Koch v. Koch Industries, Inc.

• Decision Date: 02 April 1998
• Docket Number: No. 85-1636-SAC.,85-1636-SAC.
• Citation: 6 F.Supp.2d 1192
• Parties: William I. KOCH, et al., Plaintiffs, v. KOCH INDUSTRIES, INC., et al., Defendants.
• Court: U.S. District Court — District of Kansas

6 F.Supp.2d 1192

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

No. 85-1636-SAC.

United States District Court, D. Kansas.

April 2, 1998.

Clifford L. Malone, Adams, Jones, Robinson & Malone, Wichita, KS, Thomas E. Wright, Wright, Henson, Somers, Sebelius, Clark & Baker, LLP, 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, Federal Reserve Plaza, 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, for William Koch, Oxbow Energy, Inc., Spring Creek Art Foundation, Inc., Northern Trust Co.

Clifford L. Malone, Adams, Jones, Robinson & Malone, Wichita, KS, Harry L. Najim, Najim Law Offices, Wichita, KS, Gregory S.C. Huffman, L. James Berglund, II, Thompson & Knight, Dallas, TX, for L.B. Simmons Energy Inc., Gay A. Roane, Ann Alspaugh, Paul Anthony Andres Cox, Holly A. Andres Cox Farabee.

Clifford L. Malone, Adams, Jones, Robinson & Malone, Wichita, KS, Harry L. Najim, Najim Law offices, Wichita, KS, Russell E. Brooks, Milbank, Tweed, Hadley & McCloy New York, NY, for U.S. Trust Co. of New York, Frederick R. Koch.

Clifford L. Malone, Adams, Jones, Robinson & Malone, Wichita, KS, Harry L. Najim, Najim Law offices, Wichita, KS, Gregory S.C. Huffman, Thompson & Knight, Dallas, TX, for Marjorie Simmons Gray, Marjorie L. Simmons.

Stephen M. Joseph, Redmond & Nazar, L.L.P., Wichita, KS, Michael Paul Kirschner, Lee & Kirschner, P.L.L.C., Oklahoma City, OK, for Louis Howard Andres Cox, Nationsbank N.A.

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 Koch Industries Inc., Charles G. Koch.

James M. Armstrong, Robert L. Howard, Foulston & Siefkin L.L.P., Wichita, KS, for Sterling V. Varner, David H. Koch, Donald L Cordes, Thomas M. Carey.

MEMORANDUM AND ORDER

CROW, Senior District Judge.

The case comes before the court on the defendants' supplemental motion to strike new damage contention and motion in limine to exclude evidence thereon (Dk.688). The plaintiffs initially filed a brief on their damage claims (Dk.690) and a brief in response to the defendants' motion (Dk.703). The defendants filed a reply brief on March 16, 1998. (Dk.710). Two days later, the plaintiffs filed a motion for leave to file a sur-reply to which they attached their sur-reply (Dk.712). Finally, the defendants filed on March 20, 1998, a response (Dk.721) opposing the plaintiffs' motion for leave to file a sur-reply and asking the court for an opportunity to respond in the event the court permits the filing of the plaintiffs' sur-reply.

PROCEDURAL HISTORY

In describing the relevant procedural history, the court will highlight the other motions and rulings leading up to the defendants' supplemental motion. The defendants' filed on January 23, 1998, a "Motion To Strike Plaintiffs' New Claim Contained In The Court's Proposed Final Pretrial Order Under `Itemization of Damages'" (Dk.660). The court granted in part this motion as reflected in the final pretrial order (Dk.676) and in the memoranda and orders (Dks. 675 and 683) filed February 6, 1998, and February 17, 1998, respectively. In that motion, the defendants argued that the plaintiffs had inserted in their revised itemization of damages filed January 5, 1998, a new damages claim for the undervaluation of KII's disclosed earnings that was supported by their expert's 1997 revised damages report. (Dk.660, p. 3). The defendants calculated that the new claim increased the plaintiffs' total damage claim by another $42.82 per share.

In their motion, the defendants also called the court's attention to the following paragraph from the plaintiffs' itemization in the pretrial order:

(b) The incremental amount above $200 per share (plus a share of the Santa Barbara offshore oil field) that plaintiffs would have obtained in knowledgeable negotiations with KII for sale of their stock was at least $120 per share. Defendants' misstatements and omissions induced plaintiffs to underestimate KII's cash flow and its ability to borrow and repay debt for purchasing plaintiffs' stock.

