Appendix — Phillips Petroleum Co. v. Shutts
Supreme Court brief1988
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Supreme Court, U.S.
+ D
In THE
Supreme Court of the United
OCTOBER TERM, 1987.
AUG 28 1987
tps
F. SPANIOL, JR.
CLERK ‘
PHILLIPS PETROLEUM COMPARY,
m Petitioner,
IRL SHUTTS and ROBERT ANDERSON and BETTY ANDERSON,
Individually and as representatives of all producers and
royalty owners to whom Phillips Petroleum Company
made payment of suspended proceeds of royalties pur-
suant to Federal Power Commission Opinion Nos. 699,
699H, 749, 749C, 770 and 770A,
Respondents.
APPENDIX TO
PETITION FOR WRIT OF CERTIORARI TO THE
SUPREME COURT OF THE STATE OF KANSAS
AND PETITION FOR WRIT OF MANDAMUS
ARTHUR R. MILLER
1545 Massachusetts Avenue
Cambridge, Massachusetts 02138
(617) 495-4111
JOSEPH W. KENNEDY *
ROBERT W. COYKENDALL
Morris, LAING, EVANS, BROCK
& KENNEDY, Chartered
Fourth Floor, 200 W. Douglas
Wichita, Kansas 67202
(316) 262-2671
WILLIAM G. PAUL
JOHN L. WILLIFORD
T. L. CUBBAGE II
MICHAEL RIGGS
Phillips Petroleum Company
1256 Adams Building
Bartlesville, Oklahoma 74004
(918) 661-7026
Attorneys for Petitioner
Date: August 28, 1987
* Counsel of Record
WILSON - Epgs PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001 f /
10.
INDEX TO APPENDIX
Opinion of the Kansas Supreme Court dated Feb-
ruary 25, 1987 (240 Kan. 764, 732 P.2d 1286) .......
Order of the Kansas Supreme Court denying re-
consideration dated May 11, 1987 ...............000000000...
Memorandum Decision of the District Court of
Seward County, Kansas on remand, dated April
De es
Opinion of the United States Supreme Court dated
BUG Tis BB. CT UT. FUE YF cnerccccccnsnntrseseccctenncancens
Opinion of the Kansas Supreme Court dated March
24, 1984 (235 Kan. 195, 679 P.2d 1159) .......000......
Order of the Kansas Supreme Court denying re-
IS I BI Ba I eae tense ceticirecittrnnsivncicneniene
Journal Entry of Judgment of the District Court
of Seward County, Kansas filed May 20, 1983 ........
18 C.F.R. § 154.102 as it existed during relevant
periods (amendments subsequent to September 14,
1979, omitted) Ao SES REE is IE RIN OO A NET ENE
Phillips Petroleum Co.’s Corporate Undertaking
I I Bs RII innscncninscenndcadcccnincncscsnenstenss
Phillips Petroleum Co.’s list of subsidiaries pur-
suant to Supreme Court Rule 28.1 .........0000000....... mae.
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APPENDIX
SUPREME COURT OF KANSAS
No. 59,588 *
IRL SHUTTS, et al.,
Appellees,
Vv.
PHILLIPS PETROLEUM COMPANY,
Appellant.
SYLLABUS BY THE COURT
1. OIL AND GAS—lInterest on Suspended Royalties—
Multi-state Class Action—Application of Equitable
Principles of Unjust Enrichment. In a multi-state
plaintiff class action suit, the original decision of the
Kansas Supreme Court, after review by the United
tates Supreme Court, is remanded for the proper
due process constitutional standard to be applied. The
United States Supreme Court held that for a state’s
substantive law to be selected in a constitutionally
permissible manner, that state must have a significant
contact or significant aggregation of contacts creating
state interesis, such that the choice of its law is nei-
ther arbitrary nor fundamentally unfair. On re-
mand, it is held: After reviewing the law of the five
states where the majority of the oil and gas leases in
question are located, those jurisdictions would apply
equitable principles of unjust enrichment to hold the
1REPORTER’S NOTE: This case was argued by the parties and
decided in conference by the Supreme Court prior to the retire-
ment of Chief Justice Schroeder and the appointment of Justice
Allegrucci.
2a
producer or purchaser of gas liable to its royalty
owners for interest on suspended royalties held by the
gas purchaser or producer pending approval of rate
increases by the Federal Power Commission, now the
Federal Energy Regulatory Commission.
