Petition — Superior Oil Co. v. Sterling

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Supreme “Court, |

FILED 7

' DEC 12 1977

M’HAEL RODAK, JR., CLERK

In the ee Court of the United States

Ay OCTOBER TERM, 1977

CP a e Ra no. €0.78 47

\ Ny THE SUPERIOR OIL COMPANY, Petitioner,

A / VS.

yr? WILLIAM J. STERLING, HELENA STERLING and

) ROBERT E. STERLING, individually and as trustees

of the estate of Edd Sterling, individually and as

\ representatives of all that class of gas royalty owners

under The Superior Oil Company oil and gas leases in

the Hugoton-Anadarko area, Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF THE STATE OF KANSAS

W. B. WAGNER, JR.

Pat F. Trom™Mons

The Superior Oil Company

P. O. Box 1521

Houston, Texas 77001

*RICHARD JONES

JACK D. SAGE

HERSHBERGER, PATTERSON, JONES & ROTH

700 Farm Credit Banks Building

Wichita, Kansas 67202

Counsel for Petitioner, The Superior

Oil Company

*Counsel upon whom service is to be made.

E. L. Menpennart, Ivc., 926 Cherry Street, Kansas City. Mo. 64106, (816) 421-3080

SD MII .cennsscntisenpnonesscecietpemmmiecenataitetintnaee

STATEMENT OF THE CASE ................ sacaiientiandagliiaiieninans

REASONS FOR GRANTING WRIT . .................-..-.---

The Decision Below Seriously Threatens the Effec-

tiveness of the Guarantees of Due Process Af-

forded by the Fourteenth Amendment to the United

Se ee i

The Kansas Supreme Court’s Decision Is Directly

Contrary to the Decisions of This Court and to the

Decisions of Certain of Kansas’ Sister States ........

There Was No Common Fund Which Might Serve

ee I exciesrecncsstsntestnininitcnminsbenanetenen

SE cececcecscncesnsmnncncnarsnnnemnareaacanesennensesanneenennenaenetae

INDEX TO APPENDICES

A. Opinion of the Supreme Court of the State of Kan-

sas, dated July 29, 1977 (222 Kan. 737, 567 P.2d

TEED cnpeianecccivnasniiananisamepgendinialinaentigiinit : —

B. Opinion of the Supreme Court of the State of Kan-

sas in Shutts, Executor v. Phillips Petroleum Com-

pany, dated July 11, 1977 (222 Kan. 527, 567 P.2d

{=e A5

C. Opinion of the District Court of Stanton County,

Kansas, dated January 7, 1976 (not reported) .... A70

D. Opinion of the District Court of Kiowa County,

Kansas, dated July 29, 1976 (not reported) ....... A77

E. Statutes Involved:

CE en A82

United States Constitution, Fourteenth Amend-

a A85

Federal Rule of Civil Procedure 23 ........................ A86

Ill

AUTHORITIES

CASES

Carpenter v. Pacific Mutual Life Insurance Co., 10

Cal.2d 307, 74 P.2d 761 (1937); aff'd sub nom. Neb-

lett v. Carpenter, 305 U.S. 297 (1938), reh. den. 305

TN CE 15

Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) __.... 8

Feldman v. Bates Manufacturing Co., Inc., 143 NJ.

Greenshields v. Warren Petroleum Corp., 248 F.2d 61

(10 Cir. 1957), cert. den. 355 U.S. 907 (1957) —.......... 16

Hansberry v. Lee, 311 U.S. 32 (1940) —.. 2. 7,9

Hanson v. Denckla, 357 U.S. 235 (1958) —.......---...... 8

Hartford Life Ins. Co. v. Ibs, 237 U.S. 662 (1915) ....... 15

Huber Corp. v. Denman, 367 F.2d 104 (5th Cir. 1966) ... 17

In re Hotel Telephone Charges, 500 F.2d 86 (9th Cir.

1974) 7

International Shoe Co. v. Washington, 326 U.S. 310

(1945) 4, 6, 7,8, 10

Klemow v. Time, Incorporated, 466 Pa. 189, 352 A.2d

12 (1976) 10

Mobil Oil Corporation v. Federal Power Commission,

463 F.2d 256 (1972), cert. den. 406 U.S. 976, reh. den.

409 U.S. 903 (1972) -..... 7 dnccimmimaalenustids 17

Pennoyer v. Neff, 95 U.S. 714 (1878) 000000. 0. 8, 10

Royal Arcanum v. Green, 237 U.S. 531 (1915) -............... 15

Shaffer v. Heitner, ........ , 53 L.Ed.2d 683, 97

I Tr esate 6, 8,9, 10, 13

Shutts, Executor v. Phillips Petroleum Company, 222

Kan. 527, 567 P.2d 1292 (1977) ........-.2..-..----2ceeece000 2, 3,5, 14

Snyder v. Harris, 394 U.S. 332, reh. den. 394 U.S. 1025

EEIIETIIEY .ccnecsscinbacuninaieatieeniaiibannmel sasseiscucisishetaluigeiitsuensentiiaiuniaiiia 8, 10

Sterling, et al. v. The Superior Oil Company, 222 Kan.

ee FR, me 3,5

Supreme Tribe of Ben Hur v. Cauble, 255 U.S. 356

ae wa 15

Waechter, et al. v. Amoco, 217 Kan. 489, 537 P.2d 228

ee en) walepr ee eT 16

Zahn v. International Paper Co., 414 U.S. 29141973) ... 8

CONSTITUTIONAL PROVISIONS

Fourteenth Amendment, Section 1 200000000000... 2, 6, 8,14

STATUTES

ee ne ee 2, 3,13

RULES

Federal Rule of Civil Procedure 23 200. 3,14

MISCELLANEOUS

American Bar Association, June, 1977, p. 838 _............. 13

In the Supreme Court of the United States

OCTOBER TERM, 1977

No.

THE SUPERIOR OIL COMPANY, Petitioner,

vs.

WILLIAM J. STERLING, HELENA STERLING and

ROBERT E. STERLING, individually and as trustees

of the estate of Edd Sterling, individually and as

representatives of all that class of gas royalty owners

under The Superior Oil Company oil and gas leases in

the Hugoton-Anadarko area, Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF THE STATE OF KANSAS

The Petitioner, The Superior Oil Company (“Supe-

rior”), respectfully prays that a writ issue to review cer-

tain portions of the judgment and opinion of the Supreme

Court of the State of Kansas, entered in this proceeding

on July 29, 1977.

OPINIONS BELOW

The opinion of the Supreme Court of the State of Kan-

sas is reported at 222 Kan. 737, 567 P.2d 1325 (1977), and

appears in Appendix A hereto (pp. Al-A4). The opinion

of the Supreme Court of the State of Kansas in Shutts, Ex-

ecutor v. Phillips Petroleum Company, 222 Kan. 527, 567

P.2d 1292 (1977), followed and held to be controlling of

the decision in this case, appears in Appendix B hereto

(pp. A5-A69). The opinions of the District Courts of

Stanton and Kiowa Counties, Kansas, in the form of Find-

ings of Fact and Conclusions of Law, not reported, appear

in Appendices C and D hereto (pp. A70-A81).

JURISDICTION

The judgment of the Supreme Court of the State of

Kansas was entered on July 29, 1977. Petitioner filed a

timely petition for rehearing, which was overruled on Sep-

tember 15, 1977, and the instant petition for a writ of cer-

tiorari was filed within ninety days of said date. This

Court’s jurisdiction is invoked under 28 U.S.C. 1257(3).

The Supreme Court of the State of Kansas is the

highest court in the State of Kansas in which a decision

can be had.

STATUTES INVOLVED

K.S.A. 60-223 is set forth in Appendix E hereto (pp.

A82-A85). The Fourteenth Amendment, Section 1 of the

United States Constitution, is also set forth in Appendix

E hereto (p. A85). Federal Rule of Civil Procedure 23 is

also set forth in Appendix E hereto (pp. A86-A99).

QUESTION PRESENTED

The Kansas Supreme Court has ruled that under the

Kansas class action statute (K.S.A. 60-223), it has juris-

diction to render a judgment binding upon unnamed non-

resident members of a putative plaintiff class, even though

such persons have no contact with the State of Kansas.

Further, the Kansas Court has held that its jurisdiction

over such nonresidents is established “. . . if procedural due

process guarantees are met.” Shutts, supra, 222 Kan., at

547, 567 P.2d, at 1308, held to control in Sterling et al. v. The

Superior Oil Company, 222 Kan. 737, 567 P.2d 1325. The

question presented is whether this decision denies to Peti-

tioner and to nonresidents having no contacts with Kansas,

due process and equal protection under the law and the

benefits of a supposedly final adjudication, all in violation

of the Fourteenth Amendment to the Constitution of the

United States.’

STATEMENT OF THE CASE

This case was commenced in the District Court of

Stanton County, Kansas, by named Kansas residents, on

their own behalf and as alleged representatives of a class

composed of certain of Petitioner’s royalty owners in the

. In the Courts below Superior contended that the decisions

Supreme Court denied to Superior the

Hugoton-Anadarko area of Kansas, Oklahoma and Texas.

The class for which the named Plaintiffs (Respondents

here) sought to speak included numerous persons who

neither resided in nor had any contact with the State of

Kansas, and whose royalties were payable under lease

contracts applicable only to production from lands in Texas

and Oklahoma (222 Kan. 737, 567 P.2d 1325, 1326, App. A.,

p. A2). Over the vigorous protests of Petitioner, the trial

court certified the class as requested by Respondents.

The action sought a judgment for interest on royalty

payments deferred pending approval of certain rate in-

creases established by FPC Opinion No. 586 and collected

subject to refund by Defendant. No claims for additional

royalties were involved.

The trial court entered judgment for the class as cer-

tified and that judgment was modified and affirmed by

the Supreme Court of Kansas. Petitioner challenged the

Kansas Courts’ assertions of jurisdiction at every stage of

this case, contending that the Kansas Courts were without

jurisdiction to enter a judgment binding upon persons who

were without residence in or contacts with the State of

Kansas and who had no interest in Kansas lands or royal-

ties attributable to production therefrom. (Answer, R. 5,

7; Defendant’s Responses to Requests for Admissions, R.

