Opinion ID: 159203
Heading Depth: 2
Heading Rank: 5

Heading: District Court's Limitations on Plaintiffs' Fraud Claims

Text: 141 The Plaintiffs' Fifth Claim for Relief in their Amended Complaint pleaded fraud by the Defendants. Specifically, the fraud claim alleged that the Defendants misrepresented and concealed information about three particular KII assets Koch Qatar, Inc., the Capa Madison Unit, and the Bates & Reimann wells. In addition, the fraud claim incorporated an allegation contained in paragraph twenty-two of the Amended Complaint, which broadly stated, 142 during 1982 and continuing to the present time, defendants planned and acted to conceal the true value of shares of stock in Koch Industries from plaintiffs and the other selling shareholders and carried out a scheme designed to understate the existence, extent and value of property and assets owned directly or beneficially by Koch Industries by failing to disclose the existence, location, ownership, condition and true value of assets and property, including, but not limited to, oil and gas reserves, acreage, prospects and properties, oil and gas production and planned development of oil and gas properties owned or acquired prior to June 10, 1983. 143 In an October 17, 1985 order, the district court limited the Plaintiffs' fraud claims to those allegations concerning the three specifically referenced assets, determining that the broad allegation contained in paragraph twenty-two did not satisfy the particularity pleading requirement of Federal Rule of Civil Procedure 9(b). The district court went on to grant the Defendants summary judgment on the causes of action regarding two of the three assets Koch Qatar, Inc. and the Bates & Reimann wells. The Plaintiffs now challenge the district court's Rule 9(b) ruling restricting the Plaintiffs' fraud claims. 23 144 This court reviews a district court's Rule 9(b) ruling de novo and confines its analysis to the text of the complaint. See Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1251 (10th Cir. 1997). Rule 9(b) provides, In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other conditions of mind of a person may be averred generally. Fed. R. Civ. P. 9(b). More specifically, this court requires a complaint alleging fraud to set forth the time, place and contents of the false representation, the identity of the party making the false statements and the consequences thereof. Lawrence Nat'l Bank v. Edmonds (In re Edmonds), 924 F.2d 176, 180 (10th Cir. 1991). Rule 9(b)'s purpose is to afford defendant fair notice of plaintiff's claims and the factual ground upon which [they] are based. . . . Farlow v. Peat, Marwick, Mitchell & Co., 956 F.2d 982, 987 (10th Cir. 1992) (quotation omitted), implied overruling on other grounds recognized by, Seolas v. Bilzerian, 951 F.Supp. 978, 981-82 (D.Utah 1997). 145 Here, the broad allegation in paragraph twenty-two of the Plaintiffs' Amended Complaint, which the district court found insufficient under Rule 9(b), set forth none of the specific and required allegations. The statement that the alleged misrepresentations were made during 1982 and continuing to the present time does not alert the Defendants to a sufficiently precise time frame to satisfy Rule 9(b). Furthermore, paragraph twenty-two fails to mention at all the place at which any misrepresentations were made. In addition, this paragraph specifies nothing about the content of the alleged misrepresentations, instead reciting a general statement that the Defendants fail[ed] to disclose the existence, location, ownership, condition and true value of [KII] assets and property. Finally, paragraph twenty-two failed to identify any specific Defendant who made these alleged fraudulent misrepresentations or omissions, a particularly important requirement in this case because of the number of individual defendants involved. 146 The Plaintiffs cite Scheidt v. Klein, 956 F.2d 963 (10th Cir. 1992) for the proposition that Rule 9(b) particularity requirements are relaxed when the facts supporting a fraud claim are within the opponent's knowledge and control. Scheidt, however, is not so generous. It merely holds that [a]llegations of fraud may be based on information and belief when the facts in question are peculiarly within the opposing party's knowledge and the complaint sets forth the factual basis for the plaintiff's belief. Id. at 967. Unlike the complaint in Scheidt, paragraph twenty-two did not state that the Plaintiffs' allegations of fraud were based on information and belief, nor did it set forth any factual basis to support such a belief. Instead, paragraph twenty-two broadly alleged that the Defendants concealed the true value of KII stock without informing the court or the Defendants of the source for this contention. Moreover, the information and belief allegations in Scheidt concerned the intent or purpose of the defendants' actions, elements which this court noted were allowed to be pleaded generally under Rule 9(b). See id. Paragraph twenty-two, however, does not address intent or purpose, and thus Rule 9(b) does not excuse the generality of the Plaintiffs' allegations. Therefore, the district court properly precluded the Plaintiffs from pursuing fraud claims based on the broadly stated allegations of paragraph twenty-two.
