# Petition — Northern Natural Gas Producing Co. v. Nix

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1978
- **Citation:** 434 U.S. 1067

## Text

| Supreme Court U.S.
FILED

DEC 12 1977

In the Supreme Court of the United Statea'. ». cus

OCTOBER TERM, 1977

NORTHERN NATURAL GAS PRODUCING COMPANY
and MOBIL OIL CORPORATION, Petitioners,

VS.

HAZEL NIX and FRED SCHUPBACH, JR., individually

and as representatives of all that class of gas royalty

owners under Northern Natural Gas Producing Company

and Mobil Oil Corporation 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

Tom P. HAMILL

Roscoge C. ELMORE
Mobil Oil Corporation
Three Greenway Plaza East
Suite 800
Houston, Texas 77046

*RICHARD JONFS
Jack D. SAGE
HERSHBERGER, PATTERSON, JONES & ROTH
700 Farm Credit Banks Building
Wichita, Kansas 67202
Counsel for Petitioners, Northern
Natural Gas Producing Company
and Mobil Oi! Corporation

*Counsel upon whom service is to be made.

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

IID cisncissacersictecentinnisniendsantetcuindipannentiataniaitien 2
SIE ittcittitincricamstshsicinienniinienneissnitiiniainvidienstainaniateat 2
EE REPU sccsartcnseistsranesenanecntsnncctasdatonapionntannne 2
En 3
STATEMENT OF THE CASE -.00000.02.0.0.....scscscsccccscesceeees 3

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 States Constitution ...... os , 6

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 10

There Was No Common Fund Which Might Serve
Aaa @ TBamplig For GevtmtTN iy ann cncncnencscescnsessesceceseses 14

COI IG ain scans nccsococscsnoseccencsnvsvesatathantonghovcsecocnnnnsesenes 19

II

INDEX TO APPENDICES

Opinion of the Supreme Court of the State of
Kansas, dated July 29, 1977 (222 Kan. 739, 567
PE SENN eetttneshcereinteisnenintovninciaseninnianian 7 ” Al

Opinion of the Supreme Court of the State of
Kansas in Shutts, Executor v. Phillips Petroleum
Company, dated July 11, 1977 (222 Kan. 527, 567
gon ere A8

Opinion of the District Court of Grant County,
Kansas, dated January 8, 1976 (not reported) _....A73

Opinion of the District Court of Kiowa County,
Kansas, dated July 29, 1976 (not reported) ........ _A80

Statutes Involved:

FG pee A85

United States Constitution, Fourteenth Amend-
IT, TB cacsenstineesnncscnsenensncninenieistictennentainicccnciiamnsn A88

Federal Rule of Civil Procedure 23 ....................... .A89

Ill

AUTHORITIES

CASES

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 (1938), reh. den. 305 U.S. 675

(1939) ........... ssaetiadeiseenianictinasiadiesniuninasedbinniiaanaiente 15
Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) ........ 8
Feldman v. Bates Manufacturing Co., Inc., 143 N.J. Su.

84, 362 A.2d 1177 (1976) ....... 12
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) -0.00 7,9, 10
Hanson v. Denckla, 357 U.S. 235 (1958) -..........2.-2..----.-..-- 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) , npeebaniieeiabiianeiaes 7
International Shoe Co. v. Washington, 326 U.S. 310
IIE i: isssh diesel each talimcamablabaciaiiamaientietaiitidsihaaabsioae 6, 7, 8, 10
Klemow v. Time, Incorporated, 466 Pa. 189, 352 A.2d
12 (1976) a
Mobil Oil Corporation v. Federal Power Commission,
463 F.2d 256 (1972), cert. den. 406 U.S. 976, reh. den.
ee Se I cerricsscentennsissicatecnnatehetiingeemiteniinsniiuaupions 17

Nix, et al. v. Northern Natural Gas Producing Company
and Mobil Oil Corporation, 222 Kan. 739, 567 P.2d