(Dk.676, p. 9). The defendants limited their argument against this paragraph to the following:

Although we have had no discovery on this claim because it has never been made before, it clearly appears that plaintiffs' assertion that they would have negotiated for "at least $120" more per share, contained in yet another new paragraph of their damage contentions, beginning at the bottom of page 13 of the Court's proposed order is derived by adding the above $42.82 per share increase to the $78.60 damage calculation based on the specific refinery and accounting claims, which number appears on the bottom of page 6 of the new Patricof report, Exhibit A, and on page 13, line 11 of the Court's proposed Pretrial Order.

(Dk.660, p. 5). Because the court did not understand the plaintiffs' alternative damage theory to be necessarily premised on Patricof's report and the opinion and numbers therein, the court rejected the defendants' assumption concerning the common "$120" allegation. For that reason, the court also did not consider the defendants' principal contentions against Patricof's report to likewise be directed at the plaintiffs' alternative damage theory and its corresponding allegations in the pretrial order.

At the status conference on February 9, 1998, the defendants' counsel asked the court to remove from the pretrial order all assertions regarding this alternative damage theory. The plaintiffs' counsel responded that this damage theory had been in the first draft of the pretrial order submitted in 1993 and that they just provided more detail in their most recent itemization of damages. The plaintiffs' counsel explained that the claim as to the incremental amount above $200 that the sellers would have obtained in knowledgeable negotiations "is the out-of-pocket standard of damages that applies under rule 10(b)5 under the cases like the Supreme Court's Affiliated Citizens case. That is the standard measure of damages." (Dk. 681, Transcript of Status Conference, p. 43). The plaintiffs' counsel further explained that the $120 damage calculation in subparagraph (b) is not the sum of any numbers taken from Patricof's report, as the defendants' assumed, and that this number would be established through the trial testimony of fact witnesses. After counsel exchanged additional comments, the court set down a time for the defendants to file an additional brief and for the plaintiffs to respond. Having received those briefs, and more,¹ the court is ready to rule insofar as the present record permits.

DAMAGE CONTENTIONS AT ISSUE

The defendants' supplemental motion challenges two portions of the plaintiffs' itemization of damages which have been quoted and bolded below:

Plaintiffs contend that the appropriate measure of damages is either (1) the difference between the price actually paid for their stock and the fair market value of KII stock sold on June 10, 1983, or (2) the incremental amount above $200/share (plus a share of the Santa Barbara offshore oil field) that the selling shareholders would have obtained in knowledgeable negotiations with KII for the sale of their stock, whichever is greater. In the event that the Court allows inquiry into KII's post 1985 financial condition, plaintiffs reserve the right to claim the benefit KII derived from fraudulently inducing the selling shareholders to sell.

(a) The fair market value of KII stock sold in June 1983 includes (in addition to the $200/share purchase price plus the Santa Barbara interest) the value of KII's hidden or misstated earnings resulting from defendants' misrepresentations and omissions related to the company's condition, performance and prospects.

The fair market value of KII's hidden or misstated earnings at June 1983 was at least $73.10 to $78.60 per share (i.e., incremental value above the purchase price). The derivation of this number is detailed in Patricof & Co.'s "Revised Report on Damages" (Nov. 17, 1997).

(b) The incremental amount above $200 per share (plus a share of the Santa Barbara offshore oil field) that plaintiffs would have obtained in knowledgeable negotiations with KII for sale of their stock was at least $120 per share. Defendants' misstatements and omissions induced plaintiffs to underestimate KII's cash flow and its ability to borrow and repay debt for purchasing plaintiffs' stock.

(Dk.676, p. 9). The bolded material appearing in the first paragraph was included in the parties' proposed pretrial order submitted in the last part of 1993. The bolded material appearing at the end as subparagraph (b) was not added until the plaintiffs filed their revised itemization of damages on January 5, 1998.

ARGUMENTS²

Prior to filing any response, the plaintiffs submitted a memorandum that laid out their overview of the law and factual analysis governing their two alternative damages claims. The plaintiffs say their two damage measures are patterned after the first two damage formulations that were summarized from the jury instructions reviewed "in one of the leading cases under SEC Rule 10b-5, Myzel v. Fields, 386 F.2d 718 (8th Cir.1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968)."³ (Dk.690, p. 3). Based on the following excerpt from Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972), the plaintiffs presume that the second damage formulation from Myzel is the standard measure of Rule 10b-5 damages:

In our view, the correct measure of damages under § 28 of the Act, 15 U.S.C. § 78bb(a), is the difference between the fair value of all that the mixed-blood seller received and the fair value of what he...