Petition — Gulf Oil Corp. v. Maddox
Supreme Court brief1978
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Supreme Court, U. S.
FILED
"EC 5 1977
MICHAEL RODAK, JR., CLERK
Ynthe Supreme Court of the Wnited States
OcToBER TERM, 1977
No'?-7 = 7 oO 8
GULF OIL CORPORATION,
Petitioner,
VERSUS
LAWRENCE E. MADDOX, Individually and as representa-
tive of all that class of gas royalty owners under Gulf Oil
Corporation oil and gas leases in the Hugoton-Anadarko
Area,
Respondent.
PETITION FOR A WRIT OF CERTIORARI TO THE
SUPREME COURT OF THE STATE OF KANSAS
*EpwIn S. Hurst
P. O. Box 1589
Tulsa, Oklahoma 74102
JAMES R. YOXALL
P. O. Box 1278
Liberal, Kansas 67901
Counsel for Petitioner
December, 1977
* Counsel upon whom service is to be made.
SOS eC errr
UTTERBACK TYPESETTING Co... S19 W. CALIF... OKLAHOMA CiTy. PH. 235-0030
a
TABLE OF CONTENTS
PAGE
I I cc ciccctcnccsnciicornsienincsntneiaitinnasnsniencenlatindveioa
Gian See. ......
STATUTE INVOLVED
STATEMENT ....
REASONS FOR GRANTING THE WRIT |...
CERTIFICATE follows Petition.
~s * NW NS NS NW
APPENDICES
APPENDIX “A”—Opinion of the Supreme Court of
Kansas filed July 29, 1977 (No. 48388) ......._____. A-1
APPENDIX “B”—Opinion of the Supreme Court of
Kansas in Shutts v. se Pet. Co. — at
222 Kan. 527, 567 P.2d 1292 _ idicbicienittt catenin ae
APPENDIX “C”—Kansas Statutes Annotated § 60-223 C-1
TABLE OF AUTHORITIES
-
CASEs:
Chance v. wrenariia’ Court, 58 Cal.2d 275, 373 P.2d
849 . Fee AE
Daar v. Yellow Cab Co., 67 Cal.2d 695, 433 P.2d 732 .
Hansberry v. Lee, 311 U.S. 32
Hanson v. Denkla, 357 U.S. 235 . rt
Hartford Life Ins. Co. v. Ibs, 237 US. 662 -
Irn ow ol
—_ os
AUTHORITIES CONTINUED PAGE
Horst v. Guy, 211 N.W.2d 723 9)
International Shoe Company v. State of Washing-
nae a edlsine - e
Kentucky Finance Corporation v. Paramount Auto
Exchange Corporation, 262 U.S. 544 ' 7
McGee v. International Life Ins. Co., 355 U.S. 220 4
Pennoyer v. Neff, 95 U.S. 714 devat 4
Shaffer v. Heitner, No. 75-1812, decided June 24.
Shutts, Executor v. Phillips Petroleum Co., 222 Kan.
527, 567 P.2d 1292 ss alislaaslaenaslscescoeeieniecee a
STATUTE:
K.S.A. § 60-223 ciehicaemeinin dlighteadiagbiediiadidedeestaaess ae
In the
Supreme Court of the United States
OcToBER TERM, 1977
No.
GULF OIL CORPORATION,
Petitioner,
VERSUS
LAWRENCE E. MADDOX, Individually and as representa-
tive of all that class of gas royalty owners under Gulf Oil
Corporation oil and gas leases in the Hugoton-Anadarko
Area,
Respondent.
PETITION FOR A WRIT OF CERTIORARI TO THE
SUPREME COURT OF THE STATE OF KANSAS
Petitioner Gulf Oil Corporation prays that a Writ of
Certiorari issue to review the judgment and opinion of the
Supreme Court of the State of Kansas entered in this case.
OPINIONS BELOW
The opinion of the Supreme Court of the State of Kan-
sas (Appendix “A” hereto) is reported at 222 Kan. 733, 567
P.2d 1326. In the opinion the court adopted its earlier opin-
ion in Shutts, Executor v. Phillips Petroleum Co. (Appendix
“B” hereto), which is reported at 222 Kan. 527, 567 P.2d
1292.
~~
JURISDICTION
The judgment of the Supreme Court of the State of
Kansas was rendered on July 29, 1977. Petitioner’s Motion
for Rehearing was denied on September 15, 1977. The juris-
diction of this Court is invoked under 28 U.S.C. § 1257(3).
QUESTION PRESENTED
The question presented is whether gas royalty owners
who are nonresidents of Kansas, whose gas royalty inter-
ests are not located in Kansas and who have had no contact
with the State of Kansas, may be included in a plaintiff
class in a Kansas state court class action wherein it is sought
to recover from an oil and gas lessee interest on gas pro-
ceeds held in suspense during the time such proceeds were
subject to refund under Federal Power Commission orders
and whether such inclusion is a denial of equal protection
of the laws and due process to the adverse party.
STATUTE INVOLVED
K.S.A. § 60-223, set forth in Appendix C hereto.
STATEMENT
This case was commenced by the respondent, Maddox,
as plaintiff in the District Court of Seward County, Kansas,
seeking to have certified as a plaintiff class all Gulf Oil
Corporation (Gulf) gas royalty owners in the Hugoton-
Anadarko Area in Kansas, Texas and Oklahoma and seek-
ing to recover interest on monies collected and held by Gulf
—_—
subject to refund pending the finality of the Federal Power
Commission Area Rate Opinion No. 586.
Commencing in 1965 the Federal Power Commission
(FPC) permitted Gulf to place into effect certain rate in-
creases on gas sold in interstate commerce from the Hugo-
ton-Anadarko Area in Kansas, Texas and Oklahoma. But
the monies were collected by Gulf subject to refund to the
gas purchasers to the extent that the rates were not finally
approved. So far as the gas purchasers and the FPC were
concerned, the obligation to refund, if required, was upon
Gulf not only as to its share of the working interest gas
proceeds but also as to the royalty share of the gas proceeds.
After the Hugoton-Anadarko Rate Opinion No. 586 be-
came final in late 1972, Gulf refunded some of the monies
so collected to the gas purchasers and paid out to almost
2,000 royalty owners about $988,000.00, which monies were
not required to be refunded. 18% of such royalty owners
were residents of Kansas and about 8% were nonresidents
of Kansas whose properties were located in Kansas. The
remaining 74% of such royalty owners were nonresidents
of Kansas whose royalty interests were not located in Kan-
sas but rather in Texas or Oklahoma.
Over Gulf’s objections, the trial court certified all such
royalty owners within the plaintiff class and rendered judg-
ment in favor of the class for 6% interest on the monies so
collected. On appeal, the Supreme Court of the State of
Kansas affirmed but modified the trial court’s judgment by
increasing the rate of interest to 7% prior to the effective
date of FPC Opinion No. 586 and 8% thereafter. .
a we
REASONS FOR GRANTING THE WRIT
The opinion in the Shutts case, which the Kansas Su-
preme Court adopted in its opinion in this case, recognizes
that International Shoe Company v. State of Washington.
326 U.S. 310; McGee v. International Life Ins. Co., 355 U.S.
220; and Hanson v. Denkla, 357 U.S. 235, limit state court
in personam jurisdiction to nonresident defendants who
have had some contact with the forum state. It also refers
to this Court’s recent opinion in Shaffer v. Heitner, No. 75-
1812, decided June 24, 1977, which departed from the long-
standing Pennoyer v. Neff, 95 U.S. 714, concept of state court
in rem jurisdiction and held that even in quasi in rem and
in rem proceedings a state court had no jurisdiction over
nonresidents who had not had minimum contacts with such
state. And while the opinion in the Shutts case seems to
recognize that members of the plaintiff class who are non-
residents of Kansas and whose royalty interests are in
properties located outside the State of Kansas have not
had “minimum contacts” with Kansas, it nevertheless holds
that the “minimum contacts” requirement does not apply
to nonresident members of the plaintiff class in this case.
The court makes a distinction between plaintiffs and
defendants in this regard. It notes that the International
Shoe line of cases involved nonresident defendants and not
nonresident plaintiffs. This is understandatle since the
forum court is always selected by named plaintiffs. But in
this respect, unnamed members of a plaintiff class are akin
to defendants since they do not select the forum. That such
persons have not elected to opt out does not mean that they
have effectively consented to the jurisdiction of the court
because such conclusion must be predicated upon the er-
ant
roneous assumption that the court has jurisdiction and
power to require such nonresidents to affirmatively act in
order to be excluded from the class or otherwise, by in-
action, submit to the court’s jurisdiction.
The court also refers to Chance v. Superior Court, 58
Cal.2d 275, 373 P.2d 849; Daar v. Yellow Cab Co., 67 Cal.2d
695, 433 P.2d 732; and Horst v. Guy, 211 N.W.2d 723, as being
cases from other jurisdictions which have reached out to
bind nonresident plaintiffs. But in each of those cases, the
nonresidents had had minimum contacts with the forum
state. The Chance case involved the foreclosure of Califor-
nia real estate. In the Daar case the nonresident members
of the plaintiff class had had contact with California since
the use of the taxi cabs, which was the basis of the over-
charge claim, occurred in the Los Angeles area. The Horst
case was a class action against the Governor and Adjutant
General of the State of North Dakota for the purpose of
securing payment of a veteran’s bonus, and in order to
qualify one must have been a North Dakota resident during
certain periods of time.
The Kansas Supreme Court also relies upon Hartfor¢e
Life Ins. Co. v. Ibs, 237 U.S. 662, and other cases which it
calls “common fund” cases. These cases in reality are class
actions involving insurance company policyholders. These
so-called “common fund” cases simply hold that nonresident
policyholders of an insurance company may be bound by
class representation in proceedings in the home state of the
insurance company. In those instances each nonresident
policyholder had contact with the home state or forum state
since each acquired policies in insurance companies or-
ganized in that state. There is no “common fund” in this
wil
case, and it bears no resemblance to the insurance company
cases.
The Kansas Supreme Court relies upon dicta in Hans-
berry v. Lee, 311 U.S. 32, as supporting its conclusion that:
“Thus, although the general rule is that only persons
subject to a court’s jurisdiction are bound by its judg-
ment, there is a recognized exception for suits of a
represeritative character. .. .”
But the exception for suits of a representative character as
stated in Hansberry was to the general rule that “.. . one is
not bound by a judgment in personam in a litigation in
which he is not designated as a party or to which he has
not been made a party by service of process” and not, as
stated by the Kansas court, an exception to the general rule
“... that only persons subject to a court’s jurisdiction are
bound by its judgment... .”
The Gulf royalty owners in the plaintiff class who
were nonresidents of Kansas and whose properties were not
located in Kansas have had no contact with the State of
Kansas. Under International Shoe and Shaffer they could
not be and are not bound by the Kansas court’s judgment
in this case.
The Kansas class action statute, specifically K.S.A. 60-
223(c) (2), provides:
“The judgment in an action maintained as a class
action shall extend by its terms to the members of the
class, as defined, whether or not the judgment is favor-
able to them.”
While on its face this section should limit class certification
te persons who would be bound by the court’s judgment,
ox
the Kansas Supreme Court seems to construe it otherwise.
But it is meaningless and futile to extend a class judgment
to members of the class “. . . whether or net the judgment
is *evorable to them” if, in fact, such members are not
bound by the judgment. Such persons, if dissatisfied or un-
successful, could relitigate their claims in other forums
and on other occasions.
To permit such persons to participate in a state court
class action in which they are not bound but in which Gulf,
as their adversary, is bound, is a clear and obvious denial
by the State of Kansas to Gulf of the equai protection of the
laws and due process as required by the Fourteenth Amend-
ment to the United States Constitution. Gulf, although a
corporation, is a “person” within the meaning of both the
equal protection and due process clauses and as such is
entitled to the protection afforded thereby in state court
proceedings. Kentucky Finance Corporation v. Paramount
Auto Exchange Corporation, 262 U.S. 544.
CONCLUSION
The Petition for a Writ of Certiorari should be granted.
Respectfully submitted,
*EpwIn S. Hurst
P. O. Box 1589
Tulsa, Oklahoma 74102
JAMES R. YOXALL
P. O. Box 1278
Liberal, Kansas 67901
Counsel for Petitioner
December, 1977
* Counsel upon whom service is to be made.
CERTIFICATE OF SERVICE
I, Edwin S. Hurst, a member of the Bar of the Supreme
Court of the United States and counsel of record for the
Petitioner, hereby certify that, pursuant to the Rules of the
Supreme Court, three (3) copies of the foregoing Petition
for Writ of Certiorari was served on the following parties:
W. Luke Chapin
Gordon Penny
Alan C. Goering
P. O. Box 148
Medicine Lodge, Kansas 67104
Gary R. Hathaway
P. O. Box 527
Ulysses, Kansas 67880
by depositing said copies in the United States Mail, properly
addressed and postage fully prepaid, this - day of De-
cember, 1977.
All parties required to be served have been served.
Edwin S. Hurst
P. O. Box 1589
Tulsa, Oklahoma 74102
APPENDICES
APPENDIX A
No. 48,388
LAWRENCE E. MADDOX, individually and as representa-
tive of all that class of gas royalty owners under Gulf Oil
Corporation oil and gas leases in the Hugoton-Anadarko
area,
Appellee and Cross-Appellant,
Vv
GULF OIL CORPORATION,
Appellant and Cross-Appellee.
SYLLABUS BY THE COURT
1.
In an action by royalty owners against their producer
for interest on royalties held in “suspense,” it is held: The
trial court’s judgment is affirmed as to (1) the certification
of the plaintiff class action, (2) its determination that the
gas producers were liable for interest on the theory of unjust
enrichment, and (3) its determination that the class mem-
bers had not waived any claim for interest. The trial court’s
judgment is modified as to the computation of the interest
to be recovered. (Following Shutts, Executor v. Phillips .
Petroleum Co., 222 Kan. _., _... P.2d __.)
2.
A division order is an instrument required by the pur-
chaser of oil or gas in order that it may have a record
showing to whom and in what proportions the purchase
price is to be paid. Its execution is procured primarily to
protect the purchaser in the matter of payment for the oil
or gas, and may be considered a contract between the sellers
on the one hand and the purchaser on the other.
3.
Where a division order prepared by the lessee of an oil
and gas lease for the lessor’s signature unilaterally attempts
to amend the oil and gas lease to deprive the royalty owner
A-2
[APPENDIX]
of interest on royalties held in suspense, to which the roy-
alty owner is otherwise entitled under the leasing contract,
and the lessor signs the division order without consideration
from the lessee, the provision waiving interest is null and
void.
Appeal from Seward district court; KEATOM G.
DUCKWORTH, judge. Opinion filed July 29, 1977. Affirmed
in part, modified in part and remanded for further pro-
ceedings.
Edwin S. Hurst, of Tulsa, Oklahoma, argued the cause,
and James R. Yowall, of Liberal, was with him on the briefs
of the appellant and cross-appellee.
Gordon Penny, of Chapin & Penny. of Medicine Lodge,
argued the cause, and W. Luke Chapin and Alan C. Goering,
of the same firm, and Gary R. Hathaway, of Ulysses, were
with him on the brief for the appellee and cross-appellant.