11, 12; Order Overruling Defendant’s Motion for Re-exami-

nation and to Dismiss, R. 26; Pre-Trial Conference Order,

R. 29, 30; Transcript of Trial, R. 51, 52; Defendant’s Re-

quested Findings of Fact and Conclusions of Law, R. 84-88;

Trial Court’s Conclusions of Law, R. 101; Appellant’s State-

ment of Points on Appeal, R. 107)

2. Petitioner did not object to the inclusion in a proper class

of Kansas residents or nonresidents of Kansas having the mini-

mum contacts with the State of Kansas required by International

Shoe Company v. Washington, 326 U.S. 310 (1945).

The Kansas Supreme Court addressed Petitioners’

arguments directly in Shutts v. Phillips Petroleum Com-

pany:*

“The appellant contends the trial court erred in hold-

ing that it has jurisdiction over in personam claims

of unnamed nonresident class plaintiffs having no

contact with the State of Kansas.

. . . The question presented is how can a Kansas

court assert jurisdiction in a plaintiff class action,

where some of the individual plaintiff class members

do not reside in Kansas and do not have land in Kan-

sas covered by leases with Phillips.” 222 Kan. 540,

541, 567 P.2d 1304 (App. B, pp. A27, A28).

The Court concluded, erroneously we believe, that

. . . Therefore, while the essential element neces-

sary to establish jurisdiction over nonresident defen-

dants is some ‘minimum contacts’ between the defen-

dant and the forum state, the element necessary to

the exercise of jurisdiction over nonresident plaintiff

class members is procedural due process.” 222 Kan.

542-543, 567 P.2d 1305 (App. B, p. A30).

The Kansas Supreme Court adopted its decision in

Shutts as controlling in the instant case, and it is this rul-

ing which forms the basis of the petition of Superior to

this Court.

3. Shutts, 222 Kan. 527, 567 P.2d 1292 (1977) Ape. B, pp

A5-A69) cited by the Sterling Court as controlling in ae mee

case, 222 Kan. 737, 738, 567 P 2d 1325 (1977) (App. A, pp. A2 2 A3).

REASONS FOR GRANTING WRIT

The Decision Below Seriously Threatens the Effective-

ness of the Guarantees of Due Process Afforded by the

Fourteenth Amendment to the United States Constitu-

tion.

If allowed to stand, the decision of the Kansas Su-

preme Court in this case will result in a serious erosion

of the protectior.s afforded by the Due Process Clause of

the Fourteenth Amendment to the United States Consti-

tution, which have long been jealously guarded by this

Court. [Shaffer v. Heitner, ........ I: ceenes , 53 L.Ed.2d 683,

97 S.Ct. 2569 (1977) }

Giving lip service to International Shoe Co. v. Wash-

ington* (but only insofar as it affects defendants), the

Kansas Supreme Court denies its applicability to nonres-

ident members of a plaintiff class, even though they are

devoid of even the most minimum contacts with the State

of Kansas. The result can only be a judgment which will

not be accorded full faith and credit when asserted as res

adjudicata of the issues in the courts of other states. The

Kansas Court reaches the conclusion that such plaintiff

class members are subject to the jurisdiction of its state

courts where “procedural due process” is demonstrated.

This bootstrap approach is untenable. It is illogical

to apply different jurisdictional rules to defendants and

plaintiffs simply because of their designation or alignment,

when the ultimate result may be the same for each. The

inevitable result is denial of due process to both.

4. 326 U.S. 310 (1945).

No amount of due process can create jurisdiction

where none previously existed. Absent jurisdiction, the

decision is a nullity as to nonresident, no-contact mem-

bers of the plaintiff class, thereby denying Petitioner the

benefits of final adjudication. The Kansas decision ig-

nores the fact that jurisdiction through some minimum

contact must exist before due process comes into play. In-

ternational Shoe Co. v. Washington, supra. The substitu-

tion of “procedural due process” for the “minimum con-

tacts” required by International Shoe as the basis of

jurisdiction would permit the state court to create ju-

risdiction where none existed through procedural safe-

guards. This ignores the mandate of International Shoe

that the “quality and nature of the activity” establishes

jurisdiction®, if, such jurisdiction having been established,

due process is otherwise afforded the nonresident party.®

Moreover, the Kansas Supreme Court has overlooked or

ignored the fact [as stated in the notice to the alleged class

(R. 21)] that the judgment purports to be binding on all

class members, whether it be favorable or unfavorable.

In these circumstances a nonresident plaintiff class mem-

ber, with no Kansas contacts, may find himself subject to

an adverse judgment which, under the jurisdictional the-

ory of the Kansas Court, the Court would have no juris-

diction to render against him as a defendant lacking the

minimum contacts prescribed by International Shoe, su-

pra. Not only would unnamed nonresident class members

be bound by an adverse judgment, but they could be sub-

jected to an affirmative judgment granted defendant on

the basis of a counterclaim.

5. International Shoe, 326 U.S. 310, 319.

6. This Court has consistently held procedural rights could

not abrogate substantive rights. Hansberry v. Lee, 311 U.S. 32

(1940); In re Hotel Telephone Charges, 500 F.2d 86 (9th Cir. 1974).

Thus, a defendant, after obtaining a favorable judg-

ment in Kansas, could encounter a denial of full faith and

credit to such judgment in a suit involving the same is-

sues brought by the nonresident, no-contact plaintiff class

member in the state of his residence. Hanson v. Denckla,

357 U.S. 235 (1958). The result is to deny the protection

of the Due Process Clause of the Fourteenth Amendment

to the United States Constitution to both Petitioner and

Respondents.

The problem which now faces this Court is a product

of the evolution of class action jurisdiction, as reflected

by this Court’s recent decisions.’ These decisions have

limited substantially the cases which may claim the atten-

tion of the Federal Courts. At the same time the Court

has made clear its continued adherence to the doctrines

of Pennoyer v. Neff,® as modified by International Shoe

Co. v. Washington, supra. In Shaffer v. Heitner, supra,

this Court applied the minimum contact rule of Interna-

tional Shoe to cases of in rem jurisdiction, saying:

“We therefore conclude that all assertions of state

court jurisdiction must be evaluated according to the

standards set forth in International Shoe and its prog-

eny.” (Emphasis supplied). ........ re , 93 L.Ed.2d

703, 97 S.Ct. 2584

7. Snyder v. Harris, 394 U.S. 332, reh. den. 394 U.S. 1025

(1969); Zahn v. International Paper Co., 414 U.S. 291 (1973);

Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974).

8. 95 U.S. 714 (1878). Pennoyer v. Neff held a state court’s

jurisdiction was limited to the boundaries of the state in which

it sits. Subsequently, in International Shoe Co. v. Washington,

supra, this Court held that in personam jurisdiction may attach

on the basis of a nonresident’s contacts with the forum state but

those contacts must relate to the issues before the court. In

Shaffer v. Heitner, supra, this Court further restricted the juris-

diction of state courts in in rem actions, holding that where the

property in the state was unrelated to the plaintiff's cause of

action, the state court did not have jurisdiction, unless other sig-

nificant contacts existed.

The Court concluded its opinion with the unqualified re-

affirmance of the protections of the Due Process Clause:

“The Due Process Clause

“ “does not contemplate that a state may make binding

a judgment .. . against an individual or corporate

defendant with which the state has no contacts, ties

or relations.’ International Shoe Co. v. Washington,

supra, at 319, 90 L Ed 95, 66 S Ct 154, 161 ALR 1057.

“Delaware’s assertion of jurisdiction over appellants

in this case is inconsistent with that constitutional

limitation on state power. The judgment of the Dela-

ware Supreme Court must, therefore, be reversed.”

ilies US. ........, 53 L.Ed.2d 705, 97 S.Ct. 2587.

The situation is no different whether the judgment

seeks to bind a party defendant or an unnamed member

of a putative plaintiff class who; equally with a defendant,

lacks minimum contact with the state. The Kansas Su-

preme Court’s reliance on the dicta in Hansberry v. Lee®

is misplaced. In the first place the exception was not

precisely defined in Hansberry. Further Shaffer v.

Heitner, supra, eliminated any significance which the dicta

may have had when this Court said: “To the extent that

prior decisions are inconsistent with this standard [refer-

ring to the standards for determining jurisdiction as ex-

9. Hansberry v. Lee, 311 U.S. 32 (1940). The Supreme

Court merely discussed by way of dicta that a court could have

jurisdiction over individuals where “. . . some are not within the

jurisdiction .. .” and “. .. who were not made parties to it... .”

311 U.S. 40-42. The Court did not discuss whether those non-

residents had to have some previous contact with the forum state

and, in fact, the Court held that a judgment in a class action in

a state court construing restrictive covenants on land in Chicago,

was not binding on persons who were not actual parties.

pressed in Pennoyer, Harris and International Shoe] they

are overruled... .”?°

We cannot believe that after Shaffer this Court will

countenance the subversion of the protections of the Due

Process Clause which would result if the decision of the

Kansas Supreme Court in the case at bar is allowed to

stand. The result is to deny to both Petitioner and the

nonresident, no-contact plaintiff class members the protec-

tions afforded them by the United States Constitution.”

The Kansas Supreme Court’s Decision Is Directly

Contrary to the Decisions of This Court and to the

Decisions of Certain of Kansas’ Sister States.

In Pennoyer v. Neff, supra, this Court noted the terri-

torial limits imposed upon the jurisdiction of the several

states by the United States Constitution. The highest

courts of Pennsylvania and New Jersey have declined to

extend the jurisdiction of their state courts to nonresidents

without minimum contacts in the state. In Klemow v.

Time, Incorporated,” the plaintiff sought to represent a

class consisting of both residents and nonresidents of the

10. _... U.S, _.., 53 L.Ed.2d 703, n. 39, 97 S.Ct. 2585, n. 39.

11. This Court made clear the distinction between jurisdic-

tion and procedural due process in its Shaffer decision, when, in

commenting upon the notice served, the Court noted:

“. . . In these circumstances, we shall assume that the pro-

cedures followed would be sufficient to bring appellants be-

fore the Delaware courts, if minimum contacts existed.” .......

“ene , 53 L.Ed.2d 703, n. 40, 97 S.Ct. 2585, n. 40. (Em-

phasis supplied).

The Kansas Supreme Court failed to recognize this basic

principle of law, but instead held that the mere mailing of a

notifying an alleged class member in another state re-

garding litigation in Kansas was sufficient to create jurisdiction.

