Opposition — Phillips Petroleum Co. v. Shutts

| 7 Supreme Court, |

’ FILE

JAH 19

In the Supreme Court of the United States

OCTOBER TERM, 1977

No. 77-856

PHILLIPS PETROLEUM COMPANY,

Petitioner,

Vs.

IRL SHUTTS, 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,

Respondents.

BRIEF OF RESPONDENTS IN OPPOSITION

*W. LuKE CHAPIN

CHAPIN AND PENNY

P. O. Box 148

Medicine Lodge, Kansas 67104

Attorneys for Respondents

January, 1978

*Counsel upon whom service is to be made.

E. L. MeENDENBALL, INc., 926 Cherry Street, Kansas City, Mo. 64106, (816) 421-3030

TABLE OF CONTENTS

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ED siiinintennnincinsstenvammnineaninggmniienes

STATEMENT OF THE CASE ..00.0..........csccccscsssscsscesessecesces

REASONS FOR NOT GRANTING THE WRIT ............

I.

Il.

ITI.

VI.

VII.

VIII.

The Kansas Court’s Decision Granting Interest

Was in Line With All Applicable Law ............

Phillips’ Royalty Owners in the Hugoton-

Anadarko Area Constitute a Fixed and Def-

inite Class, Having Contacts With Kansas ....

“Fair Play and Substantial Justice” Require

That Nonresident Class Members Be Allowed

to Keep Their Judgment ..........................cccccs0e0

The Kansas Court’s Decision Is Consistent

With the Decisions of This Court and With

I,

State Court Decisions Are Based on the Facts

GU GR Te ccesictencicasnsnceeteentsnnscnssnnses

Phillips Used the Royalty Owners’ Money ....

Common Fund Cases Are Analogous to This

ARIES 8 ES RA I eee oe OR eae SEP

APPENDIX:

Trial Court’s Class Order and Notice ........................

10

12

ll

Authorities

CASES

Advertising Specialty v. Fed. Trade Commission, 238

TITEL TUITE -abscodhinasichcindinieatbinapsasibauiesibdnipmielipeinencemiitiaehaiolotateneine 14

Appleton Electric Co. v. Advance-United Expressways,

GEE a ee 13

Carpenter v. Pacific Mutual Ins. Co., 10 Cal. 2d 307,

RSET SRE ae le ene ee 17

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

761, Cc EET ites IIa ce ee a a i0

Darr v. Yel Cab Co., 67 Cal. 2d 695, 63 Cal. Rptr.

I ss eeniastsindiencliepetineinnene 10

Feldman v. Bates Mfg., 143 N.J. 84, 362 A.2d 1177 ........ 16

First Nat. Bank of Borger vy. Phillips Petroleum Co.,

513 F.2d 371 [5th Cir. 1975], cert. denied, 423 U.S.

930, 46 L. Ed. 2d 259, 96 S. Ct. 282 0... 8

Fuller v. Phillips Petroleum Co., 408 F. Supp. 643 ........ 8

Gulf Oil Corp. v. Maddox, et al., No, 77-798 00.0000... 3

i ene 12

Hartford Life Ins. Co. v. Ibs, 237 U.S. 662 0000... 17

Healy v. Pennsylvania R. R., 181 F.2d 934 200002... 2

Holstein v. Montgomery Ward & Co., Inc., CCH Pov.

L. Rptr. §9, 652 (1968-71 transfer binder) at 10, 784

RATERS a 10

Horst v. Guy, 211 N.W.2d 723 (N. Dak. 1973) ................ 10

International Shoe Co. v. Washington, 326 U.S. 310 ... 11

Klemow v. Time, Inc., 466 Pa. 189, 352 A.2d 12 ............ 16

Mobil Oil Corp. v. FPC, 463 F.2d 256 2000000. 5

Mullane v. Central Hanover Bank & Trust Co., 339 U.S.

SITY iaicrdlditieensdsdiih eeneinihiigidhdiaaeaiieleldibdiaeabashidiathdistatiihahdanapeaniinciacieninds 13

ee

Ill

Neblett v. Carpenter, 305 U.S. 297 .............cccccccccceseseeseeees 17

Northern Natural Producing & Mobil v. Niz, et al., No.

TUITE. -cosneinsthinsinenigiannininenresniosinddeeeiuedhoibinedaisiiitnnnimmeidiabtas 3

Payle v. Coca-Cola Company, 389 Mich. 583, 209 N.W.

I CI cc aaah cecil 10

Perlman v. First Nat'l Bank of Chicago, 15 Ill. App. 3d

SII MMIII TIE sci acdansieislillanstinedehseseiniehadtiudiiandaatinn 18

Phillips Petroleum Company v. Adams, 513 F.2d 355,

365 [5th Cir. 1975], cert. denied, 423 U.S. 930, 46

>. © ¢ | | |. 5 see ee ern 8

Phillips Petroleum Company v. Hazlewood, 534 F.2d 61

SUE TITEL, SEITEN sessassichistnscesstucecstneseillatenianedulecdialemabsisnineinalanmiann 8

Phillips Petroleum Company v. Hazlewood, 409 F.

ee 8

Phillips Petroleum Company v. Riverview Gas Com-

pression Company, 513 F.2d 374 [5th Cir. 1975], cert.

denied, 423 U.S. 930, 46 L. Ed. 2d 259,96 S.Ct. 281... 8

Phillips Petroleum Company v. Shutts, et al., No. 77-

TT ics sedi cineneemiesenaenneddeueemab aceon dieanniuneniinmagitennsbinaaieaiaiene 3