The opinion of the court was delivered by
SCHROEDER, J.:
This is a class action brought by Lawrence E. Maddox
(plaintiff-appellee and cross-appellant) individually and on
behalf of some 1,971 royalty owners, including those who
do not reside in Kansas or have leases covering lands in
Kansas or both, against their producer, Gulf Oil Corpora-
tion (defendant-appellant and cross-appellee), for recoverv
of interest on “suspense royalties.” The total amount of
suspense royalties held from 1965 through the fall of 1972
was almost $988,000 which Gulf commingled with its other
funds and used in its business operations. Except for the
smaller size of the class membership, the starting of with-
holding in 1965, the payout by Gulf in the fall of 1972. the
judgment of the trial court on January 9. 1976, and the point
hereafter discussed concerning division orders, this case is
identical in legal issues and factual situations to those pre-
sented in Shutts, Executor v. Phillips Petroleum Co.. 222
Kan. P.2d (No. 47,917, decided July 11, 1977).
A-3
[APPENDIX}
The same FPC Hugoton-Anadarko area and FPC Opinion
No. 586 are involved.
More than one-half of the royalty owners signed gas
division orders which expressly authorized Gulf to with-
hold, without interest, monies collected subject to refund
until Gulf’s refund obligations were finally determined or
until satisfactory indemnity was furnished. It is undisputed
that Gulf’s refund obligations were not finally determined
until FPC Opinion No. 586 became final. The trial court
held the waiver of interest provision in the division orders
ineffective. In its conclusion of law No. 9 the trial court
ruled:
“Division orders and unitization orders cannot be
construed to modify the lease obligations of the defend-
ant, being instruments reflecting royalty owners inter-
ests in proceeds from production and unitization of
acreage for allowables respectively. No consideration
is reflected in these instruments which would support
defendant’s contention that these instruments, executed
subsequent to the original leases herein, were contracts
to modify the royalty provisions of said leases.” (Em-
phasis added.)
The only testimony concerning the division orders at
the time of trial was the deposition tesimony of Jack Wat-
kins (Gulf’s supervisor of oil and gas records and account-
ing) who admitted that he had no krowledge or informa-
tion as to why the paragraph concerning interest was
inserted in the division orders. He further testified he knew
of no consideration for the royalty owners signing these
division orders, which had inserted in them the FPC
suspense rovalty paragraph pertaining to the waiver of
interest.
These division orders were obtained by Gulf in the late
1960’s and early 1970’s as deaths or transfers of royalty
owners occurred.
A-4
{APPENDIX}
It is the contention of Gulf on appeal that the gas roy-
alty owners who were paid under signed division orders
authorizing Gulf to hold such monies, without interest, are
bound by such division orders until such orders are revoked.
(Citing Phillips Petroleum Co. v. Williams, 158 F.2d 723
[5th Cir. 1946].)
This court has said a division order is an instrument
required by the purchaser of oil or gas in order that it may
have a record showing to whom and in what proportions
the purchase price is to be paid. Its execution is procured
primarily to protect the purchaser in the matter of payment
for the oil or gas, and may be considered a contract between
the sellers on the one hand and the purchaser on the other.
(Wagner v. Sunray Mid-Continent Oil Co., 182 Kan. 81, 92,
318 P.2d 1039 and authorities cited therein.) Generally
speaking, a division order is not a contract between sellers
themselves, especially in view of the fact that each of the
parties having an interest in production may in fact execute
separate division orders. (Wagner v. Sunray Mid-Continent
Oil Co., supra.)
It was the duty of Gulf under the lease contracts it had
with its royalty owners to market the gas at the best prices
obtainable at the place where the gas was produced. The
insertion in the division orders of matters contrary to the
oil and gas leases, or contrary to the law, cannot be uni-
laterally imposed upon the lessor by the lessee or the pur-
chaser. Here the unilateral attempt by Gulf in the division
orders to amend the oil and gas leases, and thereby deprive
the royalty owners of interest to which they were otherwise
entitled, was without consideration. Therefore, the pro-
visions in the division order regarding waiver of interest
are null and void as determined by the trial court.
As held in Shutts, (1) this action was properly tried as
a class action even though involving nonresident plaintiffs,
(2) the producer was liable for interest on a theory of un-
just enrichment and contractual principles, and (3) the
—— adi//
A-5
[APPENDIX]
class members had not waived any claim for interest. How-
ever, the computation of the award of interest by the trial
court should be modified to conform to the Shutts case
which held:
“We therefore hold on equitable principles Phillips
is required to pay its royalty owners herein seven per-
cent (7% ) per annum simple interest on suspense roy-
alties from the date of receipt of suspense royalties by
Phillips until October 1, 1970 (the effective date of
FPC Opinion No. 586), and eight percent (8%) simple
interest per annum thereafter until the payout to the
royalty owners on or about December 7, 1972. Apply-
ing the ‘United States Rule’ on partial payments, after
the payout there was still an unpaid principal sum due
equal to the total principal due plus accrued interest,
less the payout. Assuming proper calculations, this
amount, although principal, would equal the accrued
interest on the date of the payout. From December 7,
1972, on until the date of judgment (July 29, 1976)
equitable principles and Phillips’ contractual undertak-
ing require Phillips to pay its royalty owners herein
eight percent (8%) per annum simple interest on the
unpaid principal sum (accrued interest on date of pay-
out) plus the unpaid principal sum; and thereafter our
post-judgment interest statute, K.S.A. 16-204, requires
payment of eight percent (8%) per annum simple in-
terest for the benefit of the royalty owners on the total
amount of the judgment until paid.”
The judgment of the lower court is affirmed in part
and modified in part, and the case is remanded for further
proceedings consistent with the foregoing opinion.
APPENDIX B
No. 47,917
IRL SHUTTS, as Executor of the Estate of Althea Shutts,
Individually, and as a representative of all that class of
gas royalty owners under Phillips Petroleum Company
oil and gas leases in the Hugoton-Anadarko area,
Appellee and Cross-Appellant,
v.
PHILLIPS PETROLEUM COMPANY,
Appellant and Cross-Appellee.
SYLLABUS BY THE COURT
1. |
While the essential element to establish in personam’
jurisdiction over nonresident defendants is some “minimum
contacts” between the defendant and the forum state, the
element necessary to the exercise of jurisdiction over non-
resident plaintiff class members is procedural due process.
2.
Although the general rule is that only persons subject
to a court’s jurisdiction are bound by its judgment, there is
a recognized exception for suits of a representative charac-
ter, where those members of the class who are not joined
as parties are adequately represented to protect their
interest. |
3.
In its present form the Kansas Class Action Rule,
modeled after the Federal Rule of Civil Procedure 23, is
K.S.A. 60-223 and reveals a recognition of the need for
permitting actions to be brought by a named plaintiff in a
representative capacity.
4.
The prerequisites to a class action are specified in
K.S.A. 60-223(a) which provides that one or more mem-
B-2
[APPENDIX]
bers of a class may sue or be sued as representative parties
on behalf of all only if (1) the class is so numerous that
joinder of all members is impracticable, (2) there are ques-
tions of law or fact common to the class, (3) the claims or
defenses of the representative parties are typical of the
claims or defenses of the class, and (4) the representative
parties will fairly and adequately protect the interests of
the class.
5.
Class actions are maintainable under K.S.A. 60-223 (b)
(3) if the prerequisites of subdivision (a) are satisfied and
in addition the court finds that the questions of law or fact
common to the members of the class predominate over any
questions affecting only individual members, and that a
class action is superior to other available methods for the
fair and efficient adjudication of the controversy.
6.
Venue is not a jurisdictional matter but a procedural
one, where real property is only incidentally affected and
the action is transitory in nature.
7.
Under K.S.A. 60-223 Kansas courts can exercise juris-
diction over nonresident plaintiffs in a class action if
procedural due process guarantees are met.
8.
Under K.S.A. 60-223(c) (2) the judgment in an action
maintained as a class action is required to extend by its
terms to the members of the class, as defined, whether or
not the judgment is favorable to them.
9.
Many cases, and subsequent actions in the context of
giving full faith and credit to the prior decisions of other
state courts, clearly recognize a plaintiff class action may
be binding on nonresident plaintiffs when a “common fund”
is involved and where due process requirements are met.
eee
B-3
[APPEND!Ix)}
10. \
When a stakeholder commingles funds, which would
otherwise be “common funds” with its other cash, and uses
the funds to fulfill its business obligations, where such funds
never did or could belong to the stakeholder, the case is
embraced within the “common fund” rule.
11.
The notice which must be given to class members in
a class action is set forth in K.S.A. 60-223(c) (2) and pro-
vides: “. . . To afford members of the class an opportunity
to request exclusion, the court shall direct that reasonable
notice be given to the class, including specific notice to each
member known to be engaged in a separate suit on the
same subject matter with the party opposed to the class.”
12.
In the conduct of a class action further notice is au-
thorized under K.S.A. 60-223(d)(2) which provides: “In
the conduct of actions to which this section applies, the
court may, without limitation, make appropriate orders:
... (2) requiring, for the protection of the members of the
class or otherwise for the fair conduct of the action, that
notice be given in such manner as the court may direct to
some or all of the members of any step in the action. or of
the proposed extent of the judgment, or of the opportunity
of members to signify whether they consider the represen-
tation fair and adequate, to intervene and present claims or
defenses, or otherwise to come into action... .”
13.
Both the federal rules and Kansas rules regarding class
actions permit members of a class to “opt-out” upon receiv-
ing the required notice, and under K.S.A. 60-223(c) (2) the
court shall exclude those members who, by a date to be
specified, request exclusion, unless the court finds that their
inclusion is essential to the fair and efficient adjudication
of the controversy and states its reasons therefor.
B-4
{APPENDIX}
14.
In a review of the record on appeal involving a plaintiff
class action which includes nonresident plaintiffs, it is held:
The plaintiff class members were given reasonable notice
which satisfies jurisdictional and constitutional due process
requirements.
15.
The class action is premised on the theory that mem-
bers of the class who are not before the court can justly be
bound because the self-interest of their representative co-
incides with the interest of the members of the class and
will assure adequate litigation of the common issues. Where
the interests of absent class members have not been ade-
quately represented, binding them by the class judgment
would seem to offend the requirements of due process.
Notice to absent members of the class in this regard is par-
ticularly important, for it is the greatest single safeguard
against inadequate representation.
16.
The provisions of K.S.A. 60-223(d) authorize the court
to make appropriate orders for the protection of the mem-
bers of the class or otherwise for the fair conduct of the
action. It provides that notice be given in such manner as
the court may direct to some or all of the members of anv
step in the action, or of the proposed extent of the judgment.
or of the opportunity of members to signify whether thev
consider the representation fair and adequate, to intervene
and present claims or defenses, or otherwise to come into
the action. K.S.A. 60-223(e). which authorizes the court to
control dismissals and compromises, assists in assuring that
absent class members are adequately represented.
oy.
Where inadequate representation is established, courts
have denied res judicata effect to class action judgments.
B-5
[APPENDIX)
18.
Before a class action is certified the trial judge should
consider concepts of manageability in terms of our Kansas
class action statute, the nature of the controversy and the
relief sought, the interest of Kansas in having the matter
determined, and the class size and complexity. A court
should also give careful consideration to any possible con-
flict of law problems.
19.
The doctrine of unjust enrichment prevents one from
profiting or enriching himself at the expense of another
contrary to equity. But there must be some specific legal
principle or situation which equity has established or recog-
nized to bring a case within the scope of the doctrine.
20. ;
Where a party retains and makes actual use of money
belonging to another, equitable principles require that it
pay interest on the money so retained and used.
21.
In an action by royalty owners against their producer
for interest on royalties held in “suspense,” pending deter-
mination of lawful rates by the Federal Power Commission
upon application of the producer for increased rates, it is
he!d that interest on suspended royalties may be recovered
for the period of time such royalties remained in the control
of. and were available for use by, the gas producer during
the pendency of FPC proceedings and related litigation
regarding the determination of applicable lawful rates for
gas sales. and litigation regarding the determination cf
issues involved in this appeal. all as more particularly set
forth in the opinion.
22.
Where a gas producer, under circumstances described
in the foregoing syllabus, files a corporate undertaking with
the Federal Power Commission, wherein it agrees to pay
B-6
[APPENDIX}
7% interest on “FPC suspense monies” until rate proceed-:
ings are determined by the commission, and 8% thereafter
on the gas purchasers’ share of the “impounded” money, in
the event the commission orders a refund, equitable prin-
ciples require that the royalty owners receive the same
treatment as to their share, all as more particularly set forth
in the opinion.
23.
Where the lessee gas producer has expressly contracted
to pay a percentage of the price received for the sale of gas
on which month-by-month payments to royalty owners
were to be based, and the amount received by the lessee for
the sale of gas in excess of the established rates pending
FPC determination, although subject to possible refund,
was not contractually excluded from the price received, the
lessee is in no position to unilaterally impose burdensome
conditions upon the royalty owners precedent to fulfilling
its contractual commitment, albeit permissive until final
FPC approval of rate increase applications; and the failure
of the royalty owners to comply with these conditions prece-
dent to payment of royalty in excess of the established rates
does not constitute a waiver of their claim to interest on
“suspense royalties,” held and used by their lessee, or op-
erate as an estoppel.
24.
The “United States Rule” approved by this court pro-
vides that in applying partial payments to an interest-
bearing debt which is due, in the absence of an agreement
or statute to the contrary, the payment should first be
applied to the interest due.
25.
In an action by royalty owners against their producer
for interest on royalties held in “suspense,” it is held: The
trial court’s judgment is affirmed as to (1) certification of
the plaintiff class action, (2) its determination that the class
members had not waived any claim for interest. and (3) its
B-7
[APPENDIX]
determination that the gas producer was liable for interest
on the theory of unjust enrichment. The trial court’s judg-
ment is modified as to the computation of the interest to
he recovered.
Appeal from Kiowa district court; KEATON G. DUCK-
WORTH, judge. Opinion filed July 11, 1977. Affirmed in
part, modified in part and remanded for further proceed-
ings.
Joseph W. Kennedy, of Morris, Laing, Evans, Brock &
Kennedy, Chtd., of Wichita, argued the cause, and T. L.
Cubbage, II, of Phillips Petroleum Company, of Amarillo.
Texas, was with him on the briefs for the appellant and
cross-appellee.
W. Luke Chapin, of Chapin & Penny, of Medicine
Lodge. argued the cause, and Alan C. Goering, of the same
firm. was with him on the brief for the appellee and cross-
appellant.
The ovinion of the court was delivered by
SCHROEDER, J.:
This is a class action suit filed against Phillips Petro-
leum Company seeking to recover interest on “suspense-
royalties” attributed to gas produced from leases in the
three-state Hugoton-Anadarko area during the nine-year
period from June 1961, to October 1970. Phillips Petroleum
Company finally paid what it termed “suspense royalties”
without interest in December 1972, after the Federal Power
Commission (FPC) approved certain of Phillips’ pending
gas price rate increase applications. The trial court deter-
mined (1) the matter could be tried as a class action, (2)
the class members had not waived any claim for interest.
(3) that Phillips was liable for interest on a theory of
unjust enrichment, and (4) the class should be awarded
six percent compound interest. Phillips Petroleum Company
has appealed and the class has cross-appealed asserting the
points hereinafter considered and determined.
