Petition — Phillips Petroleum Co. v. Shutts

Supreme Court brief1978

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IN THE MICHAD. ROON

Supreme Court of the United States

Ocronen Team, 1977

77-856

Puitia PernoneuM Company, Petitioner,

In, Suvurra, as Executor of the Eatate of Althea

Shutta, Individually, and as representative of all that

Clana of gas royalty owners under Phillips Petroleum

Company oil and gas leases in the Hugoton-Anadarko

aren, Rexpondenty,

CLERK

PETITION FOR A_ WRIT OF CERTIORARI

TO THE SUPREME veka THE STATE OF

CLARK M, CLIPPORD

Canon M, Giana

Ronenr A, ALTMAN

Joun G, CALENDER

Crirpord, GLasa, Mol wain

& FINNEY

815 Conneetiont Ave,

Washington, D.C, 20006

Joampu W, Kennepy

Monnia, Larne, Evana, Brook

& KENNEDY

Biite 440, 200 Weat Douglas

Wichita, Kansas 67202

Kenneren Hrapy

C.J, Rowena

T, lL. Cunnace IT

Phillipa Petroleum Company

Rartleaville, Oklahoma 74004

Pease of Bveenw © Abawe Painting, ine, Waeniweren, DO

INDEX

Page

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Opinion and Judgment of the Distriet Court |

Cree, Modifying the venguen of the District

Pretrial Order of the Distriet es re Ia

Opinion and Judgment of the Supreme Court .., 26a

Denial of Motion for Rehearing ............... Oba

il TABLE OF AUTHORITINA

Canna! Page

American Iron Co, ¥, Seaboard Air Line Ratlway, 238

hen Bop lnes Ocurs, S18 Pad eae (beg) 87" 1b

, serene

Chief Pada Philadel ciple .. Morton Malt Co,, 248 F.Bupp, nd

Cooke Nofe ni 46 oh a i oo io

Daar vy ¥ Co,, 488 ik sano eens 16

Feldman ¥, y oT fg, Oo, Cont 1.

A.2d W177 (App, Div, VOTB) cere reer eens iu

Freeman V, Alderaan. 110 U, 4 oes OL)

Gray ¥ Aneee, Production Company, Pod 679 ;

a eg er a

Benson 7 ie , 67 ULB, 296 1 368) ink on ok 8, 10, 12, 18

Hartford LAfe Ins, Co, Co, ie iD. ee os) (1916) .,, 4

ba i ys § 1 Ww, : arte, bee do,

In ity im nay rho Aven re Gave; 466 Bib

latoraational ay Co. ¥, Washing om, 308 26 U8

(10GB) nrcccpeveeseeegereces 7 ber 10, Mi, ih, af 16

Kiemow v, Time Ine,, 406 f-" Dn Od 12, vert,

denied, 420 UA, ‘w28 (LOTS) sv secccrseneseengons 1

Maddow v, Gulf Corporation, 107 PQd 1926 (Kan, :

uellens Cini ienover Honk @ Hrasd Go, th

U, MS, sree? Gee pr sretntrraeene Or i '

607 P.dd 1992 (Kan, OTT) ccc ccc cece renee 7

P N77)

wh. 116 BOTT) vpeccaccecpores 12

Philadelphia Meine Co, ¥, A American Hrase ,

shoe’ Hele UB 1 Bk, 3060 i uh

Siting ve 4 OE onpony, ‘tet’ Pod’ _ '

se ran arn i

Supreme Tbe r Hen Hur . Com, 260 U8. 906 -

tohn —y SEG Paper Co, 414 U.S. 201 (1078) .7,19

Table of Authorities Continued it

Page

ConwrrrutionaL Provisions:

Article VI of the United States em ppoeeses y

Fourteenth Amendment to the United Sta

Os 2, 4, 4,7, 4, 0 11, 16, 20, 21

MraTurns |

Tv vetd s cec cues eehideeenaeue 4,6, 4, 16, 16,10

TT Aids ode ion Ko bndsbnd nbd phensoben 4, 14,16

Itule 25, our Kules of Civil Procedure ..,,,,,,., 14

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a 7 yr the Sherman Antitrust Act, 16 U.S.C, 46 16

Say ey PEED be'sewedendebebedecadecdeceee oo §

Neautations’

Vederal Power Commiasion

18 OF Mt, 4 164.106(4) TTT TTTTY pbbobdedbedes 4

Apminieraative Decisions:

Hugoton-Anadarko Area Rate C , Opinion 686, 44

NPC, 761 (apt0h bebeees pe sosenbuevevers 4,6,8

MisORLLAN ROUSE |

Comment, Class Action Adjudications, 18 ULC.L.A,

L, Rev, URED his cl chbansceccsenses 14

FPPC Publication 8-217, Sales fe oy, Producera ve of Natural

Gas to Interstate 1070, ULB,

Government Printing Oo peeesbecevcoes 1A

Neotion 6 of the Proposed Uniform Class Action Act 11

veelymeor™ Class Actions, 63 A.B.A, Journal 487 1

IN THE

Supreme Court of the United States

OctToBER TERM, 1977

No.

Puusme PerroLeum Company, Petitioner,

Inu, Suurrme, as Executor of the Estate of Althea

Mhutts, Individually, and as representative of all that

élass of gas royalty owners under Phillips Petroleum

Company oil and gas leases in the Hugoton-Anadarko

area, Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF THE STATE OF

Petitioner Phillips Petroleum Company prays that a

writ of certiorari issue to review the opinion and judg-

ment of the Supreme Court of Kansas entered in these

proceedings on July 11, 1977.

The opinion of the Supreme Court of the State of

Kansas ia reported at 222 Kan. 527, 567 P.2d 1292, and

appears in the Appendix hereto. (26a) The unpublished

judgment and opinion of the District Court of Kiowa

County, Kansas, dated July 29, 1976 (App. 6a), modi-

fied on August 13, 1976 (App. lla), makes reference

to stipulations in the Pretrial Order filed April 14,

1976, which is reproduced in pertinent part in the

Appendix. (12a)

JURISDICTION

The judgment of the Supreme Court of Kansas was

made and entered on July 11, 1977. A timely motion

for rehearing was denied on September 15, 1977 (App.

65a), and this petition for certiorari was filed within

90 days of that date. This Court’s jurisdiction is in-

voked under 28 U.S.C. § 1257(3). The Supreme Court

of Kansas is the highest court of the State of Kansas

in which a decision can be had.

CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED

The Fourteenth Amendment to the United States

Constitution provides in pertinent part:

[N]Jor shall any State deprive any person of life,

liberty, or property, without due process of law....

Article VI of the United States Constitution pro-

vides in pertinent part:

This Constitution, and the Laws of the United

States which shall be made in Pursuance thereof;

and all Treaties made, or which shall be made,

under the Authority of the United States, shall be

the supreme Law of the Land; and the Judges in

every State shall be bound thereby, any Thing in

the Constitution or Laws of any State to the Con-

trary notwithstanding.

The statutory provisions involved are set forth in the

Appendix beginning at page la. They include the fol-

lowing:

1. Kansas Statutes Annotated, Sections 60-223 and

60-266.

2. Section 4(e) of the Natural Gas Act, 15. U.S.C.

§ 717e(e).

QUESTIONS PRESENTED

I. The Kansas Supreme Court has ruled that under

the Kansas class action statute (K.S.A. 60-223), Kansas

state courts have jurisdiction to render a judgment

binding upon vnnamed nonresident members of a plain-

tiff class, even though such persons have absolutely no

contact with the State of Kansas. Further, the Kansas

court has held that jurisdiction over such nonresidents

is established ‘‘if procedural due process guarantees

are met.” (App. 42a, 567 P.2d at 1308) The first

question presented is whether the exercise of in per-

sonam jurisdiction by a state court over unnamed non-

resident members of a plaintiff class, having no contact

with the forum state, under a standard of procedural

due process, and not “‘minimum contacts’’ with the

forum state, exceeds the constitutional limitations of

the state’s power and violates the Due Process Clause

of the Fourteenth Amendment.

II. The Kansas Supreme Court has ruled that Peti-

tioner must pay interest on additional royalties paid

in 1972, for the period prior to the time the royalties

were ascertained and due and payable. The second ques-

tion presented is whether the decision to award interest,

on equitable grounds, for the period when the final

payment of royalty was properly delayed by operation

of federal law so offends notions of fairness as to be

violative of the Due Process Clause of the Fourteenth

Amendment.

STATEMENT OF THE CAS=

Petitioner Phillips Petroleum Company (‘‘Phil-

lips’’), during the times relevant to this action, was

engaged in the production and purchase of natural gas

from mineral leases in the Hugoton-Anadarko area and

‘he sale of its gas to various pipeline companies for

transportation and resale in interstate commerce.’ Re-

spondents were royalty owners in said leases.’

Numerous respondents entered into separate agree-

ments with Phillips which provided, inter alta, that the

royalty to be paid should be computed in relation to

the weighted average price per Mef received by Phillips

during any calendar month from all sales of gas deliv-

ered by Phillips within a certain ‘‘designated area’’ in

the Hugoton-Anadarko area.’

In September 1970, Federal Power Commission

(““FPC’’) Opinion No. 586 was issued and it became

final in October 1972. In re Hugoton-Anadarko Area

Rate Case, 466 F.2d 974 (9th Cir. 1972). Opinion No.

‘The Hugoton-Anadarko area is a Federal Power Commission

rate making area encompassing generally the State of Kansas and

the Panhandle Section of Texas and Oklahoma. 18 C.F.R. § 154.106

(g).

? The royalty relationship was governed by oil and gas leases and

amendments thereto, including gas royalty agreements.

* The ‘‘designated area’’ is Texas County, Oklahoma, and Sher-

man and Hansford Counties, Texas.

——

586 determined the lawful rates for interstate sales of

gas in the Hugoton-Anadarko area. The effect of Opin-

ion 586, insofar as Phiilips and the respondents are

concerned, was its approval, in whole or part, of Phil-

lips’ nineteen pending applications for permission to

increase prices for the sale of gas by Phillips within

the ‘‘designated aree ’’ Insofar as the rate applications

were approved it meant that the respondents were en-

titled to receive approximately $5,700,000 in additional

royalties relating to gas production between 1961 and

1970. In December 1972, Phillips disbursed the addi-

tional royalties to the respondents, who numbered over

6,400.*

Irl Shutts, a resident of Kansas, brought this action

on behalf of himself, and other royalty owners having

leases in the Hugoton-Anadarko area to whom Phillips

had disbursed additional royalties, to recover interest

thereon. Over Phillips’ jurisdictional objection (De-

fendant’s Motion to Dismiss Purported Class Action

As to Non-Resident Class Plaintiffs, Record on Appeal,

p. 19) the trial court certified Ir] Shutts as a member

and proper representative of a class of the royalty

owners (including nonresidents) who received addi-

tional royalty payments from Phillips. The only con-

tact between the State of Kansas and the plaintiff class

was the residency in that state of 218 of its members.

The District Court of Kiowa County, Kansas, heard

the case as a class action under K.S.A. 60-223. On the

merits, and over Phillips’ objection that no interest is

to be awarded where the payment of the principal sum

‘For a fuller, and more detailed discussion of the facts in this

ease, the Court’s attention is directed to the factual recitation in

the opinion of the Kansas Supreme Court. (App. 26a-35a, 567

P.2d 1298-1304)

properly is delayed by federal law, the trial court con-

elnded that Phillips was liable for interest. The trial

court’s ruling was appealed to the Kansas Supreme

Court, which affirmed the trial court with regard to its

holdings that: (1) it had jurisdiction over unnamed

nonresident plaintiff class members who had no contact

with the State of Kansas; and (2) that Phillips must

pay interest on the additional royalties notwithstanding

their final distribution was properly delayed by federal

law.

These two holdings form the basis of Phillips’ peti-

tion to this Court.

REASONS FOR GRANTING THE WRIT

For the first time in the United States, a state court

has attempted to exercise in personam jurisdiction over

a nationwide plaintiff class in which ninety-six percent

of the class members were nonresidents of and had no

contact whatsoever with the forum state. International

Shoe Co. v. Washington, 326 U.S. 310, 316 (1945), held

that in order to subject a party who is not present with-

in the forum to in personam jurisdiction, he must have

‘‘eertain minimum contacts with it such that the main-

tenance of the suit does not offend ‘traditional notions

of fair play and substantial justice.’ ’’ Ignoring Inter-

national Shoe, the Kansas Supreme Court held that

“‘the element necessary to the exercise of jurisdiction

over nonresident plaintiff class members is procedural

due process,”’ and not minimum contacts with the forum

state. (App. 38a, 567 P.2d at 1305) (emphasis in orig-

inal) This assertion of personal jurisdiction over non-

resident parties having no contacts, ties, or relations

with the State of Kansas and who have not affirmatively

submitted themselves to the jurisdiction of its courts

1S an egregious violation of the Due Process Clause

of the Fourteenth Amendment. ‘‘[A] State, in seeking

to assert jurisdiction over a person located outside its

borders, may only do so on the basis of minimum con-

tacts among the parties, the contested transaction, and

the forum state.”’ Shaffer v. Heitner, —— U.S. —-,

97 S.Ct. 2569, 2588 (1977) (Brennan, J., concurring

and dissenting).

It is imperative that this Court grant certiorari in

this case and decide whether state court jurisdiction

over a plaintiff class in a nationwide class action must

be determined by the traditional jurisdictional require-

ments set forth in International Shoe and Shaffer, or

whether some new and expanded concept of state court

jurisdiction is to be constitutionally sanctioned.’ The

likelihood of other multistate class actions in state

courts is not a mere possibility but a reality. At this

time there are a number of similar class actions in-

volving nonresidents pending in the courts of Kansas

which have assumed jurisdiction over the nonresident

class members. See, e.g., Niz v. Northern Natural Gas

Producing Company, 567 P.2d 1322 (Kan. 1977);

Sterling v. Superior Oil Compamy, 567 P.2d 1325 (Kan.

1977) ; Maddoz v. Gulf Oil Corporation, 567 P.2d 1326

(Kan. 1977); and Gray v. Amoco Production Com-

pany, 564 P.2d 579 (Kan. Ct. App. 1977).

