Okland Oil Company v. Knight

F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
DEC 17 2003
TENTH CIRCUIT
PATRICK FISHER
Clerk
OKLAND OIL COMPANY, an
Oklahoma corporation;
INTERNATIONAL FINANCIAL
SERVICES GROUP, INC., an Oklahoma
corporation,
Plaintiffs-Appellees,
v. No. 02-6028
DERAL D. KNIGHT, No. 03-6026
(D.C. No. 99-CV-1302-M)
Defendant-Appellant, (W.D. Oklahoma)
and
JAMES D. MOORE; JAMES A.
MOORE, SR.,
Defendants.
ORDER AND JUDGMENT*
Before BRISCOE, BALDOCK, and LUCERO, Circuit Judges.
In the first of these two consolidated appeals (Case No. 02-6028), Deral D. Knight
*
This order and judgment is not binding precedent, except under the doctrines of
law of the case, res judicata, and collateral estoppel. The court generally disfavors the
citation of orders and judgments; nevertheless, an order and judgment may be cited under
the terms and conditions of 10th Cir. R. 36.3.
appeals a jury verdict of $1.5 million in favor of Okland Oil Co. (Okland) and
International Financial Services Group (IFSG) and against Knight and his codefendants,
jointly and severally. In the second appeal (Case No. 03-6026), Knight appeals the
district court’s denial of his post-judgment motion pursuant to Federal Rule of Civil
Procedure 60(b)(3). We exercise jurisdiction pursuant to 28 U.S.C. § 1291 and affirm.
I.
The Arkansas Project – The Arkansas Project involved a plan to develop a gas
field located near Magnolia, Arkansas. The plan consisted of three transactions, namely:
acquisition of the gas field, acquisition of a pipeline system, and the refurbishment and
installation of a cryogenic gas processing plant. The cryogenic plant was to be used to
distill valuable liquids from the gas.
Relevant people and entities – Okland is an oil and gas exploration company. J.
Steve Wetwiska is the company’s president. George N. Keeney, III, was a director, vice
president, and chief financial officer of the company. IFSG was formed by Keeney and
he was its president.
Knight was president and 90% owner of Knight Equipment & Manufacturing
Corporation (KEMCO), which manufactured, refurbished, and installed gas processing
plant equipment. In May 1995, Knight sold his KEMCO stock to Concord Energy
(Concord) and KEMCO became a wholly-owned subsidiary of Concord. Knight
remained as chairman of the board and president of KEMCO until sometime in 1996 or
2
1997 when he became chairman of the board and CEO of Concord.
James D. Moore (Moore) and James A. Moore, Sr., (Moore Sr.), who are not
related, were professional engineers in the fields of gas gathering, gas processing, and gas
processing design. In the summer of 1995, Moore, Moore Sr., and Earle Mattes formed
M&M Gas Corporation (M&M Gas). The three also owned, in their individual
capacities, a gas processing plant in Oklahoma known as the “Magic Medford Plant.”
Robert Gershen (Gershen) is manager of Energy Income Funds (EIF). In addition
to the plaintiffs’ investment, the financing of the Arkansas Project would ultimately
depend on a $10.5 million loan from EIF.
Initial involvement of Concord, KEMCO, and Moore Sr. – Sometime in 1994,
Concord considered investing in the Arkansas Project and hired Moore Sr. as a consultant
to review the project. Concord decided not to invest and released Moore Sr. from the
consulting agreement so he could pursue the Arkansas Project on his own. At trial,
Moore Sr. testified that his release was conditioned upon KEMCO being awarded the
construction contract to refurbish and install the plant if Moore Sr. found investors to
finance the project.
The FROG time period – Moore Sr., Moore, and Mattes formed M&M Gas after
Moore Sr. was released from Concord. M&M Gas did not have the resources to pursue
the Arkansas Project on its own and appeared to have secured an investor, First Reserve
Oil & Gas Company (FROG) by early 1996. The deal did not materialize but some
3
significant events occurred in anticipation of the proposed agreement. M&M Gas formed
M&M Gathering, L.L.C. (M&M Gathering), which was intended to be owned jointly by
FROG and M&M Gas, and was to exist solely for purposes of the Arkansas Project
development. FROG conditioned its investment in M&M Gathering on commitment by
M&M Gas of $154,000 of its own money, and a construction contract with firm
commitment by the contractor to refurbish and install the cryogenic plant at a fixed price.
In an effort to satisfy FROG’s prerequisites, KEMCO (through Knight) and M&M Gas
(through the Moores) entered into an agreement.
At trial, plaintiffs argued the gist of the agreement was that Knight artificially
would inflate the cost of refurbishing and installing the gas processing plant to fund a
“kickback” to M&M Gas, which M&M Gas would in turn use to fund its investment in
the Arkansas Project. In support of their theory, plaintiffs introduced several versions of
a price list prepared by Knight. Each version indicated one price for M&M Gas
($3,735,000) and a different price for M&M Gathering ($4,000,000). The price lists
indicated a subtraction of $265,000 from the M&M Gathering price for the “Purchase of
Magic Medford + 200 shares of M&M Stock,” resulting in a new total of $3,735,000.
App. at 1312, 1316. It is undisputed that by February 1996, KEMCO, through Knight,
had agreed to purchase from M&M Gas the Magic Medford plant for $65,000, and 200
shares of M&M stock for $1,000 per share. A draft agreement dated February 15, 1996,
between Knight and Moore Sr., but never signed, reflects (1) that Knight paid $50,000 to
4
M&M Gas as a deposit on the agreement; and (2) the stock purchase was contingent upon
the Arkansas Project going forward and KEMCO being awarded the contract to refurbish
and install the gas processing plant.
During trial, Knight testified that he “didn’t particularly value” M&M Gas shares.
Id. at 3546. He stated that “KEMCO didn’t value them very much, Concord didn’t value
them very much, and I didn’t value them very much at that time.” Id. at 3547. Although
KEMCO eventually received M&M Gas shares, the shares were never declared as
received in KEMCO’s SEC filings. Knight insisted at trial that the $265,000 subtraction
on the price lists reflected a “sales commission,” apparently for the Moores’ assistance in
obtaining the contract for KEMCO. Id. at 3545. With regard to the M&M Gas shares, he
further testified: “We were in the habit of getting as much benefit for our cost as we
could. M&M was out there offering shares of their company, so we accepted.” Id. at
3546.
In contemplation of the closing with FROG, on February 26, 1996, Knight and
Moore Sr. executed the “Agreement for Movement, Refurbishment and Installation of
Cryogenic Gas Plant Facility,” by and between M&M Gathering (buyer) and KEMCO
(contractor). Id. at 2872. The total contract price was $4,119,500 but credits, apparently
for equipment to be retained by KEMCO after the project, were subtracted, resulting in a
contract balance of $3,909,500. The buyer’s project manager was given certain authority
over so-called “change orders” and Moore was designated as the project manager in
5
Exhibit F to the contract. After the FROG deal failed, the Moores began looking for new
investors and designation of the project manager was blank in a new Exhibit F to the
contract.