B-8
[APPENDIX }
Irl Shutts (plaintiff-appellee and cross-appellant), a
resident of Sun City, Kansas, is the executor of the estate
of Althea Shutts, and a royalty owner under producing oil
and gas leases owned by Phillips Petroleum Company (de-
fendant-appellant and cross-appellee) (hereafter Phillips)
in the Hugoton-Anadarko area. Shutts or his predecessor
in title, Althea Shutts, received certain of the “FPC sus-
pense money,” so-called, paid out as royalties by Phillips
as hereinafter set forth. The trial court certified Shutts as
a member and proper representative of a class of approxi-
mately 6,400 gas royalty owners (less a small number of
such royalty owners who have opted-out after having re-
ceived notice given by publication and mailing according
to order of the court) who received retained funds paid out
as royalties by Phillips as a result of Federal Power Com-
mission Opinion No. 586, issued September 18, 1970, by the
Commission and which became final October 28, 1972, deter-
mining the lawful gas rates in the Hugoton-Anadarko area
rate proceedings. (In re Hugoton-Anadarko Area Rate Case,
466 F.2d 974 [9th Cir. 1972].)
During her lifetime, Althea Shutts, a resident of Kan-
sas, owned one-seventh (1/7) of the lessor’s interest in two
oil and gas leases covering lands in Oklahoma and Texas.
These leases were within the Federal Power Commission’s
rate-making area known as the “Hugoton-Anadarko area”
which encompasses all of the State of Kansas and the pan-
handle sections of Texas and Oklahoma. (See 18 C.F.R.
$ 154.106[g].) The lessee’s interest in Althea Shutts’ two
leases was owned by Phillips Petroleum Company which
operated five producing gas wells.
On each of these two leases, Althea Shutts’ predecessor
in title had entered into a gas royalty agreement with Phil-
lips which has remained in full force and effect and which
provides that the royalty paid to the Jessor shall be com-
puted in relation to the weighted average price per Mcf
received by Phillips during anv calendar month from all
B-9
[APPENDIX)
sales of gas delivered by Phillips within a certain “desig-
nated area.”
On June 7, 1954, in Phillips Petroleum Co. v. Wisconsin,
347 U.S. 672, 98 L.Ed. 1035, 74 S.Ct. 794, it was determined
that Phillips, as an independent natural gas producer selling
gas to interstate pipeline companies for interstate trans-
portation and resale, was a “natural gas company” within
the Natural Gas Act. (15 U.S.C. § 717, et seq.) Accordingly,
such sales of gas by Phillips were subject to regulation by
the Federal Power Commission (hereafter FPC). By vari-
ous orders issued since that decision, the FPC has sus-
pended increases in prices for sales of gas by Phillips and
has permitted such increases to be collected at some date
subsequent to the original date proposed by Phillips, only
upon Phillips’ filing with the Commission a corporate under-
taking to refund any or all portions of such increase which
the FPC might find not to have been justified. This cor-
porate undertaking cost Phillips nothing to obtain. Phillips
chose to collect the higher rate, subject to possible refund.
because increases in gas sales prices not made effective sub-
ject to FPC approval could not be made retroactive. Phillips
filed the required corporate undertaking to refund the “FPC
suspense money.”
After June 7, 1954, Phillips sold gas in the “designated
area” and throughout the Hugoton-Anadarko area. Some of
this gas was sold subject to the FPC jurisdiction at prices
which had not been approved by the FPC. The increased
prices for some, but not all. of Phillips’ gas sales in the
“designated area’ and the Hugoton-Anadarko area were
collected by Phillips subject to a duty to refund the same
to the gas purchasers in the event the FPC failed to approve
the sales prices pursuant to Section 4(e) of the Natural Gas
Act, 15 U.S.C. § 717c(e). with interest at seven percent
(7°) per annum from the date of receipt until Septembe«
18, 1970, and eight percent (8%) per annum thereafter
until paid out, if the FPC did not approve the sales price.
B-10
{APRPENCIX }
(18 C.F.R. § 154.102[c] and FPC Opinion No. 586, p. 33.)
Until such time as the FPC approved such increased sales
prices, or a portion of such prices, Phillips was entitled to
retain the proceeds from such sales under federal cases
holding that the royalty owners had no legally enforceable
right to obtain such monies held by Phillips subject to re-
fund. (See Ashland Oil & Refining Company v. Staats, Inc.,
271 F. Supp. 571, 579 [D. Kan. 1967]; and Boutte v. Chevron
Oil Company, 316 F. Supp. 524 [E.D. La. 1970], aff'd 422 F.
2d 1337 [5th Cir. 1971].)
Until June 1, 1961, Phillips in its monthly payments to
its gas royalty owners in the Hugoton-Anadarko area paid
all of their share of the increased rates being collected by
Phillips subject to refund, as well as their share of proceeds
from the sale of gas which were not subject to refund, the
so-called “firm” proceeds. Beginning June 1, 1961, Phillips’
management decided to begin withholding all of its royalty
owners’ share of increased gas prices subject to refund,
unless the royalty owners put up an acceptable indemnity
to repay the same with interest if the increased prices were
not approved by the FPC.
In July 1961, Phillips gave the following notice to
Althea Shutts and all other royalty owners in the Hugoton-
Anadarko area:
“NOTICE
“As you probably know, since June, 1954, all sales
of gas to the interstate pipelines have been subject to
the control of the Federal Power Commission. Phillips
has been successful since that time in securing a num-
ber of increases in its contract prices, but these could
not be placed into effect until they were approved,
after investigation and hearing, by the Federal Power
Commission, except by the agreement of Phillips to
refund to the purchaser, with appropriate interest, such
amounts that are not finally allowed by the Commis-
sion. Heretofore, Phillips Petroleum Company has vol-
B-11
[APPEND!IX}
untarily computed royalties paid you on the basis of a
weighted average price which included total proceeds
received in the area, without regard to the possibility
of future refunds. This practice can no longer be con-
tinued. Effective June 1, 1961, and until further notice,
royalties paid you will be computed by excluding that
portion of any price being collected subject to refund
which exceeds 11 [cents] per Mcf (presently the maxi-
mum area price level for increased rates as recently
announced by the Federal Power Commission in its
Statement of General Policy. Payment of royalty based
on the balance of the sums collected will be made at
such time as it is determined that the sums collected
are no longer subject to refund.
“Interest owners desiring to receive payments com-
puted currently on the full sums being collected may
arrange to do so by furnishing Phillips Petroleum Com-
pany acceptable indemnity to cover their proportionate
part of any re uired refunds, plus the required interest.
“PHILLIPS PETROLEUM COMPANY
NATURAL GAS DEPARTMENT
BARTLESVILLE. OKLAHOMA”
(Emphasis added.)
The indemnity which Phillips required was not a no-
cost corporate undertaking, which was all Phillips filed
with the FPC. Rather, Phillips required a corporate surety
bond in an amount based on estimated production for two
years, plus seven percent (7°) interest, subject to Phillips’
review at the end of eighteen (18) months.
This notice was included with Phillips’ royalty checks
for June 1961, that were mailed to all its royalty owners
on July 28, 1961. Seventeen (17) persons or entities (who
are not members of this class action) did furnish indemni-
ties acceptable ‘to Phillips and received current payments
computed on the full sums being collected, including
B-12
[APPENDIX]
amounts subject to refund. However, none of the approxi-
mately 6,400 class members responded to Phillips’ offer con-
tained in the notice, or requested that they be allowed to
furnish Phillips with acceptable indemnity, so that they
might be paid otherwise than according to the method out-
lined in Phillips’ July 28, 1961, notice.
At various times after May 20, 1960, Phillips had nine-
teen (19) applications before the FPC requesting permis-
sion to increase the price for sales of gas by it within
the “designated area.” In due course the FPC issued orders
suspending the nineteen (19) rate increase applications. On
November 27, 1963, the FPC consolidated the applications
of Phillips and others for hearing in the Hugoton-Anadarko
area rate proceeding.
From June 1, 1961, to October 1, 1970, Phillips depos-
ited the increased rate monies collected in its general
account and commingled it with its other funds, without
ever giving notice of this fact to royalty owners during the
time it was holding money. It is important to note that dur-
ing this period of time Phillips had no entitlement to the
gas royaly owners’ share of the “suspense royalties,”
whether or not the rates were approved by the FPC. Phil-
lips never owned this money. While Phillips collected eight-
eighths (8/8) of the increased rates, under no condition was
the one-eighth (1/8) of the increase attributable to the
royalty owners ever to go to Phillips. That royalty share,
according to eventual FPC ruling, was either to go to Phil-
lips’ rovalty owners, or back to Phillips’ gas purchasers
with interest, or part to one and part to the other.
On September 18, 1970, the FPC issued Opinion No. 586
in the Hugoton-Anadarko rate cases which established sales
prices applicable to the gas sales and refund requirements.
The order was made effective October 1, 1970. (See 44 FPC
761 and 35 Fed. Reg. 15,986 [1970].) The effect of FPC
Opinion No. 586 was to approve the increased rates collected
by Phillips from September 1, 1956, to the extent of ap-
B-13
f[APPENDIX}
proximately $152,000,000 in plant sales of gas and approxi-
mately $1,000,000 in field or lease sales of gas, and to
disapprove rate increases to the extent of approximately
$29,000,000 in plant sales of gas and $73,000 in lease sales
of gas, the latter amounts being found refundable to the
gas purchasers with interest.
However, the FPC had no jurisdiction over landowner
royalty interests relating to the sale of gas, and it under-
took to make no ruling with reference to whether any
interest or compensation was payable by the producers to
the royalty owners for “suspense royalties” held by Phil-
lips.
As of October 1. 1970, Phillips again began paying all
of the royalty owners, to whom it accounted, royalties
including the rate increases as to current monthly royalties.
but Phillips did not then pay any back “suspense rovalties”
on monies previously withheld. On or about November 25.
1970, Phillips sent the following notice to Althea Shutts
and other royalty owners in the class:
“NOTICE CONCERNING FEDERAL POWER COM-
MISSION OPINION NO. 586 COVERING INTER-
STATE SALES OF GAS PRODUCED FROM THE
HUGOTON-ANADARKC AREA:
“Effective as of October 1, 1970, and until further
notice, Phillips Petroleum Company is giving effect to
the full ceiling rate levels established by the Federal
Power Commission in Opinion No. 586. If the check -
enclosed herewith includes payment for your interest
in properties in the Hugoton-Anadarko Area. you are
herebv notified that such payment has been based upon
the full ceiling rate levels established by the Opinion.
“If such Opinion should be changed, set aside, or
vacated, resulting in a reduction of the rate levels
relied upon by Phillips in its calculations, Phillips wil!
expect you to reimburse it in full for any overpav-
B-14
[APPENDIX]
ments occasioned thereby. Such recovery may be had,
at Phillips’ election, by withholding from subsequent
payments to you for your interest in oil or gas, or both
oil and gas, whether or not produced from the same
properties under which the overpayment occurred.
“Your acceptance of the enclosed check will be re-
garded as evidence of your consent to such recovery.
“PHILLIPS PETROLEUM COMPANY
EXPLORATION & PRODUCTION DE-
PARTMENT GAS SETTLEMENTS
DIVISION—619 FPB
BARTLESVILLE. OKLAHOMA 74004”
The foregoing notice from Phillips to Althea Shutts and
all class members was included with Phillips’ royalty checks
for October 1970.
Litigation regarding FPC Opinion No. 586 continued
until July 31, 1972, when the Ninth Circuit Court of Appeals
affirmed the FPC opinion. When no appeal was taken, the
opinion became final on October 28, 1972. (See In re Hugo-
ton-Anadarko Area Rate Case, supra.)
On or about December 7, 1972, Phillips mailed royalty
checks to royalty owners in payment of the increased royal-
ties due them by virtue of the finality of FPC Opinion No.
586. Phillips paid Althea Shutts the sum of $2,831.25, and
paid out approximately $5,700,000 in additional royalties
to over 6,400 persons, firms, corporations and entities
(which includes the class as defined by the trial court).
Only 218 of these persons were residents of Kansas. Of that
number only 128 had executed gas royalty agreements of
the type under which Althea Shutts royalty was paid. (See
Phillips’ July 1961, notice to all of its royalty owners in the
Hugoton-Anadarko area heretofore quoted as stipulated by
the parties herein.) The record is barren as to the number
in the plaintiff class residing in other states who have gas
B-15
(APPENDIX)
leases with Phillips covering land in Kansas, which encom-
passes the largest portion of the Hugoton-Anadarko area
At the time of these payouts, Phillips sent the itewing
notice to each payee:
“NOTICE
“The enclosed check covers payment based upon gas
proceeds which have heretofore been held in suspense
pending determination by the Federal Power Commis-
sion of the just and reasonable rates applicable to the
Hugoton-Anadarko Area, and, subsequent to issue of
Opinion No. 586 of the Federal Power Commission
which determined such rates, pending appeal and ju-
dicial finality of said Opinion. The decision of the Cir-
cuit Court of Appeals affirming Opinion No. 586 has
recently became final.
“Credits to leases for these heretofore suspended
sums have been accrued by computer in suspense ac-
counts, pursuant to numerous Federal Power Commis-
sion dockets. The detailed monthly prices and lease
accrual information cannot, therefore, be reflected in
any practicable manner on the enclosed check. The
detail of our computations can be audited during regu-
lar business hours at our Bartlesville, Oklahoma office.
“PHILLIPS PETROLEUM COMPANY
SETTLEMENTS DIVISION
EXPLORATION & PRODUCTION
DEPARTMENT
BARTLESVILLE, OKLAHOMA 74004”
(Emphasis added. )
The foregoing notice discloses Phillips neither paid nor
offered to pay any interest for the use of the money. nor
did Phillips say anything about interest or how long the
money had been held or used by Phillips.
B-16
[APPENDIX |!
Althea Shutts accepted the payment for increased roy-
alties before she died on May 15, 1974. On September 16,
1974, Irl Shutts filed this action. Shutts, as a representative
of approximately 6,400 royalty owners, claimed approxi-
mately $1,000 interest for himself and interest for the
members of the class on the amount ultimately paid to the
royalty owners which have heretofore been denominated
“suspense royalties.”
On November 26, 1974, Shutts filed a motion to certify
the action as a class action. On May 1, 1975, Judge Robert
M. Baker granted Shutts’ motion for a class order under
K.S.A. 60-223 and ordered notice to be given to all gas
royalty owners in the Hugoton-Anadarko area, regardless
of whether such leases covered land in Kansas, Texas or
Cklahoma. Phillips’ request to take an interlocutory appeal
was denied.
Shutts prepared notices which were distributed by
Phillips during a monthly royalty payment mailing to all
royalty owners in the Hugoton-Anadarko area then receiv-
ing royalties from Phillips. After setting forth the facts
surrounding the lawsuit, the notice provided:
“1. The court will include as members of the plain-
tiff class herein all of the gas royalty owners addressed
above; provided, however, any person or concern so
included may by filing a written request to the Clerk
of the District Court of Kiowa County, Kansas, Greens-
burg, Kansas, 67054, on or before the 30th day of April,
1976, [original notice specified July 15, 1975] be ex-
cluded from the class unless upon notice and after
hearing and for stated reasons the court finds that
inclusion is essential to the fair and efficient adjudica-
tion of the controversy. Any class member, if he so
desires. may appear in the case in person or through
his own counsel; otherwise, plaintiff's counsel will rep-
resent him as a member of plaintiff class.
B-17
fAPPENDIX}
“2. Judgment in this action, whether for the plain-
tiff class or for the defendant, will be binding on all
class members except those who may be excluded as
above stated. Class members excluded will not be en-
titled to share in the benefit of any judgment or settle-
ment entered or concluded favorable to plaintiff class.
“3. Plaintiffs’ attorneys’ fees are contingent on re-
covery. If the plaintiffs are successful, the court will
allow a reasonable attorneys’ fee for plaintiffs’ attor-
neys out of the interest fund created. If plaintiffs are
unsuccessful. there will be no allowance of attorneys’
fees.”