IOI irisenccididieclldeeiehicbenicilbatanneniods dbtinapaintinnciaitaionnitionn 3,5
Pennoyer v. Neff, 95 U.S. 714 (1878) ........-----eeceeececeseeees 8, 10
Royal Arcanum v. Green, 237 U.S. 531 (1915) ................ 15

IV

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

LX. TEED CDBG) «niscrccrsrsimssisiiincnnesiivaaiddasgiianian 6,8, 10, 13
Shutts, Executor v. Phillips Petroleum Company, 222
Kan, 527, 567 P.2d 1292 (1977) -...2.2...-...-.0c-ce-e00-0 2,5, 14,15
Snyder v. Harris, 394 U.S. 332, reh. den. 394 U.S. 1025
(TBD) <xcccsssssssnsesnencsmnntenitnainiaaee 8,10
Supreme Tribe of Ben Hur v. Cauble, 255 U.S. 356
0: | eS A Ee hoes 15
Waechter, et al. v. Amoco, 217 Kan. 489, 537 P.2d 228
(BT) onccecesasvcsssessnsscensnndensieitiesaasonsiatiisaiaisinaniienniannnnnan 16

Zahn v. International Paper Co., 414 U.S. 291 (1973) ... 8

CONSTITUTIONAL PROVISIONS

Fourteenth Amendment, Section 1 ....000000000.00000.... 2,3, 8,14
STATUTES
TESA, GD ccncssncesresnestenieaneeee 2,3, 13,14
RULES
Federal Rule of Civil Procedure 23 —0000002 eee 3, 14
MISCELLANEOUS

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

In the Supreme Court of the United States

OCTOBER TERM, 1977

NORTHERN NATURAL GAS PRODUCING COMPANY
and MOBIL OIL CORPORATION, Petitioners,

vs.

HAZEL NIX and FRED SCHUPBACH, JR., individually
and as representatives of all that class of gas royalty
owners under Northern Natural Gas Producing Company
and Mobil Oil Corporation 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 Petitioners, Northern Natural Gas Producing Com-
pany (“Northern”) and Mobil Oil Corporation (“Mobil’’),
respectfully pray that a writ issue to review certain por-
tions 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. 739, 567 P.2d 1322 (1977), and
appears in Appendix A hereto (pp. Al-A7). The opinion
of the Supreme Court of the State of Kansas in Shutts,
Executor 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. A8-A72). The opinions of the District Courts of Grant
and Kiowa Counties, Kansas, in the form of Findings of
Fact and Conclusions of Law, not reported, appear in Ap-
pendices C and D hereto (pp. A73-A84).

JURISDICTION

The judgment of the Supreme Court of the State of
Kansas was entered on July 29, 1977. Petitioners 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.
A85-A88). The Fourteenth Amendment, Section 1 of the

3

United States Constitution, is also set forth in Appendix
E hereto (p. A88). Federal Rule of Civil Procedure 23 is
also set forth in Appendix E hereto (pp. A89-A92).

QUESTION PRESENTED

The Kansas Supreme Court has ruled that under the
Kansas class action statute (K.S.A. 60-223), it has jurisdic-
tion to render a judgment binding upon unnamed nonresi-
dent 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 Nix, et al. v. North-
ern Natural Gas Producing Company and Mobil Oil Corpo-
ration, 222 Kan. 739, 567 P.2d 1322. The question presented
is whether this decision denies to Petitioners and to non-
residents having no contacts with Kansas, due process and
equal protection under the law and the benefits of a sup-
posedly final adjudication, all in violation of the Four-
teenth 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

1. In the Courts below Petitioners contended that the deci-
sions of the Kansas Supreme Court denied to Petitioners the
protection of Kansas statutes relating to interest and limitations
of action. Petitioners reserve the right to urge these issues in
briefs and argument in the event certiorari is granted.