12. 466 Pa. 189, 352 A.2d 12 (1976).

State of Pennsylvania, in a suit initiated in the Pennsyl-

vania state court. While the dismissal of plaintiff's suit

was reversed on other grounds, the Pennsylvania Supreme

Court commented as follows with respect to the propriety

of a class including nonresidents of Pennsylvania:

“Here it is conceivable that appellant could plead and

establish that he can properly represent a class com-

posed of all Pennsylvania residents with similar un-

expired LIFE subscriptions who have not settled their

claims and have similar damage claims to be re-

solved.*®

oe eS es

“15. Because the jurisdiction of the courts of the

Commonwealth is territorially limited, the class may

consist only of Pennsylvania residents. The class may

also include nonresidents who submit themselves to

the jurisdiction of the state courts. See Botwinick v.

Credit Exchange, Inc., 419 Pa. 65, 213 A.2d 349 (1965);

Hanson v. Denckla, 357 U.S. 235, 78 S.Ct. 1228, 2 L.

Ed.2d 1283 (1958); Mullane v. Central Hanover Bank

& Trust Co., 339 U.S. 306, 70 S.Ct. 652, 94 L.Ed. 865

(1950); Pennoyer v. Neff, 95 U.S. 714 (1877) [sic

1878]; cf. Simpson v. Simpson, 404 Pa. 247, 172 A.2d

168 (1961); McGinley v. Scott, 401 Pa. 310, 164 A.2d

424 (1960).

“16. Appellant’s complaint states that he represents

a class of all persons who had unexpired LIFE sub-

scriptions—more than 5 million people. The record

indicates however that the class of which he is a

member will be substantially smaller. The class is

limited by the court’s jurisdiction, note 15 supra.” 466

Pa. 189, 352 A.2d 12, 16.

In Feldman v. Bates Manufacturing Co., Inc., 143 N.J.

Su, 84, 362 A2d 1177 (1976), plaintiff sought to pros-

ecute a class action in the New Jersey state courts on be-

half of an alleged class, including both residents and non-

residents having no contacts with the State of New Jersey.

The Appellate Division of the Supreme Court of New

Jersey declined to permit maintenance of the action on

behalf of the nonresident class members. The Court said:

‘

‘. . . However, as a consequence of the territorial

limitations of state power, the Due Process Clause

of the Fourteenth Amendment limits the judicial power

of the states. Hanson v. Denckla, 357 U.S. 235, 249-

251, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958); Pennoyer

v. Neff, 5 Otto 714, 95 U.S. 714, 24 L.Ed. 565 (1878).

Simply put, a state court cannot exercise binding

jurisdiction over persons residing outside its bounda-

ries unless there is some reasonable basis for doing so.

A state court does not have jurisdiction over, and

therefore cannot bind to a judgment, an individual

with whom the state has no ‘contacts, ties or relations.’

International Shoe Co. v. Washington, 326 U.S. 310,

66 St.Ct. 154, 90 L.Ed. 95 (1945); accord, Hanson v.

Denckla, supra, 357 U.S. at 251, 78 S.Ct. 1228; Note,

‘Multistate Consumer Class Actions,’ 25 Hasting L.J.

1411 (1974); Note, ‘Expanding the Impact of State

Court Class Action Adjudications,’ 18 U.C.L.A. L.Rev.

1002 (1971)... .” 143 NJ. Su. 84, 362 A.2d 1179-80.

The law with respect to the application of the Due

Process Clause of the United States Constitution in class

actions must be uniform in all fifty states; otherwise, a

most unseemly rash of “forum shopping” certainly will

result." The firm supervisory hand of this Court should

be exercised to prevent this abuse. Indeed, this Court,

in Shaffer v. Heitner, supra, extended the safeguards of

the Due Process Clause as to in rem and quasi in rem ac-

tions.

“ .. This recognition leads to the conclusion that in

order to justify an exercise of jurisdiction in rem, the

basis for jurisdiction must be sufficient to justify ex-

ercising ‘jurisdiction over the interests of persons in

a thing.’ The standard for determining whether an

exercise of jurisdiction over the interests of persons

is consisten with the Due Process Clause is the mini-

mum contacts standard elucidated in International

Shoe.” (Footnotes omitted). ........ | | a , 93 L.Ed.

2d 699-700, 97 S.Ct. 2581-2.

Inasmuch as a judgment pursuant to the Kansas class

action statute binds all members of the class, whether it

be favorable or unfavorable (K.S.A. 60-223(c) (2), App.

E, p. A83), the existence of jurisdiction must be tested in

the context of an unfavorable judgment. If, as appears to

be inevitable, Petitioner is to be deprived of the benefits

of a judgment in its favor and against the class or a mem-

ber or members thereof, Petitioner’s right to constitu-

tional due process will have been violated.

class

visions allowing service had the members of the plaintiff class

defendants in the suit.” American Bar Association Journal,

been

June, 1977, p. 838.

Compounding the error of the Kansas Court is the

obvious effect of the following unusua! provision of the

Kansas statute: °

“... 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 therefor....” (Emphasis supplied).

K.S.A. 60-223 (c) (2).

This provision is included in a statute otherwise conform-

ing closely to Federal Rule of Civil Procedure 23. (App.

E, pp. A87-A88) The effective result is to foreclose to

the nonresident, no-contact plaintiff class member his last

clear chance to avoid unwilling submission to the Kansas

Courts. Where then are his constitutional rights to due

process under the Fourteenth Amendment? Conversely,

Petitioner’s Fourteenth Amendment rights are violated be-

cause any judgment rendered will not be entitled to full

faith and credit in the courts of other states, since the

putative class member has no absolute right to “opt out”.

There Was No Common Fund Which Might Serve As a

Basis for Jurisdiction.

Inasmuch as Shutts was held to be controlling of the

decision in the instant case, we now analyze the position

there adopted by the Kansas Supreme Court.

In apparent recognition of its tenuous position in as-

serting jurisdiction over nonresident, no-contact members

of the alleged plaintiff class, the Kansas Supreme Court

in Shutts attempted to relate this case to the common fund

——2--

cases."*- All of these cases involved a fund of money

within the state exercising jurisdiction, in which fund the

plaintiffs claimed a joint or common ownership and pos-

sessed some “mutality of interest.” The cases also in-

volved fraternal societies or insurance companies organized

in the state which exercised jurisdiction and in each in-

stance the contro] and regulation of the company or society

was of vital interest to the state of its organization. More-

over, in each instance, the nonresident policyholders had

purchased policies, thereby establishing contact with the

home state of the insurance company. The Kansas Court

speaks repeatedly of “suspense royalties” (which sup-

posedly constituted the common fund) and makes the er-

roneous statement that:

“ . . The ‘suspense royalties’ in question never did or

could belong to Phillips [Petitioner]... .” 222 Kan. 552,

567 P.2d 1311 (App. B, p. A45).

Contrary to the conclusion of the Kansas Supreme

Court, the members of the plaintiff class, being lessors,

had no ownership rights in the gas produced and, there-

fore, there will be no “suspense royalties.” The leases

provide for a delivery to the lessor of a fraction of all

oil produced as royalty. But, this is not so with respect

to gas produced. The royalty on gas is not payable in

kind as is oil royalty. Rather, the leases require a payment

in money measured by proceeds from or value of the gas

produced and sold by lessee. This results in a debtor-

14. Hartford Life Ins. Co. v. Ibs, 237 U.S. 662 (1915); Car-

penter 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.

938), reh. den, 305 U.S. 675 (1939); Royal Arcanum v.

Green, 237 U.S. 531 (1915); Supreme Tribe of Ben Hur v. Cauble,

U.S. 356 (1921).

creditor relationship pursuant to a contract (lease agree-

ment) and no fund exists.

The relationship is clearly explained in Greenshields v.

Warren Petroleum Corp., 248 F.2d 61 (10 Cir. 1957), cert.

den. 355 U.S. 907 (1957). There, Greenshields, the lessor,

maintained that, though he had executed an oil and gas

lease, because he had not signed a submitted stipulation

of interest (in the nature of a division order) there had

been no transfer of title to the gas. He sued his lessee for

conversion of the gas. Judge Lewis, speaking for a unan-

imous panel of the United States Court of Appeals for the

Tenth Circuit, rejected the lessor’s claim. The Court said:

“... It is well settled that the provision concerning

the payment for gas operates to divest the lessor of

his right to obtain title in himself by reduction to

possession and that thereafter his claim must be based

upon the contract with the one to whom he has granted

that right. His claim can only be for a payment in

money and not for the product itself. Mussellem v.

Magnolia Petroleum Co., 107 Okl. 183, 231 P. 526;

American Oil & Refining Co. v. Cornish, 173 Okl. 470,

49 P.2d 81; United States v. Stanolind Crude Oil Pur-

chasing Co., 10 Cir., 113 F.2d 194. The transfer from

the lessors was as contemplated by their leases and

effectively passed title to the lessees.” 248 F.2d 67.

In its rationale the Kansas Court has turned its back

on its own decision in Waechter et al. v. Amoco, 217 Kan.

489, 537 P.2d 228 (1975), where it held:

“. . . We know of no precedent to the effect stated

therein nor of any reason why an oil and gas lessee

should be declared a fiduciary. It seems well estab-

lished that a lessee under an oil and gas lease is not a

fiduciary to his lessor; his duty is to act honestly and

fairly under a contractual relationship (Bunger v.

Rogers, 188 Okla. 620, 112 P.2d 361)....” 217 Kan. 510.

Moreover, the Kansas Court’s statements are in direct

conflict with the consistent position of the royalty owners

(who compose the alleged plaintiff class) that they have

no gas to sell, thereby admitting they have no interest in

the proceeds accumulated during periods of suspension,

pending FPC approval of rate increases, since all of the

monies are attributable to the sale of lessee’s gas. This

was the conclusion reached by the United States Court of

Appeals for the District of Columbia Circuit in Mobil Oil

Corporation v. Federal Power Commission.”

15. 463 F.2d 256 (1972); cert. den. 406 U.S. 976, reh. den.