Furthermore, the award of interest by the Kansas

Supreme Court constitutes a denial of due process of

law to Phillips. It is clearly contrary to concepts of

* Zahn v. International Paper Co., 414 U.S, 291 (1972) and

Snyder v. Harris, 394 U.S, 332 (1969), preclude most nationwide

diversity class actions in the federal courts.

fundamental fairness to require Phillips to pay in-

tereat on additional royalties prior to the time that

they became legally due and payable, The Kansas Su-

preme Court concedes that the additional royalties

were not due and payable until after FPC Opinion 586

became final, This should be the controlling factor in

the award of interest, Phillips ahould not be penalized

for the delay by the FPC in ruling on Phillipa’ price

increase applications,

Since a judgment in a clase action in Kansas binds

the class whether favorable or unfavorable to the class,

K.S.A, 60-223(¢) (2), the exiatence of jurisdiction must

be teated in the context of a judgment unfavorable to

the class, If the rule were otherwise, a judgment favor-

able to Phillips would not be accorded full faith and

credit, Hanson v, Denckla, 357 U.S, 235 (1958), Due

process would thus be denied Phillips,

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

(1945), held that a judgment cannot be entered against

one who has no contacta with the forum state:

Whether due process ia satisfied must depend

rather upon the quality and nature of the activity

in relation to the fair and orderly administration

of the lawa which it was the purpose of the due

roceas clause to insure, That clause does not con-

Complete that a state may make binding a judg

ment in personam against an individual or corpo-

rate defendant with which the state has no con

tacta, ties or relationa, (326 U.S, at 319)

This rule recently has been extended by the decision

in Shaffer v, Heitner, —— U.S, ——~, 97 S.Ct, 2669

(1977), There, this Court aaid:

The standard for determining whether an exerciae

of jurisdiction over the interests of persons is con-

sistent with the Due Process Clause ia the mini-

mum contacts atandard elucidated in /nternational

Shoe, (97 S.Ct, at 2682)

The erucial holding by the Kansas Supreme Court

with reapect to the extension of state juriadiction is as

follows:

Therefore, while the easential element necessn

to eatabliah ,uriadiction over nonresident defend-

ante is come ‘minimum contacta’’ between the de-

fendant and the forum atate, the element neceasary

to the exercise of juriadiction over nonresident

plaintiff clase members ia procedural due process.

(Ap oer 567 Pld at 1805) (emphasia in

origina

The Kansas Supreme Court clearly disregarded the

minimum contacts requirement for the aseumption of

jurisdiction over nonresident plaintiffs, Thus the Kan-

sas Supreme Court created an erroneous distinction

between plaintiffs and defendants which thie Court

never before has recognised, Shaffer v. Heitner indi-

cates that it is improper to draw such a distinction

when determining questions of juriadiction:

ag assertions of state court jurisdiction muat

evaluated according to the standards set forth

in International Shoe and ita progeny, (97 S.Ct.

at 2684-85)

= ee

V————— eee

Since aa noted, judgmenta in class actiona bind the

class even if unfavorable, there la no authority or rae

tional baaia for the Kansas Supreme Court's disregard

of the minimum contact standard required by the Due

Process Clause, Substituting ‘procedural due process”

for the ‘minimum contacta’’ required by /nternational

Shoe and Shaffer aa the foundation of jurisdiction

moana that the atate court can create juriadiction where

none exists merely by following certain procedural

safeguards, The Kanaas Supreme Court, by focusing

on notice and adequacy of representation as providing

procedural due process and thereby establishing jurin-

diction, has ignored the mandate of International Shoe

that it ia the ‘quality and nature of the activity” whieh

eatablishes juriadiction if due process is otherwise

watinfled,’

Phillips does not dispute that a nonresident plaintiff

may bring an action against a defendant in any state

which can properly assert jurisdiction over the defend.

ant, In that situation, however, the plaintiff must vol-

untarily submit himself to the juriadiction of the atate

court by filing his complaint there, He muat purposely

avail himself of the privilege of bringing suit in the

forum atate, ‘thus invoking the benefits and protections

of ite lawa.’’ Hanson v. Denekla, 397 U.S, 235, 253

(1958), In the instant action, the only plaintiff who

affirmatively submitted himself to the jurisdiction of

Kansas courte was the representative party, Shutte,

The unnamed nonresident clase members took no af-

“The Kansas Supreme Court ignores the rule that jurisdiction

must exiat before procedural due process becomes an issue, No

amount of procedural due process (in the form of notice) ean

create jurisdiction where none previously existed, See Shaffer v.

Heitner, supra, 97 8.01, at 2086, n, 40,

firmative action within the forum atate which could

invoke the benefits and protections of ita laws, Conne-

quently, the Kansas court's effort to assume jurisdic:

tion over the nonresident members of the plaintiff

clans was void for it was a clear attempt to exerciae

power in violation of the Due Process Clause,

A finding of minimum contacts with the forum «tate

must be a prerequisite to the assumption of in personam

jurisdiction over both unnamed nonresident plaintiffs

in a class action and defendants,’ The Kansas Supreme

Court erred in ruling otherwise, There is nothing im-

proper in holding unnamed nonresident plaintiffs in a

Class action to the aame rules of jurisdiction aa non-

resident defendants, The positions of both are similar,

Neither has affirmatively acted to submit himself to the

atate court's jurisdiction, In a real sense, both are in-

voluntarily ‘‘dragged"’ into court,

B. There le « Conflict of Decisions Among the Giates on this

Important lasue of Juriediction.

The confusion among the atates on this constitutional

issue can only be resolved by a decision from thia Court.

Contrary to the decision in Kansas, the Supreme Court

of Pennaylvania declined to assert jurisdiction over

nonresidents, holding that a plaintiff class must be

' This requirement ie ined by the National Conference of

Comminsioners on Uniform State Laws in Section 6 of their Pro-

“y- Uniform Class Action Act, (App. 5a) That section idea

or juriadietion over a class member, either plaintiff or ’

if ''a basis for juriadiction existe or would exist in a suit againat

the person under the law of this state.’’ ( added) This

clearly the constitutional minimum contacte

announced in /nternational Shoe the plaintiff as well aa the

oor eget mm Vestal, Uniform Class Actions, 68 A.B.A, Journal

limited to residenta of the forum state ‘'[b]ecause the

jurisdiction of the courte of the Commonwealth is ter-

ritorially limited,’’ The class may only include non-

residenta ‘‘who submit themselves to the jurisdiction

of the state courta,’’ Klemow v, Time Ine, 466 Pa, 189,

197 n.15, 952 A.2d 12, 16 0.15, cert, denied, 420 US,

828 (1976), The Pennaylvania Court supported its

holding with prior decisions of this Court, Hanaon

v. Denckla, 967 U.S, 236 (1068); Mullane v, Central

Hanover Bank & Truat Co,, 399 U.S, 306 (1960),

Pennoyer Vv, Neff, 06 U.S, 714 (1877),

A New Jersey intermediate appellate court, relying

on International Shoe v. Washington, supra, reached

the same conclusion, holding that ‘‘a state court does

not have jurisdiction over, and therefore cannot bind to

a judgment, an individual with whom the state has no

‘eontacta, ties or relations.’ '’ Feldman v, Bates Mfg.

Co., 143 NJ, Super, 84, 362 A.2d 1177, 1180 (App, Div.

1976). The court declined to assert jurisdiction over

o multistate plaintiff class and correctly distinguished

this Court's cases that involved a ‘common fund" or

an overriding state interest in the regulation of the

defendant corporation organized in that state, 362 A.2d

at 1180-81,

In view of thie Court's decisions in Snyder v, Harria,

904 U.S. 392 (1969), and Zahn v. International Paper

Co., 414 U.S, 201 (1973), whieh limit federal court ju-

riadiction in diversity class actions, it is apparent that

nationwide class actions will increasingly be brought in

atate courte, Therefore, it is essential that this Court

set the appropriate bounds of state court jurisdiction

in such cases and announce a rule to be applied unt-

formly throughout the nation,

In attempting to justify the expansion of state court

jurisdiction the Kansas Supreme Court held “[{t}hat

there is indeed a difference between the jurtadictional

standards governing class actions, and those governing

all other actions’’ (App, 38a, 567 P.2d at 1905), relying

on the following dicta in Hanaberry v, Lee, 911 U.S,

$2, 41 (1940);

Courts are not infrequently called upon to proceed

with catises in which the number of thone interested

J the be they h . oo reat fe te make difleult or

within the jurisdiction, . .. sais seed

The authorities cited by the Kansas Supreme Court in

support of this statement, ¢.9., Supreme Tribe of Ben-

Hur v, Cauble, 265 U.S, 966 (1921), were all actions

where either the nonresident class members had mini-

mum contacts with the forum state as required by /n-

ternational Shoe, or where the forum state had undis-

puted juradiction over property in which the non-

residents were interested, When viewed in the context

of the authorities cited, the statement in Mansherry

that ‘some are not within the jurisdiction” ean only

be taken to mean that the plaintiffs were physically

outside the territorial limita of the forum state, not

that such nonresidents were not properly ‘subject to"

the forum state's jurisdiction, However, the Kansas

Supreme Court misconstraes Hansberry v, Lee as pro-

viding authority for exercising jurisdiction over per-

sons who were not otherwise “subject to" the forum

state's jurisdiction, The suggestion that Hanaberry vy.

Lee provides a different jurisdictional standard for

representative actions does not bear analysis,”

The Kansas Supreme Court's attempt to expand the

jurisdiction of Kansas state courte because the form of

the action is a clase action runes afoul of the statutes

of Kansas, In the first place, K.8.A, 60-266 clearly

provides that ‘‘[t]his article shall not be construed to

extend or limit the juriadiction of the district courts,

..' A similar attempt to expand federal court juris

diction because of Rule 24, Federal Rules of Civil Pro-

— ('Thie precise proposition was considered in « thorough article in

the ULCLL.A, Law Heview |

It might be argued that the juriadietional standard of due process

for representative actions ia different than it ia for individual ae.

tions, especially in light of Mansberry v, Lee, in whieh the Court

recognized an exeeption to the traditional requirement of absolute

judicial power over the parties involved in a elaas aetion, Hansherry

made it clear that for a clase member to be bound by a court's

decree in a representative action, he muat be adequately represented

hy other members of the class, It might he maintained that if a elaas

member ia well represented, he eannot elaim that he ia not bound

by the judement of the adjudicating eourt, even if he ia not a

resident of the forum atate. However, the effeet of Hansherry ean

not be drawn with auch a broad brush, for it was not a class aetion

ease ond ‘‘ite broad pronouneementa of the requirementa of due

process in clase actions are rank dieta.’’ Alao, the exception of

Hansherry goes to the ability of the court to render a binding judg.

ment on resident class members not actually before the court, and

perhane even to those who have not had notiee of the proceedings,

hut it does not aanetion the use by atate courts of jurisdictional

power unknown to any form of aetion to affect the lewal relations

of nonresidents, Neither Hanaherry, nor any subsequent ease, has

held that a clam action based on separate and distinet claime ean

have a binding effeet on members of the class who are outside the

commonly accented juriadietional limita of the atate eourt whieh

renders the judgment. NWenee, the jurtedictional reach of a state

court in the same whether the action ta representative or individual

Comment Class Action Adjudications, 18 UCLA. Ll, Rev, 1002,

1011 (1971) (omphaaia supplied)

cedure, was specifically rejected in Snyder v. Harris,

#4 U.S, 442, 337 (1969). Furthermore, there is no hint

in the elase action statute itself, K.S.A. 60-223, that the

clase action device was intended in any way to broaden

the Kansas courts’ jurisdiction beyond the territorial

limite of the state, or in any way to attempt to change

(or abridge) the requirements of due process.as dic-

tated by International Shoe and Shaffer.

The authorities cited by the Kansas Supreme Court

in an attempt to bolster extraterritorial jurisdiction

in clase action situations are all distinguishable. Chance

v. Superior Court, 373 P.2d 849 (1962), clearly was an

in rem proveeling. Daar v. Yellow Cab Co., 433 P.2d

742 (1907), involved only persons who had traveled in

Yellow Cabs in the Los Angeles area which gave rise

to their elaims. Horst v. Guy, 211 N.W. 2d 723 (N.D.

1973), speetfically limited the class to residents or for-

mer residents of North Dakota. These authorities

clearly do not support the court’s conclusion. The

federal cases, such as Philadelphia Electric Co. v. Ana-

conda American Brass Co., 43 F.R.D. 452 (E.D. Pa.

19068) and City of Philadelphia v. Morton Salt Co., 248

F.Supp, 506 (E.D. Pa. 1965), are completely inappo-

nite beenuuse they were cases brought under the anti-

triiet lawa of the United States where nationwide juris-

diction is granted by Section 5 of the Sherman Anti-

trust Act, 15 U.S.C. $5.

It follows that the Kansas Supreme Court’s holding

that different jurisdictional standards apply in class

action suite is not supported by any authority and is

contrary to K.S.A, 60-223 and K.S.A. 60-266. The Kan-

sas Supreme Court has construed K.S.A. 60-223 as

expanding state court jurisdiction over nonresidents

having no contact with Kansas. This construction

renders K.S.A. 60-223 unconstitutional and violates

Phillips’ rights under the Due Process Clause of the

Fourteenth Amendment.

D. This Case is Not Controlled by Prior “Common Fund” Cases.

The Kansas Supreme Court, apparently sensing that

it was distorting legal precedent in extending state

court jurisdiction to nonresident class plaintiffs who

had no contacts with Kansas, next considered the

‘‘eommon fund”’ eases which it said were ‘‘closely ana-

logous to the case at bar.’’ (App. 47a, 567 P.2d at

1311) Phillips has no quarrel with the ‘‘common

fund’’ cases and believes them to be correct holdings

in their particular fact situations. However, Phillips

strenuously objects to the suggestion by the Kansas

Supreme Court that the ‘‘common fund”’ cases are in

any way controlling here or even ‘‘closely analogous”’

to the facts in the instant case. This suggestion displays

a total lack of understanding by that court of the under-

lying relationships between Phillips and its royalty

owners giving rise to the claims herein.

Under the oil and gas leases Phillips obtains title to

the gas when it is produced. Phillips sells gas owned by

it to pipeline companies under gas purchase agree-

ments. The royalty owners have no right to any of the

gas once it is produced, but only have claims against

Phillips for the amount of royalty due under the ap-

plicable contracts. The relationship between Phillips

and its royalty owners is simply a debtor-creditor rela-

tionship with each royalty owner having a separate

and distinct claim against Phillips and Phillips having

a series of separate and distinct contractual liabilities

to its royalty owners.*

* This is the reason, as the Kansas Supreme Court correctly notes,

that the royalty owners’ claims could not be aggregated for federal

/ Prior decisions of this Court recognizing the bind-

ing effect of class action judgments on nonresident

plaintiffs in ‘‘ecommon fund”’ cases do not control the

instant case. E.g., Hartford Life Ins. Co. v. Ibs, 237

U.S. 662 (1915); Supreme Council of the Royal Ar-

canum Vv. Green, 237 U.S. 531: (1915). Those cases are

distinguishable on their facts and rationale. They each

involved a single separate fund, maintained by an orga-

nization that was chartered under and controlled by

state law. Each fund was kept within the forum state

and existed by the grace of its laws. No other state’s

law controlled. Because the funds were finite and ex-

haustable, inconsistent judgments could have had a

destructive effect on the rights of some of the plaintiff

class members who had interests in the funds. Thus,

this Court recognized the need for unitary adjudica-

tion of plaintiffs’ rights to the common fund, and the

power of the forum state court to decide issues con-

cerning the fund.