Notices were also published in seven area newspapers and
sent by first class mail by the plaintiff to former royalty
owners. Judge Baker later disqualified himself, and Judge
Duckworth was eventually assigned to this case.
On August 12, 1975, three Texas residents mailed a
notice to the clerk of the district court saying they did not
wish to participate in this class action suit. Because this
notice was not timely filed and because a multiplicity of
suits could occur if exclusion was granted, the trial court
sustained Phillips’ motion to deny the exclusion.
The trial court adopted by reference the stipulations of
the parties set forth in the pretrial order as its findings of
fact and concluded (1) the matter could be tried as a class
action, (2) the class members had not waived any claim
for interest, (3) that Phillips was liable for interest on a
theory of unjust enrichment, and (4) the class should be
awarded six percent compound interest. Specifically, the
trial court determined in its conclusions of law:
“1. This is a proper class action under the provisions
of K.S.A. Supp. 60-223 because:
(a) The approximately 6400 royalty owners in
the Hugoton-Anadarko area makes joinder imprac-
table; [sic]
B-18
[APPEND!X]
(b) Any interest due each member of the class
is too small to justify separate actions;
(c) Questions of fact and law are common to all
members in that the facts are really undisputed and
the sole legal issue presented is whether the plaintiff
members are entitled to interest on the suspended
royalties held by defendant;
(d) The claims of the named parties herein are
typical of the claims of all members of the class and
will fairly and adequately protect the interest of
the class;
(e) The question presented common to all mem-
bers of the class predominates over any individual
question and a class action is not only superior but
the only efficient manner to adjudicate the dispute
herein (to avoid multiple suits and excessive ex-
penses) and that this court having jurisdiction of a
large physical portion of the Hugoton-Anadarko area
is a convenient forum for such action.
* * % * * *
“4. The defendant concomitant with its duty to its
royalty owners to secure the best price obtainable
(under its covenant to market) had the duty to remit
the collected share of royalty as promptly as commer-
cially feasable [sic] on the same conditions as it was
received by defendant or in the alternative to place
the funds in a proper investment fund for subsequent
disbursement. The fact that FPC permitted and es:en-
tially required defendant to post bond and agree to pay
back interest if a refund was ordered did not entitle
defendant to free use of the royalty owners share of
the increased proceeds. The FPC bond and interest
pay back requirements certainly justify and permit
defendant business use of the increased rates of its own
share of those rates but not the royalty owners share
which did not belong to defendant under any eventual
- eee eee
B-19
_ [APPENDIX)
ruling by the FPC. See Phillips Petroleum Co. v.
Adams, 513 F2d 355. The Court therefore concludes
that the defendant is liable for interest on royalty pro-
ceeds retained by it and used as a business asset by it
pending final FPC approval and conclusion of litigation
based on its contractual duty to remit royalty proceeds
in a reasonably prompt manner. It is specifically not
the basis of this decision that such duty arises from an
attempt to impose any facet of fiduciary relationship
to the defendant.
“7. The acceptance without an accounting as to rates
or interest of payment of the suspended royalties herein
in December, 1972, did not constitute ratification be-
cause there was no basis for the royalty owners to know
what was involved in the payment. For the same reason
estoppel does not apply to preclude recovery herein.
“8. Division orders and unitization orders cannot be
construed to modify the lease obligations of the defend-
ant, being instruments reflecting royalty owners inter-
ests in proceeds from production and unitization of
acreage for allowables respectively. No consideration
is reflected in these instruments which would support
defendant’s contention that these instruments, executed
subsequent to the original leases herein. were contracts
to modify the royalty provisions of said leases. For the
same reasons, the gas royalty agreements do not change
defendant’s obligations under their original leases ex-
cept for agreements to the controlled price.
“9 Defendant's contention that the payment of the
additional royalties in December 1972 constituted a
‘bounty’ to plaintiffs is without any foundation and is
contrary to said ‘gas royalty agreements’ establishing
the FPC approved prices as the basis for royalty pav-
ments.
B-20
{APPENDIX}
“10. To allcw defendant free use of the royalty share
of production for over ten years as a result of the diffi-
culties and delays caused by the FPC regulations would
unjustly enrich defendants. Defendant paid the full
royalty share of proceeds collected prior to June 1,
1961, and after October 1, 1970. The decision to with-
hold the increased (but unapproved) rates in the inter-
vening period was a unilateral decision by defendant
that cannot rise to the stature of a defense of ratifica-
tion. Nor does it support the ‘bounty’ theory of defend-
dant herein as noted above.
“11. The statutory rate of interest herein in Kansas,
Oklahoma and Texas-is six per cent per annum and
is allowed as the proper rate of interest to be applied
to the suspended royalties herein from time of receipt
until date of judgment herein with interest com-
pounded on an annual basis.” (Emphasis added)
Appeal has been duly perfected by Phillips, and a cross-
appeal has been taken challenging the amount of interest
awarded by the trial court.
The appellant contends the trial court erred in holding
that it had jurisdiction over in personam claims of unnamed
nonresident class plaintiffs having no contact with the State
of Kansas.
Here the representative of the plaintiff class is a resi-
dent of Kansas. The named defendant does business in
Kansas, and has been duly served with process in Kansas.
No question is asserted on this appeal as to the jurisdiction
of the trial court over the defendant or the trial court’s
power to enforce a judgment against the defendant. Two
hundred and eighteen plaintiff class members are Kansas
residents, and an unknown number of the plaintiff mem-
bers, many of whom reside in other states, have gas leases
with Phillips covering Kansas lands. But it must be con-
ceded some gas leases or other contracts entered into he-
et ae en
ae
B-21
(APPENDIX!
tween Phillips and the gas royalty owners in the plaintiff
class involve persons who are not residents of Kansas or
persons who have gas leases covering land which is outside
the physical boundaries of Kansas or both.
It is a basic rule of law that for a person to be bound
by a state court’s judgment affecting his legal rights, he
must be subject to the adjudicating court’s jurisdiction. The
question presented is how can a Kansas court assert juris-
diction in a plaintiff class action, where some of the indi-
vidual plaintiff class members do not reside in Kansas and
do not have land in Kansas covered by leases with Phillips.
It is apparent the multistate class action filed herein
presents a novel issue in terms of in personam jurisdiction.
However, while multistate class actions are novel, state
courts have long been confronted with actions brought
against nonresident defendants. Out of these cases have
developed jurisdictional principles which permit courts to
assert personal jurisdiction over a foreign defendant or to
obtain jurisdiction over the property of a foreign defendant,
and in both cases to render a binding judgment.
The basic requirements to subject defendants to per-
sonal liability were first established in Pennoyer v. Neff,
95 U.S. 714, 24 L.Ed. 565, where the United States Supreme
Court held:
“'.. The authority of every tribunal is necessarily
restricted by the territorial limits of the State in which
it is established. Any attempt to exercise authority
beyond those limits would be deemed in every other
forum, as has been said by this court, an illegitimate
assumption of power, and be resisted as mere abuse.
...” (p. 720.)
The ruling in Pennoyer wes expanded and made more
flexible by cases examining the “minimum contacts” neces-
sary to exercise in personam jurisdiction over a nonresident
defendant. (Internat. Shoe Co. v. Washington, 326 U.S. 310.
B-22
{APPENDIX}
90 L.Ed. 95, 66 S.Ct. 154, 161 A.L.R. 1057; and McGee v.
International Life Ins. Co., 355 U.S. 220, 2 L.Ed. 2d 223, 78
S.Ct. 199.) Pennoyer was also expanded by quasi in rem
judgments binding a nonresident defendant by the court’s
exercise of in rem jurisdiction over the nonresident defend-
ant’s property, thereby subjecting the property to the
court’s jurisdiction. (Note, Consumer Class Actions with a
Multistate Class: A Problem of Jurisdiction, 25 Hastings
L. J. 1411, 1426-1428 [1974].)
Recently, in Hanson v. Denckla, 357 U.S. 235, 2 L.Ed. 2d,
1283, 78 S.Ct. 1228, the United States Supreme Court re-
affirmed the Pennoyer rule in holding that the lower court’s
exercise of in personam jurisdiction over the nonresident
defendant was invalid. The United States Supreme Court
stated:
“|. . But it is a mistake to assume that this trend
heralds the eventual demise of all restrictions on the
personal jurisdiction of state courts. (Citation omitted. )
Those restrictions are more than a guarantee of im-
munity from inconvenient or distant litigation. They
are a consequence of territorial limitations on the
power of the respective States. However minimal the
burden of defending in a foreign tribunal, a defendant
may not be called upon to do so unless he has had the
‘minimal contacts’ with that State that are a prerequi-
site to its exercise of power over him... .” (p. 251.)
(Emphasis added.)
The most recent case of the United States Suvreme
Court indicating the parameters of quasi in ren jurisdiction
over nonresident defendants is Shaffer v. Heitner, US.
: L.Ed. 2d ° S.Ct. [No. 75-1812, decided
June 24, 1977]. following Internat. Shoe Co. v. Washing-
ton, supra.
Kansas cases examining and following these jurisdic-
tional requirements over nonresident defendants include
B-23
{APPENDIX}
Misco-United Supply, Inc. v. Richards of Rockford, Inc.,
215 Kan. 849, 528 P.2d 1248; Tilley v. Keller Truck & Imple-
ment Corp., 200 Kan. 641, 438 P.2d 128; and Woodring v.
Hall, 200 Kan. 597, 438 P.2d 135.
These cases all deal with nonresident defendants, not
nonresident plaintiffs. Whether all nonresident plaintiffs in
a class action are required to have “minimum contacts”
with the forum is a different matter. Because a class action
must necessarily proceed in the absence of almost every
class member, we hold the residential makeup of the class
membership is not controlling. (Note, Consumer Class Ac-
tions with a Multistate Class: A Problem of Jurisdiction,
supra at 1432.) What is important is that the nonresident
plaintiffs be given notice and an opportunity to be heard
and that their rights be justly protected by adequate repre-
sentation. These are the essential requirements of due
process, and they must be satisfied in any class action by
every court, state or federal, regardless of the residences
of the absent class members. Therefore, while the essential!
clement necessary to establish jurisdiction over nonresident
defendants is some “minimum contacts” between the de-
fendant and the forum state, the element necessary to the
exercise of jurisdiction over nonresident plaintiff class mem-
bers is procedural due process.
That there is indeed a difference between the jurisdic-
tional standards governing class actions, and those govern-
ing all other actions, was emphasized long ago by the United
States Supreme Court in Hansberry v. Lee, 311 U.S. 32, 85
L.Ed. 22, 61 S.Ct. 115, 132 A.L.R. 741. There the court re-
fused to bind a Negro petitioner to a judgment against him,
as a member of a class on the basis of earlier litigation,
where a false and fraudulent stipulation was entered into.
In that case the court noted:
“Tt is a principle of general application in Anglo-
American jurisprudence that one is not bound by a
judgment in personam in a litigation in which he is not
B-24
[AP PENDIX!
designated as a party or to which he has not been made
a party by service of process. Pennoyer v. Neff, 95 U.S.
714; 1 Freeman on Judgments (5th ed.). § 407. A judg-
ment rendered in such circumstances is not entitled to
the full faith and credit which the Constitution and
statute of the United States. R.S. $ 905, 28 U.S.C. $ 687.
prescribe. ...
“To these general rules there is a recognized excep-
tion that, to an extent not precisely defined by judicial
opinion, the judgment in a ‘class’ or ‘representative’
suit, to which some members of the class are parties,
may bind members of the class or those revresented
who were not made parties to it... .
“... Courts are not infrequently called upon to pro-
ceed with causes in which the number of those inter-
ested in the litigation is so great as to make difficult or
impossible the joinder of all because some are not
within the jurisdiction or because their whereabouts
is unknown or where if all were made parties to the
suit its continued abatement by the death of some
would prevent or unduly delay a decree. In such cases
where the interests of those not joined are of the same
class as the interests of those who are, and where it is
considered that the latter fairly represent the former
in the prosecution of the litigation of the issues in
which all have a common interest. the court will pro-
ceed to a decree... .” (pp. 40-42.) (Emphasis added.)
Thus, although the general rule is that cnlv rerscrs
subject to a court’s jurisdiction are bound by iis judgment.
there is a recognized exception for suits of a representative
character. While the United States Supreme Court eonceded
that the extent of this exception had not been precisely
defined by judicial opinion, it went on to suggest that if a
class were adequately represented, its interest would be
protected and the court could proceed to a final decree.
B-25
[APPENDIX}
These pronouncements, a!though pure dicta, would not have
been included in the opinion unless they were intended to
state the rule regarding class actions. The opinion also fore-
tells what is an essential requisite of due process as to
absent plaintiff class members, adequate representation.
(See Gray v. Amoco Production Co.,1 Kan. App.2d _—__. 564
P.2d 579 | No. 48,385, decided May 20, 1977].)
An examination of the nature of class action suits pro-
vides a historical background for this conclusion. Class
action suits arose in equity and were known to English
chancery practice since the Seventeenth Century. (A. Hom-
burger, State Class Action and the Federal Rule, 71 Colum.
L. Rev. 609, 611 [1971]; and H. Hunter, Georgia Investment
Company v. Norman—The Supreme Court Creates a New
Form of Class Action for Georgia, 24 Mercer L. Rev. 447,
448 [1973].)
In the 1853 opinion of Smith et al v. Swormstedt, et al,
57 U.S. (16 How.) 288, 14 L.Ed. 942, the United States Su-
preme Court gave its blessing to the equitable class suit bv
noting:
“The rule is well established, that where the parties
interested are numerous, and the suit is for an object
common to them all, some of the body may maintain
a bill on behalf of themselves and of the others; and a
bill may also be maintained against a portion of a
numerous body of defendants. representing a common
interest... .” (* p. 302.)
In 1938, the Federal Rules of Civil Procedure defined
class actions in terms of the abstract nature of the rights
involved: the so-called “true” category was defined as
involving “joint, common, or secondary rights”; the “hy-
brid” category, as involving “several” rights related to
“specific property”; the “spurious” category, as involving
“several” rights affected by a common question and related
to common relief. (See Proposed Rules of Civil Procedure,
39 F.R.D. 69, 98 [1966].)
B-26
LAPPENOIX)
Because of the unworkability of these classifications,
the Federal Rules of Civil Procedure were amended in 1966.
It was decided the new rules would allow a judgment to
bind all class members unless a member affirmatively
“opted out” of the litigation at its commencement. (Fed. R.
Civ. P. 23 [c][3].)
Recently the United States Supreme Court has re-
quired plaintiffs to assume the cost of notice in common-
question class actions. (Eisen v. Carlisle & Jacquelin, 417
U.S. 156, 40 L.Ed. 2d 732, 94 S.Ct. 2140.) The United States
Supreme Court has also refused to aggregate class action
claims to meet the $10,000 federal jurisdictional require-
ments. (Zahn v. International Paper Co., 414 U.S. 291, 38
L.Ed. 2d 511, 94 S.Ct. 505; and Snyder v. Harris, 394 U.S.
332, 22 L.Ed. 2d 319, 89 S.Ct. 1053, reh. denied 394 U.S. 1025,
23 L.Ed. 2d 50, 89 S.Ct. 1622.) While the results are sup-
ported by the fear of overloading the federal judicial system
and the desire not to judicially expand the constitutionally
established jurisdictional limits, these recent United States
Supreme Court cases have clearly restricted access to fed-
eral courts. This suit, for example, could not be brought in
a federal court. Furthermore, the FPC does not have juris-
diction over the matter. If the state courts will not hear the
matter, who will grant relief?