409 U.S. 903 (1972). At 463 F.2d 259-60, the Court stated:

“We have no need to pursue the intricacies of oil-and-gas

law, or to take note of the way in which state law concepts

vary in describind the interests created by oil and gas leases.®

It suffices for this case that generally the royalty owner is

not considered, either in common parlance or in conceptions

of state law decisions, to be engaged in any ‘sale’ of gas.’®

As to state law we refer to Judge Brown’s discussion in

Huber.!! [J. M. Huber Corp. v. Denman, 367 F.2d 104 (5th

Cir. 1966)] The lease terms give the lessee all possessory

interests in gas produced during the life of the lease, including

full right of sale.

“11. See 367 F.2d at 113-114:

“‘'The lessors make] the very simple, yet profound, conten-

tion that there can no “sale” of gas by royalty owners

since they have no gas to sell. And this seems to be true as

a matter of oil and gas law, whether based on the ownership-

in-place concept followed by Texas and others or on non-

ownership theories of other jurisdictions. For all agree that

as the gas leaves the well-mouth, the entire ownership of the

gas is in the lessee, none being reserved in the lessor.

463 F.2d 259-60, footnotes 9 and 10 and the last paragraph of

ootnote 11 omitted.]

In short, the entire ownership of natural gas produced

and the monies derived from the sale thereof is in the

lessee, whose only obligation is to pay his lessor a sum

computed by reference to volumes produced and sold, and

price. No “suspense royalty” fund is or can be created.

Each legitimate member of the plaintiff class has a cred-

itor’s claim against his lessee, and no more.

It follows that the Kansas Court’s attempt to find

support for its claim to jurisdiction in the “common fund”

cases must fail for lack of a fund.

CONCLUSION

For the foregoing reasons a writ of certiorari should

issue to review the judgment and opinion of the Supreme

Court of the State of Kansas.

Respectfully submitted,

W. B. WAGNER, JR.

Pat F. Towm™Mons

The Superior Oil Company

P. O. Box 1521

Houston, Texas 77001

*RICHARD JONES

Jack D. SAGE

HERSHBERGER, PATTERSON, JONES & RoTH

700 Farm Credit Banks Building

Wichita, Kansas 67202

Counsel for Petitioner, The Superior ©

Oil Company

*Counsel upon whom service is to be made.

APPENDIX

APPENDIX A

Vol. 222 JULY TERM, 1977 737

Sterling v. The Superior Oil Co.

No. 48,461

Wrttiam J. STERLING, HELENA STERLING and RosBErT E.

STERLING, individually and as trustees of the estate of

Edd Sterling, deceased; individually and as representa-

tives of all that class of gas royalty owners under The

Superior Oil Company oil and gas leases in the Hugo-

ton-Anadarko area, Appellees and Cross-Appellants, v.

THe Superior Om Company, Appellant and Cross-

Appellee.

SYLLABUS BY THE COURT

OIL AND GAS—“Suspense” Royalty Interest—Class Ac-

tion—Unjust Enrichment—Judgment of Interest Com-

putation Modified. 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 pro-

ducer was liable for interest on the theory of unjust

enrichment, and (3) its determination that the class

members had not waived any claim for interest. The

trial court’s judgment is modified as to the computa-

tion of the interest to be recovered. (Following Shutts,

Executor v. Phillips Petroleum Co., 222 Kan. ........,

Samah =

Appeal from Stanton district court; Keaton G. Duck-

WORTH, judge. Opinion filed July 29, 1977. Affirmed in

part, modified in part and remanded for further proceed-

ings.

Jack D. Sage, of Hershberger, Patterson, Jones &

Roth, of Wichita, argued the cause, and Richard Jones,

of the same firm, W. B. Wagner, Jr., and R. T. Robberson,

of The Superior Oil Company, of Houston, Texas, were

with him on the briefs for the appellant and cross-appellee.

Gary R. Hathaway, of Ulysses, argued the cause, and

W. Luke Chapin and Allan C. Goering, of Medicine Lodge,

were with him on the brief for the appellees and cross-

appellants.

The opinion of the court was delivered by

SCHROEDER, J.; This is a class action brought by William

J. Sterling, Helena Sterling and Robert E. Sterling (plain-

tiffs-appellees and cross-appellants) individually and on

behalf of some 246 gas royalty owners, including those

who do not reside in Kansas or have leases covering lands

in Kansas or both, against their producer, The Superior

Oil Company (defendant-appellant and cross-appellee), for

recovery of interest on “suspense royalties.” The total

amount of the suspense royalties held from May of 1960

to May of 1973 was slightly over $100,000, which Superior

commingled with its other funds and used in its business

operations. Except for the smaller size of class member-

ship, the starting of withholding in May of 1960, the pay-

out by Superior in May of 1973, and the judgment of

the trial court on January 7, 1976, this case is identical

in legal issues and factual situations to those presented

in Shutts, Executor v. Phillips Petroleum Co., 222 Kan.

eae y vee P.2d ......:. (No. 47,917, decided July 11, 1977).

be ee eee

Cte Abe

eet ne Semen hiwe.

The same FPC Hugoton-Anadarko area and FPC Opinion

No. 586 are involved.

As held in Shutts, (1) this action was properly tried

as a class action even though involving ronresident plain-

tiffs, (2) the producer was liable for interest on a theory

of unjust enrichment and contractual principles, and (3)

the class members had not waived any claim for interest.

However, 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

percent (7%) per annum simple interest on suspense

royalties 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.

Applying 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 calcula-

tions, 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

undertaking 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 payout) plus the unpaid principal sum; and there-

after our post-judgment interest statute, KSA. 16-

204, requires payment of eight percent (8%) per an-

num simple interest for the benefit of the royalty

owners on the total amount of the judgment until

pai hg

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.

;

’

si ii

we Wa.

APPENDIX B

Vol. 222 JULY TERM, 1977 527

Shutts, Executor v. Phillips Petroleum Co.

JULY TERM, 1977

PRESENT

Hon. HAROLD R. FATZER, CHIEF JUSTICE

Hon. ALFRED G. SCHROEDER,

7 Hon. ROBERT H. KAUL,

Hon. ALEX M. FROMME,

Hon. PERRY L. OWSLEY,

Hon. DAVID PRAGER,

Hon. ROBERT H. MILLER,

JUSTICES.

No. 47,917

InL 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 Com-

pany 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. COURTS—In Personam Jurisdiction over Nonresident

Defendants—Minimum Contacts—Jurisdiction over

Nonresident Plaintiff Class Members—Due Process.

While the essential element to establish in personam

jurisdiction over nonresident defendants is some “min-

imum contacts” between the defendant and the forum

state, the element necessary to the exercise of juris-

diction over nonresident plaintiff class members is

procedural due process.

. PARTIES—Class Action Exception to Rule—Parties

Not Joined Must Be Adequately Represented. Al-

though 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 repre-

sentative character, where those members of the class

who are not joined as parties are adequately repre-

sented to protect their interest.

. CLASS ACTIONS—Need for Class Actions Stated. In

its present form the Kansas Class Action Rule, mod-

eled 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 plain-

tiff in a representative capacity.

PARTIES—Prerequisites to Class Action Stated. The

prerequisites to a class action are specified in K.S.A.

60-223: a) which provides that one or more members

of a class may sue or be sued as representative par-

ties on behalf of all only if (1) the class is so nu-

merous 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 representa-

tive 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.

. SAME—When Class Actions Maintainable. Class ac-

tions 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

—

te a e

<a ows

10.

or fact common to the members of the class predomi-

nate over any questions affecting only individual mem-

bers, and that a class action is superior to other avail-

able methods for the fair and efficient adjudication

of the controversy.

VENUE—Venue is Procedural Not Jurisdictional.

Venue is not a jurisdictional matter but a procedural

one, where real property is only incidentally affected

and the action is transitory in nature.

CLASS ACTIONS—Jurisdiction Over Nonresident

Plaintiffs—Due Process. Under K.S.A. 60-223 Kansas

courts can exercise jurisdiction over nonresident plain-

tiffs in a class action if procedural due process guar-

antees are met.

PARTIES—Class Action—Must Extend to the Mem-

bers of the Class. Under K.S.A. 60-223(c) (2) the judg-

ment in an action maintained as a class action is re-

quired to exte: J by its terms to the members of the

class, as defined, whether or not the judgment is favor-

able to them.

CLASS ACTIONS—Plaintiff Class Action Binding on

Nonresident Plaintiffs—Due Process. 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 bind-

ing on nonresident plaintiffs when a “common fund”

is involved and where due process requirements are

met.

CORPORATIONS—Stakeholder Who Commingles

Funds—Common Fund Rule. When a stakeholder

commingles funds, which would otherwise be “common

funds” with its other cash, and uses the funds to

11.

12.

13.

fulfill its business obligations, where such funds never

did or could belong to the stakeholder, the case is

embraced within the “common fund” rule.

CLASS ACTIONS—Notice to Class Members. 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

provides: “... 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.”

SAME—Further Notice—What Court May Require. 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 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 members to signify whether they consider the rep-

resentation fair and adequate, to intervene and pre-

sent claims or defenses, or otherwise to come into

the action... .”

CLASS ACTIONS—Rules Permit Members to “Opt-

Out” Upon Notice—Requesting Exclusion. Both the

federal rules and Kansas rules regarding class actions

permit members of a class to “opt-out” upon receiving

the required notice, and under K.S.A. 60-223 (c) (2)

the court shall exclude those members who, by a date

<TR EEEY tee wets

14.

15.

16.

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.

SAME—Nonresident Plaintiffs—Reasonable Notice

Given—Jurisdictional and Constitutional Due Process

Requirements Satisfied. In a review of the record

on appeal involving a plaintiff class action which in-

cludes nonresident plaintiffs, it is held: The plaintiff

class members were given reasonable notice which

satisfies jurisdictional and constitutional due process

requirements.

SAME—Theory of Class Action—Interest of Absent

Class Members Not Represented—Notice to Absent

Members Important—Due Process. The class action

is premised on the theory that members of the class

who are not before the court can justly be bound

because the self-interest of their representative coin-

cides 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 adequately represented, binding them

by the class judgment would seem to offend the re-

quirements of due process. Notice to absent members

of the class in this regard is particularly important,

for it is the greatest single safeguard against inade-

quate representation.

SAME—Court By Statute Can Make Orders Protect-

ing Members of Class—Notice as Court May Direct.

The provisions of K.S.A. 60-223(d) authorize the court

to make appropriate orders for the protection of the

members 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

17.