4

their own behalf and as alleged representatives of a class
composed of certain of Petitioners’ royalty owners in 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. 739, 567 P.2d 1322, 1326,
App. A, p. 12). Over the vigorous protests of Petitioners, 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 Defendants. 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. Petitioners challenged the
Kansas Courts’ assertions of jurisdiction at every stage of
this case, contending that the Kansas Courts were with-
out 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
royalties attributable to production therefrom (Answer,
R. 5, 7; Defendants’ Response to Request for Admissions,
R. 11, 12; Memorandum Decision on Motion for Reconsid-
eration of Class Certification, R. 47; Pre-Trial Conference
Order, R. 57; Defendants’ Requested Findings of Fact and
Conclusions of Law, R. 84-88; Trial Court’s Conclusions
of Law, R. 126; Appellants’ Statement of Points on Ap-
peal, R. 135).

)

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 con-
tact 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 Kansas cov-
ered by leases with Phillips.” 222 Kan. 540, 541, 567
P.2d 1304 (App. B, pp. A30, A31).

The Court concluded, erroneously we believe, that

“ .. Therefore, while the essential element necessary
to establish jurisdiction over nonresident defendants
is some ‘minimum contacts’ between the defendant
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. A33).

The Kansas Supreme Court adopted its decision in
Shutts as controlling in the instant case, and it is this
ruling which forms the basis of the petition of Northern
and Mobil to this Court.

2. Shutts, 222 Kan. 527, 567 P.2d 1292 (1977) (App. B, pp.
A8-Al12), cited by the Nix Court as controlling in the instant
case. 222 Kan. 739, 740, 567 P.2d 1322, 1323 (1977) (App. A,
p. A3).

REASONS FOR GRANTING WRIT

The Decision Beiow 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 protections 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, ........ ae , 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 plain-
tiff class members are subject to the jurisdiction of its
state courts where “procedural due process” is demon-
strated.

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.

3. 326 U.S. 310 (1945).

7

No amount of due process can create jurisdiction where
none previously existed. Absent jurisdiction, the decision
is a nullity as to nonresiden, no-contact members of the
plaintiff class, thereby denying Petitioner the benefits of
final adjudication. The Kansas decision ignores the fact
that jurisdiction through some minimum contact must
exist before due process comes into play. International
Shoe Co. v. Washington, supra. The substitution of “pro-
cedural due process” for the “minimum contacts” required
by International Shoe as the basis of jurisdiction would
permit the state court to create jurisdiction where none
existed through procedural safeguards. This ignores the
mandate of International Shoe that the “quality and nature
of the activity” establishes jurisdiction,‘ if, such jurisdic-
tion 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. 54)] that the judgment purports to be binding
on all class members, whether it be favorable or unfavor-
able. In these circumstances a nonresident plaintiff class
member, with no Kansas contacts, may find himself sub-
ject to an adverse judgment which, under the jurisdictional
theory of the Kansas Court, the Court would have no
jurisdiction to render against him as a defendant lacking
the minimum contacts prescribed by International Shoe,
supra. Not only would unnamed nonresident class mem-
bers be bound by an adverse judgment, but they could

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

5. 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).

8

be subjected to an affirmative judgment granted defen-
dant on the basis of a counterclaim.

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 issues
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 Petitioners 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 min'mum contact rule of International
Shoe to cases of in rem jurisdiction, saying:

6. 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).

7. 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
significant contacts existed.

9

“We therefore conclude that all assertions of state
court jurisdiction must be evaluated according to the
standards set forth in International Shoe and its
progeny.” (Emphasis supplied). ........ _ paneer , o3
L.Ed.2d 703, 97 S.Ct. 2584. |

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 de-
fendant 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.”
ahaha 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,*

8. .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 nonresidents 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.