Royal Arcanum v. Green, 237 U.S. 531 ........... cece 17

Snyder v. Harris, 394 U.S. 332 ......0000.0.. ielarahaseiaadiadad 15

Sovereign Camp V. Bolin, 305 U.S. 66 20.0000... 17

Supreme Tribe of Ben-Hur v. Cauble, 255 U.S. 356 ....15, 17

The Superior Oil Co. v. Sterling, et al., No. 77-847 ........ 3

United Gas Improvement Co. v. Callery Properties Inc.,

SS icici iatleielanlinetlaielaal aa ai ec bdeciialaleial 6,7

Zahn v. International Paper Co., 414 U.S. 291 00000000... 15

ARTICLES AND MISCELLANEOUS |

SA CBE, Tits Ge wtrcrcteentecreenipestingeneinnmin 15

Chafee, “Some Problems of Equity’ 258 (1950) ........... 14

GD PERE. Sip FO VOUS onwcccensccecsensnecseceiccenettinnpnnntinnns 16

BR | ere 15

3B Moore’s Federal Practice, 123.11 -.............0..eeeeeeee 14

Restatement of Judgments $26 00............0.cccccccccceceeeeeeees 14

Restatement of Judgments Second §85 ......0........0......... 14

STATUTES

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I ia apeinibeeiabioneneantiielenn 2

K.S.A. 60-223 ............ a niaeiclieialaes imbue ituatipnaatiniiieinaunianinds 2, 12, 20

Vernon’s K.S.A. Comments, K.S.A. 60-266 0.000.000... y)

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In the Supreme Court of the United States

OCTOBER TERM, 1977

No. 77-856

PHILLIPS PETROLEUM COMPANY,

Petitioner,

vs.

IRL SHUTTS, 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,

Respondents.

BRIEF OF RESPONDENTS IN OPPOSITION

OPINIONS BELOW

The opinions of the Supreme Court of the State of

Kansas and of the trial court are as recorded in the Peti-

tion. In addition, the trial court’s class order and notice

is attached hereto as an Appendix.

JURISDICTION

The jurisdictional requirements are as set forth in the

Petition for Certiorari.

QUESTION PRESENTED

The federal question, if any, is: Whether it is a viola-

tion of Phillips’ due process or equal protection rights for

nonresident members of plaintiff class to be included in

the benefits of a Kansas state court judgment against Phil-

lips.

STATUTE INVOLVED

K.S.A. §60-223, the Kansas class action statute, as set

forth in the Appendix to the Petition, la to 3a. KS.A.

60-266 is not involved here. It simply says: “This article

(on civil procedure in Kansas) shall not be construed to

extend or limit the jurisdiction of the District Courts or

the venue of actions therein.” Phillips apparently reads

this statute as though it says only that the article shall not

extend jurisdiction. Not so. “Article II was drafted with

the intention of avoiding any conflict with the statutes

dealing with jurisdiction and venue, and (K.S.A. 60-266)

makes explicit the disclaimer of any attempt to do so.”

(Vernon’s Kansas Statutes Annotated, Comments on §60-

266.) §$60-266 has nothing to do with this case.’

1. Vernon's Comments further reads: “This rule is sub-

stantially the same as Federal Rule 82... . ‘Thus Rule [60-266]

provides in simple terms that jurisdiction and venue of the District

Courts, which are regulated by other statutory provisions, are

unaffected by Article II and the rules therein. It has thus been

said:

“| Rule 82 dispels any doubt that the [federal] rules of

civil procedure must be viewed through a jurisdictional

latticework externally constructed.” Healy v. Pennsylvania

R. R., CA.3d 1950, 181 F.2d 934, 935’.”

STATEMENT OF THE CASE

This is one of four cases in which major oil and gas

producing companies are seeking review of opinions of

the Supreme Court of Kansas finding the companies liable

for interest on gas royalties suspended and used by the

companies pending Federal Power Commission opinion and

approval of the opinion. The other cases are: __

Gulf Oil Corporation v. Maddox, et al., No. 77-798;

The Superior Oil Company ‘v. William J. Sterling, et

al., No. 77-847;

Northern Natural Producing Company and Mobil Oil

Corporation v. Hazel Nix, et al., No. 77-848.

Until June 1, 1961, Phillips had paid over to its gas

royalty owners in the Hugoton-Anadarko area all of their

share (approximately 1/8th royalty share) of the in-

creased rates being collected by Phillips for gas sales, as

well as their royalty share of so-called firm proceeds from

the sale of gas. However, “Beginning June 1, 1961, Phil-

lips management decided to begin withholding all of its

royalty owners’ share of increased gas prices subject to

refund, unless the royalty owners put up an acceptable

indemnity to repay the same with interest if the increased

prices were not approved by the FPC.” (Shutts, et al. v.

Phillips Petroleum Company, Appendix 29a.)

The Hugoton-Anadarko area is a gas production area

as defined for rate making by the Federal Power Commis-

sion and it consists of all of the State of Kansas, and

certain parts of the States of Oklahoma and Texas.”

2. The Hugoton-Anadarko area is defined more specifically

in 18 C.F.R. §154.106(g). The geographical boundaries of gas

producing areas do not recognize state lines. For instance, the

Hugoton field, named after Hugoton, Kansas, extends into both

Oklahoma and Texas.

4

Plaintiff Shutts filed this action individually and as

representative of that class of gas royalty owners under

defendant Phillips oil and gas leases in the Hugoton-

Anadarko area. Shutts is a resident of Kansas, and he

owns royalties under Phillips’ leases in Texas and Okla-

homa. (Shutts, 27a.)

The increase in gas rates collected by Phillips went

into Phillips’ corporate treasury and was commingled with

its other corporate funds and used by Phillips, without

ever giving notice of this fact to its royalty owners.

(Shutts, 30a.)