18.

19.

20.

Al0

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 repre-

sentation 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.

SAME—Inadequate Representation Established—Res

Judicata Effect Denied to Class Action. Where in-

adequate representation is established, courts have de-

nied res judicata effect to class action judgments.

SAME—Certifying Class Action—What Trial Judge

Should Consider. Before a class action is certified

the trial judge should consider concepts of manage-

ability 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 deter-

mined, and the class size and complexity. A court

should also give careful consideration to any_ possible

conflict of law problems.

EQUITY—Doctrine of Unjust Enrichment Stated. The

doctrine of unjust enrichment prevents one from prof-

iting or enriching himself at the expense of another

contrary to equity. But there must be some specific

legal principle or situation which equity has estab-

lished or recognized to bring a case within the scope

of the doctrine.

SAME—Party Making Use of Anothers Money—In-

terest Must Be Paid on Money Used. Where a party

retains and makes actual use of money belonging to

another, equitable principles require that it pay in-

terest on the money so retained and used.

All

21. INTEREST—Interest on Suspended Royalties Recov-

23.

erable—Period of Time Used by Producer. In an ac-

tion by royalty owners against their producer for inter-

est on royalties held in “suspense,” pending determina-

tion of lawful rates by the Federal Power Commission

upon application of the producer for increased rates,

it is held 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 deter-

mination of applicable lawful rates for gas sales, and

litigation regarding the determination of issues in-

volved in this appeal, all as more particularly set

forth in the opinion.

. OIL AND GAS—Gas Producer Agrees to Pay Interest

on FPC Suspense Money—Interest on Gas Purchaser’s

Share—Equity Requires Royalty to Receive Same

Treatment. Where a gas producer, under circum-

stances described in the foregoing syllabus, files a

corporate undertaking with the Federal Power Com-

mission, wherein it agrees to pay 7% interest on “FPC

suspense monies” until rate proceedings are deter-

mined by the commission, and 8% thereafter on the

gas purchasers’ share of the “impounded” money, in

the event the commission orders a refund, equitable

principles require that the royalty owners receive the

same treatment as to their share, all as more particu-

larly set forth in the opinion.

SAME—Lessee Not to Impose Burdensome Conditions

on Royalty Owner—Failure of Royalty Owners to

Comply With Conditions—No Waiver to Claim to In-

terest on Suspense Royalties Used by Lessee—Estop-

pel. Where the lessee gas producer has expressly

24.

25.

Al2

contracted to pay a percentage of the price received

for the sale of gas on which month-by-month pay-

ments 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 deter-

mination, although subject to possible refund, was not

contractually excluded from the price received, the

lessee is in no position to unilaterally impose burden-

some conditions upon the royalty owners precedent

to fulfilling its contractual commitment, albeit permis-

sive until final FPC approval of rate increase applica-

tions, and the failure of the royalty owners to comply

with these conditions precedent to payment of royalty

in excess of the established rates does not constitute

a waiver of their claim to interest on “suspense roy-

alties,” held and used by their lessee, or operate as

an estoppel.

INTEREST—U.S. Rule—Applying Partial Payments to

Interest-bearing Debt—First to Interest Due. The

“United States Rule” approved by this court provides

that in applying partial payments to an interest-bear-

ing 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.

OIL AND GAS—Judgment of Trial Court Affirmed—

As to Certification of the Plaintiff Class Action—In-

terest Claim Not Waived—Determining Gas Producer

Liable for Interest—Trial Court’s Judgment Modified

as to Computation of Interest. In an action by roy-

alty owners against their producer for interest on roy-

alties 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 class members had not waived any claim for in-

Al3

terest, and (3) its determination that the gas producer

was liable for interest on the theory of unjust enrich-

ment. The trial court’s jud-ment is modified as to

the computation of the interest to be 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 opinion of the court was delivered by

ScHROEDER, J.: This is a class action suit filed against

Phillips Petroleum 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 cer-

tain of Phillips’ pending gas price rate increase applications.

The trial court determined (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.

Al4

Phillips Petroleum Company has appealed and the class

has cross-appealed asserting the points hereinafter consid-

ered and determined.

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

(defendant-appellant and cross-appellee) (hereafter Phil-

lips) in the Hugoton-Anadarko area. Shutts or his prede-

cessor in title, Althea Shutts, received certain of the “FPC

suspense money,” so-called, paid out as royalties by Phil-

lips as hereinafter set forth. The trial court certified

Shutts as a member and proper representative of a class

of approximately 6,400 gas royalty owners (less a small

number of such royalty owners who have opted-out after

having received 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 Fed-

eral Power Commission Opinion No. 586, issued September

18, 1970, by the Commission and which became final Octo-

ber 28, 1972, determining the lawful gas rates in the Hugo-

ton-Anadarko area rate proceedings. (In re Hugoton-Ana-

darko 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 Jands in Oklahoma and

Texas. These leases were within the Federal Power Com-

mission’s rate-making area known as the “Hugoton-Ana-

darko area” which encompasses all of the State of Kansas

and the panhandle 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.

ee Se

Al5

On each of these two leases, Althea Shutts’ predeces-

sor in title had entered into a gus royalty agreement with

Phillips which has remained in full force and effect and

which provides that the royalty paid to the lessor shall

be computed in relation to the weighted average price

per Mcf received by. Phillips during any calendar month

from all sales of gas delivered by Phillips within a certain

“designated area.”

On June 7, 1954, in Phillips Petroleum Co. v. Wiscon-

sin, 347 U.S. 672, 98 L.Ed. 1035, 74 S.Ct. 794, it was deter-

mined that Phillips, as an independent natural gas pro-

ducer selling gas to interstate pipeline companies for inter-

state transportation and resale, was a “natural gas com-

pany” 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 various orders issued since that de-

cision, the FPC has suspended 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 undertaking to refund any or all

portions of such increase which the FPC might find not

to have been justified. This corporate 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 subject 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

Al6

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 September 18, 1970, and eight percent (8%) per

annum thereafter until paid out, if the FPC did not ap-

prove the sales price. (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 refund. (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 442 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:

Al7

“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. Phil-

lips has been successful since that time in securing

a number of increases in its contract prices, but these

could not be placed into effect until they were ap-

proved, after investigation and hearing, by the Federal

Power Commission, except by the agreement of Phil-

lips to refund to the purchaser, with appropriate in-

terest, such amounts that are not finally allowed by

the Commission. Heretofore, Phillips Petroleum Com-

pany has voluntarily 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 continued. 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 maximum 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 re-

fund.

“Interest owners desiring to receive payments

computed currently on the full sums being collected

may arrange to do so by furnishing Phillips Petroleum

Company acceptable indemnity to cover their propor-

tionate part of any required refunds, plus the required

interest.

“Phillips Petroleum Company

Natural Gas Department

Bartlesville, Oklahoma”

(Emphasis added.)

Als

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

boud 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 indem-

nities acceptable to Phillips and received current payments

computed on the full sums being collected, including

amounts subject to refund. However, none of the approx-

imately 6,400 class members responded to Phillips’ offer

contained 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

outlined 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 or-

ders suspending the nineteen (19) rate increase applica-

tions. 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 de-

posited 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 during this period of time Phillips had no entitlement

to the gas royalty owners’ share of the “suspense royalties,”

Alg

whether or not the rates were approved by the FPC.

Phillips never owned this money. While Phillips collected

eight-eighths (8/8) of the increased rates, under no con-

dition was the one-eighth (14) 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 Phillips’ royalty 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 require-

ments. 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 approximately $152,000,000 in plant sales

of gas and approximately $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 undertook

to make no ruling with reference to whether any interest

or compensation was payable by the producers to the roy-

alty owners for “suspense royalties” held by Phillips.

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 royalties”

on monies previously withheld. On or about November

25, i970, Phillips sent the following notice to Althea Shutts

and other royalty owners in the class:

A20

“NOTICE CONCERNING FEDERAL POWER

COMMISSION OPINION NO. 586 COVERING IN-

TERSTATE SALES OF GAS PRODUCED FROM THE

HUGOTON-ANADARKO 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

hereby notified that such payment has been based

upon the ful! 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

will expect you to reimburse it in full for any over-

payments occasioned thereby. Such recovery may be

had, at Phillips’ election, by withholding from subse-

quent 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 overpay-

ment occurred.

“Your acceptance of the enclosed check will be

regarded as evidence of your consent to such recovery.

“Phillips Petroleum Company

Exploration & Production Department

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.

o eo

A21

Litigation regarding FPC Opinion No. 586 continued

until July 31, 1972, when the Ninth Circuit Court of Ap-

peals affirmed the FPC opinion. When no appeal was

taken, the opinion became final on October 28, 1972. (See

In re Hugoton-Anadarko Area Rate Case, supra.)

On or about December 7, 1972, Phillips mailed royalty

checks to royalty owners in payment of the increased

royalties due them by virtue of the finality of FPC Opin-

ion 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 Kan-

sas. 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 leases with Phillips covering

land in Kansas, which encompasses the largest portion

of the Hugoton-Anadarko area.

At the time of these payouts, Phillips sent the follow-

ing notice to each payee:

“NOTICE

“The enclosed check covers payment based upon

gas proceeds which have heretofore been held in sus-

pense pending determination by the Federal Power

Commission of the just and reasonable rates applicable

to the Hugoton-Anadarko Area, and, subsequent to

issue of Opinion No. 586 of the Federal Power Commis-

sion which determined such rates, pending appeal and

judicial finality of said Opinion. The decision of the

A22

Circuit Court of Appeals affirming Opinion No. 586

has recently become final.

“Credits to leases for these heretofore suspended

sums have been accrued by computer in suspense ac-

counts, pursuant to numerous Federal Power Cominis-

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.

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 represen-

tative of approximately 6,400 royalty owners, claimed ap-

proximately $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 denomi-

nated “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

A23

or Oklahoma. 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

plaintiff 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, Greensburg, Kansas, 67054, on or before the

30th day of April, 1976 [original notice specified July

15, 1975] be excluded from the class unless upon notice

and after hearing and for stated reasons the court

finds that inclusion is essential to the fair and effi-

cient adjudication of the controversy. Any class mem-

ber, if he so desires, may appear in the case in person

or through his own counsel, otherwise, plaintiff's coun-

sel will represent him as a member of plaintiff class.