147 After substantial but unsuccessful efforts by the Plaintiffs to litigate the claims stricken by the Rule 9(b) decision, the district court granted them leave to file a Second Amended Complaint and determined that document to be the one measuring the relevance of discovery requests. The Plaintiffs then issued subpoenas for production of documents from six different banks requesting all documents relating to any loans or transactions with KII between June 1, 1978 and June 30, 1988. In two separate orders, a federal magistrate judge limited this discovery request to those documents relating only to the Pine Bend Refinery, the Pouce Coupe, Gilt Edge and Cold Lake properties in Canada, the equity value of ABKO, and the alleged understated value of certain assets because of financial and accounting policies and practices. The Plaintiffs also subpoenaed from the Ryder Scott Company all records of KII's oil and gas reserves for the years 1980 through 1988. A federal magistrate judge also limited this discovery to those documents concerning four KII assets the Pouce Coupe, Gilt Edge, Cold Lake and Capa Madison properties. 148 The district court then affirmed the magistrate's decisions in its own order of October 24, 1991. In so ruling, the district court first determined that paragraphs thirty-eight and forty-six of the Plaintiffs' Second Amended Complaint did not delineate allegations of financial impropriety with sufficient particularity under Rule 9(b) to justify discovery into all accounting documents and practices of Koch Industries during the relevant time period. Additionally, the district court reasoned that even under the Plaintiffs' breach of contract and breach of fiduciary duty claims, Rule 26 barred the requested discovery because the burden and expense of producing these documents far outweighed the Plaintiffs' mere hope that they might find something upon which to base a claim. The Plaintiffs challenge the district court's orders limiting their discovery attempts. 149 This court reviews discovery rulings for an abuse of discretion. See Pippinger v. Rubin, 129 F.3d 519, 533 (10th Cir. 1997). Rule 26(b) provides, Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action . . . . The information sought need not be admissible at the trial if the information sought appears reasonably calculated to lead to the discovery of admissible evidence. Fed. R. Civ. P. 26(b)(1). Despite this broad language, the rule does allow a court to limit discovery if the burden or expense of the proposed discovery outweighs its likely benefit. Fed. R. Civ. P. 26(b)(2)(iii). Indeed, the 1983 and 1993 Advisory Committee Notes indicate this sub-section was added to encourage judges to be more aggressive in identifying and discouraging discovery overuse and to enable the court to keep tighter rein on the extent of discovery. 150 The Plaintiffs attempted to justify their extraordinarily expansive discovery requests as relevant to two broad, non-specific allegations contained in their Second Amended Complaint. 24 When a plaintiff first pleads its allegations in entirely indefinite terms, without in fact knowing of any specific wrongdoing by the defendant, and then bases massive discovery requests upon those nebulous allegations, in the hope of finding particular evidence of wrongdoing, that plaintiff abuses the judicial process. That is what occurred here. The limits which Rule 26(b)(2)(iii) place upon discovery are aimed at just such a tactic. Utilizing its discretionary power under this rule, the district court appropriately recognized that the likely benefit of this attempted fishing expedition was speculative at best. Furthermore, the district court understood that to require the six banks and the Ryder Scott Company to produce the massive amount of documents requested, first weeding out privileged and confidential records, would impose a serious burden and expense upon these non-parties. The district court thus properly determined that the burden and expense of these discovery requests far outweighed their likely benefit. Therefore, this court concludes the district court did not abuse its discretion in limiting the Plaintiffs' discovery. 151