Plaintiffs’ involvement – In July 1996, Moore presented Keeney with a business
plan that, among other things, stated: (1) KEMCO would be the contractor that would
refurbish the gas processing plant; (2) potential downsides included cost overruns and
delays; (3) there were “no known conflicts of interest between the investor and any of the
entities involved in the gas project transactions”; and (4) M&M Gas had “no relationships
with . . . any of the parties from whom assets [were] being purchased.” Id. at 2766.
By the end of July 1996, Okland and M&M Gas had signed a letter agreement
providing that Okland would be “performing its due diligence,” but also that Okland
might “require the services of M&M in connection with its due diligence efforts.” Id. at
1364-65. The agreement set forth terms of compensation for assistance provided by
M&M Gas. At trial, Keeney testified that Okland retained the Moores as consultants to
assist in analyzing the economics of the cryogenic plant and the project in general,
including services in connection with Okland’s due diligence. The Moores also provided
plaintiffs with three volumes of “due diligence” materials, which included a copy of what
was represented as the “KEMCO contract.”
In August 1996, Knight and the Moores attended two meetings with plaintiffs in
Oklahoma City. Gershen and other EIF representatives also attended the second meeting.
6
Keeney testified that at the first meeting, Knight and the Moores represented, among
other things, that (1) the KEMCO contract was a “turnkey” contract, meaning the work
was to be performed for a designated price and was to result in an operational facility; (2)
the KEMCO contract had been negotiated at arm’s length by unrelated parties; and (3)
KEMCO successfully had completed a previous similar project, the Blacklake plant, in
Louisiana for the Moores’ former employer, Western Gas. Although Keeney inquired
about obtaining other bids for the plant, he was dissuaded by the Moores’ assurances that
they had negotiated an extremely favorable price with KEMCO. Wetwiska testified that,
at the second meeting, Knight answered a series of questions from EIF’s general counsel
and its accountant and “[e]veryone seemed to be satisfied that we had a turnkey contract.”
Id. at 3870.
On September 20, 1996, plaintiffs formed Magnolia Gas Company, L.L.C., and
MKP Production Company, L.L.C. (the LLCs) to take over the Arkansas Project. The
LLCs each consisted of ownership by Okland of 62.1%, by M&M Gas of 29%, by IFSG
of 6.9%, and by Pat Bryan (an individual investor) of 2%. Okland was to be the
managing member.
On September 23, Moore Sr. forwarded a proposed assignment of the KEMCO
contract to the LLCs. Moore Sr. advised Okland that the agreement was the same
KEMCO agreement contained in the due diligence books. Okland, as managing member
of the LLCs, accepted assignment of the KEMCO contract on September 25. As a result,
7
upon closing with EIF, there would be an initial payment due KEMCO of $1.3 million.
On September 26, Moore Sr. requested and Knight wire transferred $150,000 to M&M
Gas for 150 shares of M&M Gas stock. On September 26 and 27, plaintiffs closed on the
loan with EIF and Okland made its $1.5 million contribution to the LLCs. Immediately
after closing, Okland caused the LLCs to make the initial payment of $1.3 million to
KEMCO. On October 3, KEMCO wire transferred $115,000 to M&M Gas, and on
October 9, M&M Gas issued a check labeled “loan repayment” to Knight personally in
the amount of $50,000, which Knight deposited in his personal bank account. Moore Sr.
testified that the $50,000 was an overpayment by KEMCO and the check was mistakenly
labeled “loan repayment.”1
Terms of KEMCO contract – Keeney testified at trial that he reviewed the
KEMCO contract and concluded it was a turnkey contract. Article I of the contract,
captioned “Scope of Work,” provided: “Contractor (KEMCO) shall furnish materials and
supplies, and shall design, fabricate, recondition, modify, transport and assist in start-up
of a Cryogenic Gas Plant and related treating facilities at Company’s McKaime, Arkansas
1
The evidence shows the following payments: (1) sometime before February 15,
1996, $50,000 from Knight to M&M Gas, (2) on September 26, 1996, a $150,000 wire
transfer from Knight to M&M Gas purportedly for 150 shares of M&M Gas in the name
of Knight’s wife, (3) on October 3, 1996, a $115,000 wire transfer from KEMCO to
M&M Gas, and (4) on October 9, 1996, a $50,000 check from M&M Gas to Knight,
which Knight deposited in his personal account. Thus, it appears that KEMCO and
Knight collectively made payments to M&M Gas totaling $315,000, of which $50,000
was returned to Knight personally.
8
location, in accordance with the Exhibits which are attached hereto.” Id. at 2532. Exhibit
A provided that “[t]he scope includes all Work necessary by Contractor to make the plant
operate within the parameters specified in Exhibit E.” Id. at 2540. Exhibit E set forth
specific design and material standards. Article 6, captioned “changes, additions or
deletions,” stated:
Company [buyer] reserves the right during the progress of this work
to make any changes, additions or deletions in the original plans and
specifications. All changes are to be made in writing and accepted by both
parties before proceeding with the work . . . . No bills for extras will be
allowed unless ordered in writing by Company as per Exhibit G.
Id. at 2533. Pursuant to Exhibit G, the client’s project manager was required to “initiate a
change order immediately upon any request by the client [party other than KEMCO] for
work outside the initial scope.” Id. at 2551. Thereafter, the contractor would estimate the
cost of the changes and, finally, the project manager would obtain the client’s written
approval of the change order. Keeney testified that after reviewing the contract, he
concluded that Okland, as the managing member of the LLCs, would have ultimate
authority to approve or disapprove change orders.
Change orders and problems with KEMCO’s work – By January 30, 1997,
KEMCO was proposing about $692,700 in change orders. Okland was not aware of all of
the proposed change orders. In a February 4, 1997, status report to Okland, Moore Sr.
represented that change orders would result in approximately $250,000 in overruns on the
KEMCO contract. Moore testified that as early as February 1997, he had a lot of
9
problems with KEMCO, felt the quality of its work was not good, and believed it should
have been replaced. However, he testified that he did not consider recommending that
KEMCO be removed as a contractor.
Plaintiffs, Knight, and the Moores met to discuss the proposed change orders.
Knight and Moore represented to plaintiffs that they had negotiated an agreement to add
approximately $400,000 to the contract price and Okland caused the LLCs to advance
$404,000 to KEMCO on the change orders. Keeney and Wetwiska expressed
dissatisfaction with KEMCO’s performance at this meeting and raised the possibility of
firing KEMCO. However, the Moores assured plaintiffs that KEMCO would complete
the plant by early May and plaintiffs were persuaded to stay with KEMCO. By April
1997, the Moores were predicting completion by June 1, 1997.
