties being included in the SPA. The defendants consider these facts undisputed based upon the plaintiffs' allegations in their third-amended complaint3 and in their mandamus petition4 to the Tenth Circuit and upon the testimony5 of William Koch.
The defendants argue that the plaintiffs' suspicion and mistrust of the defendants and their insistence on explicit contractual warranties precludes them from alleging and proving under their other legal theories — common-law fraud, federal securities fraud, and breach of fiduciary duty — that they were relying on the defendants to disclose truthfully all material information. The defendants maintain that, as a matter of law, the plaintiffs relied instead on their ability to sue on these warranties in the event of a breach.
In large part, the defendants stake their position on Slaymaker v. Westgate State Bank, 241 Kan. 525, 739 P.2d 444 (1987). In Slaymaker, the plaintiff sued for fraud alleging that he had purchased a 1962 Triumph TR-3 based on written and verbal representations that the car had only 528 miles, had not been restored, and was in its original condition. Before purchasing the car, the plaintiff told the seller about his concerns with the seller's representation about the car's original condition. The plaintiff also inspected the car himself looking for signs of reconditioning. Despite this conversation and his inspection, the plaintiff still had doubts and again told the seller that he was reluctant to accept the truthfulness of the seller's representations. The seller responded this time by offering a buy-back provision if the car turned out not to be as represented. The plaintiff testified that this offer ultimately induced him to buy the car.
The district court granted partial summary judgment on the plaintiff's fraud claim finding that the plaintiff had failed to prove reliance on the alleged misrepresentations. The Kansas Supreme Court affirmed. Though misrepresentations need not be the exclusive cause of the plaintiff's injury, they must be the "moving cause," that is, without those representations the "plaintiff would not have acted to his detriment." 241 Kan. at 532, 739 P.2d 444. Slaymaker admitted that he actively doubted the representations on the car's originality and that his doubt was "`offset' only by" the buy-back provision. 241 Kan. at 533, 739 P.2d 444. The Kansas Supreme Court acknowledged the rule that "[t]he mere presence of a warranty will not ordinarily prevent liability where the plaintiff has also relied on the fraudulent misrepresentations of another." 241 Kan. at 533, 739 P.2d 444. It further observed that the courts were divided over whether a plaintiff can rely on representations after insisting on a warranty as a precondition to entering into the transaction. Id. The Kansas Supreme Court applied these rules in the following way:
[I]n the instant case, it is not the presence of a warranty alone that prevents a finding of justifiable reliance. In none of the cases cited above did the plaintiffs face suspicious circumstances which caused them to entertain actual doubts of the truthfulness of the fraudulent misrepresentations. In neither of these cases did the plaintiffs seek to relieve those doubts by requiring a warranty. We are not presented with the simple case in which the tortfeasor adds a warranty to his misrepresentations, or where the victim requires a warranty as a part of his normal course of business. In the present case, defendant['s] ... promise to rescind the contract if the car was not in original condition is important because it reflects plaintiff's consistent refusal to believe the representations of original condition.
....
Plaintiff did not rely on the truthfulness of the sign at the Tulsa auto auction because he never believed it was true. Plaintiff actively doubted the truth of the claims of "original" condition....
....
Plaintiff, according to his own testimony, did not rely upon a belief that the representations of "original" condition were true. He actively doubted whether they were true. Rather, what plaintiff relied upon was the possibility that they might be true, coupled with the knowledge that he could rescind the transaction if they were not true.
241 Kan. at 534-35, 739 P.2d 444. The Kansas Supreme cited in support of this discussion the decision of Humphrey v. Merriam, 32 Minn. 197, 20 N.W. 138 (1884), and the Restatement (Second) of Torts § 548 (1976) with its corresponding comment.
The defendants argue that the plaintiffs here, just like the plaintiff in Slaymaker, actively doubted the completeness and truthfulness of the defendants' disclosure and, thus, insisted upon the warranties found in the SPA. The defendants point to the broad releases that the plaintiffs signed while being fully represented in the negotiations by counsel. According to the defendants, "[t]he settling plaintiffs were willing to give such a broad release, so long as their bargained-for warranties survived the closing and any investigation that might have been made." (Dk.645, p. 7). Citing a line of decisions from other jurisdictions, the defendants argue that when a release occurs in settlement of fraud and breach of fiduciary duty claims the element of justifiable reliance cannot be proved to set aside the release. Based on these arguments, the defendants ask the court to dismiss as a matter of law the plaintiffs' tort and securities law theories and to limit the plaintiffs' claims for trial to a breach of warranty theory.
This is not a summary judgment proceeding. The defendants do not directly challenge the sufficiency of the plaintiffs' evidence. Neither side invokes summary judgment procedures, and the court does not consider them applicable to the defendants' brief. When it asked the parties to brief thirteen and fourteen of the defendants' issues of law, the court assumed there would be questions of law ripe for ruling. Based on what has been argued and the procedural posture of this case, the court believes the following to be that issue of law. Have the plaintiffs made judicial admissions concerning their reliance on the contractual warranties that preclude them from proving reliance on the defendants' disclosure of information relevant in determining KII's value? The court's analysis of this issue begins with deciding whether the plaintiffs have made any binding judicial admissions concerning their reliance on the contractual warranties.
"`Judicial admissions are formal admissions ... which have the effect of withdrawing a fact from issue and dispensing wholly with the need for proof of the fact.'" Guidry v. Sheet Metal Workers Intern. Ass'n, Local 9, 10 F.3d 700, 716 (10th Cir. 1993) (quoting American Title Ins. Co. v. Lacelaw Corp., 861 F.2d 224, 226 (9th Cir. 1988)), cert. denied, 514 U.S. 1063, 115 S.Ct. 1691, 131 L.Ed.2d 556 (1995)....
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