The instant action does not involve a common fund

controlled solely by a single state’s laws. At issue here

is whether Phillips should pay interest on the addi-

tional royalties due as a result of its separate contract-

ual relation with the individual royalty owners. Since

any interest payment which Phillips may be required to

make will not come out of a finite or exhaustable fund,

correlative rights need not be protected. Contradictory

judgments in the several states, some granting and

some denying interest, will not impair any mutual

rights. In fact each royalty owner’s claim can be adjudi-

= separately without affecting the rights of any

others.

— memes purposes. Snyder v. Harris, 394 U.S. 332

No single state has an overriding interest in obtain-

ing consistent judgments for parties other than its own

residents on the interest question. While Phillips is

authorized to do business in Kansas, as it is in Okla-

homa and Texas, it is not chartered in Kansas. Rather,

it is a Delaware corporation with its principal place of

business in Oklahoma. A few of the producing leases

involve Kansas lands and may have been executed in

Kansas, but Kansas’ interest cannot be grounded on

the interpretation of contracts executed exclusively

in, or involving lands lying solely within, its borders.

Although much of the land situated in the FPC’s Hugo-

ton-Anadarko rate making area is located in Kansas,”

the greatest volume of jurisdictional gas production

for the period has been from the Texas counties of the

rate making area.” In this case, the ‘‘designated area”’

gas sales which gave rise to the additional royalties

took place in one county of Oklahoma and two coun-

ties of Texas. Therefore, neither Kansas, nor Okla-

homa, nor Texas, nor any other state can allege a com-

pelling interest in adjudicating all of the class mem-

bers’ individual contract claims. It would strain the

concept of due process and territorial limitations on

jurisdiction to allow a state court to adjudicate claims

°The Kansas Supreme Court sought to justify its assumption

of jurisdiction by stating that ‘‘ Kansas has a legitimate interest in

adjudicating the common issue herein because Kansas comprises the

largest physical area included in the . . . Hugoton-Anadarko area.

_. .’’ (App. 52a, 567 P.2d at 1314-15) This, however, is not an

appropriate rationale for the exercise of personal jurisdiction.

‘* The state] does not acquire that jurisdiction by being the ‘center

of gravity’ of the controversy, or the most convenient location for

litigation.’’ Hanson v. Denckla, 357 U.S. 235, 254 (1958).

See FPC Publication S-217, Sales By Producers of Natural

Gas to Interstate Pipeline Companies—1970, U.S. Government

Printing Office, 1972, Table D, pp. XIII-XIV.

of nonresidents who have no contact with the state

merely because their claims have issues in common with

claims asserted by residents.

Even assuming, under conflict of law rules, that

Kansas law alone governed the entire class action, this

would not be sufficient to give Kansas courts personal

jurisdiction over the nonresident class members. ‘‘ [W Je

have rejected the argument that if a State’s law can

properly be applied to a dispute, its courts necessarily

have jurisdiction over the parties to that dispute.’’

Shaffer v, Heitner, —— U.S. ——, 97 S.Ct. 2569, 2586

(1977).

E. The Failure of Class Members to Opt Out of the Class Did

Not Constitute an Election to Submit Themselves to the Juris-

diction of the Kansas Court.

The Kansas Supreme Court implies that because the

class action notice satisfied procedural due process re-

quirements, it also was effective as a device for acquir-

ing jurisdiction. (App. 48a, 567 P.2d at 1313) The

rationale for such a conclusion is that by failing to opt

out of the plaintiff class, the nonresidents elected to

submit themselves to the jurisdiction of the Kansas

Court.” This theory erroneously presupposes that the

trial court had the power (or jurisdiction) to require

the nonresident notice recipients to act affirmatively in

order to be excluded from the class or, in failing to

act, to submit voluntarily to the court’s jurisdiction.

** According to the notice concerning the pending class action,

which Shutts sent to all class members, their right to opt out was

not absoluie. Rather, it was within the discretion of the District

Court to deny exclusion and force any class member to be bound

by its final decision, regardless of the member’s desire not to submit

himself to the jurisdiction of the court. K.S.A. 60-223(¢) (2).

The authorities recognize the clear rule that no state

law or rule of judicial procedure has any effect of its

own force beyond the limits of the sovereignty from

which the authority is derived. In the United States,

each state constitutes a distinct and independent sov-

ereignty, and consequently the laws of one state do not

operate in any other state of their own force.” Just as

the laws of every state are subject to territorial limita-

tions, so also is the jurisdiction of the states’ courts. A

state court’s jurisdiction cannot extend beyond the

territory belonging to the sovereignty on behalf of

which it functions.“ Thus, the nonresident recipients

of the Kansas court’s notice could disregard it with

impunity for the notice was ineffective and void for

want of power and violative of the Due Process Clause

of the Fourteenth Amendment.

Il. THE KANSAS COURT ERRED IN HOLDING THAT PHILLIPS

MUST PAY INTEREST ON THE ADDITIONAL ROYALTIES

The interest issue in this case arises from the pric-

ing provisions in the gas royalty agreements. Just as the

price Phillips undertook to pay royalty owners was

pegged to the average price of gas sold by Phillips in

the ‘‘designated area,’’ that ‘‘area’”’ price in turn was

dependent upon the rates that the FPC allowed Phil-

8 Cook v. Moffat, 46 U.S. (5 How.) 295, 308 (1847) : ‘‘It is true,

that as between the several States of this Union, their respective

. . . laws, like those of foreign States, can have no effect in any

forum beyond their respective limits. . . .”’

* Huling v. Kaw Valley Railway and Improvement Co., 130

U.S. 559, 563 (1889) : ‘‘[T]he process of the courts of the State...

have no efficacy beyond their own borders. . . .’’; Freeman v.

Alderson, 119 U.S. 185, 188 (1886): ‘‘The laws of the State have

no operation outside of its territory, . . . its tribunals cannot send

their citation beyond its limits and require parties there domiciled

to respond to proceedings against them... .’’

lips to charge for its gas. That price was not known

until long after the gas was produced. The Kansas

Supreme Court correctly noted that until such time as

the FPC approved Phillips’ proposed price increases,

or a portion thereof, Phillips was legally entitled to

retain the proceeds from its gas sales in the ‘‘desig-

nated area.”’ The court noted further that under prior

federal cases the plaintiff class had no legally enforce-

able right to obtain royalties on the monies which were

collected and held by Phillips subject to possible re-

fund pursuant to Section 4(e) of the Natural Gas

Act, 15 U.S.C. § 717e(e). (App. 28a, 567 P.2d at 1299)

It is elementary that interest is not allowed until the

principal sum becomes due and payable, unless other-

wise provided by contract. American Iron Co. v. Sea-

board Atr Line Railway, 233 U.S. 261, 265 (1914).

Here, the contracts do not provide for interest.

Notwithstanding the above rule, the Kansas Supreme

Court held that Phillips must pay interest on the addi-

tional royalty ultimately found to be due for the period

during which the ascertainment of the amount due was

delayed by operation of federal law. In so holding, the

Kansas Supreme Court ignored the interstate market

in which the natural gas was sold and the supremacy

of existing federal law and regulations. The award of

interest for the period when the final payment of the

additional royalty was properly delayed by operation

of federal law so offends notions of fairness as to be

violative of the Due Process Clause.

CONCLUSION

For the reasons stated, the petition noe writ of certi-

orari should be granted.

Respectfully submitted,

CLank M, CLIProrD

Canson M, Giase

Rosert A, ALTMAN

Joun G, CALENDER

Currrorp, Giass, McIL warn

& Finney

815 Connecticut Ave,

Washington, D.C, 20006

Joaepa W., Kennepy

Morais, Larne, Evans, Brock

& Kennepy

Suite 430, 200 West Douglas

Wichita, Kansas 67202

Kennetau Heapy

©, J, Roperrs

T. L. Cunpace II

Phillips Petroleum Company

Bartlesville, Oklahoma 74004

APPENDIX

nt -_-.,. _ *

See es -

Sections 60-229 and 60-266 of the Kansas Statules Annotated

Provide:

60.223, Clase actions, (a) Prerequisites to a class action,

One or more members of a class may sue or be sued as

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

is ao numerous that joinder of all members is impracti-

cable, (2) there are questions of law or fact common to the

class, (3) the claima or defenses of the representative

partios are typical of the claima or defenses of the class,

and (4) the representative parties will fairly and ade-

quately protect the interests of the class,

(b) Class actions maintainable, An action may be main-

tained ar a clase action if the prerequisites of subdivision

(a) are satisfied, and in addition;

(1) The prosecution of separate actions by or againat

individual members of the class would create a risk of

(A) inconsistent or varying adjudications with reapect to

individual members of the class which would establish in-

compatible standards of conduct for the party opposing

the class, or (B) adjudications with reapect 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 protect their interests; or

(2) the party opposing the class bas acted or refused to

act on grounds generally applicable to the class, thereby

making appropriate final injunctive relief or corresponding

declaratory relief with reapect to the class as a whole; or

(3) the count finds that the questions of law or fact com-

mon to the members of the class predominate over any

questions affecting only individual members, and that a

clase action is superior to other available methods for the

fair and efficient adjudication of the controversy. The mat-

ters pertinent to the findings include; (A) The interest of

members of the class in prosecuting or defending separate

actions; (B) the extent and nature of any litigation con-

corning the controversy already begun by or againet mem-

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

ing, and the procedural measures which may be needed in

conducting, a class action,

maintained; judgment; actions conducted partially as class

actiona,

(1) As soon as practicable after the commencement and

before the decision on the merits of an action brought as

a clase action, the court shall determine by order whether

it ja to be maintained as such, Where necessary for the

protection of a party or of absent persons, the court, upon

motion or on ite own initiative at any time before the

decision on the merite of an action brought as a nonclass

action, may order that it be maintained as a class action,

An order under thie subdivision may be conditional, and

may be altered or amended before the decision on the

merits,

(2) The judgment in an action maintained as a class

action shall extend by ite terms to the members of the

clans, as defined, whether or not the judgment is favorable

to them.

In any class action maintained under subdivision (>)

(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 ad-

judication of the controversy and states ite reasons there-

for. To afford members of the class an opportunity to re-

quest exclusion, the court shall direct that reasonable

notice be given to the class, including specific notice to each

member known to be engaged in a separate suit on the

same subject matter with the party oppored to the class,

(3) When appropriate (A) an action may be brought or

maintained as a class action with respect to particular is-

sues such as the issue of liability, or (B) a class may be

divided into subclasses and each subclass treated as a class,

and the provisions of this section shall then be construed

and applied accordingly.

(d) Orders im conduct of actions, In the conduct of ac-

tions to which this section applies, the court may, without

limitation, make appropriate orders; (1) Settling the

course of proceedings or prescribing measures to prevent

undue repetition or complication in the presentation of

evidence or argument; (2) requiring, for the protection of

the 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 atep

in the action, or of the proposed extent of the judgment,

or of the opportunity of members to signify whether they

consider the representation fair and adequate, to intervene

and present claims or defenses, or otherwise to come into

the action; (3) imposing conditions on the representative

parties or on intervenors; (4) requiring that ne pleadings

be amended to eliminate therefrom allegations as to repre-

sentation of absent persons, or to include such allegations,

and that the action in either case proceed accordingly,

The orders may be combined with an order under K.S.A.,

(0-216, and may be altered or amended as may be desir-

able from time to time,

(¢) Diwatssal or compromise, An action maintained as a

clans action shall not be dismissed or compromised without

the approval of the court, and the court in ite discertion

may order that notice of a proposed dismissal or compro-

mise be given to the clase in such manner as the court

may direct,

60-266, Jurisdiction and venue, This article shall not be

construed to extend or limit the jurisdiction of the district

courts or the venue of actions therein,

Section de) of the Natural Gas Act, 16 U.8.C. §717e(e), Provides:

Whenever any such new schedule is filed the Commission

shall have authority, either upon complaint of any State,

municipality, State commission, or gas distributing com-

pany, or upon its own initiative without complaint, at once,

and if it so orders, without answer or formal pleading by

the natural-gas company, but upon reasonable notice, to

enter upon a hearing concerning the lawfulness of such

rate, charge, classification, or service; and, pending such

hearing and the decision thereon, the Commission, upon

fling with such schedules and delivering to the natural-gas

company affected thereby a statement in writing of its

reasons for such suspension, may suspend the operation of

auch schedule and defer the use of such rate, charge, classi-

fication, or service, but not for a longer period than five

months beyond the time when it would otherwise go into

effect; and after full hearings, either completed before or

after the rate, charge, classification, or service goes into

effect, the Commission may make such orders with refer.

ence thereto as would be proper in a proceeding initiated

after it had become effective, If the proceeding has not been

concluded and an order made at the expiration of the sus-

pension period, on motion of the natural-gas company

making the filing, the proposed change of rate, charge, clas-

sifleation, or service shall go into effect, Where increased

rates or charges are thus made effective, the Commission

may, by order, require the natural-gas company to furnish

a bond, to be approved by the Commission, to refund any

amounts ordered by the Commission, to keep aceurate ac-

counts in detail of all amounts received by reason of such

increase, specifying by whom and in whose behalf euch

amounts were paid, and, upon completion of the hearing

and decision, to order such natural-gas company to refund,

with interest, the portion of such inereased rates or charges

by its decision found not justified, At any hearing involving

a rate or charge sought to be increased, the burden of proof

to show that the increased rate or charge is just and rea-

sonable shall be upon the natural-gas company, and the

Commission shall give to the hearings and decision of such

questions preference over other questions pending before

it and decide the same as speedily as possible.

The Proposed Gection 6 of the Uniform Class Action Act Reads

Follows:

Section 6, (Jurisdiction over Multi-State Classes. ]

(4) A court of this State may exercise jurisdiction over

ee P _— who is a member of the class suing or being

(1) @ basis for jurisdiction exists, or would exist in a

suit against the person, under the law of this State;

[(2) the state of residence of the class member has by

clase action law, similar to subsection (b), made its resi-

dence subject to the jurisdiction of the courts of this State

in class actions. ]

[(b) A resident of this State who is a member of a class

suing or being sued in another state is subject to the juris-

diction of that state if it by similar class action law extends

reciprocal power to this State. ]

IN THE DISTRICT COURT OF KIOWA COUNTY, KANSAS

No. 5309

Int Suutrs, as Executor of the estate of Althea Shutts,

individually and as representative of all that class of

gas royalty owners under Phillips Petroleum Company

oil and gas leases in the Hugoton-Anadarko Area,

Plaintiff,

vs.

Pumurs Perroteum Company, Defendant.

(Juty 29, 1976)

Frxprnes or Fact

The stipulations in the pre-trial order provide ade-

quately for the findings of fact necessary to present the is-

sues herein and are adopted by the court by reference as

its findings of fact herein.

Also, the contention of the parties are set forth in the

pre-trial order in at least sufficient length and are also

adopted by reference.