FPC Opinion No. 586 was entered on September 18,

1970, approving most of the rate increases filed. The

validity of FPC Opinion No. 586 was challenged in the

courts and finally sustained on October 28, 1972. (Shutts,

30a, 3la and 32a.) Subsequently, in about December,

1972, approximately 6,400 persons and firms constituting

Phillips royalty owners in the Hugoton-Anadarko area

were paid about $5,700,000.00 in additional royalties due

them by virtue of the finality of FPC Opinion No. 586.

(Shutts, 32a.)

Notice was sent with such FPC suspense royalty checks

which 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.” (Shutts, 32a.)

As to portions of the suspended rates not approved,

Phillips was under contractual duty to refund the same

to its gas purchasers, “with interest at the rate of seven

percent (7%) per annum from the date of receipt until

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

thereafter until paid out. . .” (18 C.F.R. $154.102 (c) and

FPC Opinion No. 586, page 33; as quoted at Shutts, 28a.)

5

FPC has no jurisdiction over amounts paid to gas

royalty owners® and had no regulations covering interest

due gas royalty owners on FPC suspense royalty payments.

On May 1, 1975, the trial court granted plaintiffs’

Motion for a Class Order, and all members of the class

were served with notice by first class mail and by publica-

tion.*

Ordinarily, if a question of jurisdiction would be

raised as to nonresident members of plaintiff class, it

would be raised by a nonresident member in the court

of another state, after judgment against the plaintiff class.

However, in this case, Phillips attempts to raise the ques-

tion of jurisdiction of the Kansas courts over nonresident

members after judgment in favor of plaintiff class, in

order to save itself from paying a substantial part of

the judgment against it.

Statutes of limitation have run against the payment

of interest on the FPC suspense royalties in Oklahoma

and Texas.’ Royalty owners in the Hugoton-Anadarko

area are not entitled to go into the federal court and

bring a class action because many of the claims are less

than $10,000.00. This leaves the Kansas court as the

only forum and the Kansas Court’s judgment in this case

as the only possibility of nonresidents of Kansas obtaining

interest on the FPC royalty funds here involved.

Phillips does business in Kansas and has been_duly

served with process in Kansas. No question is asserted

3. Mobil Oil Corp. v. Federal Power Commission, 463 F.2d

256 (D. C. Cir.), cert. denied, 406 U.S. 1976 (1972).

4. See Appendix attached to this Brief for full copy of

Class Order and of Notice.

5. See Shutts, 40a.

6. See Shutts, 39a and cases there cited.

6

as to the jurisdiction of the trial court or the Supreme

Court over Phillips or the trial court’s power to enforce

a judgment against Phillips.

REASONS FOR NOT GRANTING THE WRIT

I. The Kansas Court’s Decision Granting Inter-

est Was in Line With All Applicable Law.

Phillips has not raised any federal question pertaining

to the allowance of interest. Be that as it may, the Kansas

Court’s decision allowing interest in this case is fully sup-

ported by a U. S. Supreme Court case* and by all other

applicable law. The trial court allowed interest on the

basis that Phillips would be unjustly enriched if it were

allowed to use royalty owners’ money without paying in-

terest on the money so retained and used.

The Supreme Court of Kansas affirmed on the unjust

enrichment theory and further found and held that:

“What is significant is these gas royalty suspense

monies never did or could belong to Phillips.” (Shutts,

Appendix 55a. )

“Phillips made substantial profit during the years 1961-

1973. The net profit ranged from $113,000,000.00 to

$132,000,000.00 during the period in question and stock-

holders’ equity increased from $1,205,000,000.00 in 1962

to over $1,749,000,000.00 in 1971.” (Shutts, Appendix

55a.)

“ . . We do not believe that Phillips may enrich

itself in the absence of any contractual sanction or

7. United Gas Improvement Co. v. Callery Properties Inc.,

382 U.S. 223, 15 L. Ed. 2d 284, 86 S. Ct. 360.

7

seize upon the procedural complexities of the FPC

to avoid responsibility for an appropriate measure of

damages, expressed in terms of interest.” (Shutts, Ap-

pendix 56a.)

“. . . If Phillips chose to withhold the 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.” (Shutts, Appendix 57a.)

“Furthermore, the United States Supreme Court has

noted the imposition of interest on refunds ordered

by the FPC is not an inappropriate means of prevent-

ing unjust enrichment. (United Gas v. Callery Prop-

erties, 382 U.S. 223, 15 L. Ed. 2d 284, 86 S. Ct. 360.)”

(Shutts, Appendix 57a.)

“We are dealing with ‘suspense royalties’ which never

could or would belong to Phillips. This was the

equivalent of a common fund which was accumulated

and used by Phillips. . . Phillips was a stakeholder

who retained the fund which it used for its own

benefit . . . if the FPC had denied all of Phillips’

rate increase applications, Phillips would have had

to pay 7% and later 8%, interest to the gas pur-

chasers pursuant to its express agreement and corpo-

rate undertaking with the FPC. Thus, Phillips has

made an express agreement, with regard to the monies

accumulated in the suspense fund by Phillips, to pay

7% and later 8% interest, as ultirfately determined

by the FPC Opinion No. 586.” (Shutts, Appendix 59a.)

“Here, of course, an agreement for the payment of

interest on the part of Phillips is clearly present.”

(Shutts, Appendix 60a. )

8

“In passing we also note a long line of federal cases

have concluded Texas law permits—and equity re-

quired—the award of interest on suspense royalties

under similar circumstances. (Phillips Petroleum

Company v. Adams, 513 F.2d 355, 365 [5th Cir. 1975],

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

281; First Nat. Bank of Borger v. Phillips Petroleum

Co., 513 F.2d 371 [5th Cir. 1975], cert. denied, 423

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

Petroleum Co. v. Riverview Gas Compression Com-

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

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

Petroleum Co. v. Hazlewood, 534 F.2d 61 [5th Cir.

