Koch v. Koch Industries, Inc.

• Citation: 2 F.Supp.2d 1416
• Decision Date: 27 March 1998
• Docket Number: No. 85-1636-SAC.,85-1636-SAC.
• Parties: William I. KOCH, et al., Plaintiffs, v. KOCH INDUSTRIES, INC., et al., Defendants.
• Court: U.S. District Court — District of Kansas

2 F.Supp.2d 1416

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

No. 85-1636-SAC.

United States District Court, D. Kansas.

March 27, 1998.

Clifford L. Malone, Adams, Jones, Robinson & Malone, Wichita, KS, Thomas E. Wright, Wright, Henson, Somers, Sebelius, Clark & Baker, L.L.P., Topeka, KS, 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, Ellen A. Cirangle, Bartlit, Beck, Herman, Palenchar & Scott, Denver, CO, Gregory S. C. Huffman, L. James Berglund, II, 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 William I. Koch, Oxbow Energy Inc., L. B. Simmons Energy Inc. dba Rocket Oil Company, United States Trust Company of New York, as Trustee, Spring Creek Art Foundation Inc., Gay A. Roane, Ann Alspaugh, Marjorie Simmons Gray, as Trustee, Northern Trust Company, as Trustee, Marjorie L. Simmons, as Trustee, Louis Howard Andres Cox, Paul Anthony Andres Cox, Holly A. Andres Cox Farabee, Frederick R. Koch, Nationsbank N.A., co-trustee of the Louis Howard Andres Cox Trusts B & D, plaintiffs.

James M. Armstrong, Robert L. Howard, Timothy B. Mustaine, Foulston & Siefkin L.L.P., Donald L. Cordes, Koch Industries, Inc., Wichita, KS, for Koch Industries Inc., Charles G. Koch, Sterling V. Varner, David H. Koch, Donald L. Cordes, Thomas M. Carey, defendants.

Michael W. Merriam, Gehrt & Roberts, Chartered, Daniel R. Lykins, Bryan, Lykins & Hejtmanek, P.A., Topeka, KS, for Kansas Press Association, Kansas Association of Broadcasters, Wichita Eagle-Beacon, Topeka Capital-Journal, WIBW-TV, Kansas City Star Company, The, Wichita Business Journal Harris Enterprises, Inc., Koch Crime Comm, movants.

MEMORANDUM AND ORDER

CROW, Senior District Judge.

Trial in this matter is commences on April 6, 1998. This memorandum and order addresses two of the outstanding issues in this case: (1) choice of law on certain claims and (2) bifurcation of the issue of punitive damages at trial.

Choice of Law

In its January 14, 1998, memorandum and order, see Koch v. Koch Industries, Inc., 996 F.Supp. 1273 (D.Kan.1998), the court requested certain plaintiffs to address the choice of law issue pertaining to Count VI of the plaintiffs' Third Amended complaint. Count VI alleges that the misrepresentations and omissions are actionable as common-law "fraud under the laws of Texas, Oklahoma, Mississippi, and possibly other states, and also . . . [as violations of] Tex.Rev.Civ. Ann. art. 581-33 (Vernon 1964); Tex. Bus. & Com.Code § 27.01 (Vernon 1983); and Okla. Stat. Ann. tit. 15, §§ 57-60 (West 1983)." (Dk. 522, P 80). Consistent with that count, the plaintiffs have included as an issue of law the following:

K. Whether the law of Texas, Oklahoma, and Mississippi govern the state and common law fraud claims of plaintiffs L.B. Simmons Energy, Inc. d/b/a Rocket Oil Company, Gay A. Roane, Ann Alspaugh, Louis Howard Andres Cox, Paul Anthony Andres Cox, Holly Andres Cox Farabee, and Ronald W. Borders, under Count VI of the Third Amended Complaint.

In briefing the choice of law issue, the court instructed the parties to consider the following statement of law:

In Kansas, tort actions are governed by the lex loci delicti doctrine, that is, the substantive law of the state where the tort occurred applies. Ling v. Jan's Liquors, 237 Kan. 629, 634, 703 P.2d 731 (1985). Under this doctrine, "the situs of the injury determines the governing law," even if the tortious act occurred in another state. Id. "In a misrepresentation or fraudulent omission claim, the `last event' is the injury; the `place of the wrong,' therefore, is where the loss is sustained, not where the fraud or misrepresentations were made." Steele v. Ellis, 961 F.Supp. 1458, 1463 (D.Kan.1997) (citations omitted). Thus, the governing law comes from the state where the plaintiff felt the effects of the fraud. Maberry v. Said, 911 F.Supp. 1393, 1399 (D.Kan.1995); see Thomas v. Talbott Recovery Systems, Inc., 982 F.Supp. 794, 798 (D.Kan.1997) ("Because plaintiff alleges financial injury in this case, he felt the wrong in Kansas, where he is a resident."); Bushnell Corp. v. ITT Corp., 973 F.Supp. 1276, 1286 n. 2 (D.Kan.1997) (similar statement).

