Koch v. Koch Industries, Inc.

969 F.Supp. 1460

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

No. 85-1636-SAC.

United States District Court, D. Kansas.

July 11, 1997.

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Harry Najim, Najim & Baker, Cliff Malone, Adams, Jones, Robinson & Malone, Wichita, KS, Kirkland & Ellis, Donald E. Scott, Denver, CO, Fred H. Bartlit, Jr., John T. Hickey, Jr., Alex Dimitrief, Chicago, for William I. Koch, Oxbow Energy, Spring Creek Art Foundation, Northern Trust.

Harry Najim, Najim & Baker, Cliff Malone, Adams, Jones, Robinson & Malone, Wichita, KS, Gregory Huffman, Frank L. Hill, Dallas, TX, for L B Simmons Energy, Gay A. Roane, Ann Alspaugh, Marjorie Gray, Marjorie Simmons, Paul Cox, Holly Farabee.

Harry Najim, Najim & Baker, Cliff Malone, Adams, Jones, Robinson & Malone, Wichita, KS, Russell E., Brooks, Milbank, Tweed, Hadley & McCloy, New York City, for Frederick Koch, U.S. Trust Co.

Robert L. Howard, James Armstrong, Foulston & Siefkin, Wichita, KS, Tim Mustaine, Donald L. Cordes, for Koch Industries, Charles G. Koch, David H. Koch, Donald L. Cordes, Thomas M. Carey.

TABLE OF CONTENTS
   I. BACKGROUND AND NATURE OF THE CASE ...................................... 1468
  II. SUMMARY JUDGMENT STANDARDS ............................................. 1470
      A. Affidavits .......................................................... 1471
      B. Plaintiffs' Procedural Objections ................................... 1472
 III. STATEMENT OF GENERAL FACTS ............................................. 1472
  IV. LEGAL THEORIES ......................................................... 1486
      A. Federal Securities Fraud ............................................ 1486
      B. Common-law Fraud .................................................... 1489
      C. Breach of Fiduciary Duty ............................................ 1490
      D. Breach of Warranty .................................................. 1491
      E. Materiality ......................................................... 1492
   V. PINE BEND REFINERY ..................................................... 1493
      A. Statement of Uncontroverted Facts ................................... 1493
      B. Scope of Claims ..................................................... 1503
      C. Claim: Capacity as of the SPA ....................................... 1504
         1)  Arguments ....................................................... 1504
         2)  Analysis ........................................................ 1506
      D. Claim: Future Expansion Plans to 155,000 bpd ........................ 1507
         1)  Arguments ....................................................... 1507
         2)  Analysis ........................................................ 1509
      E. Claim: Future Expansion Plans to 175,000 bpd ........................ 1510
         1)  Arguments ....................................................... 1510
         2)  Analysis ........................................................ 1511
      F. Detrimental Reliance ................................................ 1511
         1)  Arguments ....................................................... 1511

         2)  Analysis ........................................................ 1512
      G. Claim: False Statements at the March 1983 Meetings and Material ..... 1512
           Omissions Prior to the SPA
         1)  Arguments ....................................................... 1513
         2)  Analysis ........................................................ 1513
  VI. CANADIAN AND UNITED STATES OIL AND GAS PROPERTIES ...................... 1514
      A. Statement of Facts .................................................. 1514
      B. Claim: Cold Lake Reserves ........................................... 1527
         1)  Undisclosed Development Activities .............................. 1528
             a. Factual Overview ............................................. 1528
             b. Arguments .................................................... 1528
             c. Analysis ..................................................... 1530
         2)  Reserve Changes ................................................. 1531
             a. Factual Overview ............................................. 1531
             b. Arguments .................................................... 1531
             c. Analysis ..................................................... 1532
      C. Claim: Giltedge Producing Properties ................................ 1535
      D. Claim: Capa Madison Property ........................................ 1538
         1)  Fireflood project ............................................... 1538
             a. Factual overview ............................................. 1538
             b. Arguments .................................................... 1538
             c. Analysis ..................................................... 1539
         2)  Expected Value of the Capa Madison Unit ......................... 1539
             a. Factual Overview ............................................. 1539
             b. Arguments .................................................... 1540
             c. Analysis ..................................................... 1541
 VII. ABKO ................................................................... 1542
      A. Statement of Facts .................................................. 1542
      B. Claims .............................................................. 1551
      C. Arguments ........................................................... 1552
      D. Analysis ............................................................ 1553
         1)  Reliance on $45 million valuation ............................... 1554
         2)  Fair Market Value of Dealership Properties ...................... 1555
         3)  Defendants' Knowledge of Fair Market Value ...................... 1557
         4)  Plaintiffs' reliance on Report's Valuation ...................... 1557
VIII. ACCOUNTING ............................................................. 1558
      A. Failure To Disclose Non-Recurring Expenses .......................... 1570
         1)  Scope of Alleged Claim .......................................... 1571
         2)  Arguments ....................................................... 1572
         3)  Analysis ........................................................ 1573
      B. Capitalization Versus Expensing of Certain Refinery Expenditures .... 1574
         1)  Claim ........................................................... 1574
         2)  Arguments ....................................................... 1574
         3)  Analysis ........................................................ 1575
      C. Capitalization Versus Expensing of Interest on Construction Projects. 1577
         1)  Claim ........................................................... 1577
         2)  Arguments ....................................................... 1577
         3)  Analysis ........................................................ 1577
      D. Accounting for the Loss on Blue Hill ................................ 1579
         1)  Claim ........................................................... 1579
         2)  Arguments ....................................................... 1579
         3)  Analysis ........................................................ 1580
      E. Accounting for Refinery Turnaround Expenses ......................... 1580
         1)  Claim ........................................................... 1580
         2)  Arguments ....................................................... 1581
         3)  Analysis ........................................................ 1581
  IX. STATUTE OF LIMITATIONS ON CLAIMS AGAINST THE DEFENDANTS
        CAREY, CORDES AND DAVID KOCH ......................................... 1583

MEMORANDUM AND ORDER

CROW, Senior District Judge.

For some time, the court has had pending before it the defendants' motion for summary judgment (Dk.580). By any standards, the briefs and exhibits filed in conjunction with this summary judgment proceeding are extraordinary. The defendants' memorandum in support of its motion (Dk.581) consists of 138 pages, the plaintiffs' memorandum in opposition (Dk.597) is 150 pages, the defendants' reply memorandum (Dk.602) is 75 pages. The plaintiffs' "Objections to Impermissible Evidentiary Arguments and Response to New Matters in Defendants' Reply Brief" (Dk.605), which is in effect a surreply brief, is 20 pages. The defendants' response (Dk.608) to the surreply is another 12 pages. The defendants' motion and reply and the plaintiffs' opposing memorandum are supported by statements of fact that total more than 400 pages. Behind each statement of facts are exhibits that total close to 10,000 pages. All together, the memoranda and exhibits take up more than twelve feet of shelf space in the court's library. Accordingly, it seems an understatement to say only that the parties inundated the court with material.

Reasons for the delay go beyond the sheer volume of material filed. The issues and arguments advanced and the factual detail presented in support of them were unusually complex. More often than revealed in this order, both parties expected the court to evaluate arguments without the benefit of a full background explanation of the relevant operating concepts and principles involved in refinery operations, oil and gas exploration, real estate ventures, and accounting matters. Other circumstances also contribute to the complexity of this motion. The plaintiffs' claims span a period of years. Each area of claims has its own group of witnesses, most of whom are unable to recall...