On June 23, 1997, Dale Burford, an M&M Gas shareholder and employee, advised
Moore by a handwritten memo of 12 separate defects in the plant and conveyed Burford’s
conclusion that the quality of the work being performed by KEMCO was poor and would
not result in an operational facility. The memo was not forwarded to plaintiffs. Moore
Sr.’s July 13 status report to plaintiffs did not identify the problems referred to in
Burford’s memo.
By the end of August 1997, the LLCs had made payments to KEMCO in excess of
the original contract price and construction was not complete. Plaintiffs engaged Don
Nicol, an independent consulting engineer, to evaluate the appropriateness of new
10
proposed change orders. Keeney scheduled a meeting between Nicol and KEMCO for
September 2, 1997. On the weekend before the meeting, Moore, Moore Sr., and Knight
met and a settlement was reached regarding the change orders. The Moores were aware
that Okland objected to some of the change orders, and Moore was aware that KEMCO
was delivering defective equipment and that KEMCO’s work had been poor in quality.
Moore hoped that his approval of the change orders and KEMCO’s threat of a lawsuit
would force the LLCs to pay the disputed charges. When Nicol arrived for his scheduled
meeting on September 2 with KEMCO, Moore Sr. advised there was no need for the
meeting. Moore had authorized additional payment to KEMCO of $376,933.75, which
was in addition to the prior payment of $404,000 in change orders.
On September 15, 1997, Moore Sr. for the first time asserted that the agreement
was not a turnkey contract. In a letter to Okland, he stated: “The contract was not
encompassing of all the equipment and ancillary items needed for a complete plant.” Id.
at 1837. He also stated: “The entire contract was assigned without amendment. This
means that the specific term of the contract designating James D. Moore as the project
manager is still in effect.” Id. at 1836. Shortly thereafter, Okland sent KEMCO a list of
items that Nicol recommended be resolved and KEMCO left the job. On September 26,
1997, the LLCs filed a lawsuit against KEMCO in Arkansas for breach of contract. On
September 30, 1997, KEMCO filed a lawsuit against the LLCs in Texas and attached to
the complaint was a copy of the contract with the original Exhibit F designating Moore as
11
project manager. Sometime in early 1997, M&M Gas withdrew from the LLCs. At trial,
Okland’s accountant testified that Okland never received the version of the contract
attached to KEMCO’s complaint and that the version it received did not designate a
project manager. Gershen also testified that the version of the contract contained in EIF’s
loan files did not designate a project manager.
Blacklake project – As noted, according to Keeney, the Moores and Knight
referred to the Blacklake project as a similar project that successfully had been completed
by KEMCO. It is undisputed that Knight provided plaintiffs a KEMCO brochure touting
the Blacklake project as an example of a plant “purchased and relocated, including
engineering, reconditioning, modification, installation and start-up.” Id. at 1856. In fact,
KEMCO did not complete the project and KEMCO was shut down by the state of
Louisiana for lack of a contractor’s license. Western Gas, the Moores’ former employer
and the client in the Blacklake project, sued KEMCO and the case was settled in late
March 1996. Knight admitted at trial that neither he nor the Moores advised plaintiffs
about the problems with the Blacklake project.
Plaintiffs’ continued commitment to the project – Kenney testified on cross-
examination at trial that as late as October 1998 plaintiffs were still trying to make the
Arkansas Project survive, primarily by buying out the contractual right then held by
Arkansas Power & Light to purchase gas from the Arkansas Project. He also testified
that at that time he considered the economics to be “very shaky due to high operating
12
costs relative to the low liquid prices.” Id. at 3198. On redirect examination, he testified:
Well, the plant was still not working. And as a result – and this is in
October of ‘98. The plant still wasn’t working properly. As a result of that
entire circumstance, we had lost the cash flow benefit of being able to
extract liquids from the anticipated date, which would have been June or
July of ‘97, all the way until October of ‘98. Those are not revenue dollars
that can ever be recovered. Once that gas is produced, it’s burned at a
power plant, and you can’t ever recover those liquids. They’re simply
burned at the power plant for AP&L.
And because of that, there was just a tremendous hole in the
economics of the project.
Id. at 3306-07. Gershen testified that from the beginning, his primary concern was the
“satisfactory completion and startup of the new plant” because “there is no cash flow until
[the plant is] up and running.” Id. at 3819-20. According to Gershen, delay in
completion of the plant was “a significant contributing factor” in the failure of the
Arkansas Project. Id. at 3820.
The LLCs ultimately filed for bankruptcy and their assets were repossessed by the
lender. Plaintiffs’ interest in the LLCs had no equity value and plaintiffs received no
distributions in bankruptcy court.
Procedural history – Plaintiffs filed suit on August 31, 1999. The complaint
contained over 30 paragraphs of factual allegations under the heading “Fraud,
Constructive Fraud, Negligent Misrepresentation, Breach of Duty of Loyalty and Deceit.”
Following a two-week trial, the jury found in favor of plaintiffs on fraudulent
nondisclosure or concealment, constructive fraud, and negligent misrepresentations. The
jury also found that Knight, Moore, and Moore Sr. had participated in a civil conspiracy
13
to commit fraud and had been involved in a joint venture. On September 24, 2001, the
jury returned a verdict of $1.5 million in favor of plaintiffs and against defendants, jointly
and severally. Having been instructed on defendants’ statute of limitations defense, the
jury found by special interrogatory that plaintiffs’ claims were not time barred. The
district court entered judgment consistent with the jury’s verdict. Knight filed a motion
pursuant to Federal Rule of Civil Procedure 60(b)(3) for relief from judgment, alleging
plaintiffs had concealed documents during discovery, which was denied.
II.
On appeal, Knight contends (1) there was insufficient evidence to support a causal
link between the alleged misrepresentations and omissions and plaintiffs’ losses; (2) the
district court erred in making certain evidentiary rulings; (3) the court erred in including
previously-unpled theories and allegations in its final pretrial order; (4) the court erred in
allowing evidence of certain alleged misrepresentations and omissions when, according to
Knight, claims based on such allegations were barred by the statute of limitations; (5)
there was insufficient evidence to support the jury’s finding that Knight and his
codefendants were part of a joint venture; and (6) the court erred in denying his Rule
60(b) motion for post-judgment relief.
Sufficiency of evidence as to causation
Knight argues plaintiffs failed to present sufficient evidence to establish a causal
link between the damages awarded and defendants’ alleged wrongful conduct. In
14
response, plaintiffs argue that Knight waived this argument by failing to raise it in his
Rule 50(a) motion at the close of plaintiffs’ case. Alternatively, plaintiffs contend there
was sufficient evidence to support the jury’s verdict.