“2. Judgment in this action, whether for the

plaintiff class or for the defendant, will be binding

on all class members except those who may be ex-

cluded as above stated. Class members excluded will

not be entitled to share in the benefit of any judg-

ment or settlement entered or concluded favorable

to plaintiff class.

“3. Plaintiffs’ attorneys’ fees are contingent on

recovery. If the plaintiffs are successful, the court

will allow a reasonable attorneys’ fee for plaintiffs’

attorneys out of the interest fund created. If plaintiffs

are unsuccessful, there will be no allowance of attor-

neys’ fees.”

A24

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 find-

ings 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 pro-

visions 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) Any interest due each member of the class

is too small to justify separate actions;

members in that the facts are realiy undisputed

and the sole legal issue presented is whether the

plaintiff members are entitled to interest on the

suspended royalties held by defendant;

A25

(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 exces-

sive expenses) and that this court having juris-

diction 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 obtain-

able (under its covenant to market) had the duty

to remit the collected share of royalty as promptly

as commercially 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 per-

mitted and essentially required defendant to post bond

and agree to pay back interest if a refund was or-

dered did not entitle defendant to free use of the

royalty owners share of the increased proceeds. The

FPC bond and interest pay back requirements cer-

tainly 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 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 proceeds retained by

A253

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 ratifica-

tion because 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

defendant, being instruments reflecting royalty owners

interests in proceeds from production and unitization

of acreage for allowables respectively. No consider-

ation 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 agree-

ments do not change defendant’s obligations under

their original leases except for agreements to the con-

trolled 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’ establish-

ing the FPC approved prices as the basis for royalty

payments.

A27

“10. To allow defendant free use of the royalty

share of production for over ten years as a result

of the difficulties and delays caused by the FPC regu-

lations would unjustly enrich defendants. Defendant

paid the full royalty share of proceeds collected prior

to June 1, 1961, and after October 1, 1970. The de-

cision to withhold the increased (but unapproved)

rates in the intervening period was a unilateral de-

cision by defendant that cannot rise to the stature

of a defense of ratification. Nor does it support the

‘bounty’ theory of defendant herein as noted above.

“11. The statutory rate of interest herein in Kan-

sas, 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

compounded 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 hold-

ing 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 res-

ident 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 jurisdic-

tion 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 plain-

tiff members, many of whom reside in other states, have

A28

gas leases with Phillips covering Kansas lands. But it

must be conceded some gas leases or other contracts en-

tered into between 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

jurisdiction in a plaintiff class action, where some of the

individual 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 de-

fendant, 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.)

att.

A29

The ruling in Pennoyer was 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 USS.

310, 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

defendant’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 reaf-

firmed 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 guar-

antee of immunity from inconvenient or distant litiga-

tion. They are a consequence of territorial limitations

on the power of the respective States. However, mini-

mal 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 prerequisite to its exercise of power over

him. ...” (p. 251.) (Emphasis added.)

The most recent case of the United States Supreme

Court indicating the parameters of quasi in rem jurisdiction

over nonresident defendants is Shaffer v. Heitner,

A30

a extents —_— BMI cncceceey conssess A dentin [No. 75-

1812, decided June 24, 1977], following Internat. Shoe Co.

v. Washington, supra.

Kansas cases examining and following these jurisdic-

tional requirements over nonresident defendants include

Misco-United Supply, Inc. v. Richards of Rockford, Inc.,

215 Kan. 849, 528 P.2d 1248; Tilley v. Keller Truck &

Implement Corp., 200 Kan. 641, 438 P.2d 128; and Wood-

ring 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 Actions with a Multistate Class: A Problem of Juris-

diction, 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 representation. These are the essential require-

ments 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 element necessary to establish jurisdic-

tion over nonresident defendants is some “minimum con-

tacts” 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.

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

A3l

the court refused 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:

“It 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 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 judgment rendered in such circum-

stances 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 ex-

ception that, to an extent not precisely defined by

judicial opinion, the judgment in a ‘class’ or ‘repre-

sentative’ suit, to which some members of the class

are parties, may bind members of the class or those

represented who were not made parties to it. ...

“ _ . Courts are not infrequently called upon to

proceed with causes in which the number of those

interested 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 where-

abouts 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 litiga-

tion of the issues in which all have a common inter-

est, the court will proceed to a decree... .” (pp.

40-42.) (Emphasis added.)

A32

Thus, 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

character. While the United States Supreme Court con-

ceded that the extent of this exception had not been pre-

cisely 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. These pronouncements, although pure dicta, would

not have been included in the opinion unless they were

intended to state the rule regarding class actions. The

opinion also foretells what is an essential requisite of due

process as to absent plaintiff class members, adequate rep-

resentation. (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

provides 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 Actions and the Federal Rule, 71 Co-

lum. L, Rev. 609, 611 [1971]; and H. Hunter, Georgia

Investment Company v. Norman—The Supreme Court Cre-

ates 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 Supreme Court gave its blessing to the equitable

class suit by noting:

“The rule is well established, that where the par-

ties 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

A33

others; and a bill may also be maintained against

* portion of a numerous body of defendants, represent-

ing 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].)

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

US. 1025, 23 L.Ed.2d 50, 89 S.Ct. 1622.) While the results

are supported by the fear of overloading the federal judicial

system and the desire not to judicially expand the constitu-

tionally established jurisdictional limits, these recent

United States Supreme Court cases have clearly restricted

access to federal courts. This suit, for example, could

A34

not be brought in a federal court. Furthermore, the FPC

does not have jurisdiction 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 because they

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

adjudications for a class which is otherwise treated alike.

Furthermore, the statute of limitations has run in Okla-

homa and Texas. The United States Supreme Court has

held the commencement 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. Car-

lisle & Jacquelin, supra.) However, if in this action Kan-

sas is without jurisdiction over class plaintiffs in other

states, this action would not toll the statute 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; RS. 1923, 60-413; and L. 1963,

ch. 303, § 60-223, amended by Supreme Court order dated

July 17, 1969.)

A35

In its present form the Kansas Class Action Rule,

modeled 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 represen-

tative parties on behalf of all only if (1) the class

is so numerous that joinder of all members is im-

practicable, (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

subdivision (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 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

refused to act on grounds generally applicable to the

class, thereby making appropriate final injunctive re-

lief or corresponding declaratory relief with respect

to the class as a whole; or

A36

“(3) the court finds that the questions of law

or fact common to the members of the class predomi-

nate over any questions affecting only individual mem-

bers, and that a class action is superior to other avail-

able methods for the fair and efficient adjudication

of the controversy. The matters pertinent to the find-

ings include: (A) The interest of members of the

class in prosecuting or defending separate actions; (B)

the extent and nature of any litigation concerning

the controvery already begun by or against members

of the class; (C) the appropriate place for maintain-

ing, 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 governing 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

Lincoln 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, 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 [1973],

appeal dismissed 60 Ill.2d 529, 331 N.E.2d 65.)

Citations to the venue statutes of Kansas and other

states are inapplicable here. (See United States v. Truck-

ing 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

A37

court has in personam 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 Kan-

sas residents because the venue statute would require sep-

arate 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

common interests in reaching other assets, and where their

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 services in the Los Angeles area who were

overcharged by Yellow Cab. The California Supreme

Court permitted this class action to proceed although some

A38

members of the plaintiff class were unknown and may

have been residents of other states.

In Horst v. Guy, 211 N.W.2d 723 (N.D. 1973), the

plaintiff filed a class action to secure payment of a vet-

eran’s bonus under the North Dakota Vietnam Conflict

Veterans’ Adjusted Compensation Act. The appellants

claimed a class action was inappropriate because the dis-

trict court might not have jurisdiction over all class mem-

bers 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

residents 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 classes

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 Prac-

tice and Procedure, § 1124 [1969]; Compare School Dist.

of Philadelphia v. Harper & Row Publishers, Inc., 267

F. Supp. 1001, 1005 [E.D. Pa, 1967].) While the residen-

tial characteristics of a class are seldom discussed by fed-

eral courts, it is reasonable to assume from the various

factual circumstances giving rise to federal class actions

that the court’s jurisdiction 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.L.

A39

Pa. 1968]; and City of Philadelphia v. Morton Salt Com-

pany, 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 propositions 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 beyond

the territorial limits of the class suit court is immate-

rial 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:

“§ 26. REPRESENTATIVE OR CLASS AC-

TIONS.

“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

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.)

A40

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 party who is:

“(e) The representative of a class of persons sim-

ilarly situated, designated as such with the approval

of the court, of which the person is a member.

“(2) Aperson represented by a party to an action

is bound by the judgment even though the person

himself 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 Mis-

souri’s New Common-Question Class Action, 38 Mo. L.

Rev. 173, 209 [1973].)

Phillips suggests a contrary conclusion is dictated by

Klemow v. Time Incorporated, ........ ae , d02 A2d

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 con-

tinued publication of the magazine. The trial court dis-

missed the suit but the Pennsylvania Supreme Court, while

reversing on other grounds, indicated the class could not

A4l

encompass nonresident plaintiffs. The court said in a foot-

note:

“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 omit-

ted.)” (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 numer-

ous as to make it impracticable to join all as parties,

any one or more of them who will adequately repre-

sent 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 favorable 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

Federal Access?, 78 Dick. L. Rev. 460, 521-524 [1973].)

In Feldman v. Bates Manufacturing Co., 143 NJ.

Super. 84, 362 A.2d 1177 (1976), the court indicated that

without “affiliating circumstances” between the forum

A42

state and the litigation, such as a “common trust fund,”

the judgment in a plaintiff class action suit could not

bind nonresident class members. It held class action cer-

tification was not appropriate since the judgment would

not satisfy due process with respect to the nonresidents.

There the Bates Manufacturing Corporation had no assets

in New Jersey, was not authorized to do business in New

Jersey, and the vast majority of its preferred stockholders

(plaintiff class members) were nonresidents with no con-

tacts in New Jersey, which had no special interest in

adjudicating litigation. However, the court noted Dela-

ware, Bates’ domiciliary state, was fully capable of provid-

ing a uniform determination 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 jurisdiction of a large physi-

cal 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’

residences.