10

is misplaced. In the first place the exception was not pre-
cisely 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 [referring to
the standards for determining jurisdiction as expressed in
Pennoyer, Harris and International Shoe] they are over-
ee

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 Petitioners and the
nonresident, no-contact plaintiff class members the pro-
tections afforded them by the United States Constitution.’°

The Kansas Supreme Court’s Decision Is Directly Con-
trary to the Decisions of This Court and to the Deci-
sions of Certain of Kansas’ Sister States.

In Pennoyer v. Neff, supra, this Court noted the ter-
ritorial limits imposed upon the jurisdiction of the several
states by the United States Constitution. The highest

oe mee US. ...... 53 L.Ed.2d 703, n. 39, 97 S.Ct. 2585, n. 39.

10. This Court made clear the distinction between juris-
diction 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
before the Delaware courts, if minimum contacts existed.”
... US. —.... 53 L.Ed.2d 703, n. 40, 97 S.Ct. 2585, n. 40.
(Emphasis supplied).

The Kansas Supreme Court failed to recognize this basic
principle of law, but instead held that the mere mailing of a
postcard notifying an alleged class member in another state re-
garding litigation in Kansas was sufficient to create jurisdiction.

11

courts of Pennsylvania and New Jersey have declined to
extend the jurisdiction of their state courts to nonresi-
dents 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
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
composed of all Pennsylvania residents with similar
unexpired LIFE subscriptions who have not settled
their claims and have similar damage claims to be
resolved.”®
* & «

“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 Han-
over 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-

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

12

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 A.2d 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 Jer-
sey 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 juris-
diction over persons residing outside its boundaries
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 S.Ct. 154, 90 L.Ed. 95 (1.45); 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 N.J. Su. 84, 362 A.2d 1179-80.

13

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.2 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 actions.

“. .. 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 consistent with the Due Process Clause is the
minimum contacts standard elucidated in International
Shoe.” (Footnotes omitted). ........ Nhat , 53 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,
pp. A86-A87), the existence of jurisdiction must be tested
in the context of an unfavorable judgment. If, as appears
to be inevitable, Petitioners are to be deprived of the
benefits of a judgment in their favor and against the

12. In an effort to alleviate this problem the National Con-
ference of Commissioners on Uniform State Laws recently adopted
and sent to the American Bar Association’s House of Delegates a
Uniform Class Action [Act] [Rule] which deals with jurisdiction
over both plaintiffs and defendants. The Chairman, Allan Vestal,
in explaining Section 6, states that “. . . in the case of a plaintiff
class, that jurisdiction will turn on (1) sufficient minimum con-
tacts between class members and the state and (2) state pro-
visions allowing service had the members of the plaintiff class
been defendants in the suit.” American Bar Association Journal,
June, 1977, p. 838.

14

class or a member or members thereof, Petitioners’ right
to constitutional due process will have been violated.

Compounding the error of the Kansas Court is the

obvious effect of the following unusual 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 con-
forming closely to Federal Rule of Civil Procedure 23
(App. E, pp. A90-A91). The effective result is to fore-
close 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? Con-
versely, Petitioners’ Fourteenth Amendment rights are
violated because any judgment rendered will not be en-
titled 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 analyse 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

15

of the alleged plaintiff class, the Kansas Supreme Court
in Shutts attempted to relate this case to the common fund
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 “mutuality 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.
Moreover, 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
supposedly constituted the common fund) and makes the
erroneous statement that:

“ . . The ‘suspense royalties’ in question never did
or could belong to Phillips [Petitioner]... .” 222 Kan.
552, 567 P.2d 1311 (App. B, pp. A48).

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 pay-
ment in money measured by proceeds from or value of

13. Hartford Life Ins. Co. v. Ibs, 237 U.S. 662 (1915);
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 (1938), reh. den. 305 U.S. 675 (1939); Royal Arcanum Vv.
Green, 237 U.S. 531 (1915); Supreme Tribe of Ben Hur v. Cauble,
255 U.S. 356 (1921).