. SAME—Interest on Suspended Royalties—Multi-state
Class Action—Purchaser or Producer of Gas Required
to Pay Interest to Royalty Owners on Funds Held in
Suspense. After reviewing the law of the five states
where the majority of the oil and gas leases in ques-
tion are located, it is held: Under equitable principles
those states would imply an agreement binding the
producer or purchaser of gas to pay the funds held
in suspense to the royalty owners when the Federal
Power Commission approved the respective rate in-
creases, together with prejudgment interest at the
rates and in accordance with the Federal Power Com-
mission regulations found in 18 C.F.R. § 154.102
(1986).
. JUDGMENTS—Reversal of Judgment by U.S. Su-
preme Court—Post-judgment Interest Runs from Time
of New Judgment. The action taken by the United
States Supreme Court upon reviewing the conflict of
laws issue in this case constitutes a full reversal and,
as such, the original judgment and interest awarded
by the district court is vacated and post-judgment in-
terest runs from the time the new judgment is en-
tered, as more fully set forth in the opinion.
. SAME—Post-judgment Interest in Multi-state Class
Action on Oil and Gas Suspended Royalties—Post-
judgment Interest for Royalty Owners Determined by
State in Which Lease Exists. Post-judgment interest
for royalty owners having leases in Texas, Oklahoma,
Louisiana, New Mexico, and Wyoming are determined
by the statutory rate of post-judgment interest for
each of the respective states which is in effect on the
date of the new judgment. The Kansas statutory rate
3a
of post-judgment interest applies to those royalty
owners having leases in Kansas and all other jurisdic-
tions involved, as more fully stated in the opinion.
Appeal from Seward district court; KEATON G. DUCK-
WORTH, judge. Opinion filed February 25, 1987. Affirmed
as modified.
Joseph W. Kennedy, of Morris, Laing, Evans, Brock &
Kennedy, Chartered, of Wichita, argued the cause, and
Robert W. Coykendall, of the same firm, Arthur R.
Miller, of Cambridge, Massachusetts, and T. L. Cubbage,
II, of Bartlesville, Oklahoma, were with him on the briefs
for the appellant.
Gordon M. Penny, of Chapin & Penny, of Medicine
Lodge, argued the cause, and W. Luke Chapin, of the
same firm, Harold Greenleaf, of Smith, Greenleaf &
Brooks, of Liberal, and Ed Moore, of Ginder & Moore, of
Cherokee, Oklahoma, were on the brief for the appellees.
The opinion of the court was delivered by
SCHROEDER, C.J.: This is the third time this class ac-
tion case has come before the Supreme Court for review.
In Shutts, Executor v. Phillips Petroleum Company, 222
Kan. 527, 567 P.2d 1292 (1977) (Shutts I), a class ac-
tion against Phillips Petroleum Company (Phillips),
plaintiffs sought to recover interest on “suspense royal-
ties” attributable to gas produced from leases in the
three-state Hugoton-Anadarko area, the largest physical
portion of which was located in Kansas, during a nine-
year-period from June 1961 to October 1970. The named
plaintiff, a Kansas resident, was a representative of a
class of 6,400 gas royalty owners, 218 of whom were
Kansas residents. This court ruled it could exercise in
personam jurisdiction over unnamed nonresident class
plaintiffs where procedural due process was satisfied by
notice, an opportunity to be heard, and adequate repre-
sentation. Having found the class action was proper and
binding on nonresident plaintiffs, this court also ruled
4a
that, under the equitable principle of unjust enrichment,
Phillips was liable to the plaintiffs for interest on the
suspended royalties in the amount set forth under Phil-
lips’ corporate undertaking with the Federal Power Com-
mission (FPC), seven percent per annum, with an addi-
tional statutory post-judgment interest of eight percent
per annum.