Conc.usions or Law

1. This is a proper class action under the provisions

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

(a) The approximately 6400 royalty owners in the

Hugoton-Anadarko area makes joinder impractable ;

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

small to justify separate actions;

bers in that the facts are really undisputed and the sole

legal issue presented is whether the plaintiff members are

entitled to interest on the suspended royalties held by

defendant ;

(d) The claims of the named parties are typical of the

claims of all members of the class and will fairly and ade-

quately protect the interest of the class;

(e) The question presented common to all members of

the class predominate over any individual question and a

class action is not only superior but the only efficient man-

ner to adjudicate the dispute herein (to avoid multiple

suits and excessive expenses) and that this court having

jurisdiction of a large physical portion of the Hugoton-

Anadarko area is a convenient forum for such action.

2. Defendant, in compliance with its contractual duty

with its royalty owners, secured the best price obtainable

to post bond and agree to the interest back pay provisions

to its purchasers or to forfeit the negotiated price increases

until final FPC approval.

3. The portion of the increased rates secured under the

above paragraph that applied to the royal share of the pro-

ceeds was to be paid to royalty owners or to be refunded

if not approved by the FPC. This royalty share did not

belong to the defendant whether or not the rate was ap-

proved by the FPC.

4. The defendant concomitant with its duty to its

royalty owners to secure the best price obtainable (under

its covenant to market) had the duty to remit the collected

share of royalty as promptly as commercially feasable on

the same conditions as it was received by defendant or in

the altcrnative 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 ordered did not

entitle defendant to free use of the royalty owners share

of the increased proceeds. The FPC bond and interest pay

back requirements certainly justify and permit defendant

business use of the increased rates of its own share of those

rates but not the royalty owners share which did not belong

to defendant under any eventual 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 it and used as a business

asset by it pending final FPC approval and conclusion of

litigation based on its contractual duty to remit royalty

proceeds in a reasonably prompt manner. It is specifically

not the basis of this decision that such duty arises from an

attempt to impose any facet of fiduciary relationship to the

defendant. 3

5. The evidence proffered by plaintiff consisting of the

profit and loss statements of defendant and reports relat-

ing to economic inflation is excluded and not considered

berein. Nor is the FPC regulation requiring interest of the

royalty share returned to the purchasers controlling herein.

The FPC regulation in point herein did not, and could not

for lack of jurisdiction to do so, attempt to regulate the

obligation between defendant and members of the plain-

tiff class herein as to the time or manner or amount of the

royalty interests to be paid out of the increased rates.

6. The royalty owners were entitled to rely on defend-

ant to collect the best price obtainable and to represent the

royalty owners’ interest before the courts and the FPC

(as a result of the implied lease covenant.) This does not

imply, however, consent for the defendant to use the roy-

alty proceeds as a business asset resulting in the economic

gain of interest to defendant to the exclusion of the royalty

owners.

7. The acceptance without an accounting as to rates or

interest of payment of the suspended royalties herein in

December, 1972, did not constitute ratification 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 defend-

ant, being instruments reflecting royalty owners interests

in proceeds from production and unitization of acreage for

allowables respectively. No consideration is reflected in

these instruments which would support defendant’s con-

tention that these instruments, executed subsequent to the

origina] leases herein, were contracts to modify the royaliy

provisions of said leases. For the same reasons, the gas

royalty agreements do not change defendant’s obligations

under their original leases except for agreements to the

controlled price.

9. Defendants contention that the payment of the ad-

ditional royalties in December 1972 constituted a ‘*bounty’’

to plaintiffs is without any foundation and is contrary to

said ‘‘gas royalty agreements’’ establishing the FPC ap-

proved prices as the basis for royalty payments.

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 regulations would unjustly

enrich defendants. Defendant paid the full royalty share of

proceeds collected prior to June 1, 1961, and after October

1, 1970. The decision to withhold the increased (but un-

approved) rates in the intervening period was a unilateral

decision 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 Kansas,

Oklahoma and Texas is six per cent per annum and is

allowed as the proper rate of interest to be applied to the

suspended royalties herein from time of receipt until date

“a judgment herein with interest compounded on an annual

sis.

12. Excluded from this judgment are those i

parties who

have filed their elections herein to be excl ded

of the Plaintiff Class. , —

10a

Jupement 1s THenerore entered for the Plaintiff Class

as set forth herein with Defendant ordered to account to

the Court as set forth herein for members of Plaintiff

Class.

The issue of attorney fees is reserved pending the ac-

counting ordered herein.

29, 1976.

wae ony /s/ Keaton G. DuckwortH

Keaton G. Duckworth

District JUDGE

ila

(CaPTIOoN OMITTED IN PRINTING)

Order On Motion

On this 13th day of August, 1976, the post judgment

Motion of plaintiff class to alter and supplement the

judgment of the Court dated July 29, 1976, comes regularly

on for hearing, plaintiff class being represented by Chapin

& Penny, Medicine Lodge, Kansas, their attorneys; and

defendant being represented by T. L. Cubbage II of Ama-

rillo, Texas, and Joe Kennedy of Wichita, Kansas, its at-

torneys.

THEREUPON, the Motion is presented to the Court and the

Court being well and fully advised in the premises finds

and orders as follows:

1) The judgment of the Court entered herein as of

July 29, 1976, is a final judgment as to liability of defend-

ant and is appealable prior to the time defendant computes

interest as directed therein.

_ 2) From and after July 29, 1976, date of entry of

judgment of the Court herein, such judgment shall bear

interest at the statutory rate of 8% per annum on interest

due and to be accounted for herein as ordered by the Court.

/8/ Keaton G. Duckwortn

Keaton G. Duckworth

12a

(CAPTION OMITTED IN PRINTING)

Pretrial Order

On the 26th day of February, 1976, a Pretrial Conference

was had in the above-entitled case, plaintiff class being

represented by W. Luke Chapin and Gordon Penny of

Chapin & Penny, Medicine Lodge, Kansas; and the de-

fendant Phillips Petroleum Company being represented

by T. L. Cubbage, II, of Phillips Petroleum Company, P. 0.

Box 1751, Amarillo, Texas, 79105, and Joseph W. Kennedy,

of Morris, Laing, Evans, Brock & Kennedy, Chartered,

Suite 430, 200 West Douglas, Wichita, Kansas, 67202.

Wuenevroy, after considering the arguments and stipu-

lations of counsel, the pleadings, depositions, interroga-

tories, admissions, and exhibits submitted, the Court made

the following order:

VI.

STIPULATIONS

A. The parties have agreed to be bound by the follow-

ing stipulations, subject to introducing such further evi-

dence regarding the same as the parties may deem neces-

sary or desirable:

1. This action was filed by the plaintiff, Irl Shutts,

(**Shutts’’) a resident of Sun City, Barber County, Kan-

sas. Shutts is an owner of gas royalty interests under

leases owned or operated by defendant Phillips Petroleum

Company (‘‘Phillips’’) in the Hugoton-Anadarko area as

hereinafter defined. Shutts or his predecessor in title,

Althea Shutts, received certain of the ‘‘FPC suspense

money’’, so called, paid out as royalties by Phillips as here-

inafter set forth.

13a

2. This action was filed by Shutts seeking to recover,

in behalf of himself and all others of Phillips’ gas royalty

owners in the Hugoton-Anadarko area, interest, or a share

of profits as damages in lieu of interest, on monies with-

held by Phillips for a period of years pending approval

by the Federal Power Commission (‘‘FPC”’ or ‘‘Commis-

sion’’) of certain rate increases on gas purchases.

3. The Court has ordered that as such royalty owner,

plaintiff Shutts is a member of a class of approximately

6,400 royalty owners (less a small number of such royalty

owners who have opted-out after having received a 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 FPC Opinion No. 586, issued

September 18, 1970, by the Commission, pertaining to gas

rates in the Hugoton-Anadarko area rate proceedings; such

FPC opinion being affirmed in In Re Hugoton-Anadarko

Area Rate Case, 446 F.2d 974 (July 31, 1972), which be-

came final October 28, 1972.

4. The ‘“‘Hugoton-Anadarko area’’ is a rate making

area defined by the FPC consisting of all of the State of

Kansas and parts of the States of Texas and Oklahoma,

being roughly the panhandle sections of Texas and Okla-

homa. FPC Regulation § 154.106(g) svecifically defines the

Hugoton-Anadarko area as follows: —

(g) The Hugoton-Anadarko area consists of the State

of Kansas, Texas Railroad Commission District No. 10,

and the Oklahoma Counties of Cimarron, Texas, Bea-

ver, Harper, Woodward, Ellis, Woods, Alfalfa, Grant,

Major, Garfield, Roger Mills, Dewey, Custer, Blaine,

ae oy pene nants nova Washita, Caddo and

rady, an t part of Stephens County lyi ithi

T.2N., RS.4 and 5 West. . a rar

ee ee re CT Re ee a

l4a

5. By various orders issued since the United States

Supreme Court, on June 7, 1954, decided Phillips Petroleum

Company v. State of Wisconsin, et al., 346 US. 672, 74

§.Ct. 794, 98 L.Ed. 1036, and determined that Phillips, as

an independent natural gas producer selling gas to inter-

state pipeline companies for interstate transportation and

resale was a ‘‘natural gas company’’ within the Natural

Gas Act, the FPC suspended increases in prices for sales

of gas filed by Phillips and 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 all or any

portion of such increases which the FPC might find not to

have been justified.

6. Subsequent to June 7, 1954, Phillips and its subsid-

iaries sold natural gas, and components of natural gas,

which was produced in the Hugoton-Anadarko area. Some,

but not all, of the gas being sold by Phillips within the

Hugoton-Anadarko area was sold subject to the jurisdic-

tion of the FPC at prices, a portion of which had not been

approved by the FPC.

7. The increased sales prices for some, but not all of

Phillips’ gas sales in the Hugoton-Anadarko area, were

collected by Phillips subject to a duty to refund the same to

the 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.—717e(e), with interest at 7% per annum

from the date of receipt until September 18, 1970, and at

8% per annum thereafter until paid out. 18 C.F.R. § 154.102

8. Until June 1, 1961, Phillips paid over to its gas

royalty owners in the Hugoton-Anadarko area all of their

share (approximately 1/8th) of the increased rates being

collected by Phillips, as well as their royalty share of firm

proceeds from the sale of gas.

15a

9. Beginning June 1, 1961, as a result of a decision of

Phillips’ management, Phillips began withholding all of

its royalty owners’ share of increased gas prices unless

the royalty owners put up an acceptable indemnity to re-

pay the same with interest if the increased rates were not

approved by F'PC; and Phillips so notified all of its royalty

owners in the Hugoton-Anadarko area.

10. In July, 1961, Phillips gave the following notice to

Althea Shutts, and all other members of the class:

‘*Nortice

‘*As you probably know, since June, 1954, all sales

of gas to the interstate pipelines have been subject to

the control of the Federal Power Commission. Phillips

has been successful since that time in securing a num-

ber of increases in its contract prices, but these could

not be placed into effect until they were approved, after

investigation and hearing, by the Federal Power Com-

mission, except by the agreement of Phillips to refund

to the purchaser, with appropriate interest, such

amounts that are not finally allowed by the Commis-

sion. Heretofore, Phillips Petroleum Company has

voluntarily computed royalties paid you on the basis

of a weighted average price which included total pro-

ceeds 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¢ per Mef ( presently

the maximum area price level for increased rates as

ayo es > be Federal Power Commission

in i ment o eral Policy). Payment of roy-

alty based on the balance fe bah collected will be

made at such time as it is determined that the sums

collected are no longer subject to refund.

eee

l6a

‘‘Interest owners desiring to receive payments com-

puted 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.

‘‘Pumurs PetroLteum Company

Natura, Gas DepaRTMENT

BagTLesviLLe, OKLAHOMA”’

11. Seventeen persons or entities (including two

trusts, each representing a number of royalty owners) did

furnish indemnities acceptable to Phillips and received

current payments computed on the fuli sums being collected

subject to refund. These seventeen persons or entities are

not class members of the plaintiff class herein.

12. As to all other gas royalty owners to whom Phillips

was accounting for royalties, Phillips, while collecting pro-

ceeds for the proposed increased rates, withheld and de-

posited such cash to its general account and commingled it

with its other funds from June 1, 1961, to October 1, 1970.

13. On November 27, 1963, the FPC, by its Order In-

stituting Area Rate Proceedings (Hugoton-Anadarko Area

Dockets No. AR 64-1), issued November 27, 1963, published

at 28 Fed. Reg. 12645, subsequently reprinted at 30 FPC

1354, consolidated Phillips’ pending applications, and those

of others, for hearing under the consolidated designation

of Dockets No. AR 64-1.

14. On September 18, 1970, the FPC issued Opinion

586, Dockets No. AR 64-1, et al, Hugoton-Anadarko Rate

Cases, which established sales prices applicable to gas

sales and established refund requirements. The same was

published on October 10, 1970, at 35 Fed. Reg. 15986 and

republished at 44 F.P.C. 761. The decision of the FPC was

17a

appealed to the United States Court of Appeals for the

Ninth Circuit.

15. 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 royal-

ties but did not then pay any back royalties on FPC monies

previously withheld.

16. On or about November 25, 1970, Phillips cent the

following notice to Althea Shutts and all class members:

‘‘Notice Conoerninc Feperat Power Commission

Orrnton No. 586 Covertnc Interstate Sates or Gas

Propucep FRoM THE HucoTon-ANapDARKO 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 your payment for your in-

terest in properties in the Hugoton-Anadarko Area,

you are hereby notified ‘hat such payment has been

based upon the full ceiling rate levele 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 overpayments

occasioned thereby. Such recovery may be had, at Phil-

lips’ election, by withholding from subsequent pay-

ments to you for your interest in oil or gas, or both

oil and gas, whether or not produced from the same

properties under which the overpayment occurred.

18a

‘‘Your acceptance of the enclosed check will be re-

garded as evidence of your consent to such recovery.

‘‘Pynips PeTroLeum CoMPANY

Expitoration & Propuction DgPpaRTMENT

Gas SetrLements Drvisron—619 FPB

BarTLesvitLe, OxLaHoma 74004’’

17. The November 25, 1970, notice from Phillips to

Althea Shutts and all class members was included with

Phillips’ royalty settlement check for October, 1970.

18. On July 31, 1972, the Court of Appeals for the

Ninth Circuit affirmed Opinion 586 in California v. Federal

Power Commission, 466 F.2d 974 (9th Cir. 1972), and, as of

October 28, 1972, no application for writ of certiorari had

been filed by any of the parties to said action.

19. 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 $152,000,000.00 in

plant sales of gas and approximately $1,000,000.00 in field

or lease sales of gas, and to disapprove rate increases to

the extent of approximately $29,000,000.00 in plant sales of

gas and $73,000.00 in lease sales of gas, the latter amounts

being found refundable to the gas purchasers with interest.