Plaintiffs are correct that issues not raised in an initial Rule 50(a) motion may not
be asserted in a subsequent post-trial motion for judgment as a matter of law under Rule
50(b). See Fed. R. Civ. P. 50; Hinds v. General Motors Corp., 988 F.2d 1039, 1045 (10th
Cir. 1993). It is undisputed that Knight raised the causation issue for the first time in a
post-trial motion for judgment as a matter of law pursuant to Rule 50(b). However, when
Knight made his Rule 50(b) motion, plaintiffs failed to argue that it exceeded the scope of
his Rule 50(a) motion. “[W]hen the non-moving party fails to raise the inadequacy of a
Rule 50(a) motion in opposition to a Rule 50(b) motion, that party cannot raise waiver as
an argument on appeal.” Guides, Ltd. v. Yarmouth Group Prop. Mgmt., Inc., 295 F.3d
1065, 1076 n.3 (10th Cir. 2002) (collecting cases). Therefore, plaintiffs waived this
argument by not raising it in the district court.
We have described the standard of review for challenges to the denial of a civil
defendant’s motion for judgment as a matter of law as follows:
We review de novo the district court’s ruling on a motion for a
directed verdict. In so doing, we apply the same standard applied by the
district court: whether the evidence, viewed in the light most favorable to
the nonmoving party, presents a disagreement sufficient to mandate
submission to a jury or whether it is so one-sided that one party must prevail
as a matter of law. A directed verdict is justified only where the proof is all
one way or so overwhelmingly preponderant in favor of the movant so as to
permit no other rational conclusion. In reviewing the district court’s ruling,
15
we cannot assess credibility of witnesses or substitute our judgment for that
of the jury.
Hinds, 988 F.2d at 1045 (internal citations omitted).
Under Oklahoma law, which the parties agree is controlling, causation includes the
traditional components of “cause in fact” and “legal causation.” McKellips v. St. Francis
Hosp., Inc., 741 P.2d 467, 470 (Okl. 1987). In fraud cases, there are two methods of
measuring damages: (1) the out-of-pocket rule, and (2) the benefit-of-the-bargain rule.
LeFlore v. Reflections of Tulsa, Inc., 708 P.2d 1068, 1076 (Okl. 1985). The out-of-
pocket rule “allows the plaintiff to recover the difference between the value given up and
the actual value received where the former is greater. Id. The benefit-of-the-bargain rule
“provides the plaintiff with the difference between the value the plaintiff gave and the
amount the defendant represented the plaintiff would receive.” Id. Oklahoma has
adopted a form of the benefit-of-the-bargain rule under which a plaintiff may “recover the
difference between the actual value received and the value the defrauded party would
have had if it had been as represented.” Id. at 1077. This measure of damages allows a
plaintiff to recover for damages that were the “natural and probable result” of the
fraudulent inducement. Id. at 1077; see also Oklahoma ex rel. Southwestern Bell Tel. Co.
v. Brown, 519 P.2d 491, 495 (Okl. 1974) (stating that “the gist of fraudulent
misrepresentation is the production of a false impression . . . and damage sustained as the
natural and probable consequence of the acts charged”).
Knight attributes plaintiffs’ lost investment to the weak market prices for natural
16
gas, poor production from the gas field, and the burdensome terms of the EIF loan.
Plaintiffs’ theory of the case at trial was that the Arkansas Project was doomed from the
beginning because KEMCO and the Moores were “in cahoots” and were “obligated to
each other, not to the LLC.” App. at 3922. Wetwiska testified that, “We couldn’t make
good, reasonable evaluations of the information coming in, because it was biased.” Id. at
3958. Further, he testified that Okland would not have invested in the Arkansas Project if
it had known all of the facts about the relationship between Knight and the Moores.
Gershen testified that he would have walked away from the deal if he had known about
the undisclosed payment by KEMCO to M&M Gas. The jury apparently accepted the
plaintiffs’ theory.
Knight notes that plaintiffs were still interested in the Arkansas Project as late as
October 1998 and argues their continued interest showed their investment had not been
lost as a result of defendants’ misrepresentations and omissions, which plaintiffs knew
about well before that time. Knight’s argument is misguided. The crux of the issue is not
when plaintiffs discovered or should have discovered the fraud, but whether there was
sufficient evidence to allow the jury to conclude that plaintiffs’ loss, whenever it
occurred, was the natural and probable consequence of the fraud. While there may have
been some evidence that other factors contributed to plaintiffs’ loss, there is no basis for
substituting our judgment for that of the jury. As noted, a directed verdict is only justified
if the evidence allows no other rational conclusion. We conclude that the evidence
17
presented at trial was sufficient to allow the jury to rationally conclude that defendants’
fraudulent conduct caused plaintiffs’ entire loss.
Evidentiary rulings
Knight argues the district court abused its discretion in allowing defendants to use
the term “kickback” and “permitting the impeachment of Knight with irrelevant,
subsequent-in-time, collateral matters.” Aplt. Br. at 53.
We may reverse the district court’s decision to admit or exclude evidence only if
there has been an abuse of discretion. Hinds, 988 F.2d at 1047. See also United States v.
Kingston, 971 F.2d 481, 487-88 (10th Cir. 1992) (applying abuse of discretion standard to
district court’s decision to allow use of terms “straw-seller” and “straw-buyer”). Before
trial, Knight moved to preclude plaintiffs from “making any reference to the commission
agreement as being in any way improper, illegal or a ‘kickback’ or part of an ‘artificially
inflated’ KEMCO contract.” App. at 945-46. The trial court ruled as follows:
Knight’s motion in limine to exclude any reference to a “kickback,”
“scheme” or purportedly “illegal commission” agreement is denied in part
insofar as it seeks to exclude references to “kickbacks” or “schemes,” and is
granted in part insofar as it seeks to exclude use of the term “illegal
commission” or other references to “illegal.”
Id. at 1080.
In light of the district court’s ruling, Knight did not object to use of the term
“kickback” during trial. Plaintiffs argue that by failing to object, Knight waived any
objection to use of the term. There is no merit to plaintiffs’ waiver argument. A pretrial
18
motion in limine preserves an issue for appeal when the issue: “(1) was adequately
presented to the district court; (2) is the type that can be finally decided in a pretrial
hearing; and (3) is definitively ruled upon by the district court.” Richardson v. Missouri
Pac. R.R. Co., 186 F.3d 1273, 1276 (10th Cir. 1999); see also Fed. R. Evid.
103(a)(effective Dec. 1, 2000) (“Once the court makes a definitive ruling on the record
admitting or excluding evidence, either at or before trial, a party need not renew an
objection or offer of proof to preserve a claim of error for appeal.”). Here, the issue was
fully presented to the court before trial, there was no reason for the court to delay its
ruling, and the court ruled definitively. Accordingly, this court must determine whether
the court abused its discretion in allowing plaintiffs to use the term “kickback.”