If state courts cannot maintain class action suits with
nonresident plaintiffs, can the “small man” find legal re-
dress in our modern society which increasingly exposes
people to group injuries for which they are individually
unable to get adequate legal redress. either bécaus2 ‘he v
do not know enough or because such redress is dispropor-
tionately expensive? (See A. Homburger. State Class Ac-
tions and the Federal Rule, 71 Colum. L. Rev. 609. 641-643
{1971].)
The appellant argues this action should be brought in
several different state courts. This risks inconsistent adjudi-
cations for a class which is otherwise treated alike. Further-
B-27
[APPENDIX]
more, the statute of limitations has run in Oklahoma and
Texas. The United States Supreme Court has held the com-
mencement of a class action suit tolls the applicable statute
of limitations as to all members of the class. (American Pipe
& Construction Co. v. Utah, 414 U.S. 538, 38 L.Ed. 2d 713, 94
S.Ct. 756, reh. denied 415 U.S. 952, 39 L.Ed.2d 568, 94 S.Ct.
1477; and Eisen v. Carlisle & Jacquelin, supra.) However,
if in this action Kansas is without jurisdiction over class
plaintiffs in other states, this action would not toll the stat-
ute of limitations in those states.
We examine then the Kansas rules regarding class
actions. Our statutes reveal a recognition of the need for
permitting actions to be brought by a named ‘plaintiff in a
representative capacity. (G.S. 1868, ch. 80, § 38; L. 1909, ch.
182, $37; R.S. 1923, 60-413; and L. 1963, ch. 303, § 60-223,
amended by Supreme Court order dated July 17, 1969.)
In its present form the Kansas Class Action Rule, mod-
eled after the Federal Rule of Civil Procedure 23, is found
at K.S.A. 60-223. It gives the prerequisites for a class action
as follows:
“(a) Prerequisites to a class action. One or more
members of a class may sue or be sued as representa-
tive parties on behalf of all only if (1) the class is so
numerous that joinder of all members is impracticable.
(2) there are questions of law or fact common to the
class, (3) the claims or defenses of the representative
parties are typical of the claims or defenses of the class.
and (4) the representative parties will fairly and ade-
quatelv protect the interests of the class.
“(b) Class actions maintainable. An action may be
maintained as a class action if the prerequisites of sub-
division (a) are satisfied, and in addition:
“(1) The prosecution of separate actions by or
against individual members of the class would create
a risk of (A) inconsistent or varving adjudications with
B-28
{APPENDIX}
respect to individual members of the class which would
establish incompatible standards of conduct for the
party opposing the class, or (B) adjudications with
respect to individual members of the class which would
as a practical matter be dispositive of the interests of
the other members not parties to the adjudications
or substantially impair or impede their ability to pro-
tect their interests; or
“(2) the party opposing the class has acted or re-
fused to act on grounds generally applicable to the
class, thereby making appropriate final injunctive relief
or correspondingly declaratory relief with respect to
the class as a whole; or
“(3) the court finds that the questions of law or fact
common to members of the class predominate over
any questions affecting only individual members, and
that a class action is superior to other available methods
for the fair and efficient adjudication of the controversy.
The matters pertinent to the findings include: (A) The
interest of members of the class in prosecuting or de-
fending separate actions; (B) the extent and nature of
any litigation concerning the controversy already begun
by or against members of the class; (C) the appropriate
place for maintaining, and the procedural measures
which may be needed in conducting, a class action.”
Phillips argues this is not a proper case for class action
treatment under K.S.A. 60-223 (b)(3) because there are
differing questions of law and fact governirg the rights
which arise under gas leases in three states. Phillips at-
tempts to apply an overly restrictive interpretation of the
“commonality” requirement of K.S.A. 60-223 (a). (Gray
v. Amoco Production Co., supra; Sommers v. Abraham Lin-
coln Federal Savings & L. Ass’n, 66 F.R.D. 581 [E.D. Pa.
1975]; and Fertig v. Blue Cross of Iowa, 68 F.R.D. 53 [N.D.
Iowa 1974].) However. as explained later in this opinion,
" . — za -_*
B-29
(APPENDIX)
there are questions of fact and law common to the plaintiff
class. (‘See Perlman v. First National Bank of Chicago, 15
Ill. App. 3d 784, 305 N.E. 2d 236 [19731], appeal dismissed
60 Il]. 2d 529, 331 N.E. 2d 65.)
Citations to the venue statutes of Kansas and other
states are inapplicable here. (See United States v. Trucking
Employers, Inc., 72 F.R.D. 98 [D.D.C. 1976].) First, venue
is not a jurisdictional matter, but a procedural one. (Gray
v. Amoco Production Co., supra; and 77 Am. Jur. 2d, Venue,
$ 1, p. 832.) Second, this is a transitory action affecting real
property only incidentally. Because this court has-in per-
sonam jurisdiction over the defendant, venue lies in Kiowa
County. (Gray v. Amoco Production Co., supra; 20 Am. Jur.
2d, Courts, § 121, p. 476-477; and Farha v. Signal Companies,
Inc., 216 Kan. 471, 532 P.2d 1330, modified 217 Kan. 43, 535
P.2d 463.) Lastly, if the venue attack is carried to its logical
conclusion a class action could not even be maintained in
Kansas with Kansas residents because the venue statute
would require separate suits in the different counties.
After reviewing K.S.A. 60-223, we hold Kansas courts
can exercise jurisdiction over nonresident plaintiffs in a
class action if procedural due process guarantees are met.
Although no case in Kansas or any other jurisdiction is
precisely in point on the factual situation here presented,
many courts in cases from other jurisdictions have reached
out to bind nonresident plaintiffs.
In Chance v. Superior Court, 58 Cal. .2d 275, 23 Cal.
Rptr. 761, 373 P.2d 849 (1962), the California Supreme
Court held a class action to foreclose separate trust deeds
securing each of 2,139 notes was proper and did not deny
due process to unnamed noteholders, many of whom may
not have been California residents, where the class was
ascertainable and susceptible to notice, where the virtually
identical notes were created in a single transaction as part
of a speculative scheme, where all policyholders had com-
mon interests in reaching other assets, and where their
B-30
[APPENDIX]
individual lots were all in one tract which was more valu-
able as an entity.
In Daar v. Yellow Cab Co., 67 Cal. 2d 695, 63 Cal. Rptr.
724, 433 P.2d 732 (1967), the plaintiff brought a class action
on behalf of himself and all other users of the taxi cab serv-
ices in the Los Angeles area who were overcharged by
Yellow Cab. The California Supreme Court permitted this
class action to proceed although some members of the plain-
tiff class were unknown and may have been residents of
other states.
In Horst v. Guy, 211 N.W. 2d 723 (N.D. 1973), the plain-
tiff filed a class action to secure payment of a veteran’s
bonus under the North Dakota Vietnam Conflict Veterans’
Adjusted Compensation Act. The appellants claimed a class
action was inappropriate because the district court might
not have jurisdiction over all class members because some
members were outside the state of North Dakota. The North
Dakota Supreme Court held:
“.. [T]he fact that some of the members of the
| plaintiff] class may not be within North Dakota does
not remove the jurisdiction of the district court to hear
the case as a class action.” (p. 727.)
However, there the class was limited to North Dakota resi-
dents or former residents who were no longer residents of
the state.
Furthermore, the lower federal courts seem to be rela-
tively untroubled by the inclusion of nonresidents in cless7s
represented before them, although federal courts are, in the
absence of statute, generally limited in territorial reach of
personal jurisdiction to the state in which they sit. (Fed.
R. Civ. P. 4[f]; 4 Wright and Miller Federal Practice and
Procedure, § 1124 [1969]; Compare School Dist. of Phila-
delphia v. Harper & Row Publishers, Inc., 267 F. Supp. 1001.
1005 |E.D. Pa. 1967].) While the residential characteristics
B-31
[APPENDIX}
of a class are seldom discussed by federal courts, it is rea-
sonable to assume from the various factual circumstances
giving rise to federal class actions that the court’s jurisdic-
tion over the entire class is not affected by the fact some
members reside outside the state in which the court sits.
(See e.g.. Philadelphia Electric Co. v. Anaconda American
Brass Co., 43 F.R.D. 452 [E.D. Pa. 1968]; and City of Phila-
delphia v. Morton Salt Company, 248 F. Supp. 506 [E.D.
Pa. 1965].)
Many commentators agree a state court has the power
to bind a nonresident plaintiff class member. Professor
Chafee in Some Problems of Equity (1950) notes the Re-
statement of Judgments “gives the court where a class
action is properly brought jurisdiction to bind unnamed
members, even if not personally within the jurisdiction of
the court.” He recognizes the usual rules of res judicata
apply to all representative suits, but agrees that with some
limitations the propcesitions of the Restatement should
usually be applied.
Professor Moore in his treatise, 3B Moore’s Federal
Practice, § 23.11(5), in discussing the 1938 Federal Rule of
Civil Procedure 23 indicates:
“The fact that members of the class are bevond the
territorial limits of the class suit court is immaterial
as to the binding effect of the class suit judgment.”
(p. 23-2893.)
The Restatement of the Law of Judgments verbalizes
the answer to the question of nonresident plaintiff class
members without equivocation:
“$96. REPRESENTATIVE OR CLASS ACTIONS.
“Where a class action is properly brought by or
against members of a class, the court has jurisdiction
by its judgment to make a determination of issues
involved in the action which will be binding as res
B-32
[APP ENCIX)
judicata upon other members of the class, although
such members are not personally subject to the juris-
diction of the court.” (p. 118.) (Emphasis added.)
Tentative Draft No. 2 of the Restatement of the Law of
Judgments, Second, § 85 (April 15, 1975) states:
“(1) A person who is not a party to an action but
who is represented by a party is bound by and entitled
to the benefits of the rules of res judicata as though
he were a party. A person is represented by a partv
who is:
& % * * * *
“(e) The representative of a class of persons simi-
larly situated, designated as such with the approval
of the court, of which the person is a member.
“(2) A person represented by a party to an action
is bound by the judgment even though the person him-
self does not have notice of the action, is not served
with process, or is not subject to service of process.”
(pp. 56-57.)
We are persuaded the view expressed by the foregoing
authorities represents the correct rule of law to follow.
(Contra, Note, Expanding the Impact of State Court Class
Action Adjudications to Provide an Effective Forum for
Consumers, 18 UCLA L. Rev. 1002, 1019 [1971]; and Fisch.
Notice, Costs, and the Effect of Judgment in Missouri’s New
Common-Question Class Action, 38 Mo. L. Rev. 173. 209
[1973].) :
Phillips suggests a contrary conclusion is dictated bv
Klemow v. Time Incorporated, Pa. , 352 A.2d 12
(1976), cert. denied, 429 U.S. 828. 50 L.Ed. 2d 91. 97 S.Ct. 86.
There the plaintiff filed a class action suit on behalf of both
residents and nonresidents of Pennsylvania who subscribed
to Life magazine seeking to compel continued publication
of the magazine. The trial court dismissed the suit but the
— ee ae
B-33
[APPENDIX}
Pennsylvania Supreme Court, while reversing on other
grounds, indicated the class could not encompass nonresi-
dent plaintiffs. The court said in a footnote:
“Because the jurisdiction of the courts of the Com-
monwealth is territorially limited, the class may con-
sist only of Pennsylvania residents. The class may also
include non-residents who submit themselves to the
jurisdiction of the state courts. (Citations omitted.)”
(352 A.2d 16.)
However, the Pennsylvania class action statute, 12 P.S.App.
Rules of Civ. Proc. § 2230, reads:
“(a) If persons constituting a class are so numerous
as to make it impracticable to join all as parties, any
one or more of them who will adequately represent the
interest of all may sue or be sued on behalf of all, but
the judgment entered in such action shall not impose
personal liability upon anyone not a party thereto.”
(p. 241.) (Emphasis added.)
K.S.A. 60-223(c) (2) provides:
“The judgment in an action maintained as a class
action shall extend by its terms to the members of the
class, as defined, whether or not the judgment is favor-
able to them.”
It is readily apparent the Pennsylvania statutory language
is completely at variance with the Kansas statutory lan-
guage. The distinction robs Klemow of its persuasion in
Kansas. (See Donne and Van Horn, Pennsylvania Class
Actions: the Future in Light of Recent Restrictions of Fed-
eral Access?, 78 Dick. L. Rev. 460, 521-524 [1973].)
In Feldman v. Bates Manufacturing Co., 143 N.J. Super.
84, 362 A.2d 1177 (1976), the court indicated that without
“affiliating circumstances” between the forum state and the
litigation, such as a “common trust fund,”’ the judgment in
B-34
{APPENDIX}
a plaintiff class action suit could not bind nonresident class
members. It held class action certification was not appro-
priate since the judgment would not satisfy due process
with respect to the nonresidents. There the Bates Manufac-
turing Corporation had no assets in New Jersey, was not
authorized to do business in New Jersey, and the vast ma-
jority of its preferred stockholders (plaintiff class mem-
bers) were nonresidents with no contacts in New Jersey,
which had no special interest in adjudicating litigation.
However, the court noted Delaware. Bates’ domiciliary
state, was fully capable of providing a uniform determina-
tion of the issues involved. The Feldman court also applied
the doctrine of forum non conveniens which is inapplicable
here because the trial court found “this court having juris-
diction of a large physical portion of the Hugoton-Anadarko
area is a convenient forum for such action.”
Our rejection of the Klemow and Feldman cases as
applied to the facts here presented is aided by the United
States Supreme Court approval of quasi in rem class actions
which included nonresident class members, some of whom
were later found to be bound by the class action decisions.
These actions involved as the res, insurance funds. and
their holdings were found to be determinative of issues
concerning the same funds in subsequent actions. In these
actions, known as the “common fund” cases, the respective
courts found that the various plaintiffs were members of
the classes, and therefore bound by the judgments of the
prior actions, despite the fact that the prior actions were
conducted in states other than those of the plaintiffs’ resi-
dences.
Thus in Hartford Life Ins. Co. v. Ibs, 237 U.S. 662, 59
L.Ed. 1165, 35 S.Ct. 692, Ibs, a Minnesota resident who was
insured by Hartford was held bound by a prior Connecticut
state court judgment rendered against Dresser, a Connecti-
cut resident, and 30 other members of Hartford holding
certificates who brought suit “in their own behalf and in
B-35
[APPENDIX}
behalf of all others similarly situated.” Dresser’s unsuccess-
ful challenge to Hartford’s right to increase the premium
assessments against Hartford’s 12,000 members was held
binding on all policyholders, regardless of veliense. The
United States Supreme Court stated:
“*Where the parties interested in the suit are nu-
merous, their rights and liabilities are so subject to
change and fluctuations by death or otherwise, that
it would not be possible, without very great incon-
venience, to make all of them parties, and would often-
times prevent the prosecution of the suit to a hearing.
For convenience, therefore, and to prevent a failure of
justice, a court of equity permits a portion of the par-
ties in interest to represent the entire body, and the
decree binds all of them the same as if all were before
the court. The legal and equitable rights and liabilities
of all being before the court by representation, and
especially where the subject-matter of the suit is com-
mon to all. there can be very little danger but that the
interest of all will be properly protected and main-
tained.’ .. .” (p. 672.)
(See also Hartford Life Ins. Co. v. Barber, 245 U.S. 146.