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

Mineral Account Check Number 274,352, payable to Althea

Shutts, Box 1181, Sun City, Kansas, 67143, in the sum of

$2,831.25, and in due course of mail, said check was re-

ceived and negotiated by the said payee. On or about the

same date Phillips mailed royalty checks to all other

members of the class in payment of increased royalties

due them by virtue of the finality of FPC Opinion 586.

21. On and after December 7, 1972, Phillips made a

payout of approximately $5,700,000.00 in additional royal-

19a

ties to over 6,400 persons, firms, corporations, and entities

(which includes the class as defined by this Court).

22. At the time of the payouts referenced in paragraph

21 above, Phillips sent the following notice to each payee:

Notice

‘*The enclosed check covers payment based upon gas

proceeds which have heretofore been held in suspense

pending determination by the Federal Power Commis-

sion of the just and reasonable rates applicable to the

Hugoton-Anadarko Area, and, subsequent to issue of

Opinion No. 586 of the Federal Power Commission

which determined such rates, pending appeal and ju-

dicial finality of said Opinion. The decision of the Cir-

cuit Court of Appeals affirming Opinion No. 586 has

recently become final.

‘*Credits to leases for these heretofore suspended sums

have been aecrued by computer in suspense accounts,

pursuant to numerous Federal Power Commission

dockets. The detailed monthly prices and lease accrual

information cannot, therefore, be reflected in any prac-

ticable manner on the enclosed check. The detail of our

computations can be audited during regular business

hours at our Bartlesville, Oklahoma office.

‘‘Ponurs Perroteum ComPaNy

Setrtemexts Drvision

Expioration & Propuction DeparTMENT

BaRTLESVILLE, OxLaHoma 74004’’

23. At the time of the payouts referenced above in

paragraph A.21, Phillips neither paid nor offered to pay

any interest for the use of the money nor did Phillips in

the notice sent with the check say anything about interest

or how long the money had been held or used by Phillips.

20a

24. The approximately $5,700,000.00 in additional roy-

alties paid out by Phillips on or after December 7, 1973,

was accumulated by Phillips over a period of years be-

ginning in 1961 and it ‘‘was not segregated in a separate

fund; rather, this cash was commingled with the defend-

ant’s other money and was identified by defendant through

an accounting system, as a separate and distinct account

entity, and accrued as an account payable liability on de-

fendant’s books.’’ (Answer to Interrogatory No. 10, Para-

graph b.) ‘‘The proceeds were taken in a normal cash

account.’’ (Roberts Deposition Page 52.)

25. The legal rate of interest, if not ‘specified by con-

tract, in Kansas, Texas, and Oklahoma is 6% per annum.

B. The parties also have agreed to be bound by the

following stipulations, subject to introducing such further

evidence regarding the same as the parties may deem neces-

sary or desirable; Provipep However, that while Shutts

and the plaintiff class agree that the following stipulations

are factually correct, they object to their relevancy to any

issue material in this action:

1. On July 26, 1937, J. T. Clawson and Nannie Claw-

son, as Lessors, executed an oil and gas lease, which lease

is recorded in Book 211 at page 45 of the Records of Texas

County, Oklahoma, covering the East Half (E/2) of Section

31, Township 1 North, Range 17 E.C.M., in Texas County,

Oklahoma, wherein the lessee is Cabot Carbon Company.

2. On June 13, 1944, Cabot Carbon Company, as as-

signor, assigned the above-referenced oil and gas lease of

July 26, 1937, to Phillips by an instrument which is recorded

in Book 242 at page 444 of the Records of Texas County,

Oklahoma.

3. At some time prior to May 1, 1946, Nannie Clawson

succeeded to the rights of J. T. Clawson in the above-

referenced oil and gas lease of July 26, 1937.

2la

4. On May 1, 1946, Nannié Clawson and Phillips ex-

ecuted an instrument entitled Gas Royalty Agreement,

which agreement is recorded in Book 262 at page 311 of the

Records of Texas County, Oklahoma.

5. On April 1, 1958, as a remainderman under the Will

of John T. Clawson, deceased, and upon the death of Nan-

nie Clawson, Althea Shutts became the owner of a part in-

terest in the above-referenced oil and gas lease of July

26, 1937.

6. On September 14, 1938, Nannie Clawson, as lessor,

executed an oil and gas lease, which lease is recorded in

Volume 7 at page 48 of the Lease and Contract Records of

Hansford County, Texas, covering the East 120 acres of

Section 15, in Block No. 1, Grantee Public Free School and

the West 360 acres of Section 16, in Block No. 1, Grantee

Public Free School and all of Section 37, in Block No. 1,

Grantee W. C. Ry. Co., all in Hansford County, Texas,

wherein the lessee was Cabot Carbon Company.

7. On November 25, 1938, Nannie Clawson executed

an instrument (recorded in Volume 7 at page 52 of the

Lease and Contract Records of Hansford County, Texas)

amending the above-referenced oil and gas lease of Sep-

tember 14, 1938, so that it would include the East 126.5

acres of Section 15, instead of the East 120 acres only.

8. On August 10, 1944, Cabot Carbon Company, as-

signor, assigned the oil and gas lease of September 14, 1938,

as amended, referenced above, to Phillips by an instrument

which is recorded in Volume 11 at page 147 of the Lease

and Contract Records of Hansford County, Texas.

9. On May 21, 1946, Nannie Clawson and Phillips exe-

cuted an instrument entitled Gas Royalty Agreement, which

agreement is recorded in Volume 15 at page 407 of the

Lease and Contract Records of Hansford County, Texas.

22a

10. On April 1, 1958, as a remainderman under the

Will of John T. Clawson, deceased, and upon the death of

Nannie Clawson, Althea Shutts became the owner of a part

interest in the oil and gas lease of September 14, 1938, as

amended, referenced above.

11. On April 1, 1958, the above-referenced Gas Royalty

Agreement of May 1, 1946, and the above-referenced Gas

Royalty Agreement of May 21, 1946, were in full force and

effect.

12. The Gas Royalty Agreement of May 1, 1946 and

the Gas Royalty Agreement of May 21, 1946, speak for

themselves. Copies of the same are attached to this Pretrial

Order as Appendixes [ and II, and reference is made to

said Appendixes as though the same were copied in full

at this point.

13. During her lifetime, neither Althea Shutts nor

Phillips terminated either the above-referenced Gas Roy-

alty Agreement of May 1, 1946, or the above-referenced

Gas Royalty Agreement of May 21, 1946, and the same

remained in full force and effect between April 1, 1958, and

the time of Althea Shutts’ death.

14. Althea Shutts died on May 15, 1974.

15. At all times relevant to this action, Phillips has

operated five gas wells on the two above-referenced leases,

said wells being more specifically described as follows:

23a

P.P.Co.

Well name File No. Meter No. Location

(1) Winfield 45104 56010 Sec. 31

(2) Logsdon 43168 52722 Sec. 15

(3) Lighter #1 43168 52721 Sec. 16

(4) Byrne #1 45390 53408 Sec. 37

(5) Byrne #2 45390 52809 ‘Sec. 37

and Phillips has produced from said five wells.

16. The leases described above in paragraphs B.1 and

B.6 cover lands situated within the Hugoton-Anadarko

area as defined above in paragraph A.4.

17. The ‘‘designated area’’ is an area comprising

Texas County, Oklahoma and Sherman and Hansford

Counties, Texas.

18. At times relevant to this action, Phillips had 19

applications before the FPC requesting permission to in-

crease the prices for sales of gas by Phillips within the

‘‘designated area’’, and other increases outside the ‘‘desig-

nated area’’ but within the Hugoton-Anadarko area. In due

course, the FPC issued order suspending all of Phillips’

rate increase applications and published the suspension

orders in the Federal Register.

19. Phillips chose to collect the higher rates subject to

possible refund pursuant to Section 4(e) of the Natural

Gas Act. Increases in gas sales prices not made effective

subject to FPC approval cannot be made retroactive.

20. As to the FPC suspenses monies, FPC regulations

required that certain bond or indemnity agreement or

agreements be filed by gas producers in order to collect the

increased rates. Pursuant to regulations and indemnity

agreements duly filed, Phillips did collect the increased

rates and agreed to pay any money ordered refunded to gas

purchasers back to the gas purchasers together with in-

terest.

24a

21. This action does not involve ‘‘firm proceeds’’, i.e.,

the proceeds derived from sales of gas within the Hugoton-

Anadarko area at prices which were at or below the rate

which had already been approved by the FPC. Royalties

calculated in relation to such firm proceeds were all paid

in a timely manner.

22. On a month-by-month basis, and prior to October 1,

1970, Shutts, Shutts’ predecessors in interest, and all class

members, received a royalty computed on the basis of the

firm proceeds of Phillip’s sales in the Hugoton-Anadarko

area, i.e., a rate based on sales prices already found just

aud reasonable by the PFC.

23. On September 20, 1960, the FPC issued its State-

ment of General Policy, as amended (initially published in

25 Fed. Reg. 9578).

24. That the notice, quoted above in paragraph A.10,

to Althea Shutts and all other members of the class was

mailed on or about July 28, 1961, and was included with

Phillips’ royalty settlement check for June, 1961, that was

sent by Phillips to all class members.

25. In the due course of mail, Althea Shutts received

and negotiated Phillips’ check for the June, 196] royalty

settlement. However, neither Althea Shutts nor anyone act-

ing on her behalf contacted Phillips regarding its offer as

stated in the above-referenced notice.

26. In the due course of mail, all other class members

received and negotiated Phillips’ check for the June, 1961

royalty settlement.

27. After July 28, 1961, Althea Shutts did not request

Phillips to continue to disburse royalties to her as before,

without indemnity to cover those monies subject to possible

refund.

28. After July 28, 1961, neither Althea Shutts nor any

other class member responded to Phillips’ offer in its

25a

notice of July, 1961, and requested that they be allowed to

furnish Phillips with acceptable indemnity so that they

might be paid otherwise than according to the method out-

lined in Phillips’ July 28, 1961 notice. (Seventeen persona

or entities did accept Phillips’ offer, and they are not

members of the plaintiff class herein.)

26a

IN THE SUPREME COURT OF THE STATE OF KANSAS

JULY TERM, 1977

PRESENT

How. HAROLD R. FATZER, Curr Justice

Hor. ALFRED G. SCHROEDER,

Hon. ROBERT H. KAUL,

How. ALEX M. FROMME,

Hon. PERRY L. OWSLEY,

Hox. DAVID PRAGER,

Hox. ROBERT H. MILLER,

JUSTICES.

No. 47,917

Int Suvutts, as Executor of the Estate of Althea Shutts,

Individually, and as a representative of all that class of

gas royalty owners under Phillips Petroleum Company

oil and gas leases in the Hugoton-Anadarko area, Ap-

pellee and Cross-Appellant, v. Pumu.is PrTRoLeuM

Company, Appellant and Cross-Appellee.

(Juty 11, 1977)

The opinion of the court was delivered by

Scuroeper, 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. Phil-

lips Petroleum Company finally paid what it termed ‘‘sus-

pense royalties’’ without interest in December 1972, after

the Federal Power Commission (FPC) approved certain of

Phillips’ pending gas price rate increase applications. The

trial court determined (1) the matter could be tried as a class

action, (2) the class members had not waived any claim for

27a

interest, (3) that Phillips was liable for interest on a theory of

unjust enrichment, and (4) the class should be awarded six

percent compound interest. Phillips Petroleum Company has

appealed and the class has cross-appealed asserting the points

hereinafter considered and determined.

Irl Shutts (plaintiff-appellee and cross-appellant), a resident of

Sun City, Kansas, is the executor of the estate of Althea Shutts,

and a royalty owner under producing oil and gas leases owned by

Phillips Petroleum Company (defendant-appellant and cross-ap-

pellee) (hereafter Phillips) in the Hugoton-Anadarko area. Shutts

or his predecessor 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 Federal Power Commission Opinion No. 586, issued

September 18, 1970, by the Commission and which became final

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

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

Area Rate Case, 466 F.2d 974 [9th Cir. 1972].)

During her lifetime, Althea Shutts, a resident of Kansas, owned

one-seventh (1/7) of the lessor’s interest in two oil and gas leases

covering lands in Oklahoma and Texas. These leases were within

the Federal Power Commission’s rate-making area known as the

“Hugoton-Anadarko area” which encompasses all of the State of

Kansas and the 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’ predecessor 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 from all sales of gas delivered by Phillips within

a certain “designated area.”

On June 7, 1954, in Phillips Petroleum Co. v. Wisconsin, 347

2oa

U.S. 672, 98 L.Ed. 1035, 74 S.Ct. 794, it was determined that

Phillips, as an independent natural gas producer selling gas to

interstate pipeline companies for interstate transportation and

resale, was a “natural gas company” within the Natural Gas Act.

(15 U.S.C. § 717, et seq.) Accordingly, such sales of gas by

Phillips were subject to regulation by the Federal Power Com-

mission (hereafter FPC). By various orders issued since that

decision, 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 in-

creases 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 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 approve 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 o. Staats, Inc., 271 F.

Supp. 571, £79 [D. Kan. 1967]; and Boutte vo. Cheoron Oil Com-

pany, 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

29a

Beginning June 1, 1961, Phillips’ management decided to begin

In July 1961, Phillips gave the following notice to Althea

Shutts and all other royalty owners in the Hugoton-Anadarko

area:

“NOTICE

“As you probably know, since June, 1954, all sales of gas to the interstate

pipelines have been subject to the control of the Federal Power Commission.

Phillips has been successful since that time in securing a number of increases in

its contract prices, but these could not be placed into effect until they were

approved, after investigation and hearing, by the Federal Power Commission,

“PHILLIPS PETROLEUM COMPANY

NATURAL GAS DEPARTMENT

BARTLESVILLE, OKLAHOMA”

(Emphasis added.)

The indemnity which Phillips required was not a no-cost

corporate undertaking, which was all Phillips filed with the FPC.

Rather, Phillips required a corporate surety bond in an amount

based on estimated production for two years, plus seven percent

(7%) interest, subject to Phillips’ review at the end of eighteen

. (18) months.

‘30a

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 indemnities acceptable to Phillips and

- eceived current payments computed on the full sums being

“collected, including amounts subject to refund. However, none of

the approximately 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. ey

At various times after May 20, 1960, Phillips had nfneteen (19)

applications before the FPC requesting permission to increase

the price for sales of gas by it within the “designated area.” In

due course the FPC issued orders suspending the nineteen (19)

rate increase applications. On November 27, 1963, the FPC

consolidated the applications of Phillips and others for hearing in

the Hugoton-Anadarko area rate proceeding.

From June 1, 1961, to October 1, 1970, Phillips deposited the

increased rate monies collected in its general account and com-

mingled 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.

Phillips never owned this money. While Phillips collected eight-

eighths (8/8) of the increased rates, under no condition was the

one-eighth (%) 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 ap-

plicable to the gas sales and refund requirements. The order was

made effective October 1, 1970. (See 44 FPC 761 and 35 Fed. Reg.