16

the gas produced and sold by lessee. This results in a
debtor-creditor relationship pursuant to a contract (lease
agreement) 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, speak-
ing for a unanimous 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 te 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 pay-
ment 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 Purchasing 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

17

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."*

14. 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 describing 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 be 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 owner-
ship-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
footnote 11 omitted.]

18

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.

19

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,

Tom P. HAMILL

Roscoe C. ELMORE
Mobil Oil Corporation
Three Greenway Plaza East
Suite 800
Houston, Texas 77046

*RICHARD JONES
JACK D. SAGE
HERSHBERGER, PATTERSON, JONES & RotH
700 Farm Credit Banks Building
Wichita, Kansas 67202
Counsel for Petitioners, Northern
Natural Gas Producing Company
and Mobil Oil Corporation

*Counsel upon whom service is to be made.

Al

APPENDIX

APPENDIX A

Vol. 222 JULY TERM, 1977 739

Nix and Schupbach v. Northern Natural Gas
Producing Co.

No. 48,470

Hazet Nrx and Frep SCHUPBACH, JR., individually and as
representative of all that class of gas royalty owners
under Northern Natural Gas Producing Company and
Mobil Oil Corporation oil and gas leases in the
Hugoton-Anadarko area, Appellees and Cross-Appel-
lants, v. NORTHERN NATURAL GAS PRODUCING COMPANY
and Mosii O1t Corporation, Appellants and Cross-Ap-
pellees.

SYLLABUS BY THE COURT

1. OIL AND GAS—“Suspense” Royalty Interest—Class
Action—Unjust Enrichment—Judgment of Interest
Computation 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-
ducers were 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 computation
of the interest to be recovered. (Following Shutts,
Executor v. Phillips Petroleum Co., 222 Kan. __.
edie

A2

2. PLEADINGS—Amended Pleadings—Relate Back to
Date Of Original. Under K.S.A. 60-215(c) whenever
the claim or defense asserted in the amended plead-
ing arose out of the conduct, transaction, or occurrence
set forth or attempted to be set forth in the original
pleading, the amendment relates back to the date of
the original pleading, and an amendment changing
the party against whom a claim is asserted relates
back if the foregoing provision is satisfied and other
conditions of the statute are satisfied.

Appeal from Grant district court; Keaton G. Duck-
WoRTH, judge. Opinion filed July 29, 1977. Affirmed in
part, modified in part and remanded for further proceed-
ings.

Richard Jones, of Hershberger, Patterson, Jones &
Roth, of Wichita, argued the cause, and Jack D. Sage,
of the same firm, and Roscoe C. Elmore, of Mobil Oil
Corporation, of Houston, Texas, were with him on the
briefs for the appellants and cross-appellees.

Alan C. Goering, of Chapin & Penny, of Medicine
Lodge, argued the cause, and W. Luke Chapin, of the
same firm, and Gary Hathaway, of Hathaway & Kimball,
of Ulysses, were with him on the brief for the appellees
and cross-appellants.

The opinion of the court was delivered by

ScuHRoeDER, J.: This is a class action brought by Hazel
Nix and Fred Schupbach, Jr., (plaintiffs-appellees and
cross-appellants) individually and on behalf of some 5,739
gas royalty owners, including those who do not reside
in Kansas or have leases covering land in Kansas or both,
against their producers, Northern Natural Gas Producing
Company and Mobil Oil Corporation (Defendants-appel-

A3

lants and cross-appellees), for recovery of interest on “sus-
pense royalties.” The total amount of suspense royalties
held from 1967 by Mobil and 1968 by Northern to May
1971 was approximately $1,250,000 by Mobil and approxi-
mately $223,000 by Northern, which both Mobil and North-
ern commingled with other funds and used in their business
operations. Except for the size of the class membership,
the starting of withholding in 1967 by Mobil and 1968
by Northern, the payout by both Mobil and Northern
in May 1971, the judgment of the trial court on January
8, 1976, and a statute of limitations question hereinafter
discussed, this case is identical in legal issues and factual
situations to those presented in Shutts, Executor v. Phil-
lips Petroleum Co., 222 Kan. ........ Gleataad _s (No.
47,917, decided July 11, 1977). The same FPC Hugoton-
Anadarko area and FPC Opinion No. 586 are involved.