1976]; Fuller v. Phillips Petroleum Co., 408 F. Supp.

643 [N.D. Tex. 1976]; and Phillips Petroleum Co.

v. Hazlewood, 409 F. Supp. 1193 [N.D. Tex. 1975].)”

(Shutts, Appendix 56a. )

It follows that the award of interest by the Kansas

Supreme Court is in accord with the decisions of this

Court and all other courts that have considered the allow-

ance of interest on FPC suspense royalties. The award

of interest involves no federal question and was eminently

fair and just.

II. Phillips’ Royalty Owners in the Hugoton-

Anadarko Area Constitute a Fixed and Definite

Class, Having Contacts With Kansas.

Phillips asserts the class includes nonresidents having

“absolutely no contract with the State of Kansas.” (Petition,

3.) Not so. Whether or not “minimum contacts” are

necessary for plaintiff class jurisdiction, the many contacts

that tie this certain group of Phillips royalty owners to-

gether are enumerated in the Shutts opinion, 52a, 53a, as

follows:

9

“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 manage-

able with nonresidents of Kansas included because

Phillips would be required to take an extra step in

separating nonresident royalty owners in its records.

Phillips treated all royalty owners in the Hugoton-

Anadarko area alike, regardless of residency, particu-

lar lease provisions or royalty agreements. (See Phil-

lips’ notices to royalty owners heretofore quoted as

stipulated by the parties herein.) Actually, it would

be difficult to imagine a more manageable plaintiff

class action.

“Kansas has a legitimate interest in adjudicating the

common issue herein because Kansas comprises the

largest physical area included in the FPC designated

Hugoton-Anadarko area where Phillips is doing busi-

ness and producing gas which it sells in interstate

commerce. All of the gas royalty owners in the Hugo-

ton-Anadarko area have leases with Phillips and a

common interest in the money collected by Phillips

as ‘suspense royalties’ from the sale of gas in the

designated area. It was the same FPC regulation that

caused and permitted Phillips to collect the ‘suspense

royalties’ and the same FPC Opinion No. 586 pursuant

to which the ‘suspense royalties’ were paid out to

the royalty owners in the area. All of the gas royalty

owners in the Hugoton-..nadarko 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

reasons of such common interest.”

10

Ill. ‘‘Fair Play and Substantial Justice’’ Require

That Nonresident Class Members Be Allowed to

Keep Their Judgment.

Phillips opens its brief with a rather rash statement:

“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 96% of

the class members were nonresidents of and had no

contact whatsoever with the forum state.” (Petition,

6.)

First, this is not a nationwide plaintiff class. It is

restricted to (1) gas royalty owners under Phillips oil

and gas leases, (2) those certain gas royalty owners whose

leases to Phillips are within the State of Kansas or parts

of Oklahoma and Texas (the Hugoton-Anadarko area) and

(3) only those Hugoton-Anadarko Phillips lessors who

elected to stay in the class action, after first class mail

notice, by failing to write a letter of exclusion to the

Clerk of the Court within a certain time.

Second, this is not the first time that a state court

has exercised such jurisdiction over a multi-state plaintiff

class. Other instances are spelled out in the Shutts opin-

ion, 42a.*

Third, a substantial number “. . . 218 of the (class

members) were residents of Kansas ... the record is

barren as to the number in the plaintiff class residing

in other states who have gas leases with Phillips covering

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

761, 373 P.2d 849; Darr v. Yellow Cab Co., 67 Cal. 2d 695, 63

Cal. Rptr. 724, 433 P.2d 732; Horst v. Guy, 211 N.W.2d 723 (N.

Dak. 1973): also, see Payle v. Coca-Cola Company, 389 Mich. 583,

209 N.W.2d 232 (1973); and Holstein v. Montgomery Ward & Co.,

Inc., CCH Pov. L. Rptr. §9, 652 (1968-71 transfer binder) at 10,

784 (Ill. Cir. Ct. 1969).

11

land in Kansas, which encompasses the largest portion

of the Hugoton-Anadarko area.” (Shutts, 32a.) And

Shutts, the named plaintiff, also represented Oklahoma

and Texas royalty owners because his royalties were lo-

cated in those states. (Shutts, 27a.)

Fourth, whether or not any “minimum contacts are

necessary, this group of Phillips’ Hugoton-Anadarko area

royalty owners is tied together and with the State of

Kansas by many contacts set forth in the preceding section

II of this brief.

Phillips goes on to argue that International Shoe Co.

v. Washington, 326 U.S. 310, setting forth rules applying

to nonresident defendants, also applies to nonresident mem-

bers of plaintiff class. Phillips says that the requirement

is that there be “certain minimum contacts with (the state)

such that the maintenance of the suit does not offend

‘traditional notions of fair play and substantial justice.’”

(Petition, 6.) Traditional notions of fair play and substan-

tial justice will be offended only if the interest judgment

to which they are rightly entitled is taken away from

class members by the Phillips subterfuge that it would

be a denial of the due process of law to Phillips to require

it to pay interest to nonresident members of plaintiff class.

Phillips does not quarrel with the fact that the Kansas

court has in personam jurisdiction over Phillips and the

right and authority to require it to pay interest.

The meaning of the words “due process” and “fair

play and substantial justice” evidently escapes Phillips.

Due process has been afforded to members of plaintiff

class. They have elected to stay in the action and not

“opt out” after first class mail notice. Fair play and

justice can only be afforded nonresident members of the

plaintiff class by allowing them the benefit of their judg-

ment against Phillips—not by taking it away from them.