15,986 [1970].) The effect of FPC Opinion No. 586 was to

approve the increased rates collected by Phillips from September

1, 1956, to the extent of approximately $152,000,000 in plant sales

of gas and approximately $1,000,000 in field or lease sales of gas,

3la

and to disapprove rate increases to the extent of approximately

oe ome Sen - and $73,000 in lease sales of gas,

latter amounts ound refundable to the

— ng gas purchasers

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 royalty 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

eauring aation to Altiies Gtiatte and ether sayully ewonss in the

class:

“NOTICE CONCERNING FEDERAL POWER COMMISSION OPINION

NO. 586 COVERING INTERSTATE 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 ceilinz rate levels

eee rn

Opinion should be changed, set aside, or vacated, in a

reduction of the rate levels relied upon by Phillips in its calculations, Phillips wil!

expect you to reimburse it in full for any overpayments occasioned thereby. Such

recovery may be had, at Phillips’ election, by withholding from subsequent

payments to you for your interest in oil or gas, or both oil and gas, whether or not

produced from the same properties under which the overpayment occurred.

“Your acceptance of the enclosed check will be 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

See ae ee Phillips’ royalty checks for October

Litigation regarding FPC Opinion No. 586 continued until

July 31, 1972, when the Ninth Circuit Court of Appeals affirmed

the FPC opinion. When no appeal was taken, the opinion became

32a

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 Opinion No. 586. Phillips paid

Althea Shutts the sum of $2,831.25, and paid out approximately

$5,700,000 in additional royalties to over 6,400 persons, firms,

corporations and entities (which includes the class as defined by

the trial court). Only 218 of these persons were residents of

Kansas. Of that number only 128 had executed gas royalty agree-

ments of the type under which Althea Shutts’ royalty was paid.

(See Phillips’ July 1961, notice to ail 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 following notice

to each payee:

“NOTICE

“The enclosed check covers payment based upon _gas proceeds which have

heretofore been held in suspense pending determination by the Federal Power

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 Com-

mission which determined such rates, pending appeal and judicial finality of said

Opinion. The decision of the 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 accounts, 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 regular business hours at our Bartles-

ville, 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 royalties

33a

before she died on May 15, 1974. On September 16, 1974, Irl

Shutts filed this action. Shutts, as a representative of approxi-

mately 6,400 royalty owners, claimed approximately $1,000 in-

terest for himself and interest for the members of the class on the

amount ultimately paid to the royalty owners which have here-

tofore been denominated “suspense royalties.”

On November 26, 1974, Shutts filed a motion to certify the

action as a class action. On May 1, 1975, Judge Robert M. Baker

granted Shutts’ motion for a class order under K.S.A. 60-223 and

ordered notice to be given to all gas royalty owners in the

Hugoton-Anadarko area, regardless of whether such leases cov-

ered land in Kansas, Texas 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 receiving royalties from

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 efficient adjudication of the controversy. Any

class member, if he so desires, may appear in the case in person or through his

an an a a

“2. Judgment in this action, whether for the plaintiff class or for the de-

fendant, will be binding on all class members except those who may be excluded

as above stated. Class members excluded will not be entitled to share in the

Sane ey Sa Se

“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 wil] be no

allowance of attorneys’ fees.”

Notices were also published in seven area newspapers and sent

by first class mail by the plaintiff to former royalty owners. Judge

Baker later disqualified himself, and Judge Duckworth was

eventually assigned to this case.

On August 12, 1975, three Texas residents mailed a notice to

the clerk of the district court saying they did not wish to par-

34a

ticipate 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 >retrial order as its findings of fact and

concluded (1) the matter could be tried as a class action, (2) the

class members had not waived any claim for interest, (3) that

Phillips was liable for interest on a theory of unjust enrichment,

and (4) the class should be awarded six percent compound inter-

est. Specifically, the trial court determined in its conclusions of

law:

“1. This is a proper class action under the provisions of K.S.A. Supp. 60-223

because:

(a) The approximately 6400 royalty owners in the Hugoton-Anadarko area

makes joinder impractable; [sic]

(b) Any interest due each member of the class is too small to justify

separate actions;

are really undisputed and the sole legal issue presented is whether the

plaintiff members are entitled to interest on the suspended royalties held by

defendant;

(d) The claims of the named parties herein are typical of the claims of all

members of the class and will fairly and adequately protect the interest of

the class;

(e) The question presented common to all members of the class predo-

minates over any individual question and a class action is not only

superior but the only efficient manner to adjudicate the dispute herein (to

avoid multiple suits and excessive expenses) and that this court hacing

furisdiction of a large physical portion of the Hugoton-Anadarko area is a

convenient forum for such action.

“4. The defendant concomitant with its duty to its royalty owners to secure the

best price obtainable (under its covenant to market) bed the duty to remit the

collected share of royalty as promptly as commercially ::asable [sic] on the same

conditions as it was received by defendant or in the alte: native to place the funds

in a proper investment fund for subsequent disbursement. The fact that FPC

permitted and essentially required defendant to post bond and agree to pay back

interest if a refund was ordered did not entitle defendant to free use of the royalty

owners share of the increased proceeds. The FPC bond and interest pay back

requirements certainly justify and permit defendant business use of the increased

rates of its own share of those rates but not the royaiiy owners share which did not

belong to defendant under any eventual ruling by the FPC. See Phillips Petro-

leum Co. v. Adams, 513 F2d 355. The Court therefore concludes that the

defendant is liable for interest on rayalty proceeds retained by it and used as a

35a

business asset by it pending final FPC approval and conclusion of litigation based

on its contractual duty to remit royalty proceeds in a reasonably prompt manner. It

is specifically not the basis of this decision that such duty arises from an attempt

to impose any facet of fiduciary relationship to the defendant.

“ The eccaytance without on accounting 0s to sates or taterest of payment of

the suspended royalties herein in December, 1972, did not constitute ratification

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

fendant’s obligations under their original leases except for agreements

controlled price. a

“D. Defendant's contention that the payment of the additional royalties in

December 1972 constituted a ‘bounty’ to plaintiffs is without any foundation and

is contrary to said gas royalty agreements’ establishing the FPC approved prices

“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 regulations

would unjustly enrich defendants. Defendant paid the full royalty share of

proceeds collected prior to June 1, 1961, and after October 1, 1970. The decision

to withhold the increased (but unapproved) rates in the intervening period was a

unilateral decision 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

“11. The statutory rate of interest herein in Kansas, Oklahoma and Texas is six

per cent per annum and is allowed as the proper rate of interest to be applied to the

suspended royalties herein from time of receipt until date of judgment herein with

interest compounded on an annual basis.” (Emphasis added.)

Appeal has been duly perfected by Phillips, and a cross-appeal

hes been taken challenging the amount of interest awarded by the

court.

The appellant contends the trial court erred in holding that it

had jurisdiction over in personam claims of unnamed nonresident

class plaintiffs having no contact with the State of Kansas.

Here the representative of the plaintiff class is a resident of

Kansas. The named defendant does business in Kansas, and has

been duly served with process in Kansas. No question is asserted

on this appeal as to the jurisdiction of the trial court over the

defendant or the trial court’s power to enforce a judgment against

36a

the defendant. Two hundred and eighteen plaintiff class members

are Kansas residents, and an unknown number of the plaintiff

members, many of whom reside in other states, have gas leases

with Phillips covering Kansas lands. But it must be conceded

some gas leases or other contracts entered 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 de-

fendant or to obtain jurisdiction over the property of a foreign

defendant, and in both cases to render a binding judgment.

The basic requirements to subject defendants to personal lia-

bility were first established in Pennoyer ov. 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 territo-

rial limits of the State in which it is established. Any attempt to exercise authority

beyond those limits would be deemed in every other forum, as has been said by

this court, an illegitimate assumption of power, and be resisted as mere

abuse. . . .” (p. 720.)

The ruling in Pennoyer was expanded and made more flexible

by cases examining the “minimum contacts” necessary to exer-

cise in personam jurisdiction over a nonresident defendant. (Jn-

ternat. Shoe Co. v. Washington, 326 U.S. 310, 90 L.Ed. 95, 66

S.Ct. 154, 161 A.L.R. 1057; and McGee wv. 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

37a

nonresident defendant's property, thereby subjecting the prop-

erty 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 reaffirmed the

Pennoyer rule in holding that the lower court’s exercise of in

personam jurisdiction over the nonresident defendant was in-

valid. The United States Supreme Court stated:

“. . . But it is a mistake to assume that this trend heralds the eventual

demice of alll sestrictions on the personal juriediction of state cousts. (Citation

omitted.) Those restrictions are more than a guarantee of immunity from incon-

venient or distant litigation. They are a consequence of territorial limitations on

the power of the respective States. However minimal the burden of defending in a

foreign tribunal, a defendant may not be called upon to do so unless he has had

-the ‘minimal contacts’ with that State that are a prerequisite to its exercise of

power over him. . . .” (p. 251.) (Emphasis added.)

The most recent case of the United States Supreme Court

indicating the parameters of quasi in rem jurisdiction over non-

resident defendants is Shaffer v. Heitner, ___ U.S. "

L.Ed.2d . S.Ct. __. [No. 75-1812, decided June 24,

1977], following Internat. Shoe Co. v. Washington, supra.

Kansas cases examining and following these jurisdictional re-

quirements over nonresident defendants include Misco-United

Supply, Inc. v. Richards of Rockford, Inc., 215 Kan. 849, 528 P.2d

1248; Tilley vo. Keller Truck & Implement Corp., 200 Kan. 641,

438 P.2d 128; and Woodring o. Hall, 200 Kan. 597, 433 P.2d 135.

These cases all deal with nonresident defendants, not nonresi-

dent 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 resi-

dential makeup of the class membership is not controlling. (Note,

Consumer Class Actions with a Multistate Class: A Problem of

Jurisdiction, supra at 1432.) What is important is that the non-

resident plaintiffs be given notice and an opportunity to be heard

and that their rights be justly protected by adequate representa-

tion. These are the essential requirements of due process, and

they must be satisfied in any class action by every court, state or

federal, regardless of the residences of the absent class members.

Therefore, while the essential element necessary to establish

38a

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.

That there is indeed a difference between the jurisdictional

standards governing class actions, and those governing 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 i 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 o. Neff, 95 U.S. 714; 1 Freeman on Judgments (Sth ed.), § 407. A

judgment rendered in such circumstances is not entitled to the full faith and credit

which the Constitution and statute of the United States, R.S. § 905, 28 U.S.C.

§ 687, prescribe. . . .

Uae seeeey eae Game scenes enyiee OS, 9 Sbes om

precisely defined by judicial opinion, the judgment in a ‘ ’ or ‘representative

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 jurisdic-

tion or because their whereabouts is unknown or where if all were made parties to

the suit its continued abatement by the death of some would prevent or unduly

delay a decree. In such cases where the interests of those not joined are of the same

class as the interests of those who are, and where it is considered that the latter

fairly represent the former in the prosecution of the litigation of the issues in

which al) have a common interest, 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 rec-

ognized exception for suits of a representative character. While

the United States Supreme Court conceded that the extent of this

exception had not been precisely defined by judicial opinion, it

went on to suggest that if a class were adequately represented, its

interest would be protected and the court could proceed to a final

decree. 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

39a

what is an essential requisite of due process as to absent plaintiff

class members, adequate representation. (See Gray cv. 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. Homburger, State Class Actions and the

Federal Rule, 71 Colum. L. Rev. 609, 611 [1971]; and H. Hunter,

Georgia Investment Company v. Norman—The Supreme Court

Creates a New Form of Class Action for Georgia, 24 Mercer L.

Rev. 447, 448 [1973].)

In the 1853 opinion of Smith et al v. Swormstedt, et al, 57 U.S.

(16 How.) 288, 14 L.Ed. 942, the United States Supreme Court

gave its blessing to the equitable class suit by noting:

“The rule is well established, that where the parties interested are numerous,

and the suit is for an object common to them all, some of the body may maintain a

bill on behalf of themselves and of the others; and a bill may also be maintained

against a portion of a numerous body of defendants, representing a common

interest. . . .” (* p. 302.)

In 1938, the Federal Rules of Civil Procedure defined class

actions in terms of the abstract nature of the rights involved: the

so-called “true” category was defined as involving “joint, com-

mon, or secondary rights”; the “hybrid” 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 Fed-

eral 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 liti-

gation at its commencement. (Fed. R. Civ. P. 23 [c] [3].)

Recently the United States Supreme Court has required plain-

tiffs to assume the cost of notice in common-question class

actions. (Eisen o. 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 requirements. (Zahn v. Intemational Paper

Co., 414 U.S. 291, 38 L.Ed.2d 511, 94 S.Ct. 505; and Snyder ov.

40a

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

system and the desire not to judicially expand the constitutionally

established jurisdictional limits, these recent United States Su-

preme 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 nonresi-

dent plaintiffs, can the “small man” find legal redress in our

modern society which increasingly exposes people to group inju-

ries for which they are individually unable to get adequate lega!

redress, either because they do not know enough or because such

redress is disproportionately expensive? (See A. Homburger,

State Class Actions 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 Oklahoma and Texas. The United States

Supreme Court has held the commencement of a class action suit

tolls the applicable statute of limitations as to all members of the

class. (American Pipe & Construction Co. c. Utah, 414 U.S. 538,

38 L.Ed.2d 713, 94 S.Ct. 756, reh. denied 415 U.S. 952, 39

L.Ed.2d 568, 94 S.Ct. 1477; and Eisen v. Carlisle & Jacquelin,

supra.) However, if in this action Kansas is without jurisdiction

over class plaintiffs in other states, this action would not toll the

statute of limitations in those states.

We examine then the Kansas rules regarding class actions. Our

statutes reveal a recognition of the need for permitting actions to

be brought by a named plaintiff in a representative capacity. (G.S.

1868, ch. 80, § 38; L. 1909, ch. 182, § 37; 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 representative parties on behalf of all only if (1) the class is so

4la

numerous that joinder of al! members is impracticable, (2) there are questions of

law or fact common to the class, (3) the claims or defenses of the representative

parties are typical of the claims or defenses of the class, and (4) the representative

parties will fairly and adequately protect the interests of the class.

“(6) 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 protect their interests; or

“(2) the party opposing the class has acted or refused to act on grounds

generally applicable to the class, thereby making appropriate final injunctive

relief or corresponding declaratory relief with respect to the class as a whole; or

(3) the court finds that the questions of law or fact common to the members of

the class predominate over any questions affecting only individual members, and

that a class action is superior to other available methods for the fair and efficient

adjudication of the controversy. The matters pertinent to the findings 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 treat-

ment under K.S.A. 60-223(5)(3) because there are differing ques-

tions of law and fact governing the rights which arise under gas

leases in three states. Phillips attempts to apply an overly restric-

tive interpretation of the “commonality” requirement of K.S.A.