62 L.Ed. 208, 38 S.Ct. 54 [Connecticut judgment binding on
Missouri resident].)
In Carpenter v. Pacific Mutual Life Insurance Co., 10
Cal. 2d 307, 74 P.2d 761 (1937), aff'd sub nom. Neblett v.
Carpenter, 305 U.S. 297, 83 L.Ed. 182, 59 S.Ct. 170, reh.
denied, 305 U.S. 675, 83 L.Ed. 437, 59 S.Ct. 355, the Cali-
fornia Supreme Court, and ultimately the United States
Supreme Court, expanded on the binding effect of judg-
ments in insurance cases on nonresident plaintiffs. The
courts upheld the right of the California Insurance Com-
missioner to liquidate and rehabilitate the Pacific Mutual
Life Insurance Company, which was insolvent and on the
brink of bankruptcy, against the wishes of the plaintiff class
of policvholders. Acknowledging the significant state inter-
B-36
{APPENDIX}
est in insurance, and relying on Hartford Life Insurance Co.
v. Ibs, supra, the California state court judgment was held
binding on North Carolina, Illinois and Wisconsin residents.
(Taylor v. Insurance Co., 214 N.C. 770, 200 S.E. 882 [1939];
Larson v. Pacific Mutual Life Ins. Co., 373 Ill. 614, 27 N.E.
2d 458 [1940], cert. denied, 311 U.S. 698, 85 L.Ed. 452, 61
S.Ct. 137; and Padway v. Pacific Mut. Life Ins. Co. of Cali-
fornia, 42 F. Supp. 569 [E.D. Wis. 1942].)
Taken together, these cases and subsequent actions in
the context of giving full faith and credit to the prior de-
cisions of other state courts clearly recognize a class action
may be binding on nonresident plaintiffs when a “common
fund” is involved and where due process requirements are
met. (See also Royal Arcanum v. Green, 237 U.S. 531, 59
L.Ed. 1089, 35 S.Ct. 724; Supreme Tribe of Ben-Hur v.
Cauble, 255 U.S. 356, 65 L.Ed. 673, 41 S.Ct. 338; Sovereign
Camp v. Bolin, 305 U.S. 66, 83 L.Ed. 45, 59 S.Ct. 35, 119
A.L.R. 478; and Sam Fox Publishing Co. v. U.S., 366 U.S.
683, 6 L.Ed. 2d 604, 81 S.Ct. 1309.)
The “common fund” cases, which seem to be uni-
versally accepted, are closely analogous to the case at bar.
Here Phillips filed a corporate undertaking guaranteeing to
refund any or all portions of the “FPC suspense money”
with interest which it collected and held pending FPC
determination of the lawful gas rates in the Hugoton-
Anadarko area rate proceedings. All gas royalty owners
had a common concern in the funds attributable to
“suspense royalties” held by Phillips. The “suspense roy-
alties” in question never did or could belong to Phillips.
If the proposed rates had been disapproved, the money
and interest, which Phillips agreed to pay by its corporate
undertaking, would have gone to the pipeline companies
who purchased the gas from Phillips. If the proposed rates
were approved, the “suspense rovalties” would go to the
gas rovalty owners.
Ae ere ee
B-37
[APPENDIX)
.Ind Phillips put the “suspense royalties” into a com-
mon trust fund, separate from its operating funds, to be
used solely to pay either the pipeline companies or the gas
royalty owners once the FPC ultimately decided the rate
increase question, this case would dovetail nicely into the
“common fund” cases. Instead Phillips commingled the
“suspense royalties” with its other cash and used the “sus-
pense royalties” to fulfill all its business obligations. In this
manner the “suspense royalties,” which never did or could
belong to Phillips, enriched Phillips at the expense of the
royalty owners. To hold that Phillips’ act of using the
money for business purposes, and not putting it into a
separate corporate account, takes this case out of the “com-
mon fund” category would reward Phillips’ action at the
expense of innocent gas royalty owners.
In Perlman v. First National Bank of Chicago, 15 II.
App. 3d 784, 305 N.E. 2d 236 (1973), a class action was
brought by bank borrowers who attacked the bank’s com-
putation of interest. The defendant bank attacked the class
action because there was no common fund. The bank as-
serted any money which the class members might claim
was commingled with other assets. The Illinois court held:
“ . . There seems no basis in law or logic for per-
mitting a class action against an individual who has
sequestered all money wrongfully acquired but deny-
ing one against an individual who has commingled it
with his other assets.
* * ® * * *
“. .. The liability or wrongdoing creates the fund.
and whatever is taken wrongfully constitutes the fund.”
(pp. 800-801).
(See also Note, Class Actions in Illinois: A Viable Alterna-
tive to Federal Rule 23?, 8 J. Marshall J. Prac. and Proc.
113 [1974].)
B-38
‘APPENOIX)
Phillips kept accurate records on this matter in the
memory bank of its computer and our holding will not
unduly burden them.
While the authorities are conflicting on whether a class
action may bind nonresident defendants, where a “common
fund” may fairly be established, no question should be
raised as to the binding effect of a class on nonresident
plaintiffs.
Class actions with nonresident plaintiffs may be
brought in Kansas only if due process guarantees are met.
We now examine our class action statute and the procedures
followed to insure that due process was provided.
Initially the query must be whether reasonable notice
was given to all class members. The notice provisions of
K.S.A. 60-223(c) differ slightly from the federal notice
provisions in Federal Procedure Rule No. 23. K.S.A. 60-
223(c) (2) reads in part:
“To afford members of the class an opportunity
to request exclusion, the court shall direct that reason-
able notice be given to the class, including specific
notice to each member known to be engaged in a sepa-
rate suit on the same subject matter with the party
opposed to the class.”
K.S.A. 60-223 (d) (2) reads in part:
“In the conduct of actions to which this section ap-
plies, the court may, without limitation, make appro-
priate orders: ... (2) requiring, for the protection of
the members of the class or otherwise for the fair
conduct of the action, that notice be given in such
manner as the court may direct to some or all of the
members of any step in the action, or of the proposed
extent of the judgment, or of the opportunity of mem-
bers to signify whether they consider the representa-
tion fair and adequate, to intervene and present claims
or defenses. or otherwise to come into the action... .”
B-39
[APPENDIX]
Federal courts have attached particular significance to
Rule No. 23’s requirement of notice in common question
actions due to the finality afforded them. Notice to those
whose legal relations are to be affected by a pending action
has always been a fundamental requirement of due process.
As the United States Supreme Court suggested in Mullane
v. Central Hanover Tr. Co., 339 U.S. 306, 94 L.Ed. 865, 70
S.Ct. 652, this elementary notion applies even when the
interested parties are so numerous that the task of notifica-
tion is a complex one. In fact, it is Mullane’s constitutional
standard for notice that is incorporated into Rule No. 23:
“the best notice practicable under the circumstances, in-
cluding individual notice to all members who can be identi-
fied through reasonable effort,” although some suggest Rule
No. 23’s requirement of notice does not involve constitu-
tional due process. (See Eisen v. Carlisle & Jacquelin,
supra.) We need not enter into a discussion on this matter
hecause of the notice given in this case.
Here the notice given fully comports with Federal Rule
No. 23, K.S.A. 60-223 and any possible constitutional re-
quirements. Phillips has maintained extensive records in
connection with the “suspense royalties.” All gas royalty
owners and their interests are known. There are no un-
named or unknown plaintiff class members. The representa-
tive plaintiff prepared the notices, quoted earlier, which
were distributed by Phillips during a monthly payment
mailing to all royalty owners in the Hugoton-Anadarko area
then receiving gas royalties. Notices were also sent by first
class mail by the plaintiff to former gas royalty owners.
Notices were also published in seven area newspapers.
Having Phillips mail the notice during its monthly
mailing does not present error here cognizable. This pro-
cedure may not comply with the dictates of Eisen v. Carlisle
& Jacquelin, supra, although that case does note an excep-
tion where a fiduciary duty preexisted between the plaintiff
and the defendant, as in a shareholder derivative suit.
B-40
TAPPER UIX |
The record discloses no objection by Phillips at the
trial because it was required to mail the notice. It is well
settled an issue presented for the first time on appeal will
not be considered by this court. (In re Estate of Barnes, 218
Kan. 275, 542 P.2d 1004; and Landrum v. Taylor, 217 Kan.
113, 535 P.2d 406.) In view of our favorable decision to the
class, which may recover the cost of notification, this ren-
ders moot Phillips’ appellate objection to mailing notice.
(See Lamb v. United Security Life Company, 59 F.R.D. 25
[S.D. Iowa 1972]; and Ostapowicz v. Johnson Bronze Com-
pany, 54 F.R.D. 465 [W.D. Pa. 1972].)
Phillips argues our notice statute which allows a party
to “opt-out” of a class action suit cannot be used to “boot-
strap” jurisdiction of the court. Suffice it to say the federal
rules and our rule regarding class actions are the result of
a conscious choice to decide between provisions allowing
parties to “opt-out” or “opt-in.” A determination was made
to follow the “opt-out” procedure to bind the greatest num-
ber of people. (See Proposed Rules of Civil Procedure, 39
F.R.D. 69, 105 [1966]; Cohn, The New Federal Rules of
Civil Procedure, 54 Geo. L.J. 1204, 1226 [1966]; and Staff
Studies Prepared for the National Institute for Consumer
Justice on Consumer Class Action, pp. 138, 149 [1972].)
Phillips argues our class action statute does not give
the putative class member an absolute right to “opt-out”
as does Federal Rule No. 23 (c)(2)(A). K.S.A. 60-223(c)
(2) provides in pertinent part:
“__ [T]he court shall exclude those members who,
by a date to be speciped, request exclusion, unless the
court finds that their inclusion is essential to the fair
and efficient adjudication of the controversy and states
its reasons therefor. . . .’ (Emphasis added.)
Phillips argues by removing the choice of the putative
class member to “opt-out” of the class, it was the intent of
the rule to apply to persons over whom the court already
B-41
[APPENDIX}
had jurisdiction. We do not think such a convoluted conclu-
sion logically follows. The language simply gives the court
the power to deny exclusion to class members, be they resi-
dents or nonresidents of Kansas, whose inclusion is essential
to the fair and efficient adjudication of the ‘controversy.
However, we need not examine this section in great detail.
(See Staff Studies Prepared for the National Institute for
mang Justice on Consumer Class Action, supra at 145-
146.)
Here three Texas residents filed an untimely request
for exclusion. Phillips filed a motion to deny the request
for exclusion alleging in part the three men would file a
class action suit in Texas. The trial court sustained Phillips’
motion. However, an untimely request for exclusion could
be denied under either the federal or Kansas class action
statutes without raising constitutional issues.
. We hold reasonable notice was given to satisfy jurisdic-
tional and constitutional due process requirements. (Mul-
lane v. Central Hanover Tr. Co., supra.)
Second, we must examine the representation accorded
the resident and nonresident plaintiffs by the named repre-
sentative.
K.S.A. 60-223(d) gives the trial court the authority to
make appropriate orders as follows:
“. .. (1) Settling the course of proceedings or pre-
scribing measures to prevent undue repetition or com-
plication in the presentation of evidence or argument:
(2) requiring, for the protection of the members of
the class or otherwise for the fair conduct of the action.
that notice be given in such manner as the court may
direct to some or all of the members of any step in the
action, or of the proposed extent of the judgment, or
of the opportunity of members to signify whether thev
consider the representation fair and adequate, to inter-
vene and present claims or defenses. or otherwise to
B-42
[APPENDIX }
come into the action; (3) imposing conditions on the
representative parties or on intervenors; (4) requiring
that the pleadings be amended to eliminate therefrom
allegations as to representation of absent persons, or
to include such allegations, and that the action in
either case proceed accordingly. The orders may be
combined with an order under K.S.A. 60-216, and may
be altered or amended as may be desirable from time
to time.”
Furthermore, K.S.A. 60-223(e) insures adequate represen-
tation by controlling dismissals or compromises.
Where inadequate representation is established, courts
have denied res judicata effect to class action judgments.
(See Research Corp. v. Pfister Associated Growers, Inc., 301
F. Supp. 497 [N.D. Ill. 1969]; and Gonzales v. Cassidy. 474
F.2d 67 [5th Cir. 1973].)
The class action is premised on the theory that mem-
bers of the class who are not before the court can justly
be bound because the self-interest of their representative
coincides with the interest of the members of the class and
will assure adequate litigation of the common issues. Where
the interests of absent class members have not been ade-
quately represented, binding them by the class judgment
would seem to offend the requirements of due process.
(Hansberry v. Lee, supra.) Notice to absent members of
the class in this regard is particularly important, for it is
the greatest single safeguard against inadequate representa-
tion. (Mullane v. Central Hanover Tr. Co., supra at 214.)
Here we find adequate representation has been ac-
corded the plaintiff class members by their representative
through his attorneys who have done a superior job in
bringing this action and in arguing and briefing the law
on this appeal.
B-43
{APPENDIX}
We hasten to add, this opinion should not be read as an
invitation to file nationwide class action suits in Kansas and
overburden our court system. Concepts of manageability in
terms of our Kansas class action statute, the nature of the
controversy and the relief sought, the interest of Kansas
in having the matter determined, and the class size and
complexity will have to be applied. (See Note, Consumer
Class Actions with a Multistate Class: A Problem of Juris-
diction, supra at 1438-1439.) A court should also give careful
consideration, as we have attempted to do, to any possible
conflict of law problems. When liability is to be determined
according to varying and inconsistent state laws, the com-
mon question of law or fact prerequisite of K.S.A. 60-223 (a)
(2) will not be fulfilled.
An excellent example of a factual situation in which a
trial judge applying our class action statute should deny
certification of a class action, where nonresident plaintiff
class members are involved, is presented in Feldman v.
Bates Manufacturing Co., supra.
The manageability of the class action herein is demon-
strated in various ways. There are no basic issues of fact,
the material facts having been stipulated by the parties and
made a part of the pretrial order. The names, addresses and
suspense royalty amounts for each of the royalty owners
were readily available in Phillips’ records. In fact, the class
is more manageable with nonresidents of Kansas included
because Phillips would be required to take an extra step in
separating nonresident royalty owners in its records. Phil-
lips treated all royalty owners in the Hugoton-Anadarko
area alike, regardless of residency, particular lease provi-
sions or royalty agreements. (See Phillips’ notices to roy-
alty owners heretofore quoted as stipulated by. the parties
herein.) Actually, it would be difficult to imagine a more
manageable plaintiff class action.
Kansas has a legitimate interest in adjudicating the
common issue herein because Kansas comprises the largest
B-44
![APPENODI!IX}
physical area included in the FPC designated Hugoton-
Anadarko area where Phillips is doing business and pro-
ducing gas which it sells in interstate commerce. All of the
gas royalty owners in the Hugoton-Anadarko area have
leases with Phillips and a common interest in the monev
collected by Phillips as “suspense royalties” from the sale
of gas in the designated area. It was the same FPC regu-
lation that caused and permitted Phillips to collect the
“suspense royalties,” and the same FPC Opinion No. 586
pursuant to which the “suspense royalties’ were paid out
to the royalty owners in the area. All of the gas rovaltv
owners in the Hugoton-Anadarko area have a right in com-
mon with each other, in the equivalent of a common fund.
to claim damages for commingling and use of the “suspense
royalties” by Phillips, payable as interest, and they have a
contact with Kansas by reason of such common interest.