This action was originally commenced on January 24,
1974, by filing a petition which alleged “Mobil Oil Corpora-
tion pays royalties on leases of Northern Natural Gas
Producing Company, and Plaintiff is informed that Mobil
Gas [Oil] Corporation has some interest in Northern Nat-
ural Gas Producing Company or its leases. Northern Nat-
ural Gas Producing Company is commonly referred to
as ‘Northern Natural’ and for convenience, both defendants
are referred to as ‘Northern Natural’ in this Petition.”

The original petition was filed by Hazel Nix, individ-
ually and as representative of a class “composed of all
of the owners of royalty interests in oil and gas leases
in an area known as the Hugoton-Anadarko Area who
have had increased proceeds from the sale of their gas
withheld by Northern Natural [Gas Producing Com-
pany].” The trial court found the appellees were members
and proper representatives of a class of royalty owners
entitled to “suspense royalties” in the Hugoton-Anadarko

EOE

A4

area affected by FPC Opinion 586 under leases owned
by Northern Natural Gas Producing Company or Mobil
Oil Corporation or any of their predecessor companies.
The trial court excluded the royalty owners that opted-
out and others that had individual actions pending against
the defendants or their predecessor companies from the
plaintiff class.

The trial court found Northern Natural Gas Producing
Company to be a wholly owned subsidiary of Mobil Oil
Corporation.

Attorneys for the parties agreed to add Fred Schup-
bach, Jr., as a party plaintiff in accordance with the terms
and provisions of an amended petition. The agreement
is recited in an order filed May 24, 1974, (dated May
22, 1974) which allowed the filing of an amended petition.
The order recited, among other things, that the defendants
were given 30 days from the date of the order to file
amended answers and amended supplemental answers to
interrogatories and requests for admissions in conformity
to the amended petition. The defendants complied and
filed their answers to the amended petition on June 24,
1974.

The record discloses the amended petition was not
filed until June 13, 1974. Three years from the date of
mailing the FPC suspense royalty checks was May 25,
1974.

Upon the foregoing, Mobil contends the three-year
statute of limitations is applicable to the appellees’ claims,
and, therefore, the claims of Mobil royalty owners, first
asserted more than three years aftef appellees’ alleged
cause of action accrued, are barred.

The trial court found that “Since the petition herein
was filed January 24, 1974, not even the implied contract

A5

statute of limitations of three years in Kansas and Okla-
homa (and four years in Texas) has run and the court
finds the written contract limitation should apply.”

Assuming the three-year statute of limitations to be
the applicable time limitation for consideration, as Mobil
contends, we do not think the claims of Mobil royalty
owners are barred. The original petition filed January
24, 1974, referred to both defendants, Mobil and Northern
Natural, as “Northern Natural.” Both defendants had am-
ple notice prior to the running of any statute of the contents
of the amended petition. By agreement of the parties
an order was entered by the trial court prior to the running
of the statute on May 24, 1974, allowing the amended
petition to be filed. The claim against Mobil and Northern
Natural arose out of the same facts as alleged in the
original petition. The defendants admitted in their answer
to the amended petition that “Mobil Oil Corporation pays
royalties on leases of Northern Natural Gas Producing
Company” and that Northern Natural Gas Producing Com-
pany is a wholly owned subsidiary of Mobil. It was stipu-
lated in the pretrial order that Mobil receives all proceeds
from gas sales due Northern Natural Gas Producing Com-
pany.

Under these circumstances the plaintiff Nix, although
a royalty owner under a lease with Northern Natural,
had the same standing to seek recovery against Mobil
as did the plaintiff Schupbach for damages payable as
interest arising from the use of FPC suspense funds. The
question presented was common to all class plaintiffs re-
gardless of which defendant’s lease was applicable.