By permitting use of the term “kickback,” the district court did not prevent
defendants from arguing that payments from KEMCO to M&M Gas were proper and
legal. Indeed, the nature of those payments was a hotly contested issue at trial. The
Moores contended the payments were made in exchange for M&M Gas stock and the
Magic Medford plant. Knight characterized the payments as a commission, admitting that
neither he nor his company particularly valued the M&M Gas stock. Plaintiffs used the
term “kickback” as shorthand for their theory that KEMCO agreed to make secret
payments to M&M Gas to secure the gas plant contract and that defendants thereafter
concealed that arrangement from plaintiffs. Defendants were free to dispute plaintiffs’
theory and did so throughout the case. There was nothing inherently prejudicial about
19
plaintiffs’ use of the term “kickback.” We conclude the district court did not abuse its
discretion in allowing plaintiffs to use the term “kickback” or in refusing to give a
limiting instruction to guide the jury’s consideration of the evidence concerning the
alleged “kickback.”
The district court allowed plaintiffs to question Knight, over his objection, about
KEMCO’s internal operating manual which KEMCO disclosed to the SEC in its filings
for the fiscal year of June 1996 to June 1997.2 Portions of the manual were admitted into
evidence, including a section on ethics which provided:
[D]iverse activities can overlap and cause people to be torn between interest
in both. Conflicts of interest on divided loyalty can be unproductive and
result in neither interest being adequately served. . . .
. . . Divided loyalty can also arise from less obvious involvement,
such as substantial personal or family stock ownership, loans or holding an
important position with a competing business, a client or a vendor.
App. at 2600, ¶¶ 5, 7. Knight objected to admission of the manual on the grounds that it
was irrelevant and more prejudicial than probative. Plaintiffs respond in conclusory
fashion that “[t]he Code was relevant and probative on the issues of duty to disclose,
conflicts of interest, industry standards, fraudulent practices and proximate cause.”
Aplee. Br. at 53.
2
Knight argues the ethics manual was not adopted by KEMCO until June 1997
and has no bearing on the propriety of Knight’s conduct before then. Knight testified at
trial that the code of ethics was not adopted by KEMCO until late 1997. However, there
was undisputed evidence introduced at trial that Concord’s SEC filing was in relation to
the fiscal year starting in June 1996.
20
The manual has no bearing on the issue of proximate cause. Further, industry
standards were never an issue in the case, and the jury was not instructed on industry
standards. Nevertheless, the code of ethics is marginally relevant to the conflict of
interest question. Moreover, it is relevant for the purpose of refuting Knight’s testimony
that his company merely had paid M&M Gas a “commission” pursuant to KEMCO’s
general company policy.
Knight argues the manual should have been excluded under Federal Rule of
Evidence 403 as more prejudicial than probative. “As has been stated many times, Rule
403 does not protect a party from all prejudice, only unfair prejudice.” Deters v. Equifax
Credit Info. Servs., Inc., 202 F.3d 1262, 1274 (10th Cir. 2000). Without doubt,
KEMCO’s manual was introduced by plaintiffs because it paralleled their theory of
liability. However, nothing in the record suggests the potentially prejudicial impact of the
manual outweighed its probative value.
Knight contends the two evidentiary issues “in the aggregate . . . rose to the level
of plain error.” Aplt. Br. at 53. In this case, a cumulative error analysis would be
appropriate only if we concluded that the district court erred by allowing use of the term
“kickback” and by admitting KEMCO’s manual and then concluded that each error by
itself was harmless. See Duckett v. Mullin, 306 F.3d 982, 992 (10th Cir. 2002). Further,
Knight does not explain how the “plain error” standard of review is relevant. Knight
objected to both evidentiary rulings. The “plain error” standard would be appropriate if
21
Knight had not timely objected in the district court. See Pandit v. Am. Honda Motor Co.,
82 F.3d 376, 379 (10th Cir. 1996); Fed. R. Evid. Rule 103(d).
New theories and allegations in final pretrial order
Knight argues the district court erred in allowing plaintiffs to “raise new
allegations and theories” in the pretrial order that were not pled in the complaint. Aplt.
Br. at 55. He also argues that the court erred in denying his request for a continuance.
The pretrial order is the controlling document for trial. Wilson v. Muckala, 303
F.3d 1207, 1215 (10th Cir. 2002). “[T]he inclusion of a claim in the pretrial order is
deemed to amend any previous pleadings which did not include that claim.” Id. On
August 23, 2001, the parties jointly filed a final pretrial report. On August 28, the district
court adopted the final pretrial report as its pretrial order without addressing Knight’s
objections contained in the report. Knight’s motion to strike was denied at the pretrial
conference. On the first day of trial, Knight moved for a continuance to conduct
additional discovery, which was denied.
Although the pretrial order supersedes the pleadings, this court has stated that it
does not “normally expect to see claims or defenses not contained in the pleadings
appearing for the first time in the pretrial order.” Id. “Such a practice deprives one’s
adversary of fair notice, possibly discovery, and the opportunity for motion practice, and
is subject to abuse by those who employ a sporting theory of justice. The laudable
purpose of Fed. R. Civ. P. 16 is to avoid surprise, not foment it.” Id. at 1215-16. On the
22
other hand, “[a]s a general rule, a plaintiff should not be prevented from pursuing a valid
claim just because she did not set forth in the complaint a theory on which she could
recover, provided always that a late shift in the thrust of the case will not prejudice the
other party in maintaining his defense upon the merits.” Evans v. McDonald’s Corp., 936
F.2d 1087, 1090-91 (10th Cir. 1991) (internal quotations omitted). By permitting the
assertion of additional theories and allegations in the pretrial order, the district court was
effectively allowing plaintiffs to amend their complaint. A motion to amend a pleading is
governed by Federal Rule of Civil Procedure 15(a), which states that leave to amend shall
be freely given “when justice so requires.” Fed. R. Civ. P. 15(a).
Here, because Knight essentially argues the district court erroneously permitted a
last-minute amendment to the pleadings, we apply the standard of review of a district
court’s grant of a motion to amend. The decision to grant or deny a motion to amend is
committed to the sound discretion of the trial court, and the district court’s decision is not
subject to review on appeal except for abuse of discretion. See Nettis v. Levitt, 241 F.3d
186, 192 (2d Cir. 2001). “The denial of a continuance is reviewable only under the
standard of arbitrary abuse of discretion, upon a showing of manifest injustice.”
Morrison Knudsen Corp. v. Fireman’s Fund Ins. Co., 175 F.3d 1221, 1230 n.4 (10th Cir.
1999) (internal quotations omitted).