Phillips contends the members of the class within the
court’s jurisdiction are not so numerous as to make their
joinder impracticable. Phillips argues only 218 class mem-
bers are Kansas residents and of this number only 128
signed a gas royalty agreement of the same type under
which Althea Shutts was paid her money in December of
1972. Phillips does not indicate. nor does the record disclose,
how many gas royalty leases covering Kansas land are in-
volved. In view of what has heretofore been said, there is
no need to examine this contention. (However, see Williams
v. Humble Oil & Refining Company, 234 F. Supp. 985 [E.D.
La. 1964] [joinder of 76 persons impracticable]; For v.
Prudent Resources Trust, 69 F.R.D. 74 [E.D. Pa. 19751 [ioin-
der 148 limited partners impracticable]; Sabala v. Western
Gillett, Inc., 362 F.Supp. 1142 [S.D. Tex 1973] [class began
with 39 and twelve opted-out]: and Republic Nat. Bank of
Dallas v. Denton & Anderson Co., 68 F.R.D. 208 [N.D. Tex
1975].)
Phillips argues this is not a proper class action case
under K.S.A. 60-223(b)(1). We think this point is imma-
B-45
[APPENDIX]
terial. The trial court treated it as a K.S.A. 60-223(b) (3)
class action, despite its class order finding number four
which was relevant to a 60-223(b) (1) class action.
The appellant contends the trial court erred in holding
that Phillips had been unjustly enriched by retaining cer-
tain increased proceeds of gas sales, subject to refund under
appropriate FPC regulations, until final determination by
the FPC of the just and lawful rate for such gas sales.
The trial court awarded interest on the grounds of
unjust enrichment as reflected in its tenth conclusion of
law, heretofore quoted. The doctrine of unjust enrichment
prevents one from profiting or enriching himself at the
expense of another contrary to equity. But there must be
some specific legal principle or situation which equity has
established or recognized to bring a case within the scope
of the doctrine. (Anderson v. Anderson, 155 Kan. 69, 72.
123 P.2d 315.)
The appellant contends, and we agree, its retention of
the suspense royalties pending FPC determination was law-
ful. (Ashland Oil & Refining Company v. Staats, Inc., 271 F.
Supp. 571 [D. Kan. 1967]; Boutte v. Chevron Oil Company,
316 F. Supp. 524 [E.D. La. 1970], aff'd 442 F.2d 1337 [5th
Cir. 1971]; and Phillips Petroleum Company v. Adams, 513
F. 2d 355, 361-362 [5th Cir. 1975], cert. denied 423 U.S. 930,
46 L.Ed. 2d 259, 96 S.Ct. 281.) However, that does not mean
Phillips owes no interest as a result of the long retention of
the FPC “suspense royalties.” (Boutte v. Cherron Oil Com-
pany, supra.) ;
This identical issue was presented in Lightcap v. Mobil
Oil Corporation, 221 Kan. 448, 562 P.2d 1. (On June 15, 1977,
Mr. Justice White of the United States Supreme Court
stayed the mandate of this court in that case.) In Lightcap,
Mobil was paying gas royalties on the basis of old contract
rates of 8.74 cents and 7.15 cents per Mcf while collecting
increased rates. Mobil and its predeccssors made active use
B-46
[APPENDIX]
of the plaintiffs’ monies collected and plaintiffs were de-
prived of that use. Although this court was not in complete
agreement on other aspects of that opinion, it unanimously
held:
“Where a party retains and makes actual use of
money belonging to another, equitable principles re-
quire that it pay interest on the money so retained and
used.” (Syl. 12.)
As previously indicated the FPC may order Phillips or
any other natural gas companies to refund, with interest,
the portion of such increased rates or charges found not
justified by the FPC. (15 U.S.C. §717c[e]; and 18 C.F.R.
$ 154.102[c].) The rate of interest in the event a refund is
ordered is presently seven percent (7%) per annum for all
rate filings tendered prior to October 10, 1974. (18 C.F.R.
$ 154.102[c].) -
In the case at bar, beginning on June 1, 1961, Phillips
withheld the share of the class members of the increased
gas prices subject to refund. Thereafter, while the FPC
slowly ground out FPC Opinion No. 586, Phillips deposited
the increased rate monies in its general accounts and com-
mingled them with other funds without giving further
notice to the royalty owners. What is significant is these
gas royalty suspense monies never did or could belong to
Phillips. If the FPC disapproved the proposed increase rates
the pipeline companies (gas purchasers of Phillips) would
receive this suspense money and the interest which Phillips
had agreed to pay by its corporate undertaking. If the FPC
approved the proposed increase rate, the “suspense royal-
ties” would go to the gas royalty owners.
Phillips held a sizable amount of money during this
period, On or about December 7, 1972, Phillips mailed ap-
proximately $5,700,000 in additional gas royalties due gas
royalty owners by virtue of the finality of FPC Opinion No.
586. A case comment on this subject at 54 Tex. L. Rev. 847
(1976) noted:
B-47
[APPENDIX]
“. .. Phillips had collected $7,500,000 in additional
proceeds from the Permian Basin area under FPC Op.
No. 662 and currently collects $500,000 per month sub-
ject to refund under FPC Op. No. 669, which relates
to nationwide rates. Petitioner’s Brief for Certiorari
at 9, Phillips Petroleum Co. v. Adams, 96 S.Ct. 281
(1975). Five major oil companies paid approximately
$4.5 million in suspense money royalties alone (nor-
mally one-eighth of the amount paid to lessees) to
16,000 Kansas and Oklahoma owners under the same
FPC rate case in Adams. Sunday Oklahoman, Jan. 11,
1976, $B, at 2, col. 1. A Kansas state court recently
awarded approximately $1.5 million in interest pay-
ments to royalty owners. Nix v. Northern Natural Gas
Producing Co., No. 3116 (Dist. Ct. Grant County, Kan.,
Jan. 8, 1976). The potential problems grow daily as the
FPC encourages the filing of rate increases to provide
an incentive to increase the supply of natural gas... .”
(fn. 54. pp. 856-857.)
Furthermore, Phillips did not permit the suspense roy-
alty money collected to remain idle. O. W. Armstrong,
Treasurer of Phillips Petroleum Company, testified in part
as follows:
“. . . Phillips’ short term investments ranged from
89.7 million dollars in 1964 up to 338.5 million dollars
in 1972... . Phillips’ total assets went up from $1,806.-
000,000.00 in 1963, to $3,269,000,000.00 in 1972, with the
exception of 1970 when there was a slight drop... .
Cash in excess of a given amount would be surplus
cash and is invested . . . the approximately $6,000,000.00
in F.P.C. suspense money was a part of Phillips’ cash,
... all of Phillips’ cash being in one pot, . . . not segre-
gated for anv purpose... .”
Phillips made substantial profit during the years 1961-
1973. The net profit ranged from $113,000,000 to $132.000,000
B-48
[APPENDIX]
during the period in question and stockholders’ equity in-
creased from $1,205,000,000 in 1962 to over $1,749.000,000
in 1971.
Phillips’ use of the “suspense royalties” was clearly a
sound and profitable business practice. We cannot condemn
Phillips for using this money because this was apparently
not repugnant to the FPC regulatory scheme, or repugnant
to Phillips’ contractual relations with the gas purchasers
under federal case law. Nor do we condemn Phillips for
the FPC delay. However, we do not believe that Phillips
may enrich itself in the absence of any contractual sanction
or seize upon the procedural complexities of the FPC to
avoid responsibility for an appropriate measure of damages.
expressed in terms of interest. In Shapiro v. Kansas Public
Employees Retirement System, 216 Kan. 353, 357, 532 P.2d
1081, the court enunciated the following general principle:
“Interest has been defined as the compensation al-
lowed by law or fixed by the parties for the use, deten-
tion, or forbearance of money. In our society todav
money is a commodity with a legitimate price on the
market and loss of its use, whether occasioned by the
delay or default of an ordinary corporation, citizen,
state or municipality should be compensable.”
(See also Lightcap v. Mobil Oil Corporation, supra at 468-
469.)
In passing we also note a long line of federal cases
have concluded Texas law permits—and equity requires—
the award of interest on suspense royalties under s.milar
circumstances. (Phillips Petroleum Company v. Adams, 513
F. 2d 355, 365 [5th Cir. 1975], cert. denied, 423 U.S. 930, 46
L.Ed. 2d 259, 96 S.Ct. 281; First Nat. Bank of Borger v. Phil-
lips Petroleum Co., 513 F. 2d 371 [5th Cir. 1975], cert. de-
nied, 423 U.S. 930. 46 L.Ed. 2d 259, 96 S.Ct. 281; Phillips
Petroleum Co. v. Riverview Gas Compression Company,
513 F.2d 374 [5th Cir. 1975], cert. denied, 423 U.S. 930. 46
B-49
[APPENDIX)
L.Ed. 2d 259, 96 S.Ct. 281; Phillips Petroleum Co. v. Hazel-
wood, 534 F.2d 61 [5th Cir. 1976]; Fuller v. Phillips Petro-
leum Co., 408 F. Supp. 643 [N.D. Tex. 1976]; and Phillips
Petroleum Co. v. Hazelwood, 409 F. Supp. 1193 [N.D. Tex.
1975}.) :
In addition, the Texas Civil Court of Appeals recently
awarded interest on suspended royalties in Stahl Petroleum
Co. v. Phillips Petroleum Co., 550 S.W. 2d 360 (Tex Civ.
App. No. 8762, filed April 6, 1977.) This case also arises out
of the Hugoton-Anadarko area and the issuance of FPC
Opinion No. 586, While recognizing Phillips Petroleum
Company v. Adams, supra, the Texas Civil Court of Ap-
peals relied on the terms of the royalty agreement and the
Texas interest statute, rather than unjust enrichment, to
require the payment of pre-judgment interest on the sus-
pended royalties.
An examination of the royalty agreement set forth in
the record herein reveals the lessee (Phillips) contracted
to pay and the lessor (royalty owner) contracted to receive
a percentage of the “weighted average price per Mcf re-
ceived by lessee from all sales of gas delivered within” a
designated area during any calendar month. While the term
“received” is not defined in the contract, giving the term
its ordinary meaning, Phillips expressly contracted to pay
a percentage of the price received for the sale of gas on
which month-by-month payments to the royalty owner
were to be based. Although the money received by Phillips
for the sale of gas in excess of the established rates pending
FPC determination was subject to possible refund, none
of the excess was contractually excluded from the price
received by Phillips and on which payment to the royalty
owner was contractually based. There was no rule or regu-
lation which prohibited Phillips from including the excess
in the amount on which calculation of payment to the rov-
alty owner on a month-to-month basis was made. (Stahl
Petroleum Co. v. Phillips Petroleum Co., supra.) But if
B-50
[APPENCIX]
Phillips chose to withhold payments of contractually owing
“suspense royalties” pending FPC approval, as authorized
by prior federal case law, that did not relieve Phillips of
its contractual obligation to pay the price received with
interest for the period of time the suspense money was held
and used by Phillips.
Oklahoma has no decision allowing interest on “sus-
pense royalties.” However, several Oklahoma decisions hold
that interest may be awarded on equitable grounds where
necessary to arrive at a fair compensation. (Smith v. Owens,
397 P.2d 673 [Okla. 1963]; and First Nat. Bank & T. Co. v.
Exchange Nat. Bank and T. Co., 517 P.2d 805 [Okla. App.
1973].)
Furthermore, the United States Supreme Court has
noted the imposition of interest on refunds ordered by the
FPC is not an inappropriate means of preventing unjust
enrichment. (United Gas v. Callery Properties, 382 U.S. 223,
15 L.Ed. 2d 284, 86 S.Ct. 360.)
Based on the foregoing authorities we hold in this case
that interest on suspended royalties may be recovered for
the period of time such royalties remained in the control
of, and were available for use by, the gas producer (Phil-
lips) during the pendency of FPC proceedings and related
litigation regarding the determination of applicable lawful
rates for gas sales. and litigation regarding the determina-
tion of issues involved in this appeal.
Having determined that interest can be awarded, tke
question becomes what rate of interest should be applicd.
The district court found:
“The statutory rate of interest herein in Kansas,
Oklahoma and Texas is six per cent per annum and is
allowed as the proper rate of interest to be applied to
the suspended royalties herein from time of receipt
until date of judgment herein with interest com-.
pounded on an annual basis.”
B-51
[APPENDIX}
Phillips contends the trial court erred in holding that
under the facts in this case it was proper to award com-
pound interest. It argues a (iegal) (statutory) rate of six
percent (6%) simple interest must apply under the laws of
Kansas, Texas and Oklahoma.
The appellee has cross-appealed contending the trial
court erred in failing to consider inflation rates and profits
so as to place the owners at least on a par with gas pur-
chasers.
In Lightcap v. Mobil Oil Corporation, supra, this court
resoived the matter. There the court noted:
“Here Mobil and its predecessor made active use of
plaintiffs’. money, and plaintiffs were deprived of that
use. Under the reasoning of the foregoing cases plain-
tiffs are entitled to be compensated for their loss. Mobil
was obligated by FPC order to pay Northern 6% inter-
est on Northern’s share of the ‘impounded’ monev:
equitable principles require that the royalty owners
receive the same treatment as to their share... .” (p.
469.) (Emohasis added.)
In the instant case Phillips was obligated by FPC order to
pay gas purchasers seven percent (7%) until September
18, 1970, and thereafter eight percent (8%) interest on the
gas purchasers’ share of the suspense monies. Here equi-
table principles require, and contractual principles acctate,
that the royalty owners receive the same treatment as to
their share.
Phillips cites the interest laws of Kansas, Texas and
Oklahoma. K.S.A. 16-201 provides:
“Creditors shall be allowed to receive interest at the
rate of six percent per annum, when no other rate of
interest is agreed upon, for any money after it becomes
due; for money lent or money due on settlement of
account, from the day of liquidating the same and
B-52
[APPENDIX]
ascertaining the balance; for money received for the
use of another, and retained without the owner’s
knowledge of the receipt; for money due and withheld
by an unreasonable and vexatious delay of payment or
settlement of accounts; for all other money due and
to become due for the forbearance of payment whereof
an express promise to pay interest has been made; and
for money due from corporations and individuals to
their day or monthly employees, from and after the
end of each month, unless the same shall be paid within
fifteen days thereafter. "(Emphasis added.)
Texas Rev. Civ. Stat., Art. 5069-1.03 (1971) states:
“When no specified rate of interest is agreed upon
by the parties, interest at the rate of 6% per annum
shall be allowed on all written contracts ascertaining
the sum payable, from and aiter the time when the
sum is due and payable; and on all open accounts, from
the first day of January after the same are made.”
(Emphasis added. )
Oklahoma Stat., tit. 15, § 266 (1966) states:
“The legal rate of interest shall not exceed six per
cent in the absence of any contract as to the rate of
interest, and by contract, parties may agree upon any
rate not to exceed ten per cent per annum. Said rates
of six and ten per cent shall be respectively, the legal
rate and the maximum contract rates of interest.”
(Emphasis added.)
All these statutes refer to situations where there is no
agreement as to the rate of interest. Here that situation does
not exist.