12

IV. The Kansas Court’s Decision Is Consistent

With the Decisions of This Court and With Estab-

lished Law.

Phillips concedes that: “A nonresident plaintiff may

bring an action against a defendant in any state which

can properly assert jurisdiction over the defendant.” (Peti-

tion, 10.) But Phillips argues that the nonresident plain-

tiffs in this case have not taken any affirmative action

to submit themselves to the jurisdiction of the Kansas

court.

This argument is contrary to the whole theory of

Federal Procedural Rule No. 23 as amended in 1966 and

to the Kansas statute, K.S.A. 60-223 which was amended

and patterned after Federal Rule No. 23 in 1969. (See

K.S.A. 60-223, the class action statute, at Appendix to

the Petition, la to 3a.) Provisions in both the Federal

Rule and the Kansas statute are practically the same

pertaining to members electing to exclude themselves after

proper notice. Phillips apparently is arguing that the

“opt out” procedure as compared to the former “opt in”

procedure is not proper.

The Kansas court in Shutts, Appendix 39a, referred

to the new Federal Rules of Civil Procedure as amended

in 1966 and pointed out that such rules allow a judgment

to bind all class members unless a member affirmatively

“opted out” of the litigation at its commencement. The

same is true of the Kansas rules.

The propriety of binding absent class members outside

the jurisdiction of the forum court was decided long ago.

This is because there is a difference in the jurisdictional

standards governing class actions and other actions. In

Hansberry v. Lee, 311 U.S. 32, this court found:

13

“It is a principle of general application in Anglo-Amer-

ican jurisprudence that one is not bound by a judg-

ment in personam in a litigation in which he is not

designated as a party...

“To these general rules there is a recognized excep-

tion that, to an extent not precisely defined by ju-

dicial opinion, the judgment in a ‘class’ or ‘represen-

tative’ suit, . . . may bind members of the class or

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

“Courts are not infrequently called upon to proceed

with causes in which the number of those interested

in the litigation is so great as to make difficult or

impossible the joinder of all because some are not

within the jurisdiction or because their whereabouts

is unknown...” 311 U.S. at 40-2. (Emphasis sup-

plied. )

To bind absent class members, the due process pro-

tections of notice and representation must be afforded.°

This was provided here and Phillips challenges neither

the method of notice nor the form or quality of represen-

tation.

9. See page 140 of Appleton Electric Co. v. Advance-United

Expressways, 494 F.2d 126, where it is said: “The notice and

exclusion provision of Rule 23 (c) (2) were designed to ‘fulfill

requirements of due process to which the class action procedure

is of course subject.’ 28 U.S.C., Rule 23, Advisory Committee's

Note at 302. The clearest statement of those requirements is in

Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 70

S. Ct. 652, 94 L. Ed. 865 (1950). To be bound by a final judg-

ment in a representation suit, one must be ‘informed that the

matter is pending and [have the opportunity] to choose for

himself whether to appear or default, acquiesce or contest.’ 339

U.S. at 314, 70 S. Ct. at 657. The kind of notice mandated in

Mullane is exactly the kind of notice defendant class members

will receive in this case . . . The members’ contacts with the

forum are as irrelevant here as were beneficiaries’ contacts with

the State of New York in Mullane.”

14

In Advertising Specialty National Ass’n v. Federal

Trade Commission, 238 F.2d 108, 120 (1st Cir. 1956), the

court found foreign members bound by a judgment in a

proper class suit even though outside the jurisdiction.

Many commentators have considered the question

raised by Phillips. They support the Kansas court’s deci-

sion on the issue. Professor Chafee in Some Problems of

Equity, 258 (1950) notes the Restatement of Judgments

“gives the court where a class action has been properly

brought jurisdiction to bind unnamed members, even if

not personally within the jurisdiction of the court.” Like-

wise, Professor Moore in his treatise, 3B Moore’s Federal

Practice, [23.11 (5), in discussing the 1928 Federal Rules

of Civil Procedure 23 indicates:

“The fact that members of the class are beyond the

territorial limits of the class suit court is immaterial

as te the binding effect of the class suit judgment.”

The Restatements are also in agreement. The Re-

statement of Judgments states:

Section 26: Representative or Class Actions.

“Where a class action is properly brought by or against

members of a class the court has jurisdiction by its

judgment to make a determination of issues involved

in the action which will be binding as res judicata

upon other members of the class, although such mem-

bers are not personally subject to the jurisdiction of

the court.”

Tentative draft number 2 of the Restatement (Second) of

Judgments §85 (April 15, 1975) provides:

“(2) A person represented by a party to an action

is bound by the judgment even though the person

15

himself does not have notice of the action, is not served

with process, or is not subject to the service of pro-

cess.”

See also, Note, “Consumer Class Action of a Multi-State

Class: A Problem of Jurisdiction,” 25 Hast. L. J. 1411,

1432, 1435 (1974);*° and 30A C.J.S. Equity §1456 (4) at

124.

This Court has implicitly concluded class actions with

a multi-state class can and should be brought in state

courts. In Snyder v. Harris, 394 U.S. 332, the Court noted

class actions premised on diversity of citizenship can

“most appropriately be tried in state court” (Id. at 341)

and plaintiffs “had nothing to fear from trying the law-

suit in the courts of their own state.” (Id. at 340.) (See,

also Zahn v. International Paper Co., 414 U.S. 291.) This

led the court in Shutts to question, at 40a, “[i]f the state

courts will not hear the matter, who will grant relief?”

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

366.