K.S.A. 60-215(c) provides:

“Whenever the claim or defense asserted in the
amended pleading arose out of the conduct, transaction,

A6

or occurrence set forth or attempted to be set forth
in the original pleading, the amendment relates back
to the date of the original pleading. An amendment
changing the party against whom a claim is asserted
relates back if the foregoing provision is satisfied and,
within the period provided by law for commencing
the action against him, the party to be brought in
by amendment (1) has received such notice of the
institution of the action that he would not be prej-
udiced in maintaining his defense on the merits, and
(2) knew or should have known that, but for a mistake
concerning the identity of the proper party, the action
would have been brought against him.”

Under all of the facts and circumstances here pre-
sented, and applying the intent and spirit of the foregoing
statute, the amended petition relates back to January 24,
1974, both as to plaintiff Nix as being a proper representa-
tive of the entire class of Mobil’s and Northern Natural’s
royalty owners and as to plaintiff Schupbach as being
such representative.

Accordingly, as held in Shutts, (1) this action was
properly tried as a class action even though involving
nonresident plaintiffs, (2) the producers were 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

A7

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, K.S.A. 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
paid.”

The judgment of the lower court is affirmed in part
and modified in part, and the case is remanded for further
proceedings consistent with the foregoing opinion.

A8

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,

Hon. ROBERT H. KAUL,

Hon. ALEX M. FROMME,

Hon. PERRY L. OWSLEY,

Hon. DAVID PRAGER,

Hon. ROBERT H. MILLER,
JUSTICES.

No. 47,917

Int 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

. 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

A9

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. A\l-
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
or fact common to the members of the class predomi-

10.

Ald

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 extend 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
fulfill its business obligations, where such funds never
did or could belong to the stakeholder, the case is
embraced within the “common fund” rule.

11.

12.

13.

All

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
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.

14.

15.

16.

Alz

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
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

17.

18.

19.

20.

21.

Al3

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-—lInadequate 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 Morey 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.

INTEREST—Interest on Suspended Royalties Recov-
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-

22.

23.

Al4

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 ges 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
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

24.

25.

Ald

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-
terest, and (3) its determination that the gas producer
was liable for interest on the theory of unjust enrich-
ment. The trial court’s judgment is modified as to
the computation of the interest to be recovered.

Al6

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.
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

eens eee - =

os

Al7

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 lands 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.

On each of these two leases, Althea Shutts’ predeces-
sor in title had entered into a gas 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

Al8

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 “netural 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
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

Alg

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:

“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

A20

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 Departmen
Bartlesville, Oklahoma”
(Emphasis added. )

2 ed oS Rae Mae .%

Ce ed

A2l

The indemnity which Phillips required was not <¢ no-
cost corporate undertaking, which was all Phillips filed
with the FPC. Rather, Phillips required a corporate surety
bond in an amount based on estimated production for
two years, plus seven percent (7%) interest, subject to
Phillips’ review at the end of eighteen (18) months.

This notice was included with Phillips’ royalty checks
for June 1961, that were mailed to all its royalty owners
on July 28, 1961. Seventeen (17) persons or entities (who
are not members of this class action) did furnish 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,”
whether or not the rates were approved by the FPC.

A22

Phillips never owned this money. While Phillips collected
eight-eighths (8/8) of the increased rates, under no con-
dition was the one-eighth (4%) 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, 1970, Phillips sent the following notice to Althea Shutts
and other royalty owners in the class:

Pa

el

uted —_

A23

“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 full ceiling rate levels established by the
Opinion.

“If such Opinion should be changed, set aside,
or vacated, resulting in a reduction of the rate levels
relied upon by Phillips in its calculations, Phillips
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.