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

A43

was insured by Hartford was held bound by a prior Con-

necticut state court judgment rendered against Dresser,

a Connecticut resident, and 30 other members of Hartford

holding certificates who brought suit “in their own behalf

and in behalf of all others similarly situated.” Dresser’s

unsuccessful challenge to Hartford’s right to increase the

premium assessments against Hartford’s 12,000 members

was held binding on all policyholders, regardless of resi-

dence. The United States Supreme Court stated:

“Where the parties interested in the suit are

numerous, their rights and liabilities are so subject

to change and fluctuation 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

parties 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 representa-

tion, and especially where the subject-matter of the

suit is common to all, there can be very little danger

but that the interest of all will be properly protected

and maintained.’...” (p. 672.)

(See also Hartford Life Ins. Co. v. Barber, 245 US. 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

California Supreme Court, and ultimately the United States

A44

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 policyholders. Acknowledging the significant state

interest in insurance, and relying on Hartford Life Insur-

ance 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 California, 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

decisions 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 require-

ments 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 univer-

sally 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

A45

had a common concern in the funds attributable to “sus-

pense royalties” held by Phillips. The “suspense royalties”

in question never did or could belong to Phillips. If the

proposed rates had been disapproved, the money and inter-

est, which Phillips agreed to pay by its corporate under-

taking, would have gone to the pipeline companies who

purchased the gas from Phillips. If the proposed rates

were approved, the “suspense royalties” would go to the

gas royalty owners.

Had 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

“suspense royalties” to fulfill ali 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

“common fund” category would reward Phillips’ action

at the expense of innocent gas royalt) owners.

In Perlman v. First National Bank of Chicago, 15

Ill. 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 asserted 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

permitting a class action against an individual who

A46

has sequestered all money wrongfully acquired but

denying 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 Alter-

native to Federal Rule 23?, 8 J. Marshall J. Prac. and

Proc. 113 [1974].)

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 proce-

dures 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 oppor-

tunity to request exclusion, the court shall direct that

reasonable notice be given to the class, including spe-

cific notice to each member known to be engaged

in a separate suit on the same subject matter with

the party opposed to the class.”

A47

K.S.A. 60-223 (d) (2) reads in part:

“In the conduct of actions to which this section

applies, the court may, without limitation, make ap-

propriate 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 repre-

sentation fair and adequate, to intervene and present

claims or defenses, or otherwise to come into the ac-

Federal courts have attached particular significance

to Rule No. 23’s requirement of notice in common ques-

tion 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 sug-

gested in Mullane v. Central Hanover Tr. Co., 339 US.

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 notification 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, including individual notice to

all members who can be identified through reasonable

effort,” although some suggest Rule No. 23’s requirement

of notice does not involve constitutional due process. (See

Eisen v. Carlisle & Jacquelin, supra.) We need not enter

into a discussion on this matter because 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

A48

requirements. Phillips has maintained extensive records

in connection with the “suspense royalties.” All gas roy-

alty owners and their interests are known. There are

no unnamed or unknown plaintiff class members. The

representative plaintiff prepared the notices, quoted ear-

lier, 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. Car-

lisle & Jacquelin, supra, although that case does note

an exception where a fiduciary duty preexisted between

the plaintiff and the defendant, as in a shareholder de-

rivative suit.

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 favor-

able decision to the class, which may recover the cost

of notification, this renders moot Phillips’ appellate objec-

tion to mailing notice. (See Lamb v. United Security Life

Company, 59 F.R.D. 25 [S.D. Iowa 1972]; and Ostapowicz

v. Johnson Bronze Company, 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

A49

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 number of people. (See Proposed Rules of Civil

Procedure, 39 F.R.D. 69, 105 [1966]; Cohn, The New Fed-

eral Rules of Civil Procedure, 54 Geo. L.J. 1204, 1226

[1966]; and Staff Studies Prepared for the National Insti-

tute 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). KSA. 60-

223 (c) (2) provides in pertinent part:

“. . [T]he court shall exclude those members

who, by a date to be specified, request exclusion, un-

less 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 had jurisdiction. We do not think such a con-

voluted conclusion logically follows. The language simply

gives the court the power to deny exclusion to class mem-

bers, be they residents 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 Consumer 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

A50

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 exclu-

sion could be denied under either the federal or Kansas

class action statutes without raising constitutional issues.

We hold reasonable notice was given to satisfy juris-

dictional and constitutional due process requirements.

(Mullane 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

prescribing measures to prevent undue repetition or

complication in the presentation of evidence or argu-

ment; (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 representation fair

and adequate, to intervene and present claims or de-

fenses, or otherwise to come into the action; (3) im-

posing conditions on the representative parties or on

intervenors; (4) requiring that the pleadings be

amended to eliminate therefrom allegations as td tep-

resentation of absent persons, or to include such alle-

gations, 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.”

A51

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. Cas-

sidy, 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 adequately 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 impor-

tant, for it is the greatest single safeguard against inade-

quate representation. (Mullane v. Central Hanover Tr.

Co., supra at 314.)

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.

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:

A52

A Problem of Jurisdiction, supra at 1438-1439.) A court

should also give careful consideration, as we have at-

tempted to do, to any possible conflict of law problems.

When liability is to be determined according to varying

and inconsistent state laws, the common 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 par-

ties 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. Phillips treated all royalty owners

in the Hugoton-Anadarko area alike, regardless of resi-

dency, particular lease provisions or royalty agreements.

(See Phillips’ notices to royalty 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

physical area included in the FPC designated Hugoton-

Anadarko area where Phillips is doing business and produc-

ing gas which it sells in interstate commerce. All of

A53

the gas royalty owners in the Hugoton-Anadarko area

have leases with Phillips and a common interest in the

money collected by Phillips as “suspense royalties” from

the sale of gas in the designated area. It was the same

FPC regulation that caused and permitted Phillips to col-

lect 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 royalty owners in the Hugoton-Anadarko area have

a right in common 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

members 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 nm «y in December

of 1972. Phillips does not indicate, nor does the record

disclose, how many gas royalty leases covering Kansas

land are involved. In view of what has heretofore been

said, there is no need to examine this contention. (How-

ever, see Williams v. Humble Oil & Refining Company,

234 F. Supp. 985 [E.D. La. 1964] [joinder of 76 persons

impracticable]; Fox v. Prudent Resources Trust, 69 F.R.D.

74 [E.D. Pa. 1975] [joinder 148 limited partners imprac-

ticable]; 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 & An-

derson 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-

A54

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 determina-

tion 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 af

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

lawful. (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.) How-

ever, that does not mean Phillips owes no interest as

a result of the long retention of the FPC “suspense roy-

alties.” (Boutte v. Chevron Oil Company, 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.)

A55

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 predecessors

made active use of the plaintiffs’ monies collected and

plaintiffs were deprived 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, Phil-

lips withheld the share of the class members of the in-

creased 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 commingled 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 in-

terest which Phillips had agreed to pay by its corporate

undertaking. If the FPC approved the proposed increase

rate, the ‘‘suspense royalties” would go to the gas royalty

owners.

A56

Phillips held a sizable emount of money during this

period. On or about December 7, 1972, Phillips mailed

approximately $5,700,000 in additional gas royalties due

gas royalty owners by virtue of the finality of FPC Opin-

ion No. 586. A case comment on this subject at 54 Tex.

L. Rev. 847 (1976) noted:

“.. 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

subject 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 in-

terest payments 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. . .

A57

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 Phil-

lips’ cash. . . . all of Phillips’ cash being in one pot,

... not segregated for any purpose... .”

Phillips made substantial profit during the years 1961-

1973. The net profit ranged from $113,000,000 to $132,-

000,000 during the period in question and stockholders’

equity increased 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 con-

demn Phillips for using this money because this was appar-

ently 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 con-

tractual sanction or seize upon the procedural complexities

of the FPC to avoid responsibility for an appropriate mea-

sure of damages, expressed in terms of interest. In Sha-

piro 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

allowed by law or fixed by the parties for the use,

detention, or forbearance of money. In our society

today 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.)

A58

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 similar

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. Phillips Petroleum Co., 513 F.2d 371 [5th Cir. 1975],

cert. denied, 423 U.S. 930, 46 L.Ed.2d 259, 96 S.Ct. 281;

Phillips Petroleum Co. v. Riverview Gas Compression Com-

pany, 513 F.2d 374 [5th Cir. 1975], cert. denied, 423 U.S.

930, 46 L.Ed.2d 259, 96 S.Ct. 281; Phillips Petroleum Co.

v. Hazlewood, 534 F.2d 61 [5th Cir. 1976]; Fuller v. Phillips

Petroleum Co., 408 F. Supp. 643 [N.D. Tex. 1976]; and

Phillips Petroleum Co. v. Hazlewood, 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 Petro-

leum Company v. Adams, supra, the Texas Civil Court

of Appeals relied on the terms of the royalty agreement

and the Texas interest statute, rather than unjust enrich-

ment, to require the payment of prejudgment interest on

the suspended 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

A59

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 regulation which prohibited Phillips from in-

cluding the excess in the amount on which calculation

of payment to the royalty owner on a month-to-month

basis was made. (Stahl Petroleum Co. v. Phillips Petro-

leum Co., supra.) But if Phillips chose to withhold pay-

ments of contractually owing “suspense roya!ties” 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 un-

just 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

A60

control of, and were available for use by, the gas producer

(Phillips) during the pendency of FPC proceedings and

related litigation regarding the determination of applicable

lawful rates for gas sales, and litigation regarding the

determination of issues involved in this appeal.

Having determined that interest can be awarded, the

question becomes what rate of interest should be applied.

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.”

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 (legal) (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

purchasers.

In Lightcap v. Mobil Oil Corporation, supra, this court

resolved 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

plaintiffs are entitled to be compensated for their loss.

Mobil was obligated by FPC order to pay Northern

6% interest on Northern’s share of the ‘impounded’

money; equitable principles require that the royalty

A61

owners receive the same treatment as to their share.

...” (p. 469.) (Emphasis 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

equitable principles require, and contractual principles dic-

tate, 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 ascertaining the balance, for money re-

ceived 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

A62

the sum payable, from and after 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 respec-

tively, 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

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 roy-

alty 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

justified the payment of seven percent (7%), and later

eight percent (8%), interest on part of this common fund

which Phillips expressly contracted 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 applica-

tions, 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 undertak-

A63

ing with the FPC. Thus, Phillips has made an express

agreement, with regard to the monies accumulated in the

suspense fund by Phillips, to pay seven percent (7%), and

later eight percent (8%) interest, as ultimately determined

by the FPC Opinion No. 586.