10. 25 Hastings Law Journal, 1411, pages 1432 and 1435:

“A ass action must proceed in the absence of almost every

class member. Therefore, ultimately, the residential makeup of

a class is unimportant. What is important is that the rights of

absent members be justly protected and that members be given

an opportunity to be heard if they so desire. These are the

essential elements 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, whereas the

essential jurisdiction over a nonresident defendant is some tan-

gible connection between him and the forum state, the element

necessary to the exercise of jurisdiction over plaintiff classes is

procedural due process. (Emphasis supplied.) (Page 1432.) ....

“It is... the suggestion of this note that by adhering to the

same jurisdictional standards of due process required on the

federal level, state courts can exercise jurisdiction over a class

action regardless of the citizenship of the class members.” (Page

1435.)

16

Judge Morris E. Frankel noted:

“If all the pertinent criteria are fairly satisfied, I be-

lieve we'll discover that the preliminary shock of

‘binding’ absent people will subside or disappear and

that the intended functioning of the [class action]

rule ... actually promotes essential fairness and jus-

tice no less than the secondary goal of judicial effi-

ciency.” (43 F.R.D. 45, 46.)

Separate suits in each of the states where class mem-

bers reside would be an extraordinarily inefficient, ex-

pensive and burdensome method of proving the liability.

Phillips is merely attempting to eliminate or diminish its

liability through a subterfuge.

V. State Court Decisions Are Based on the Facts

and Can Be Reconciled.

Phillips argues that state court opinions are in con-

flict on the question of jurisdiction over plaintiff classes

because there is one Pennsylvania case and one New Jer-

sey case opposed to the Shutts opinion. There is no con-

tradiction in the holding of various state courts as to the

law. Both the Pennsylvania and New Jersey cases were

discussed in Shutts (44a to 46a) and held inapplicable for

reasons there stated."

11. (a) Re: Klemow (Pa.): “It is apparent the Pennsyl-

vania statutory language is completely at variance with the

Kansas statutory language.” See Shutts at 45a, and the sharp

difference in the Pennsylvania statute as compared to Kansas

where it is said in the Pennsylvania statute as to a class action:

“ . the judgment in such action shall not impose personal

liability on anyone not a party hereto.”

(b) Re: Feldman v. Bates (N.J.): “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 Mfg. Co., supra.” (Shutts, 52a.)

(c) For state cases involving multi-state classes, see note

(8) this brief, supra.

17

VI. Phillips Used the Royalty Owners’ Money.

Phillips contends that its royalty owners had no gas

to sell and no interest in the proceeds of sale. (Petition,

16.) The Kansas court answered this mistaken conten-

tion very well as follows:

“What is significant is these gas royalty suspense

monies never did or could belong to Phillips.” (Ap-

pendix to Petition, 55a.)

“It is important to note that during this period of

time (June 1, 1961, to October 1, 1970) Phillips had

no entitlement to the gas royalty owners’ share of

the ‘suspense royalties’ whether or not the rates were

approved by FPC. Phillips never owned the money. . .

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.” (Shutts, 30a.)

It was Phillips that had no interest in the royalty

share—the FPC suspense royalties—not the royalty owners

as argued by Phillips.

VII. Common Fund Cases Are Analogous to This

Case.

On the question of including nonresident class plain-

tiffs, the Kansas court considered the so-called “common

fund” cases and held them to be analogous to this case.'?

12. Hartford Life Ins. Co. v. Ibs, 237 U.S. 662, 59 L. Ed.

1165, 35 S. Ct. 692; Royal Arcanum v. Green, 237 U.S. 531;

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

Camp v. Bolin, 305 U.S. 66: Carpenter v. Pacific Mutual Life Ins.

Co., 10 Cal. 2d 307, 74 P.2d 761, affirmed sub nom. Neblett v.

Carpenter, 305 U.S. 297, rehearing denied, 305 U.S. 675; and see

Shutts, 46a to 48a.

18

The Kansas court, in Shutts 47a, said:

“The ‘common fund’ cases, which seem to be univer-

sally accepted, are closely analogous to the case at

bar. Here Phillips filed a corporate undertaking

guaranteeing to refund any or all portions of ‘FPC

suspense money’ with interest which it collected and

held pending FPC determination of the lawful gas

rates in the Hugoton-Anadarko area rate proceedings...

“Had Phillips put the ‘suspense royalties’ into a com-

mon trust fund, separate from its operating funds, to

be used solely to pay either the pipeline companies

or the gas royalty owners once the FPC ultimately

decided the rate increase question, this case would

dovetail nicely into the ‘common fund’ cases. In-

stead Phillips commingled the ‘suspense royalties’ to

fulfill its business obligations. In this matter 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.”

(Citing Perlman v. First National Bank of Chicago,

15 Ill. App. 3d 784, 305 N.E.2d 236 which held:

“|. . there seems no basis in law or logic for per-

mitting a class action against an individual who has

sequestered all money wrongfully acquired but deny-

ing one against an individual who has commingled it

with his other assets.’’)

Phillips concedes that the “common fund” cases are

correct holdings (Petition, 16), but attempts to distinguish

the facts. Actually, the facts cannot be successfully distin-

- . ee ad re ee ae

oe wes

oe

19

guished and the Kansas court has correctly ordered a

common interest fund to be paid over to the Phillips’

royalty owners.

VIII. Answers to Phillips’ Other Claims.

Phillips claims that “in fact each royalty owner’s

claim can be adjudicated separately without affecting the

rights of any others.” This theory of “divide and conquer”

has been Phillips’ theory of trying the lawsuit. In order

to decrease liability, Phillips would like to limit the law-

suit either to the named plaintiff only, or to his co-lessors

and royalty owners. Failing that, Phillips would like to

limit it to the so-called “designated area” of one county

in Oklahoma and two counties in Texas where Shutts has

his royalties. Failing that, they would like to limit it to

residents of Kansas only. The Kansas trial court and

Supreme Court correctly limited the class to Phillips’ gas

royalty owners in the Hugoton-Anadarko area.