1998 WL 79151 at *6. As ordered by the court, the plaintiffs have briefed the issue, the defendants have responded and the plaintiffs have replied.

Overview

Although not expressly discussed by the parties, the choice of law issue implicated by these claims is significant as it pertains to certain plaintiffs. During the relevant time frame, some of the plaintiffs resided outside of Kansas—in Mississippi, Oklahoma or Texas. Other plaintiffs are trusts asserting claims on behalf of their beneficiaries—a fact which posits the additional conundrum of deciding whether the residence of the trustees or the beneficiaries is controlling on the choice of law issue. The choice of law issue is important for this reason: Although the elements of fraud under Kansas law are apparently very similar to those imposed by Mississippi and Oklahoma law, under the law of Texas a plaintiff may recover actual damages for fraud without proving the defendant's knowledge of falsity of a material fact. See Tex. Bus. & Com.Code § 27.01. In Kansas, the plaintiff must prove the defendants' knowledge of falsity of a material fact to establish fraud. See Albers v. Nelson, 248 Kan. 575, Syl. ¶ 5, 809 P.2d 1194 (1991) ("Actionable fraud includes an untrue statement of fact, known to be untrue by the party making it, which is made with the intent to deceive or recklessly made with disregard for the truth, where another party justifiably relies on the statement and acts to his or her injury and damage.").

Plaintiffs' Position

According to the Simmons plaintiffs' brief, "[b]ecause the elements of a fraud action under the laws of Oklahoma and Mississippi are apparently duplicative of the law of Kansas, certain of the Simmons Plaintiffs have decided to waive their alternative fraud claims in Count VI under Oklahoma and Mississippi laws and to rely instead on the Kansas fraud claims asserted in Count VI of the Third Amended Complaint, based on the Defendants' acceptance of Kansas law as an appropriate choice of law." Similarly, NationsBank, N.A., on behalf of the Cox trusts, agrees that Oklahoma law is similar to Kansas law, and, "for the sake of simplicity," "prays that Kansas law be applied to the claims asserted by it."

Although these concessions reduce the complexity of the choice of law issue, it does not dispose of it entirely. According to the Simmons plaintiffs' brief, the evidence will establish that Gay A. Roane and Holly Andres Cox Farabee were each residents of Texas during 1983. Accordingly, they contend that the law of Texas applies to their individual claims of fraud and misrepresentation under Count VI of the complaint. The claims asserted by the sixteen Simmons plaintiffs' trusts raise an even more complex choice of law issue: Is the choice of law for the plaintiffs' fraud claims determined by the residence of the trustees or the residence of the beneficiaries? Finding no Kansas case law, the Simmons plaintiffs cite a case which they contend suggests that the residence of the trustee is normally the fact fixing the choice of law, see Sack v. Low, 478 F.2d 360, 366 (2nd Cir.1973),¹ and another case which suggests that the residence of the beneficiary should be used for choice of law purposes, see Appel v. Kidder, Peabody & Co., Inc., 628 F.Supp. 153 (S.D.N.Y.1986). Under the Simmons plaintiffs' analysis, the choice of law issue would be determined based upon the court's decision to follow either the Sack or Appel rule. One trust (the Ann Alspaugh Trust) was administered by a Texas resident on behalf of a Texas resident. An additional eight of the trusts (Gay Roane Trusts B & C, Gaylan Roane Trusts B & D, G. Grant Roane Trusts B & D, and Marjorie Roane Trusts B & D) were formed in Texas and administered by a Texas resident trustee on behalf of Texas beneficiaries. Two of the trusts were created in Texas (Holly Cox [now Farabee] Trusts B & D), administered by a Massachusetts resident for the benefit of a Texas resident.²

The balance of the remaining trusts pose no choice of law concern to the Simmons plaintiffs. Because the remaining five trusts (Ann Alspaugh Cox Trust B & C, Paul Cox Trusts B & D, and Howard B. Alspaugh Trust B) were either administered by Oklahoma residents on behalf of either Oklahoma or Mississippi residents, "for the sake of simplicity" the Simmons plaintiffs agree that the law of Kansas should be applied to those trusts.

Defendants' Position

The defendants diametrically oppose the Simmons plaintiffs' attempt to assert their common law tort claims on any law other than the law of Kansas. The defendants contend that "the Kansas Supreme Court would clearly apply a single law, Kansas law, to the common law tort claims of all the plaintiffs in this case, and this Court must as well." The defendants go on to argue that "any sincere attempt to apply the traditional lex loci delicti doctrine under the facts of this case, considering the claims of a single plaintiff in isolation from the claims of the other plaintiffs, is extremely difficult and uncertain, degenerates into abstractions reminiscent of the disputes of medieval theologians, and is more likely to end up with Kansas law, or New York law, than with Texas or Massachusetts law."

Decocted to its simplest form, the defendants essentially argue that this case—a case involving hundreds of millions of dollars and a myriad of complex factual and legal issues —is one in which the Kansas...