Due to limitations on the FPC jurisdiction, it could

not provide in its order that interest be paid to the gas

royalty owners. (Mobil Oil Corporation v. Federal Power

Commission, 463 F.2d 256 [D.C. Cir. 1972], cert. denied,

406 U.S. 976, 32 LEd.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 mem-

bers of the plaintiff class herein assert as an appropriate

measure of damages, expressed in terms of interest, for

the commingling and use of the suspense monies by Phil-

lips.

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 inter-

est on unliquidated sums. In Columbian Fuel an interim

rate increase was approved by the Kansas Corporation

Commission on natural gas sold to the buyer. The buyer

was permitted 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 interest. 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.)

A64

Here, of course, an agreement for the payment of

interest on the part of Phillips is clearly present. Further,

the suspended payments in Columbian Fuel did not neces-

sarily belong to another. Here the “suspense royalties”

belong either to the royalty owners or the pipeline com-

panies. 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 cam be awarded, we must

determine 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 refusing 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 were not es-

topped from 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

computed currently on the full sums being collected

may arrange to do so by furnishing Phillips Petroleum

Company acceptable indemnity to cover their propor-

tionate part of any required refunds, plus the required

interest.”

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 circumstances to require it to now pay interest to

these royalty owners who refused to accept the money

under the same risk Phillips undertook.

A65

Where, as here, Phillips has expressly contracted to

pay a pereentage 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

November 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 in-

formed royalty ov.ners it would expect reimbursement

in full for any overpayments 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 overpayment occasioned thereby.

The royalty owner was told acceptance 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 roy-

alty at ceiling rate levels pending FPC approval of gas

rate increases, was designed to accomplish precisely what

the facts disclose. Virtually none of the royalty owners

complied with the conditions, thereby leaving the “sus-

pense royalties” in the hands of Phillips as stakeholder

A66

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 tu interest on “suspense royalties” held

by Phillips, by declining to honor the burdensome condi-

tions 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 Phillips 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 im-

posed by Phillips were far more stringent than the corpo-

rate 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

payment of the principal sum is a legal bar to a subse-

quent action for interest.

The notice Phillips unilaterally mailed to all of its

royalty owners on or about December 7, 1972, enclosing

checks, to cover payment based upon gas proceeds previ-

ously held in suspense, said nothing about interest or how

long the money had been held or used by Phillips. How-

ever, as previously indicated, Phillips is liable for interest

on these suspense royalty funds which it retained as a

A67

stakeholder and used in the operation of its business. The

payment of these funds to the plaintiff class members,

instead of extinguishing the debt, constituted only a partial

payment on an interest-bearing debt. This situation in-

vokes application 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, In-

terest 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 v. 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 argu-

ment in Phillips Petroleum v. Riverview Gas Compression

Co., 409 F. Supp. 486 (N.D. Tex. 1976), the sequel to

Phillips Petroleum Co. v. Adams, supra.

In the exercise of equitable powers our court has

refused to bar relief under theories of ratification, waiver

or estoppel where one due to unequal bargaining power

or knowledge accepts a check in reliance on a fraudulently

induced impression by the payor. (Prather v. Colorado

Oil & Gas Corp., 218 Kan. 111, 542 P.2d 297; and cases

cited therein. )

A68

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 instant case there is no indication the principal

was accepted, as such. We further note Oklahoma has

not strictly construed this statute. (Webster Drilling Co.

v. Sterling Owl of Oklahoma, Inc., 376 P.2d 236 [Okla.

1962].)

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 areement is to be inferred

from the fact that the principal is te..dered and accepted,

and the statute was held to have no application where

the conditions of payment are such that the creditor has

no opportunity 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 members 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 hercin seven percent

(7%) per annum simple interest on suspense royalties

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. Applying the “United States

Rule” on partial payments, after the payout there was

still an unpaid principal sum due equal to the total prin-

cipal 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

A69

December 7, 1972, on until the date of judgment (July

29, 1976) equitable principles and Phillips’ contractual un-

dertaking 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 re-

manded for further proceedings consistent with the fore-

going opinion

A70

APPENDIX C

TRIAL COURT’S FINDINGS OF FACT AND

CONCLUSIONS OF LAW IN

STERLING v. SUPERIOR

FINDINGS OF FACT

(Filed January 7, 1976)

Undisputed facts in this matter are as follows:

1. Plaintiffs William J. Sterling, Helena Sterling and

Robert E. Sterling filed this action individually and as

trustees of the Estate of Edd Sterling and as representatives

of that class of oil and gas royalty owners under defen-

dant’s The Superior Oil Company, oil and gas leases in

the Hugoton-Anadarko production area.

2. Defendant is a natural gas company within pur-

view of the Natural Gas Act and since the Phillips decision

has been subject to rate regulation by the Federal Power

Commission (FPC).

3. Commencing in May 1960 and pursuant to FPC

regulations, defendant received rates based on contracts

with their purchasers in various amounts which were sub-

ject to FPC approval. Under each higher rate negotiated

the FPC permitted the defendant to receive the new rate

pending final approval by posting a bond and requiring

interest to be paid to the purchasers for any amount re-

ceived in excess of the finally approved rate. The burden

on the FPC of a nearly infinite number of applications

for rate approval resulted in the Hugoton-Anadarko area

rate Opinion No. 586 entered September 18, 1970. The

validity of FPC Order No. 586 was challenged in the courts

and finally sustained in October 28, 1972.

A7l

4. Subsequently, in May, 1973, 246 royalty owners

were paid $103,949.18 as their royalty interest share of

the suspended rates. This amount was the royalty interest

share (normally 1/8th) without interest. Portions of the

suspended rates not approved were refunded to defendant’s

purchasers with interest at the rate of 7% per annum

until October 1, 1970, and at the rate of 8% per

annum ‘hereafter as required by FPC regulation 154.102

5. The FPC has no jurisdiction over royalty rates

as such (Mobile Oil v. Federal Power Commission, 464

F2d 256) and had no regulations purporting to cover in-

terest in relation to the royalty interest in the suspended

payments held by defendant.

6. Plaintiffs were allowed to proceed by previous

order of this court as a class action and all members

of the class were served with notice by first class mail

and by publication.

7. Plaintiffs by this action seek interest on the royalty

owners share of the increased rates collected by the de-

fendant and held as “suspended royalties” until approved

by FPC Order 586. These monies were collected by de-

fendant and commingled with its other funds for opera-

tional purposes.

8. The royalty owners were advised by the defendant

during the time the suspense royalties were being held

that the suspense royalties were being held pending final

approval by the FPC.

9. No demand for interest was made on the defendant

until the filing of this action and the disbursement of

the suspended royalties in 1973 did not include an account-

ing of the rates involved nor did it contain any indication

as to whether or not interest was included.

AT72

ISSUES

Plaintiffs contend it is entitled to judgment for interest

on the “suspended royalties” from date of receipt herein

on the following grounds:

1, Statutory interest based an implied contract be-

cause of the use of money by defendant belonging to royalty

owners and resulting trust or constructive trust.

2. Equitable relief based on Quasi contract or be-

cause of unjust enrichment accruing to defendant by use

of funds belonging to other than defendant.

Defendant contends:

1, That a class action is improper because the court

lacks jurisdiction of all members of the class and also

because of varying laws in the State of Kansas, Oklahoma

and Texas.

2. The leases herein were subject to the Natural Gas

Act and orders of the FPC under provisions that the leases

were subject to all Federal and State laws and regulations

which limited the bases for computation of royalty rates

(which were those actually paid).

3. That there was no liquidated sum or rate until

final FPC approval and hence no figure on which to com-

pute interest on either a damage or contract theory of

recovery.

4. That the statute of limitations as well as laches,

estoppel and accord and satisfaction preclude recovery

herein.

CONCLUSIONS OF LAW

1. This is a proper class action under the provisions

of K.S.A. Supp. 60-223 because:

AT3

(a) The 246 royalty owners in the einen

area makes joinder impracticable;

(b) Any interest due each member of the class is

too small to justify separate actions;

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 typi-

cal 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 members

of the class predominate 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 expenses) and that this court having

jurisdiction of a large physical portion of the Hugoton-

Anadarko area is a convenient forum for such action.

2. Defendant in compliance with its contractual duty

with its royalty owners secured the best price obtainable

under the FPC regulations. These regulations required

defendant to post bond and agree to the interest pay back

provisions to its purchasers or to forfeit the negotiated

price increases until final FPC approval.

3. The portion of the increased rates secured under

the above paragraph that applied to the royalty share

of the proceeds was to be paid to royalty owners or to

be refunded if not approved by the FPC. This royalty

share did not belong to the defendant whether or not

the rate was approved by the FPC.

—————eea ee elC _

AT74

4. These monies were held on account for the royalty

owners and no cause of action accrued until the May,

1973, distribution of the “suspended royalties” as to the

amount of the royalties (not in issue herein) or the question

of interest payable as a result of the withholding.

5. 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 commercially feasible on

the same conditions as it was received by defendant or

in the alternative to place the funds in a proper invest-

ment fund for subsequent disbursement. The fact that

FPC permitted and essentially 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 in-

terest pay back requirements certainly justify defendants

business use of the increased rates of its own share of

those rates but not the royalty owners share on the same

basis.

The Court therefore concludes that the defendant is

liable for interest on royalty proceeds 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 a resulting trust theory or to attempt

to impose any facet of a fiduciary relationship to the

defendant. Nor is the FPC regulation requiring interest

of the royalty share returned to the purchasers controlling

herein.

6. The FPC regulation in point herein did not, and

could not for lack of jurisdiction to do so, attempt to

A75

regulate the obligation between defendant and members

of the plaintiff class herein as to the time or manner

or amount of the royalty interests to be paid out of the

increased rates.

7. Defendant advised members of the plaintiff class

it was withholding the royalty share of the increased rates

and the royalty owners were entitled to rely on defendant

to collect the best price obtainable and to present the

royalty owners’ interest before the courts and the FPC.

It does not imply, however, consent for the defendant

to use the royalty proceeds as a business asset resulting

in the economic gain of interest to defendant to the exclu-

sion

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