It does not appear that Knight was deprived of fair notice or discovery or that there
was reason for him to be surprised by the claims and allegations contained in the pretrial
23
order. Knight argues the court erred by allowing plaintiffs to pursue “conspiracy” and
“joint venture” theories at trial when neither theory was mentioned expressly in the
complaint. The gist of the complaint is that defendants, including the Moores and Knight,
worked together to induce plaintiffs to invest under false pretenses and that thereafter
defendants continued to work together to conceal important information from plaintiffs.
The complaint also requested that defendants be held jointly and severally liable. These
allegations were sufficient to put Knight on notice of conspiracy and joint venture claims.
Knight also argues the district court erred by allowing plaintiffs to present
evidence regarding three alleged misrepresentations not specifically mentioned in the
complaint: (1) the KEMCO contract was negotiated at arm’s length, (2) Knight
considered the Arkansas Project viable, and (3) KEMCO successfully had completed the
Blacklake project. The record indicates that Knight was put on notice about each of these
allegations well in advance of trial. Knight’s first interrogatory requested that plaintiffs
set forth any facts demonstrating that Knight made fraudulent statements or otherwise
committed fraud. Plaintiffs responded on May 3, 2001, in part as follows:
Deral Knight discussed the Black Lake plant and his prior work with the
Moores . . . . Jim Moore discussed what a great plant KEMCO had
constructed and a great job KEMCO had done on the Black Lake Project.
Likewise, Deral Knight represented that the Moores were top notch
engineers who knew their business. . . .
Deral Knight concurred that the Business Plan was a simple project
and a good project . . .
Both expressly and impliedly, Deral Knight represented that the
KEMCO Contract had been competitively bid and negotiated at arm’s
length.
24
App. at 572, 574. Knight deposed both Wetwiska and Keeney after having received these
responses. Discovery was not closed until July 1, 2001, nearly two months after plaintiffs
responded to Knight’s interrogatories. We conclude the district court did not abuse its
discretion in adopting the pretrial report as its pretrial order, in denying Knight’s motion
to strike material from the pretrial order, or in denying Knight’s motion for a continuance.
Statute of limitations
Knight argues that certain allegations by plaintiffs were barred by the statute of
limitations and should not have been submitted to the jury. Although plaintiffs argue that
Knight waived the statute of limitations issue by failing to raise it in the district court, he
clearly raised the issue in his Rule 50(a) motion at the close of plaintiffs’ case and which
he renewed at the close of all of the evidence. His failure to renew the issue in his post-
verdict Rule 50(b) motion does not bar him from raising the issue on appeal. See
Morrison-Knudsen, 175 F.3d at 1246.
Under Oklahoma law, a cause of action for fraud must be brought within two years
after the cause of action “accrued.” 12 Okla. Stat. § 95(3) (providing that an action for
fraud “shall not be deemed to have accrued until the discovery of the fraud”). “The
discovery rule allows the limitation period in certain tort cases to be tolled until the fraud
is discovered or until the date the defrauded party, by the exercise of ordinary diligence,
might have recognized the deception.” Smith v. Baptist Found. of Oklahoma, 50 P.3d
1132, 1137-38 (Okla. 2002). “The question of when fraud is discovered or should have
25
been unearthed with the exercise of ordinary diligence is one of fact dependent on the
surrounding circumstances, the relationship of the parties, and all other elements peculiar
to the cause.” Id.at 1138; see also Wolf v. Preferred Risk Life Ins. Co., 728 F.2d 1304,
1307 (10th Cir. 1984) (“Questions of when a reasonable person would discover an injury
. . . are generally within the province of the jury.”).
In this case, because the complaint was filed on August 31, 1999, plaintiffs were
prohibited from recovering for any fraudulent act or omission they discovered or should
have discovered prior to September 1, 1997. As the party asserting the statute of
limitations as a defense, it was Knight’s burden to present evidence establishing the time
bar. See MBA Commercial Constr., Inc. v. Roy J. Hannaford Co., 818 P.2d 469, 472
(Okla. 1991). The district court denied defendants’ Rule 50 motion without specifically
addressing the statute of limitations issue, stating: “The court just believes that a
reasonable jury could differ and that the matters are at least disputed such that a jury
could find for the Plaintiff.” App. at 4308.
Knight’s statute of limitations argument relies upon the following evidence in the
record: (1) Keeney’s testimony that he learned sometime “shortly after” September 27,
1996, that Knight owned shares in M&M Gas; (2) Keeney’s testimony that he saw a
document on or around June 5, 1997, that indicated Knight owned 50 shares of M&M
Gas stock and that Knight’s wife owned 150 shares; (3) Keeney’s testimony that Okland
approved approximately $400,000 in change orders (apparently after the Moores’
26
February 1997 status report); and (4) testimony from another proceeding by plaintiffs’
accountant that by June 1997, it was apparent that Moore may have thought that he had
authority to approve change orders. Id. at 3264-65, 3265-66, 3105-06, 3481-82. See
Aplt. Br. at 57-58. According to Knight, this evidence unequivocally shows that
plaintiffs knew or should have known prior to September 1, 1997, that (1) the KEMCO
contract was not a turnkey contract, (2) Moore already had been designated as project
manager, (3) Knight and his wife had an ownership interest in M&M Gas, (4) the
KEMCO contract was not negotiated at arm’s length by unrelated parties, and (5) there
were conflicts of interest involved in the Arkansas Project.
The evidence does not establish that plaintiffs knew or should have known prior to
September 1, 1997, that the KEMCO contract was not a turnkey contract. The fact that
Okland approved certain change orders prior to that date is not conclusive. At trial,
Wetwiska and the Moores testified that even turnkey contracts sometimes provide for
change orders and that change orders may be agreed to even when a project is governed
by a turnkey contract.
Knight has not directed our attention to any evidence that plaintiffs knew or should
have known prior to September 1, 1997, that Moore had been designated as the buyer’s
project manager. The testimony of plaintiffs’ accountant was far from definitive. At
most, his testimony conveyed that in June 1997 it appeared that Moore may have thought
he had authority to approve change orders.
27
While there is undisputed evidence that plaintiffs knew by no later than June 1997
that Knight and his wife had an ownership interest in M&M Gas, the jury was not
instructed to consider merely whether defendants fraudulently omitted or concealed the
fact of Knight’s stock ownership. The jury was instructed to consider the following
alleged omission: “Defendant Deral D. Knight and his wife would receive and own 10%
of the outstanding stock in M&M Gas Processing Corp., if defendants James D. Moore
and James A. Moore, Sr. could induce plaintiffs to invest and fund the Arkansas Project.”
App. at 1031.
