CM Appellate Practice Group Persuades Kansas Supreme Court To Reverse A Plaintiffs' Jury Verdict And Enter Judgment For Defendants In $80 Million Dollar Stigma Damage Class Action

CM’s Appellate Practice Group recently secured monumental victories in two class action lawsuits that presented numerous questions of first impression under Kansas law.  Smith, et. al. v. Kansas Gas Service Company, 169 P.3d 1052 (Kan. 2007); and Gilley, et. al. v. Kansas Gas Service Company, 169 P.3d 1064 (Kan. 2007)

Multiple natural gas explosions occurred in downtown Hutchinson, Kansas in January 2001, causing property damage, two fatalities, and evacuations of the city and surrounding areas.  The explosions were traced to the escape of natural gas from the underground Yaggy storage facility operated by defendants.  The gas traveled underground through a naturally occurring honeycomb of caves existing in the sub-strata until it reached escape holes to the surface in and around Hutchinson.

Following the disaster, two class actions were certified in addition to numerous separate individual lawsuits.  The Smith class sought $81 million in compensatory stigma damages as well as exemplary damages on behalf of all landowners (approximately 29,000) in Reno County, Kansas, “who have suffered or will suffer diminished property values as a result of release or threatened release of natural gas from the Yaggy facility.”  The Gilley class sought compensatory business interruption damages of over $7 million dollars as well as exemplary damages on behalf of all businesses owners (approximately 1,706) in Reno County as of the date of the explosions.

Both class actions were consolidated for a jury trial.  At trial, the Smith class proffered expert testimony that all real property in Reno County suffered a permanent loss of market value as a result of the Yaggy gas explosions calculated at $81 million.  That loss was attributed to fear in the buying public, regardless of whether such fear had a basis in fact or science.  While some town residents testified to their unique experiences, none of the class representatives testified, and no evidence was introduced establishing any class-wide physical injury to property or class-wide interference with the use and enjoyment of the class members’ property.  The Gilley class proffered expert testimony that 826 businesses lost revenue while 880 businesses enjoyed increased revenue after the explosions and evacuations.

After denying defendants’ motion for judgment as a matter of law made on the grounds that stigma damages were not compensable absent physical injury to, or interference with use and enjoyment of their property, the jury found defendants liable in both cases awarding the Smith class $5 million in compensatory stigma damages; but awarding no business interruption damages to the Gilley class.  Defendants appealed the Smith verdict and the plaintiffs cross-appealed the damage finding; the business class also appealed the verdict of no damages.  All appeals were heard by the Kansas Supreme Court upon the court’s determination that there was significant public interest in the subject matter of the cases, and that they involved legal questions of major public significance.

In a ruling of first impression in Kansas, the Supreme Court held that stigma damage – damage for loss of market value – is not recoverable absent evidence of either physical injury to, or loss of use and enjoyment of, the property.  Additionally, the court held that since the stigma claim in Smith was brought as a class action, plaintiffs had to show class-wide physical injury or class-wide interference, which it failed to do since its expert based his damages estimate on fear in the buying public regardless of whether such fear was based in fact or science.  The anecdotal evidence supplied by some class members about their personal disappointment over the value of their land, did not establish class-wide injury since their experiences were not common or typical of each other or of the other Reno County landowners in the class.  The court also rejected plaintiffs’ alternative argument that diminution in value constitutes the requisite interference with use and enjoyment, labeling this argument “circular and inappropriate.”

Ultimately, the Court likened the Smith claim to a claim for negligent infliction of emotional distress to real property in the absence of physical injury.  Finding such a claim speculative and not compensable, the court remanded Smith with instructions to enter judgment as a matter of law for defendants.

In Gilley, the court affirmed the jury’s take nothing verdict for this class since the evidence at trial established that the net result for all businesses in town was an overall increase in sales revenue since the business winners equaled or exceeded the losers after the explosions.

Kansas joins the majority of jurisdictions requiring physical injury to, or interference with use and enjoyment of, property to support a stigma damage claim.  These cases highlight the difficulty of proving nebulous injury claims in the class action context.  The Kansas Supreme Court was unwilling to find either class met its burden of proving damages simply by putting on individual class members and then asking the jury to multiply individual damages by the number of class members, requiring solid expert testimony basing damages on fact or science.