We are dealing with “suspense royalties” which never
could or would belong to Phillips. This was the equivalent
of a common fund which was accumulated and used by
B-53
[APPENDIX]
Phillips. After the FPC Opinion No. 586 was announced the
monies accumulated by Phillips in this fund were later
divided between the gas purchasers and the gas royalty
owners. In other words, Phillips was a stakeholder who
retained the fund which it used for its own ‘benefit. (See
Phillips Petroleum Company v. Adams, supra.) What justi-
fies the payment of seven percent (7%), and later eight
percent (8%), interest on part of this common fund which
Phillips expressly contfacted and agreed to pay to the gas
purchasers, while paying only six percent (6%) interest to
the gas royalty owners, is impossible to discern. If the FPC
had denied all of Phillips’ rate increase applications, Phillips
would have had to pay seven percent (7% ), and later eight
percent (8%), interest to the gas purchasers pursuant to
its express agreement and corporate undertaking with the
FPC. Thus, Phillips has made an express agreement, with
regard to the monies accumulated in the suspense fund bv
Phillips, to pay seven percent (7% ), and later eight percent
(8% ) interest, as ultimately determined by the FPC Opin-
ion No. 586. a
Due to limitations on the FPC jurisdiction, it could not
provide in its order that interest be paid to the gas royaltv
owners. (Mobil Oil Corporation v. Federal Power Commis-
sion, 463 F. 2d 256 |D.C. Cir. 1972], cert. denied, 406 U.S.
976, 32 L.Ed. 2d 676, 92 S.Ct. 2413; and Lightcap v. Mobil
Oil Corporation. supra at 470, 471.) However, the FPC did
require Phillips to agree to pay interest on the suspense
monies they held, which agreement the members of the
plaintiff class herein assert as an appropriate measure of
damages, expressed in terms of interest, for the com-
mingling and use of the suspense monies by Phillips.
This answers Phillips’ contention that Columbian Fuel
Corp. v. Panhandle Eastern Pipe Line Co., 176 Kan. 433, 271
P.2d 773 and other cases prevent the payment of interest
on unliquidated sums. In Columbian Fuel an interim rate
increase was approved by the Kansas Corporation Commis-
B-54
[APPENDIX]!
sion on natural gas sold to the buyer. The buyer was per-
mitted to withhold the increase upon securing a bond. The
seller brought suit seeking to collect interest on the amount
withheld. This court noted the temporary nature of the
Kansas Corporation Commission order and disallowed in-
terest. The court held:
“In the absence of an agreement therefor interest
may not be recovered on a claim as long as the validity
of the claim is unadjudicated and the amount on which
interest could be computed, if the claim be declared
valid, remains wholly uncertain and unliquidated.”
(Syl. 5.)
Here, of course, an agreement for the payment of inter-
est on the part of Phillips is clearly present. Further, the
suspended payments in Columbian Fuel did not necessarily
belong to another. Here the “suspense royalties” belong
either to the royalty owners or the pipeline companies.
Thus we reaffirm our decision in Lightcap, supra at 466,
distinguishing Columbian Fuel.
Having determined that seven percent (7%), and later
eight percent (8°), interest can be awarded, we must de-
termine whether the actions of the royalty owners have
waived their right to interest. The appellant contends the
trial court erred in holding that the plaintiff class, by refus-
ing to accept the increased proceeds from gas sales from
Phillips under an obligation to refund the same, if Phillips
was ultimately obligated to do so, did not waive any claim
to interest on such proceeds, or vere not estcpped frem
making such claim.
Phillips relies on its July 1961, notice sent to Althea
Shutts and all other royalty owners in the Hugoton-Ana-
darko area which provided in pertinent part:
“Interest owners desiring to receive payments com-
puted currently on the full sums being collected may
B-55
[APPEND!X)}
arrange to do so by furnishing Phillips Petroleum Com-
pany acceptable indemnity to cover their proportionate
part of any required refunds, plus the required in-
terest.”
The seventeen royalty owners who accepted Phillips’
offer to reimburse Phillips with interest for any “suspense
royalties” which the FPC might require Phillips to refund
to the gas purchasers are not members of the plaintiff class.
Phillips contends it would be inequitable under these cir-
cumstances to require it to now pay interest to these roy-
alty owners who refused to accept the money under the
same risk Phillips undertook.
Where, as here, Phillips has expressly contracted to
pay a percentage of the price received for the sale of gas
on which month-by-month payments to royalty owners
were to be based, and the amount received by Phillips for
the sale of gas in excess of the established rates pending
FPC determination, although subject to possible refund,
was not contractually excluded from the price received,
Phillips is in no position to unilaterally impose burdensome
conditions upon the royalty owners precedent to fulfilling
its contractual commitment albeit permissive until final
FPC approval of rate increase applications. Furthermore,
the notices sent by Phillips to its gas royalty owners indi-
cated Phillips was not unduly concerned with security for
the possible return of “suspense royalties” paid out. The
notice sent royalty owners by Phillips on or about Novem-
ber 25, 1970, informed royalty owners it was giving effect
to full ceiling rate levels established by FPC Opinion No.
586 in the payment of royalty, although the opinion had not
become final. In the notice Phillips further informed royalty
owners it would expect reimbursement in full for any over-
payments resulting in the reduction of levels relied upon
should there be a change in the FPC Opinion No. 586, and
that Phillips would withhold from subsequent payments
of royalty on gas or oil, or both, at its election, any overpay-
B-56
[APPENDIX]
ment occasioned thereby. The royalty owner was told ac-
ceptance of the check would constitute consent to such
recovery of overpayments.
It is apparent Phillips’ previous imposition of burden-
some conditions upon royalty owners for payment of royalty
at ceiling rate levels pending FPC approval of gas rate
increases, was designed to accomplish precisely what the
facts disclose. Virtually none of the rovalty owners com-
plied with the conditions, thereby leaving the “suspense
royalties” in the hands of Phillips as stakeholder to use at
its pleasure in the operation of its business over the long
period of time the FPC retained jurisdiction over Phillips’
rate increase applications.
Under the circumstances we have no hesitance in hold-
ing that the royalty owners in the plaintiff class did not
waive any claim to interest on “suspense royalties” held by
Phillips, by declining to honor the burdensome conditions
unilaterally imposed by Phillips for their monthly payment.
For the same reasons the royalty owners are not estopped
to assert their claim in this action. Phillips’ assertion of
equity, by arguing it would be inequitable to require Phii-
lips to now pay interest to these persons who refused to
accept the money under the same risk that Phillips held it,
is not impressive. It distorts the facts and ignores Phillips’
admissions. The conditions imposed by Phillips were far
more stringent than the corporate undertaking Phillips filed
with the FPC.
Phillips argues when the plaintiff class members ac-
cepted the December 7, 1972, payment of suspense royalties
and negotiated Phillips’ checks, this extinguished the debt
and any right that might have existed to sue for interest
thereon, and that the trial court erred in holding to the
contrary. Phillips alleges they do not rely on accord and
satisfaction or an estoppel, but rather on the rule that pay-
ment of the principal sum is a legal bar to a subsequent
action for interest.
B-57
[APPENDIX]
The notice Phillips unilaterally mailed to all of its roy-
alty owners on or about December 7, 1972, enclosing checks,
to cover payment based upon gas proceeds previously held
in suspense, said nothing about interest or how long the
money had been held or used by Phillips. However, as pre-
viously indicated, Phillips is liable for interest on these
suspense royalty funds which it retained as a stakeholder
and used in the operation of its business. The payment of
these funds to the plaintiff class members, instead of ex-
tinguishing the debt, constituted only a partial payment
on an interest-bearing debt. This situation invokes applica-
tion of the so-called “United States Rule,” which provides
that in applying partial payments to an interest-bearing
debt which is due, in the absence of an agreement or statute
to the contrary, the payment should be first applied to the
interest due. (45 Am. Jur. 2d, Interest and Usury, § 99, pp.
88-89; and 47 C.J.S., Interest, § 66, pp. 72-73.)
Kansas approved this rule in Christie v. Scott, 77 Kan.
257, 94 Pac. 214, in determining appellate jurisdiction, and
cited the rule with approval in Jones v. Nossaman, 114 Kan.
886, 221 Pac. 271, 37 A.L.R. 317.
The “United States Rule” is also followed in Oklahoma
and Texas. (Landess vy. State, 335 P.2d 1077 [Okla. 1958];
Straus v. Brooks, 126 S.W. 2d 542 [Tex. Civ. App. 1939],
rev'd on other grounds, 136 Tex. 141, 148 S.W. 2d 393 [Civ.
App. 1941]; and J. I. Case Co. v. Laubhan, 64 S.W. 2d 1079
[Tex. Civ. App. 1933].)
Thus, we conclude, acceptance of the so-called “prin-
cipal sum,” by the royalty owners is not a bar to their claim
in this case. Phillips raised and lost a similar argument in
Phillips Petroleum v. Riverview Gas Compression Co., 409
F. Supp. 486 (N.D. Tex. 1976), the seque! to Phillips Petro-
leum Co. v. Adams, supra.
In the exercise of equitable powers our court has re-
fused to bar relief under theories of ratification, waiver or
B-58
[APPENDIX]
estoppel where one due to unequal bargaining power or
knowledge accepts a check in reliance on a fraudulently in-
duced impression by the pavor. (Prather v. Colorado Oil &
Gas Corp., 218 Kan. 111, 542 P.2d 297; and cases cited
therein. )
Phillips argues the Oklahoma class members are not
entitled to recovery by reason of Okla. Stat. Ann.. tit. 23. $8
(1951), which provides: “Accepting payment of the whole
principal, as such. waives all claim to interest.” In the in-
stant case there is no indication the principal was accepted.
as such. We further note Oklahoma has not strictly con~
strued this statute. (Webster Drilling Co. v. Sterling Oil of
Oklahoma, Inc., 376 P.2d 236 [Okla. 19621.)
An identical statute in California was said to be a rule
of construction to be applied between parties dealing at
arm’s length, where their agreement is to be inferred from
the fact that the principal is tendered and accepted, and
the statute was held to have no application where the con-
ditions of payment are such that the creditor has no opnor-
tunity to assert his claim for interest at the time of payment.
(McConnell v. Pacific Mutual Life Ins. Co., 205 Cal. App. 2d
469, 24 Cal. Rptr. 5 [1962].) Here the individual class mem-
bers had no practical opportunity to assert their claim for
interest under the circumstances of Phillips’ payout.
We therefore hold on equitable principles Phillips is
required to pay its royalty owners herein seven percent
(7% ) per annum simple interest on suspense rovalties frem
the date of receipt of suspense rovalties hv Phillins nti!
October 1, 1970 (the effective date of FPC Opinion No.
586). and eight percent (8) simvle interest per annum
thereafter until the pavout to the rovalty owners on or
about December 7, 1972. Applving the “United States Rule”
on partial payments, after the pavout there was still an
unpaid principal sum due equal to the total principal due
plus accrued interest, less the payout. Assuming proper
calculations, this amount. although principal. would equal
B-59
[APPENDIX]
the accrued interest on the date of the payout. From De-
cember 7, 1972, on until the date of judgment (July 29,
1976) equitable principles and Phillips’ contractual under-
taking require Phillips to pay its royalty owners herein
eight percent (8%) per annum simple interest on the un-
paid principal sum (accrued interest on date of payout)
plus the unpaid principal sum; and thereafter our post-
judgment interest statute, K.S.A. 16-204, requires payment
of eight percent (8%) per annum simple interest for the
benefit of the royalty owners on the total amount of the
judgment until paid.
Accordingly, the judgment of the lower court is af-
firmed in part and modified in part, and the case is
remanded for further proceedings consistent with the fore-
going opinion.
Se eee eee ee rrr we
APPENDIX C
—_—_———
K.S.A. § 60-223
Class actions. (a) Prerequisites to a class action. One
or more members of a class may sue or be stied as repre-
sentative parties on behalf of all only if (1) the class is so
numerous that joinder of all members is impracticable,
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties
are typical of the claims or defenses of the class, and (4) the
representative parties will fairly and adequately protect the
interests of the class.
(b) Class actions maintainable. An action may be
maintained as a class action if the prerequisites of subdivi-
sion (a) are satisfied, and in addition:
(1) The prosecution of separate actions by or against
individual members of the class would create a risk of
(A) inconsistent or varying adjudications with respect to
individual members of the class which would establish in-
compatible standards of conduct for the party opposing the
class, or (B) adjudications with respect to individual mem-
bers of the class which would as a practical matter be
dispositive of the interests of the other members not parties
to the adjudications or substantially impair or impede their
ability to protect their interests; or
(2) the party opposing the class has acted or refused
to act on grounds generally applicable to the class, thereby
making appropriate final injunctive relief or corresponding
declaratory relief with respect to the class as a whole; or
(3) the court finds that the questions of iaw or fact
common to the members of the class predominate over anv
questions affecting only individual members, and that a
class action is superior to other available methods fer the
fair and efficient adjudication of the controversy. The mat-
ters pertinent to the findings include: (A) The interest of
C-2
{APPENDIX}
members of the class in prosecuting or defending separate
actions; (B) the extent and nature of any litigation con-
cerning the controversy already begun by or against mem-
bers of the class; (C) the appropriate place for maintaining,
and the procedural measures which may be needed in con-
ducting, a class action.
(c) Determination by order whether class action to be
maintained; judgment; actions conducted partially as class
actions.
(1) As soon as practicable after the commencement
and before the decision on the merits of an action brought
as a class action, the court shall determine by order whether
it is to be maintained as such. Where necessary for the pro-
tection of a party or of absent persons, the court, upon
motion or on its own initiative at any time before the de-
cision on the merits of an action brought as a nonclass
action, may order that it be maintained as a class action.
An order under this subdivision may be conditional, and
may be altered or amended before the decision on the
merits.
(2) The judgment in an action maintained as a class
action shall extend by its terms to the members of the class,
as defined, whether or not the judgment is favorable to
them.
In any class action maintained under subdivision (b)
(3), the court shall exclude those members who, by a date
to be specified, request exclusion, unless the court finds
that their inclusion is essential to the fair and efficient
adjudication of the controversy and states its reasons there-
for. To afford members of the class an opportunity to re-
quest exclusion, the court shall direct that reasonable notice
be given to the class, including specific notice to each mem-
ber known to be engaged in a separate suit on the same
subject matter with the party opposed to the class.
C-3
[APPENDIX)}
(3) When appropriate (A) an action may be brought
or maintained as a class action with respect to particular
issues such as the issue of liability, or (B) a class may be
divided into subclasses and each subclass treated as a class,
and the provisions of this section shall then: be construed
and applied accordingly.
(d) Orders in conduct of actions. I. the conduct of
actions to which this section applies, the court may, without
limitation, make appropriate orders: (1) Settling the course
of proceedings or prescribing measures to prevent undue
repetition or complication in the presentation of evidence
or argument; (2) requiring, for the protection of the mem-
bers of the class or otherwise for the fair conduct of the
action, that notice be given in such manner as the court
may direct to some or all of the members of any step in the
action, or of the proposed extent of the judgment, or of the
opportunity of members to signify whether they consider
the representation fair and adequate, to intervene and pre-
sent claims or defenses, or otherwise to come into the action;
(3) imposing conditions on the representative parties or on
intervenors; (4) requiring that the pleadings be amended
to eliminate therefrom allegations as to representation of
absent persons, or to include such allegations, and that the
action in either case proceed accordingly. The orders may
be combined with an order under section 60-216, and may
be altered or amended as may be desirable from time to
time.
(e) Dismissal or compromise. An action maintained as
a class action shall not be dismissed or compromised with-
out the approval of the court, and the court in its discretion
may order that notice of a proposed dismissal or compromise
be given to the class in such manner as the court may direct.
|K.S.A. 60-223; Am. by Supreme Court (order dated July
17, 1969); eff. on publication in Kan. Reports and in K.S.A.
1969 Supp. |]
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.