Knight has not directed our attention to any evidence establishing that plaintiffs
knew or should have known prior to September 1, 1997, that the KEMCO contract was
not negotiated at arm’s length. Although there is evidence that plaintiffs learned on or
around June 1997 that Knight and his wife had an ownership interest in M&M Gas, it
does not necessarily follow that plaintiffs knew or should have known that the contract
was not negotiated at arm’s length,
While Knight has directed this court’s attention to evidence that plaintiffs knew or
should have known of one type of conflict of interest prior to September 1, 1997
(Knight’s stock ownership), the central issue of the case was not the mere fact of Knight’s
stock ownership but the manner in which the Knights acquired the stock, allegedly
through a so-called “kickback” scheme. Plaintiffs have argued throughout this case that
the Moores and Knight were mutually obligated to each other by this scheme and,
28
therefore, they were unable or unwilling to fulfill the legal duties owed to plaintiffs. The
fact that plaintiffs discovered one conflict of interest prior to September 1, 1997, does not
mean that plaintiffs should have discovered others that were still being concealed.
We conclude it was not error to submit the case to the jury and that the evidence
presented at trial was sufficient to allow the jury to rationally conclude that plaintiffs’
claims were not time barred.
Sufficiency of evidence to support finding of joint venture relationship
Knight argues there was insufficient evidence in the record to support the jury’s
finding of a joint venture. We disagree. To establish a joint venture, a plaintiff must
show (1) a joint interest in the subject matter; (2) an express or implied agreement to
share in the profits and losses of the venture; and (3) action or conduct showing
cooperation between the parties in the venture. Martin v. Chapel, Wilkinson, Riggs &
Abney, 637 P.2d 81, 85 (Okla. 1981).
Here there is ample evidence that defendants had a joint interest in the Arkansas
Project and in misinforming and concealing information from potential investors. While
Knight’s objective was to obtain a lucrative construction contract, the Moores’ aim was to
secure an interest in any proceeds of the Arkansas Project without putting their own
capital at risk. Further, Knight’s price lists and the corresponding payments flowing
between the defendants would allow the jury rationally to infer the existence of an
express or implied agreement between the defendants. Finally, there is evidence that the
29
Moores and Knight acted in a highly cooperative fashion. For example, there is evidence
that the Moores regularly concealed KEMCO’s shortcomings from plaintiffs and that the
Moores and Knight reached a settlement in regard to KEMCO’s proposed change orders
to pressure Okland to make payments to KEMCO.
Denial of Rule 60(b)(3) motion (Case No. 03-6026)
In June 1997, the LLCs formed Compression Solutions Company, L.L.C. (CSC).
CSC then purchased from and leased back to the LLCs eight compressors for the
Arkansas Project. The combined monthly lease payment from Magnolia and MKP to
CSC was approximately $60,000. In December 1998, the LLCs filed voluntary Chapter
11 bankruptcy petitions. CSC sought payment for claims related to the leases. EIF filed
an adversary complaint seeking a declaratory judgment that CSC was not entitled to
payment. In his Rule 60(b)(3) motion, Knight contended the bankruptcy court’s opinion
and Keeney’s testimony at the adversary proceeding were concealed by plaintiffs during
discovery in the underlying case, and Keeney’s testimony at the adversary proceeding
directly contradicted his testimony before the district court in the underlying case.
A party moving for relief pursuant to Rule 60(b)(3) must establish the “alleged
misconduct by clear and convincing evidence,” and this can only be done by showing that
the opposing party “acted with an intent to deceive or defraud the court, by means of a
deliberately planned and carefully executed scheme.” Yapp v. Excel Corp., 186 F.3d
1222, 1231 (10th Cir. 1999) (internal quotations omitted). A retrial pursuant to Rule
30
60(b)(3) is mandated by discovery misconduct only if the challenged behavior
“substantially . . . interfered with the aggrieved party’s ability fully and fairly to prepare
for and proceed at trial.” Woodworker’s Supply, Inc. v. Principal Mut. Life Ins. Co., 170
F.3d 985, 993 (10th Cir. 1999) (internal quotations omitted). In this case, the district
court found that Knight failed to establish the alleged misconduct by clear and convincing
evidence and, alternatively, any misconduct that did occur did not interfere with Knight’s
ability to prepare for and proceed at trial.
This court reviews a district court’s denial of a Rule 60(b) motion for abuse of
discretion. Stubblefield v. Windsor Capital Group, 74 F.3d 990, 994 (10th Cir. 1996). In
deciding whether the district court abused its discretion, this court “remain[s] mindful
relief under Rule 60(b) is extraordinary and may only be granted in exceptional
circumstances.” Id. (internal quotations omitted).
When plaintiffs filed suit, the Western District of Oklahoma had opted out of the
disclosure provision of Federal Rule of Civil Procedure 26(a)(1). See WDOK-LR
26.1(a). The district’s local rule required initial disclosure of “[a] general description,
including the location, of all books, documents, data, compilations, and tangible things in
the possession, custody, or control of the party that are likely to bear significantly on any
claim or defense.” WDOK-LR 26.2(a)(2).
By letter dated November 29, 2000, plaintiffs gave a general description of the
documents they possessed and their location, and made the documents available for
31
inspection and copying. During April 2001, Knight and his attorneys spent two days in
the offices of plaintiffs’ attorneys reviewing at least 73 boxes of documents in a large
conference room and an unoccupied office. According to the affidavit of plaintiffs’
counsel, Brian Peterson, on the first day of document production, over 20 boxes of
documents relating to CSC and the adversary proceeding were located in the conference
room, including exhibits admitted at the adversary proceeding, CSC’s exhibit list and
exhibits, EIF’s exhibit list and exhibits, exhibits used in depositions, and documents
produced by EIF to CSC and vice-versa. According to Peterson, the documents were
produced as they were organized, maintained, and stored in the usual and ordinary course
of business.
On day two of the document production, Peterson and plaintiffs’ counsel, Andrew
Walding, discussed the CSC adversary proceeding. According to Peterson’s affidavit,
Walding asked about the nature of the CSC adversary proceeding. There is some dispute
about where the conversation took place and the content of the conversation. According
to Peterson, he explained the general nature of the adversary proceeding. Walding asked
whether plaintiffs were seeking damages against Knight as a result of plaintiffs’ liability
related to the CSC proceedings. When Peterson stated that plaintiffs were not seeking
such damages, Walding stated he did not want to review any more documents related to
the adversary proceeding. Peterson’s affidavit concerning his conversation with Walding
is consistent with that of Peterson’s associate, Vance Brown, who stated he was present
32
during the conversation. Peterson also stated in his affidavit that he made available to
Walding the pleadings from the adversary proceeding, the entire trial transcript, and the
depositions of Keeney and Wetwiska taken in the adversary proceeding. In Walding’s
deposition, he testified that Peterson made him aware of the CSC adversarial proceeding.
Walding could not recall whether Peterson offered to produce the pleading files from the
CSC adversary proceeding. He testified that “[w]e were essentially left to ourselves.”
App. II at 574.