60-223(a). (Gray v. Amoco Production Co., supra; Sommers ov.

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. lowa 1974]}.) However, as explained later in this opinion,

there are questions of fact and law common to the plaintiff class.

(See Perlman vo. First National Bank of Chicago, 15 lll. App.3d

784, 305 N.E.2d 236 [1973], appeal dismissed 60 I1].2d 529, 331

N.E.2d 65.)

Citations to the venue statutes of Kansas and other states are

inapplicable here. (See United States c. Trucking Employers,

Inc., 72 F.R.D. 98 [D.D.C. 1976].) First, venue is not a jurisdic-

tional matter, but a procedural one. (Gray 0. Amoco Production

Co., supra; and 77 Am. Jur.2d, Venue, § 1, p. 832.) Second, this is

a transitory action affecting real property only incidentally. Be-

——-

42a

cause this court has in personam jurisdiction over the defendant,

venue lies in Kiowa County. (Gray c. Amoco Production Co.,

supra; 20 Am. Jur.2d, Courts, § 121, p. 476-477; and Farha t.

Signal Companies, Inc., 216 Kan. 471, 532 P.2d 1330, modified

217 Kan. 43, 535 P.2d 46. .) Lastly, if the venue attack is carried to

its logical conclusion a class action could not even be maintained

in Kansas with Kansas residents because the venue statute would

require separate suits in the different counties.

After reviewing K.S.A. 60-223, we hold Kansas courts can

exercise jurisdiction over nonresident plaintiffs in a class action if

procedural due process guarantees are met. Although no case in

Kansas or any other jurisdiction is precisely in point on the

factual situation here presented, many courts in cases from other

jurisdictions have reached out to bind nonresident plaintiffs.

In Chance v. Superior Court, 58 Cal.2d 275, 23 Cal. Rptr. 761,

373 P.2d 849 (1962), the California Supreme Court held a class

action to foreclose separate trust deeds securing each of 2,139

notes was proper and did not deny due process to unnamed

noteholders, many of whom may not have been California resi-

dents, where the class was ascertainable and susceptible to no-

tice, where the virtually identical notes were created in a single

transaction as part of a speculative scheme, where all policy-

holders had common interests in reaching other assets, and where

their individual lots were all in one tract which was more valu-

able as an entity.

In Daar tu. 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 Califor-

nia Supreme Court permitted this class action to proceed al-

though 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 veteran’s bonus under the

North Dakota Vietnam Conflict Veterans’ Adjusted Compensa-

tion Act. The appellants claimed a class action was inappropriate

because the district court might not have jurisdiction over all

class members because some members were outside the state of

North Dakota. The North Dakota Supreme Court held:

. [Thhe fact that some of the members of the [plaintiff] class may not be

43a

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 relatively

untroubled by the inclusion of nonresidents in classes repre-

sented before them, although federal courts are, in the absence of

statute, generally limited in territorial reach of personal jurisdic-

tion to the state in which they sit. (Fed. R. Civ. P. 4[f); 4 Wright

and Miller Federal Practice and Procedure, § 1124 [1969]; Com-

pare School Dist. of Philadelphia o. Harper & Row Publishers,

Inc., 267 F. Supp, 1001, 1005 [E.D. Pa. 1967].) While the resi-

dential characteristics of a class are seldom discussed by federal

courts, it is reasonable to assume from the various factual cir-

cumstances 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 Company, 248 F. Supp. 506 [E.D. Pa. 1965].)

Many commentators agree a state court has the power to bind a

nonresident plaintiff class member. Professor Chafee in Some

Problems of Equity (1950) notes the Restatement of Judgments

“gives the court where a class action is properly brought juris-

diction 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 Proce-

dure 23 indicates:

“The fact that members of the class are beyond the territorial limits of the class

suit court is immaterial as to the binding effect of the class suit .

. judgment.” (p.

The Restatement of the Law of Judgments verbalizes the an-

swer to the question of nonresident plaintiff class members

without equivocation:

“$26. REPRESENTATIVE OR CLASS ACTIONS.

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

t4a

court has jurisdiction by its judgment to make a determination of issues involved

in the action which will be binding as res judicata upon other members of the

class, although such members are not personally subject to the jurisdiction of the

court.” (p. 118.) (Emphasis added.)

Tentative Draft No. 2 of the Restatement of the Law of Judg-

ments, 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 similarly 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 author-

ities 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, Notioe, Costs, and the Effect of

Judgment in Missouri's New Common-Question Class Action, 38

Mo. L. Rev. 173, 209 [1973].)

Phillips suggests a contrary conclusion is dictated by Klemow

v. Time Incorporated, _. Pa. ___, 352 A.2d 12 (1976), cert.

denied, 429 U.S. 828, 50 L.Ed.2d 91, 97 S.Ct. 86. There the

plaintiff filed a class action suit on behalf of both residents and

nonresidents of Pennsylvania who subscribed to Life magazine

seeking to compel continued publication of the magazine. The

trial court dismissed the suit but the Pennsylvania Supreme

Court, while reversing on other grounds, indicated the class

could not encompass nonresident plaintiffs. The court said in a

footnote:

“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 non-residents who submit themselves to the jurisdiction of the state

courts. (Citations omitted.)” (352 A.2d 16.)

However, the Pennsylvania class action statute, 12 P.S.App.

Rules of Civ. Proc. § 2230, reads:

“(a) If persons constituting a class are so numerous as to make it impracticable

to join all as parties, any one or more of them who will adequately represent the

interest of al! may sue or be sued on behalf of all, but the judgmeni entered in such

45a

action shall not impose personal liability upon anyone not a party thereto.” (p.

241.) (Emphasis added.)

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

“The judgment in an action maintained as a class action shall extend by its

terms to the members of the class, as defined, whether or not the judgment is

favorable to them.”

It is readily apparent the Pennsylvania statutory language is

completely at variance with the Kansas statutory language. The

distinction robs Klemow of its persuasion in Kansas. (See Donne

and Van Horn, Pennsylvania Class Actions: the Future in Light

of Recent Restrictions of Federal Access?, 78 Dick. L. Rev. 460,

521-524 [1973].)

In Feldman o. Bates Manufacturing Co., 143 N.J. Super. 84,

362 A.2d 1177 (1976), the court indicated that without “affiliating

circumstances” between the forum state and the litigation, such

a “common trust fund,” the judgment in a plaintiff class action

suit could not bind nonresident class members. It held class

action certification 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 contacts in New Jersey, which had no

special interest in adjudicating litigation. However, the court

noted Delaware, Bates’ domiciliary state, was fully capable of

providing a uniform 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 physical portion of the Hugo-

ton-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 deter-

minative of issues concerning the same funds in subsequent

actions. In these actions, known as the “common fund” cases, the

respective courts found that the various plaintiffs were members

of the classes, and therefore bound by the judgments of the prior

46a

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 Connecticut 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

residence. 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 inconvenience, to make all of tuem

parties, and would oftentimes prevent the prosecution of the suit to a hearing. For

convenience, therefore, and to prevent a failure of justice, a court of equity

permits a portion of the parties in interest to represent the entire body, and the

decree binds all of them the same as if all were before the court. The legal and

equitable rights and liabilities of all being before the court by representation, 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 main-

tained.” . . .” (p. 672.)

(See also Hartford Life Ins. Co. v. Barber, 245 U.S. 146, 62 L.Ed.

208, 38 S.Ct. 54 [Connecticut judgment binding on Missouri

resident).)

In Carpenter v. Pacific Mutual Life Insurance Co., 10 Cal.2d

307, 74 P.2d 761 (1937), aff'd sub nom. Neblett v. Carpenter, 305

U.S. 297, 83 L.Ed. 182, 59 S.Ct. 170, reh. denied, 305 U.S. 675, 83

L.Ed. 437, 59 S.Ct. 355, the California Supreme Court, and

ultimately the United States Supreme Court, expanded on the

binding effect of judgments in insurance cases on nonresident

plaintiffs. The courts upheld the right of the California Insurance

Commissioner 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 policy-

holders. Acknowledging the significant state interest in insur-

ance, and relying on Hartford Life Insurance Co. o. Ibs, supra,

the California state court judgment was held binding on North

Carolina, Illinois and Wisconsin residents. (Taylor o. Insurance

Co., 214 N.C. 770, 200 S.E. 882 [1939]; Larson ». Pacific Mutual

tia

Life Ins. Co., 373 11. 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 requirements are met. (See also Royal Ar-

canum 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 universally

accepted, are closely analogous to the case at bar. Here Phillips

filed a corporate undertaking guaranteeing to refund any or al!

portions of the “FPC suspense money” with interest which it

collected and hel” sending FPC determination of the lawful gas

rates in the Hugoton-Anadarko area rate proceedings. All gas

royalty owners had a common concern in the funds attributable to

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

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

rates had been disapproved, the money and interest, which Phil-

lips agreed to pay by its corporate undertaking, would have gone

to the pipeline companies who purchased the gas from Phillips.

If the proposed rates were approved, the “suspense royalties”

would go to the gas royalty owners.

Had Phillips put the “suspense royalties” into a common 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 fulfil] all its business obli-

gations. 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.

48a

In Perlman ov. First National Bank of Chicago, 15 lll. App.3d

784, 305 N.E.2d 236 (1973), a class action was brought by bank

borrowers who attacked the bank’s computation of interest. The

defendant bank attacked the class action because there was no

common fund. The bank asserted any money which the class

members might claim was commingled with other assets. The

Illinois court held:

_ . There seems no basis in law or logic for permitting a class action

egninet 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 Alternative 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 procedures followed to insure that

due process was provided.

Initially the query must be whether reasonable notice was

given to all class members. The notice provisions of K.S.A.

60-223(c) differ slightly from the federal notice provisions in

Federal Procedure Rule No. 23. K.S.A. 60-223(c)(2) reads in part:

. . « Toafford members of the class an opportunity to request exclusion,

the cou.x 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.”

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 appropriate orders:. . . (2) requiring, for the protection of the

members of the class or otherwise for the fair conduct of the action, that notice be

given in such manner as the court may direct to some or all of the members of any

step in the action, or of the proposed extent of the judgment, or of the opportunity

49a

of members to signify whether they consider the representation fair and adequate,

to intervene and present claims or defenses, or otherwise to come into the

action. . . .”

Federal courts have attached particular significance to Rule No.

23's requirement of notice in common question actions due to the

finality afforded them. Notice to those whose legal relations are to

be affected by a pending action has always been a fundamental

requirement of due process. As the United States Supreme Court

suggested in Mullane v. Central Hanover Tr. Co., 339 U.S. 306,

94 L.Ed. 865, 70 S.Ct. 652, this elementary notion applies even

when the interested parties are so numerous that the task of

notification is a complex one. In fact, it is Mullane’s constitu-

tional standard for notice that is incorporated into Rule No. 23:

“the best notice practicable under the circumstances, including

incividual notice to all members who can be identified through

reasonable effort,” although some suggest Rule No. 23’s require-

ment 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 royalty owners and their interests

are known. There are no unnamed or unknown plaintiff class

members. The representative plaintiff prepared the notices,

quoted earlier, which were distributed by Phillips during a

monthly payment mailing to all royalty owners in the Hugoton-

Anadarko area then receiving gas royalties. Notices were also sent

by first class mail by the plaintiff to former gas royalty owners.

Notices were also published in seven area newspapers.

Having Phillips mail the notice during its monthly mailing

does not present error here cognizable. This procedure may not

comply with the dictates of Eisen vo. Carlisle & Jacquelin, supra,

although that case does note an exception where a fiduciary duty

preexisted between the plaintiff and the defendant, as in a share-

holder derivative suit.

The record discloses no objection by Phillips at the trial be-

cause 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. (Jn re Estate of Bames, 218 Kan. 275, 542 P.2d 1004;

50a

and Landrum v. Taylor, 217 Kan. 113, 535 P.2d 406.) In view of

our favorable decision to the class, which may recover the cost of

notification, this renders moot Phillips’ appellate objection to

mailing notice. (See Lamb v. United Security Life Company, 59

F.R.D. 25 [S.D. lowa 1972]; and Ostapowicz v. Johnson Bronze

Company, 54 F.R.D. 465 [W.D. Pa. 1972].)

Phillips argues our notice statute which allows a party to

“opt-out” of a class action suit cannot be used to “bootstrap”

jurisdiction of the court. Suffice it to say the federal rules and our

rule regarding class actions are the result of a conscious choice to

decide between provisions allowing parties to “opt-out” or “opt-

in.” A determination was made to follow the “opt-out” procedure

to bind the greatest number of people. (See Proposed Rules of

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

Federal Rules of Civil Procedure, 54 Geo. L.J. 1204, 1226 [1966];

and Staff Studies Prepared for the National Institute for Con-

sumer Justice on Consumer Class Action, pp. 138, 149 [1972].)

Phillips argues our class action statute does not give the puta-

tive class member an absolute right to “opt-out” as does Federal

Rule No. 23(c)(2)(A). K.S.A. 60-223(c)(2) provides in pertinent

part:

“. . . [T)he court shall exclude those members who, by a date to be spe-

cified, request exclusion, unless the court finds that their inclusion is essential to

the fair and efficient adjudication of the controversy and states its reasons

therefor. . . .” (Emphasis added.)

Phillips argues by removing the choice of the putative class

member to “opt-out” of the class, it was the intent of the rule to

apply to persons over whom the court already had jurisdiction.

We do not think such a convoluted conclusion logically follows.

The language simply gives the court the power to deny exclusion

to class members, be they residents or nonresidents of Kansas,

whose inclusion is essential to the fair and efficient adjudication

of the controversy. However, we need not examine this section in

great detail. (See Staff Studies Prepared for the National Institute

for Consumer Justice on Consumer Class Action, supra at 145-

146.)

Here three Texas residents filed an untimely request for exclu-

sion. Phillips filed a motion to deny the request for exclusion

alleging in part the three men would file a class action suit in

Texas. The trial court sustained Phillips’ motion. However, an

Hla

untimely request for exclusion could be denied under either the

federal or Kansas class action statutes without raising constitu-

tional issues.

We hold reasonable notice was given to satisfy jurisdictional

and constitutional due process requirements. (Mullane ov. Central

Hanover Tr. Co., supra.)

Second, we must examine the representation accorded the

resident and nonresident plaintiffs by the named representative.

K.S.A. 60-223(d) gives the trial court the authority to make

appropriate orders as follows:

“. . « (I) Settling the course of proceedings or prescribing measures to

prevent undue repetition or complication in the presentation of evidence or

argument; (2) requiring, for the protection of the members of the class or

otherwise for the fair conduct of the action, that notice be given in such manner as

the court may direct to some or all of the members of any step in the action, or of

the proposed extent of the judgment, or of the opportunity of members to signify

whether they consider the representation fair and adequate, to intervene and

present claims or defenses, or otherwise to come into the action; (3) imposing

conditions on the representative parties or on intervenors; (4) requiring that the

pleadings be amended to eliminate therefrom allegations as to representation of

absent persons, or to include such allegations, and that the action in either case

proceed accordingly. The orders may be combined with an order under K.S.A.