Phillips, by seeming to argue the case as though the

judgment were unfavorable to plaintiff class, attempts to

present a hypothetical case that does not exist. Phillips

is not arguing for nonresident class members but for itself.

The Kansas court judgment granted to members of the

class everything they filed suit to secure. It is far too

tenuous to assume first, a dissatisfied class member exists;

second, if he does exist, he will try to relitigate his claim,

having secured by Kansas judgment all he could possibly

obtain; and third, if he tries to relitigate the claim the

forum court will find he was not bound by the Kansas

court judgment.

This brief represents both residents and nonresidents

in opposition to the Petition for Certiorari. The nonresi-

dent members do not want to relitigate. They do not

20

want Phillips arguing “for” them. They want to be left

in the case and have the benefits of their judgment.

Phillips further argues that there is a provision in

K.S.A. 60-223 not included in Federal Rule of Civil Pro-

cedure 23 that gives the District Court authority to deny

exclusion (Petition, 19, Note 12) thereby making the notice

provisions ineffectual. This is a moot question. No mem-

ber of plaintiff class in this tase made timely request

to be excluded who was not excluded. (Trial Court’s Con-

clusion of Law No. 10, 9a.)

CONCLUSION

The Petition for Writ of Certiorari should be denied.

Respectfully submitted,

W. LuKe CHAPIN

CHAPIN AND PENNY

P. O. Box 148

Medicine Lodge, Kansas 67104

Attorneys for Respondents

January, 1978

lb

APPENDIX

CLASS ORDER AND ORDER FOR NOTICE

(Filed Mal 2, 1975)

ON the 5th day of March, 1975, this matter comes

regularly on for hearing on defendant’s Motion to Dismiss

as to all members of plaintiff class not residents of Kansas

and plaintiff's Motion to Certify as a Class Action. Plain-

tiff appears by his attorneys, W. Luke Chapin, of Chapin

& Penny, Medicine Lodge, Kansas; and the defendant

appears by its attorneys, Joseph Kennedy, of Morris, Laing,

Evans, Brock & Kennedy, Wichita, Kansas, and T. L.

Cubbage II of Amarillo, Texas.

THEREUPON, the motions are presented and argued

to the Court. Thereafter, the matter having been briefed

by counsel and memorandum opinion and requested find-

ings of fact and conclusions of law having been submitted

by counsel for the parties, and the Court having read

the briefs and requested opinions, findings and conclusions

and having examined the pleadings and files herein, and

having heard the arguments of counsel, and being well

and fully advised in the premises, files his memorandum

opinion herein dated March 31, 1975, which is made a

part hereof by reference and further finds that this action

should be maintained as a class action; and the Court

further specifically finds as follows:

1. The proposed class of parties plaintiff is extremely

numerous and exceeds some 6,600 members and an actual

joinder of all of such members is totally impracticable.

2. The Hugoton-Anadarko area consists of all of the

State of Kansas and certain counties of Texas and Okla-

homa.

2b

3. The plaintiff's claim is typical of the claims of

all the members of the proposed class: except that each

owner may be entitled to a different amount of interest

or damages; and the damages to each of the owners, if

allowed, would be too smal! to enable each owner to file

a separate action.

4. The prosecution of separate actions by individual

members of the proposed class would create a risk of

adjudications with respect to such individual members of

the class which would, as a practical matter, be dispositive

of the interests of the other members not parties to such

adjudications and might substantially impair or impede

their ability to protect their interests.

5. The proposed class of plaintiffs are royalty owners

and own their interests in the Hugoton-Anadarko area

under oil and gas leases with defendant Phillips Petroleum

Company.

6. The only questions of law and fact are common

to the entire proposed class of plaintiff-royalty owners

in that the sole issue appears to be whether defendant

Phillips is liable for interest or damages on the money

received by it from purchasers of gas and withheld by

defendant Phillips pending approval of the Federal Power

Commission for a period from June 1, 1961, through Decem-

ber 7, 1972.

7. The plaintiff alleges a claim which has substantial

possibility of success providing the Court is persuaded

of its merits.

8. The plaintiff is represented by counsel who can

adequately represent the entire class and the plaintiff will

himself adequately represent the entire class.

ee | + ee ee

3b

9. The questions of fact and law common to the mem-

bers of the proposed class dominate over any questions

affecting separate individual members and a class action

appears to be superior to any other available means for

a fair and efficient adjudication of the controversy.

10. This action should be certified as a class action

under K.S.A. 60-223 as to all of defendant Phillips’ gas

royalty owners in the Hugoton-Anadarko area. The Court

specifically defines that the plaintiff class in this case

is as follows:

“All persons who were in or before 1973, entitled

to gas royalties (excluding overriding royalties not

owned by gas royalty owners) under oil and gas leases

owned by Phillips Petroleum Company; on lands in

the Hugoton-Anadarko area and who received on De-

cember 7, 1972, and in 1973, payment of royalties

attributable to price increases collected by Phillips

subject to possible future refund in the event of disap-

proval by the Federal Power Commission, Phillips

having paid such royalties or the increased prices on

December 7, 1972, and in 1973 to the extent finally

approved by the F.P.C. in its Opinion No. 586.”

11. Notice should be given to all members of the

class enfitf€d to gas royalties during the period June 1961

through October 1, 1970 (the time involved when gas price

increases were withheld by Phillips pending final approval

of ihe Federal Power Commission).