During the two-day document inspection, plaintiffs’ counsel created a privileged
document log of any document to be withheld based upon privilege. The following
appeared on the log: “Box #72 – EIF vs. CSC Pleading Files, attorney notes re: Bill of
Costs related documents and legal research. I was advised by opposing counsel, Andy
Walding, that he didn’t want those documents.” Id. at 647. On July 31, 2001, Knight
filed a reply to plaintiffs’ response to Knight’s motion to compel production of certain
documents. He attached a copy of plaintiffs’ privileged document log, upon which he had
numbered and circled the documents which were the subject of his motion to compel.
Knight neither sought production of Box #72 nor took issue with Peterson’s recitation of
Walding’s statement regarding the documents.
The district court found that “on day two of the two-day document production at
plaintiffs’ counsel’s office, plaintiffs’ counsel and Knight’s counsel discussed the CSC
adversary proceeding.” Id. at 1003-04. Further, the court found that “Knight’s counsel
33
inquired about CSC and the nature of the proceeding in which it was involved.” Id. at
1004. The court also found that “[a]t the conclusion of the discussion, Knight’s counsel
advised plaintiffs’ counsel that he did not want to review any more of the documents
related to the CSC adversary proceeding.” Id. On the basis of these findings, the district
court concluded:
Knight has failed to establish by clear and convincing evidence that
plaintiffs and their counsel intentionally or even accidentally failed to
disclose or produce the bankruptcy opinion or Keeney’s testimony. In fact,
the Court finds Knight’s counsel was properly advised of the CSC
adversary proceeding and elected not to review any additional documents
related to that proceeding. Accordingly, the Court finds Knight’s Rule
60(b)(3) motion should be denied.
Id. at 1005. Because the district court’s findings are supported by the evidence set forth
above, we conclude the court did not abuse its discretion in concluding Knight failed to
satisfy his burden of showing by clear and convincing evidence that plaintiffs were guilty
of misconduct within the meaning of Rule 60(b)(3).
Arkansas litigation
In Knight’s reply to plaintiffs’ response to his Rule 60(b)(3) motion, he alleged for
the first time that plaintiffs had failed to disclose and/or produce documents related to a
case in the Eastern District of Arkansas, Energy Arkansas, Inc. v. Okland Operating
Company, Inc. (the Arkansas Litigation). On appeal, as in his Rule 60(b) reply brief,
Knight argues the documents related to the Arkansas Litigation would show that
plaintiffs’ losses were proximately caused by factors other than defendants’
34
misrepresentations and omissions. Knight did not submit any affidavit or other evidence
indicating that the Arkansas Litigation had not been disclosed or that the related
documents had not been produced. He did not submit any evidence indicating when he
became aware of the Arkansas Litigation. Nor did Knight offer any explanation for
belatedly raising the issue.3 In light of the new allegation raised in Knight’s reply,
plaintiffs requested leave to file a surreply, to which Knight objected and which the court
denied without explanation. Knight did not seek leave to amend his Rule 60(b)(3) motion
and the district court did not address the Arkansas Litigation in its order denying Knight’s
motion.
A federal appellate court will not consider an issue not passed upon in the district
court. Singleton v. Wulff, 428 U.S. 106, 120 (1976). When a litigant fails to raise an
issue in the district court in a timely fashion and the district court does not address the
merits of the issue, the litigant has not preserved the issue for appellate review. FDIC v.
Noel, 177 F.3d 911, 915 (10th Cir. 1999). Moreover, district courts are not required to
address arguments and allegations raised for the first time in a reply brief. See id. When
a district court declines to entertain an argument raised for the first time in a reply brief,
3
On appeal, Knight contends he first became aware of the Arkansas Litigation on
October 9, 2002, when plaintiffs mentioned the case in a motion for additional time to
respond to the Rule 60(b) motion. However, plaintiffs referred to the Arkansas Litigation
by caption and case number in two earlier motions – on July 30, 2002, in a motion for
extension of time filed in this court, and on August 30, 2002, in a request for extension of
time filed in the district court.
35
the argument has not been preserved for appellate review. See id. In this case, Knight’s
argument regarding the Arkansas Litigation has not been preserved for appellate review
and we will not consider it.
Motion to supplement appendix
Knight seeks to supplement the appendix with documents referred to as “Exhibit
880” and “Exhibit 882.” Both exhibits relate to the Arkansas Litigation. Because his
argument regarding the Arkansas Litigation has not been preserved for appeal, the
exhibits are irrelevant to this appeal. The motion to supplement is moot.
Subject matter jurisdiction
We note that the jurisdictional statement contained in plaintiffs’ complaint (which
was never amended) is technically deficient. Although the citizenship of the corporate
plaintiffs is properly alleged,4 plaintiffs only allege that defendants are residents of Texas,
which is insufficient.
Allegations supporting diversity jurisdiction must be pleaded affirmatively, and
there are two components to diversity jurisdiction – complete diversity of citizenship and
an amount in controversy in excess of $75,000. 28 U.S.C. § 1332. With regard to
citizenship of individual parties, “allegations of mere ‘residence’ may not be equated with
4
Okland is an Oklahoma corporation with its principal place of business in
Oklahoma City and, therefore, is a citizen of Oklahoma. IFSG is a Delaware corporation
with its principal place of business in Oklahoma City and, therefore, is a citizen of
Delaware and Oklahoma. See 28 U.S.C. § 1332(c)(1) (providing corporation is citizen of
both state of incorporation and state of principal place of business).
36
‘citizenship’ for the purposes of establishing diversity.” See Whitelock v. Leatherman,
460 F.2d 507, 514 (10th Cir. 1972). Where the pleadings are found wanting, an appellate
court may review the record for evidence that diversity exists. Id. at 514-15.
In this case, there is no evidence in the record from which we can determine the
citizenship of defendants. The district court did not inquire into the pertinent facts. The
case has proceeded without notice of the jurisdiction problem and there has been no
dispute as to jurisdiction. Amendments of jurisdictional pleadings at the appellate level
are expressly permitted by 28 U.S.C. § 1653 (“Defective allegations of jurisdiction may
be amended, upon terms, in the trial or appellate courts.”). In Whitelock, we allowed
such an amendment.
In the interests of judicial efficiency, we have completed our review of the entire
case as indicated and will allow plaintiffs to amend their complaint on the following
terms and conditions: Within 20 days after the filing of this opinion, plaintiffs shall file in
the district court, with a certified copy to this court, a verified amendment to the
jurisdictional pleadings of the complaint indicating the citizenship of all parties at the
time of the filing of the original complaint. In the event such amendment is not timely
accomplished, the Clerk of this court is directed to promptly calendar these appeals for
further consideration.
The judgments in both appeals are AFFIRMED subject to amendment of the
37
jurisdictional pleadings as set forth above. Knight’s motion to supplement is DENIED as
moot.
Entered for the Court
Mary Beck Briscoe
Circuit Judge
38