———— A

A24

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

—_-

A25

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 Commis-
sion dockets. The detailed monthly prices and lease
accrual information cannot, therefore, be reflected in
any practicable manner on the enclosed check. The
detail of our computations can be audited during regu-
lar business hours at our Bartlesville, Oklahoma office.

“Phillips Petroleum Company
Settlements Division
Exploration & Production Department
Bartlesville, Oklahoma 74004”

(Emphasis added. )

The foregoing notice discloses Phillips neither paid nor
offered to pay any interest for the use of the money,
nor did Phillips say anything about interest or how long
the money had been held or used by Phillips.

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 rcyalty 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

A26

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.”

nde

Ch ee Se Pe te ete ee eee Faery

ee

A27

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;

(c) Questions of fact and law are common to
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;

A28

(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

Se ee ee ee ye 4

A art AI sl ao ai

A29

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 drises 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 de-
fendant, 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.

A30

“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

A3l

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

A32

assumption of power, and be resisted as mere
abuse... .” (p. 720.)

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 U.S.
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. )

ees

A33

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, ........
I asenee sail L.Ed.2d_........ 5 Ganiates a [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-

A34

ing all other actions, was emphasized long ago by the
United States Supreme Court in Hansberry v. Lee, 311
U.S. 32, 85 L.Ed. 22, 61 S.Ct. 115, 132 A.L.R. 741. There
the court 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

A35

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. )

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 Col-
um. 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:

A36

“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
others; and a bill may also be maintained against
a 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
U.S. 1025, 23 L.Ed.2d 50, 89 S.Ct. 1622.) While the results
are supported by the fear of overloading the federal judicial

A37

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
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 commencemen. 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

A38

in a representative capacity. (G.S. 1868, ch. 80, § 38;
L. 1909, ch. 182, § 37; R.S. 1923, 60-413; and L. 1963,
ch. 303, § 60-223, amended by Supreme Court order dated
July 17, 1969.)

In its present form the Kansas Class Action Rule,
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

A39

“(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 correspopding declaratory relief with respect
to the class as a whole; or

“(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 controversy 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 Il1.2d 529, 331 N.E.2d 65. )

Citations to the venue statutes of Kansas and other
states are inapplicable here. (See United States v. Truck-

A40

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
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.

A4l

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
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-

A42

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.D.
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:

Ҥ 26. REPRESENTATIVE OR CLASS AC-
TIONS.

“Where a class action is properly brought by or
against members of a class, the court has jurisdiction

A43

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.)

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) A person 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, _.... Pa. ..., 352 A.2d
12 (1976), cert. denied, 429 U.S. 828, 50 L.Ed.2d 91, 97

A44

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
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 whowwill 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 satutory 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

le ne Mhbe WTA PY

A45

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
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

A46

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
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 iegal 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 U.S. 146,
62 L.Ed. 208, 38 S.Ct. 54 [Connecticut judgment binding
on Missouri resident]. )

ener IE ee waeer

A47

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
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.

A48

Here Phillips filed a corporate undertaking guaranteeing
to refund any or all portions of the “FPC suspense money”
with interest which it collected and held pending FPC
determination of the lawful gas rates in the Hugoton-
Anadarko area rate proceedings. All gas royalty owners
had a common concern in the funds attributable to “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 all its business obligations.
In this manner the “suspense royalties,” which never did
or could belong to Phillips, enriched Phillips at the expense
of the royalty owners. To hold that Phillips’ act of using
the money for business purposes, and not putting it into
a separate corporate account, takes this case out of the
“common fund” category would reward Phillips’ action
at the expense of innocent gas royalty 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

A49

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
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:

A50

“. . . 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.”

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 preser*
claims or defenses; or otherwise to come into the ac-
Gece”

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 U.S.
306, 94 L.Ed. 865, 70 S.Ct. 652, this elementary notion
applies even when the interested parties are so numerous
that the task of 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

ASI

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
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 tise 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-

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_0198%3A1. Public record. Not legal advice.