60-216, and may be altered or amended as may be desirable from time to time.”

Furthermore, K.S.A. 60-223(e) insures adequate representation by

controlling dismissals or compromises.

Where inadequate representation is established, courts have

denied res judicata effect to class action judgments. (See Research

Corp. v. Pfister Associated Growers, Inc., 301 F. Supp. 497 (N.D.

Ill. 1969]; and Gonzales v. Cassidy, 474 F.2d 67 [5th Cir. 1973].)

The class action is preinised 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 coincides with the interest of

the members of the class and will assure adequate litigation of the

common issues. Where the interests of absent class members have

not been adequately represented, binding them by the class

judgment would seem to offend the requirements of due process.

(Hansberry v. Lee, supra.) Notice to absent members of the class

in this regard is particularly important, for it is the greatest single

safeguard against inadequate representation. (Mullane v. Central

Hanover Tr. Co., supra at 314.)

Here we find adequate representation has been accorded the

plaintiff class members by their representative through his attor-

52a

neys who have done a superior job'in bringing this action and in

arguing and briefing the law on this appeal.

We hasten to add, this opinion should not be read as an

invitation to file nationwide class action suits in Kansas and

overburden our court system. Concepts of manageability in terms

of our Kansas class action statute, the nature of the controversy

and the relief sought, the interest of Kansas in having the matter

determined, and the class size and complexity will have to be

applied. (See Note, Consumer Class Actions with a Multistate

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

should also give careful consideration, as we have attempted to

do, to any possible conflict of la :' problems. When liability is to

be determined according to varying and inconsistent state laws,

the common question of law or fact prerequisite of K.S.A. 60-

223(a2) will not be fulfilled.

An excellent example of a factual situation in which a trial

judge applying our class action statute should deny certification

of a class action, where nonresident plaintiff class members are

involved, is presented in Feldman v. Bates Manufacturing Co.,

supra.

The manageability of the class action herein is demonstrated in

various ways. There are no basic issues of fact, the material facts

having been stipulated by the parties and made a part of the

pretrial order. The names, addresses and suspense royalty

amounts for each of the royalty owners were readily available in

Phillips’ records. In fact, the class is more manageable with

nonresidents of Kansas included because Phillips would be re-

quired to take an extra step in separating nonresident royalty

owners in its records. Phillips treated all royalty owners in the

Hugoton-Anadarko area alike, regardless of residency, particular

lease provisions or royalty agreements. (See Phillips’ notices to

royalty owners heretofore quoted as stipulated by the parties

herein.) Actually, it would be difficult to imagine a more man-

ageable plaintiff class action.

Kansas has a legitimate interest in adjudicating the common

issue herein because Kansas comprises the largest physical area

included in the FPC designated Hugoton-Anadarko area where

Phillips is doing business and producing gas which it sells in

interstate commerce. All of the gas »oyalty owners in the Hugo-

ton-Anadarko area have lease: th Phillips and a common in-

53a

terest in the money collected by Phillips as “suspense royalties”

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

regulation that caused and permitted Phillips to collect the “sus-

pense royalties,” and the same FPC Opinion No. 586 pursuant to

which the “suspense royalties” were paid out to the royalty

owners in the area. All of the gas royalty owners in the Hugoton-

Anadarko area have a right in common with each other, in the

equivalent of a common fund, to claim damages for commingling

and use of the “suspense royalties” by Phillips, payable as

interest, and they have a contact with Kansas by reason of such

common interest.

Phillips contends the members of the class within the court’s

jurisdiction are not so numerous as to make their joinder imprac-

ticable. Phillips argues only 218 class members are Kansas resi-

dents and of this number only 128 signed a gas royalty agreement

of the same type under which Althea Shutts was paid her money

in December of 1972. Phillips does not indicate, nor does the

record disclose, how many gas royalty leases covering Kansas

land are involved. In view of what has heretofore been said, there

is no need to examine this contention. (However, see Williams ov.

Humble Oil & Refining Company, 234 F. Supp. 985 [E.D. La.

1964] [joinder of 76 persons impracticable]; Fox vo. Prudent

Resources Trust, 69 F.R.D. 74 [E.D. Pa. 1975] [joinder 148

limited partners impracticable]; Sabala v. Western Gillett, Inc.,

362 F. Supp. 1142 [S.D. Tex. 1973] [class began with 39 and

twelve opted-owt]; and Republic Nat. Bank of Dallas v. Denton &

Anderson Co., 68 F.R.D. 208 [N.D. Tex. 1975].)

Phillips argues this is not a proper class action case under

K.S.A. 60-223(5)(1). We think this point is immaterial. The trial

court treated it as a K.S.A. 60-223(5)(3) class action, despite its

class order finding number four which was relevant to a 60-

223(5)X1) class action.

The appellant contends the trial court erred in holding that

Phillips had been unjustly enriched by retaining certain in-

creased proceeds of gas sales, subject to refund under appropriate

FPC regulations, until final determination by the FPC of the just

and lawful rate for such gas sales.

The trial court awarded interest on the grounds of unjust

enrichment as reflected in its tenth conclusion of law, heretofore

quoted. The doctrine of unjust enrichment prevents one from

54a

profiting or enriching himself at the expense of another contrary

to equity. But there must be some specific legal principle or

situation which equity has established or recognized to bring a

case within the scope of the doctrine. (Anderson v. Anderson, 155

Kan. 69, 72, 123 P.2d 315.)

The appellant contends, and we agree, its retention of the

suspense royalties pending FPC determination was lawful. (Ash-

land Oil & Refining Company v. Staats, Inc., 271 F. Supp. 571 [D.

Kan. 1967]; Boutte v. Chevron Oil Company, 316 F. Supp. 524

{E.D. La. 1970), aff'd 442 F.2d 1337 [5th Cir. 1971]; and Phillips

Petroleum Company v. Adams, 513 F.2d 355, 361-362 [5th Cir.

1975), cert. denied 423 U.S. 930, 46 L.Ed.2d 259, 96 S.Ct. 281.)

However, that does not mean Phillips owes no interest as a result

of the long retention of the FPC “suspense royalties.” (Boutte v.

Chevron Oil Company, supra.)

This identical issue was presented in Lightcap v. Mobil Oil

Corporation, 221 Kan. 448, 562 P.2d 1. (On June 15, 1977, Mr.

Justice White of the United States Supreme Court stayed the

mandate of this court in that case.) In Lightcap, Mobil was paying

gas royalties on the basis of old contract rates of 8.74 cents and

7.15 cents per Mcf while collecting increased rates. Mobil and its

predecessors made active use of the plaintiffs’ monies collected

and plaintiffs were deprived of that use. Although this court was

not in complete agreement on other aspects of that opinion, it

unanimously held:

“Where a party retains and makes actual use of money belonging to another,

equitable principles require that it pay interest on the money so retained and

used.” (Syl. 12.)

As previously indicated the FPC may order Phillips or any

other natural gas companies to refund, with interest, the portion

of such increased rates or charges found not justified by the FPC.

(15 U.S.C. § 717cf[e]; and 18 C.F.R. § 154.102[c].) The rate of

interest in the event a refund is ordered is presently seven percent

(7%) per annum for all rate filings tendered prior to October 10,

1974. (18 C.F.R. § 154.102{[c].)

In the case at bar, beginning on June 1, 1961, Phillips withheld

the share of the class members of the increased gas prices subject

to refund. Thereafter, while the FPC slowly ground out FPC

Opinion No. 586, Phillips deposited the increased rate monies in

its general accounts and commingled them with other funds

55a

——_— TT

without giving further notice to the royalty owners. What is

significant is these gas royalty suspense monies never did or could

belong to Phillips. lf the FPC disapproved the proposed increase

rates the pipeline companies (gas purchasers of Phillips) would

receive this suspense money and the interest which Phillips had

agreed to pay by its corporate undertaking. If the FPC approved

the proposed increase rate, the “suspense royalties” would go to

the gas royalty owners. |

Phillips held a sizable amount of money during this period. On

or about December 7, 1972, Phillips mailed approximately

$5,700,000 in additional gas royalties due gas royalty owners by

virtue of the finality of FPC Opinion No. 586. A case comment on

this subject at 54 Tex. L. Rev. 847 (1976) noted:

. Phillips had collected $7,500,000 in additional proceeds from the

Permian Basin area under FPC Op. No. 662 and currently collects $500,000 per

month subject to refund unde: FPC Op. No. 669, which relates to nationwide

rates. Petitioner's Brief for Certiorari at 9, Phillips Petroleum Co. v. Adams, 96

S.Ct. 281 (1975). Five major oi! companies paid approximately $4.5 million in

suspense money royalties alone (normally one-eighth of the amount paid to

lessees) to 16,000 Kansas and Oklahoma owners under the same FPC rate case in

Adams. Sunday Oklahoman, Jan. 11, 1976, § B, at 2, col. 1. A Kansas state court

recently awarded approximately $1.5 million in interest payments to royalty

owners. Nix v. Northern Natural Gas Producing Co., No. 3116 (Dist. Ct. Grant

County, Kan., Jan. 8, 1976). The potential problems grow daily as the FPC

encourages the filing of rate increases to provide an incentive to increase the

supply of natural gas. . . .” (fn. 54, pp. 856-857.)

Furthermore, Phillips did not permit the suspense royalty

money collected to remain idle. O. W. Armstrong, Treasurer of

Phillips Petroleum Company, testified in part as follows:

; . Phillips’ short term investments ranged from 89.7 million dollars in

1964 up to 338.5 million dollarsin 1972. . . Phillips’ total assets went up from

$1,806,000,000.00 in 1963, to $3,269,000,000.00 in 1972, with the exception of

1970 when there was aslightdrop. . . Cashin excess of a given amount would

be surplus cash and is invested. . . the approximately $6,000,000.00 in F.P.C.

suspense money was a part of Phillips’ cash, . . . all of Phillips’ cash being

in one pol, . . . mot segregated for any purpose. . . .”

Phillips made substantial profit during the years 1961-1973.

The net profit ranged from $113,000,000 to $132,000,000 during

the period in question and stockholders’ equity increased from

$1,205,000,000 in 1962 to over $1,749,000,000 in 1971.

Phillips’ use of the “suspense royalties’ was clearly a sound

and profitable business practice. We cannot condemn Phillips for

56a

using this money because this was apparently not repugnant to

the FPC regulatory scheme, or repugnant to Phillips’ contractual

relations with the gas purchasers under federal case law. Nor do

we condemn Phillips for the FPC delay. However, we do not

believe that Phillips may enrich itself in the absence of any

contractual sanction or seize upon the procedural complexities of

the FPC to avoid responsibility for an appropriate measure of

damages, expressed in terms of interest. In Shapiro v. Kansas

Public Employees Retirement System, 216 Kan. 353, 357, 532

P.2d 1081, the court enunciated the following general principle:

“Interest has been defined as the compensation allowed by law or fixed by the

parties for the use, detention, or forbearance of money. In our society today money

is a commodity with a legitimate price on the market and loss of its use, whether

occasioned by the delay or default of an ordinary corporation, citizen, state or

municipality should be compensable.”

(See also Lightcap v. Mobil Oil Corporation, supra at 468-469.)

In passing we also note a long line of federal cases have

concluded Texas law permits—and equity requires—the award of

interest on suspense royalties under similar circumstances. (Phil-

lips Petroleum Company v. Adams, 513 F.2d 355, 365 [5th Cir.

1975], cert. denied, 423 U.S. 930, 46 L.Ed.2d 259, 96 S.Ct. 281; .

First Nat. Bank of Borger tv. Phillips Petroleum Co., 513 F.2d 371

[5th Cir. 1975], cert. denied, 423 U.S. 930, 46 L.Ed.2d 259, 96

S.Ct. 281; Phillips Petroleum Co. v. Riverview Gas Compression

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

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

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

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

Petroleum Co. v. Hazlewood, 409 F. Supp. 1193 [N.D. Tex.

1975].)

In addition, the Texas Civil Court of Appeals recently awarded

interest on suspended royalties in Stahl Petroleum Co. t. Phillips

Petroleum Co., 550 S.W.2d 360 (Tex. Civ. App. No. 8762, filed

April 6, 1977.) This case also arises out of the Hugoton-Anadarko

area and the issuance of FPC Opinion No. 586. While recogniz-

ing Phillips Petroleum Company v. Adams, supra, the Texas Civil

Court of Appeals relied on the terms of the royalty agreement and

the Texas interest statute, rather than unjust enrichment, to re-

quire the payment of prejudgment interest on the suspended

royalties.

57a

An examination of the royalty agreement set forth in the record

herein reveals the lessee (Phillips) contracted to pay and the

lessor (royalty owner) contracted to receive a percentage of the

“weighted average price per Mcf received by lessee from all sales

of gas delivered within” a designated area during any calendar

month. While the term “received” is not defined in the contract,

giving the term its ordinary meaning, Phillips expressly con-

tracted to pay a percentage of the price received for the sale of gas

on which month-by-month payments to the royalty owner were to

be based. Although the money received by Phillips for the sale of

gas in excess of the established rates pending FPC determination

was subject to possible refund, none of the excess was contrac-

tually excluded from the price received by Phillips and on which

payment to the royalty owner was contractually based. There was

no rule or regulation which prohibited Phillips from including

the excess in the amount on which calculation of payment to the

royalty owner on a month-to-month basis was made. (Stahl Pe-

troleum Co. v. Phillips Petroleum Co., supra.) But if Phillips

chose to withhold payments of contractually owing “suspense

royalties” pending FPC approval, as authorized by prior federal

case law, that did not relieve Phillips of its contractual obligation

to pay the price received with interest for the period of time the

suspense money was held and used by Phillips.

Oklahoma has no decision allowing interest on “suspense

royalties.” However, several Oklahoma decisions hold that inter-

est may be awarded on equitable grounds where necessary to

arrive at a fair compensation. (Smith v. Owens, 397 P.22 673

[Okla. 1963]; and First Nat. Bank & T. Co. v. Exchange Nat. Bank

and T. Co., 517 P.2d 805 (Okla. App. 1973].)

Furthermore, the United States Supreme Court has noted the

imposition of interest on refunds ordered by the FPC is not an

inappropriate means of preventing unjust enrichment. (United

Gas v. Callery Properties, 382 U.S. 223, 15 L.Ed.2d 284, 86 S.Ct.

360.)

Based on the foregoing authorities we hold in this case that

interest on suspended royalties may be recovered for the period of

time such royalties remained in the control of, and were «vailable

for use by, the gas producer (Phillips) during the pendency of

FPC proceedings and related litigation regarding the determina-

tion of applicable lawful rates for gas sales, and l

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