12. Notice of the pendency of the action, its nature

and effects of any judgment shall be given to all members

of the class as follows:

a. Each member of the class as herein defined

whose name and address is contained in defendant’s

4b

records shall be notified of the pendency and ultimate

legal effect of the action and of the right to request

exclusion by sending each class member a notice in

form to be approved by the Court.

b. Such notices shall be sent to all such persons

as are currently receiving royalty payments by the

defendant. The defendant shall send and include such

notice in the next royalty payment disbursed to such

persons; and such notices shall be sent no later than

the June 1975 royalty payment. Such notices may

be sent by defendant in separate envelopes from the

royalty payments if preferred by defendant. The de-

fendant shall defray the costs thereof; however, any

additional costs required to comply with this judgment

shall be considered to be and shall be taxed as costs

herein.

ce. The plaintiff shall prepare a sufficient number

of notices to be included in all of the mailings of

the defendant as set forth in paragraph a. above and

such notices shall be included in the royalty payments

as aforesaid (or in separate envelopes if preferred

by defendant). Any costs of additional labor or post-

age shall be defrayed by the defendant and shall be

certified to the Clerk of the Court, the same to be

taxed as costs herein.

d. In the event that there are members of the

class who are not receiving royalty payments from

the defendant at the present time, the defendant shall

furnish to the plaintiff the names and addresses of

said persons and the plaintiff shall cause to be sent

a copy of such notice to such persrons by U. S. mail,

the costs thereof to be defrayed by the plaintiff and

the same to be taxed as costs herein.

5b

e. The plaintiff shall cause a notice by publica-

tion to be given pursuant to K.S.A. 60-307, such pub-

lication to be once each week for three consecutive

weeks in a newspaper of general circulation in each

of the following cities: Amarillo, Texas; Liberal, Kan-

sas; Elkhart, Kansas, Guymon, Oklahoma; Oklahoma

City, Oklahoma; Wichita, Kansas; and Hutchinson,

Kansas. The plaintiff shall advance the costs thereof

and such costs shall be certified to the Clerk herein

as costs. The notices as aforesaid shall in no case

commence later than June 15, 1975.

14. Defendant’s Motion to Dismiss is hereby over-

ruled.

15. The Court further finds that this order certifying

the class involves a controlling question of law; namely,

the jurisdiction of this Court as to all members of the

class, and to which there is substantial ground for differ-

ence of opinion; and that an appeal from the order certify-

ing the class will materially advance the ultimate termina-

tion of the litigation, and the implementation of this order

is stayed pending such interlocutory appeal, provided that

the same is promptly taken by the defendant as provided

by law.

IT IS BY THE COURT SO ORDERED.

ENTERED by the Court on the Ist day of May, 1975.

6b

IN THE

DISTRICT COURT OF KiOWA COUNTY, KANSAS

No. 5309

IRL SHUTTS, as Executor of the Estate of

Althea Shutts, Individually and as Repre-

sentative of certain others,

Plaintiffs,

vs.

PHILLIPS PETROLEUM COMPANY,

Defendant.

NOTICE OF CLASS ACTION SUIT

TO: All persons who were in or before 1973, entitled

to gas royalties (excluding overriding royalties not

owned by gas royalty owners) under oil and gas

leases either owned by Phillips Petroleum Company

or under which Phillips accounted for and made

royalty payments, on lands in the Hugoton-Anadarko

area and who received on December 7, 1972, and

in 1973, payment of royalties attributable to price

increases collected by Phillips subject to possible

refund in the event of disapproval by the Federal

Power Commission, Phillips having paid such royal-

ties on the increased prices on December 7, 1972,

and in 1973, to the extent finally approved by the

F.P.C. in its opinion No. 586.

This suit was filed in September, 1974, by Irl Shutts,

Executor, Individually and on behalf of all persons to

whom this Notice is directed. He asks judgment against

defendant for the payment of interest on royalties paid

by defendant in 1972 and 1973 attributable to increased

7b

gas sales prices received and withheld by defendant subse-

quent to June 1, 1961, or for damages in the form of

a share of defendant’s profits, if any, for the alleged use

of that portion of the increase finally approved by the

F.P.C. and in 1972 and 1973 paid by defendant to its

royalty owners. The leases involved are in Kansas and

in parts of Texas and Oklahoma. There are approximately

6,000 gas royalty owners who are members of the proposed

class and the above mentioned payments to royalty owners

were in excess of $6,000,000.

Defendant Phillips has denied any liability to the plain-

tiff or members of the class herein described.

The court has held that this action is to be maintained

as a class action. Accordingly:

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 15th day of July, 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 own counsel; otherwise,

Plaintiff’s counsel will represent him as a member of plain-

tiff class.

2. Judgment in this action, whether for the plaintiff

class or for the defendant, will be binding on all class

members except those who may be excluded as above

stated. Class members excluded will not be entitled to

share in the benefit of any judgment or settlement entered

or concluded favorable to plaintiff class.

8b

3. Plaintiffs’ attorneys’ fees are contingent on recov-

ery. If the plaintiffs are successful, the court will allow

a reasonable attorneys’ fee for plaintiffs’ attornéys out

of the interest fund created. If plaintiffs are unsuccessful,

there will be no allowance of attorneys’ fees.

Robert M. Baker, Judge of the

Sixteenth Judicial District.

Chapin & Penny, P.O. Box 148

Medicine Lodge, Kansas 67104

Attorneys for Plaintiff.

T. L. Cubbage, IT

Phillips Petroleum Company

P. O. Box 1751

Amarillo, Texas 79105 and

Morris, Laing, Evans, Brock & Kennedy

Suite 430 - 200 West Douglas

Wicisita, Kansas 67202

Attorneys for Defendant.