Shutts v. Phillips Petroleum Co., 235 Kan. 195, 679
P.2d 1159 (1984) (Shutts IJ), was factually similar to
Shutts I. A class action suit was brought by Irl Shutts
and Robert and Betty Anderson, individually and on be-
half of 28,100 royalty owners, including residents of all
50 states, the District of Columbia, the Virgin Islands,
and several foreign countries, against Phillips for re-
covery of interest on suspended gas royalties. These roy-
alty payments were withheld by Phillips at various times
while Phillips awaited approval by the FPC for gas price
rate increases. When approval was granted, Phillips paid
the total amount of the suspended royalties to the royalty
owners without interest. It was held first that Kansas
had in personam jurisdiction over the nonresident class
members as the procedural due process requirements
were satisfied when each class member was provided no-
tice by first-class mail describing the action and inform-
ing each member he could appear in person or by coun-
sel, and otherwise he would be represented by Shutts and
the Andersons, and that class members would be included
in the class and bound by the judgment unless they
“opted out” of the suit by returning a “request for ex-
clusion.” Second, as to the choice of law issue, it was
held that, under Kansas law and the principles of equity,
Phillips was liable for interest to the royalty owners on
the suspended royalties at the rates set forth in Phillips’
corporate undertaking with the FPC; seven percent per
annum prior to October 10, 1974; nine percent per annum
thereafter until September 30, 1979; and thereafter, at
the average prime rate compounded quarterly. Statutory
post-judgment interest of fifteen percent per annum
5a
(K.S.A. 16-204) was also imposed. In determining that
Kansas law applied, it was stated:
“In Shutts I it was held the rate of interest set
forth in the corporate undertaking established an
appropriate measure of damages to compensate the
plaintiffs for the unjust enrichment derived by Phil-
lips from the use of the plaintiffs’ money. In the
instant case Phillips has not satisfactorily established
why this court should not apply the rule enunciated
in Shutts I and instead look to the law of each state
where leases are located to determine whether dam-
ages should be based upon a rate different from that
set forth in the FPC undertaking. The general rule
is that the law of the forum applies unless it is ex-
pressly shown that a different law governs, and in
case of doubt, the law of the forum is preferred.
16 Am. Jur. 2d, Conflict of Laws § 5. Where a state
court determines it has jurisdiction over a nation-
wide class action and procedural due process guaran-
tees of notice and adequate representation are pres-
ent, we believe the law of the forum should be ap-
plied unless compelling reasons exist for applying
a different law. All of the plaintiff class members in
this lawsuit were given actual notice that this action
was being brought on their behalf in Kansas. The
plaintiffs had the opportunity to opt out of the law-
suit, but chose to have their claims litigated in the
Kansas courts. We have hereinbefore held the un-
named plaintiff class members were adequately rep-
resented in the lawsuit and that the forum has a
significant legitimate interest in adjudicating the
claims of the class members. The common fund na-
ture of the lawsuit provides an excellent reason to
apply a uniform measure of damages to the class as
a whole, as each member of the class has been simi-
larly deprived of the rightful use of his or her
money. The plaintiff class members have indicated
their desire to have this action determined under the
6a
laws of Kansas. Compelling reasons do not exist to
require this court to look to other state laws to de-
termine the rights of the parties involved in this
lawsuit.” 235 Kan. at 221-22.
Phillips appealed to the United States Supreme Court,
Phillips Petroleum Company v. Shutts, 472 U.S. 797, 86
L. Ed. 2d 628, 105 S. Ct. 2965 (1985). The United
States Supreme Court first ruled Kansas properly ac-
cepted jurisdiction over the nonresident plaintiffs as the
procedural due process requirements were satisfied, as
stated above. 472 U.S. at 814. As to the choice of law
question, however, it was ruled the application of Kan-
sas law to all of the investors’ claims for interest vio-
lated the due process and full faith and credit clauses. In
its analysis, the Court first noted that if the law of Kan-
sas was not in conflict with any of the other jurisdic-
tions connected to the suit, then there would be no injury
in applying the law of Kansas. 472 U.S. at 816. The
Court then cited differences in the laws of Kansas, Texas,
and Oklahoma which Phillips contended existed. It ap-
pears, however, no analysis was made by the Court to
determine whether these differences existed in fact. The
Court stated: -
“Petitioner claims that Kansas law conflicts with
that of a member of States connected to this litiga-
tion, especially Texas and Oklahoma. These puta-
tive conflicts range from the direct to the tangential,
and may be addressed by the Supreme Court of Kan-
sas on remand under the correct constitutional
standard.
“The conflicts on the applicable interest rates,
alone—which we do not think can be labeled ‘false
conflicts’ without a more thorough-going treatment
than was accorded them by the Supreme Court of
Kansas—certainly amounted to millions of dollars in
liability. We think that the Supreme Court of Kan-
Ta
sas erred in deciding on the basis that it did that
the application of its laws to all claims would be
constitutional.” (Emphasis added.) 472 U.S. at 816-
18.
The basis of Kansas contacts reviewed and rejected by
the Court included the common fund analogy. Because
Phillips had commingled the suspended royalties with its
general corporate account, the Court found there was no
specific identifiable res in Kansas, nor any limited amount
to deplete before every plaintiff was compensated. The
idea that all the plaintiffs consented to be bound by Kan-
sas law when they failed to “opt out” of the suit was
rejected because a plaintiff’s desire is rarely, if ever,
controlling on the choice of applicable law. Finally, the
fact that a nationwide class action was being adjudicated
and the requirements of procedural due process satisfied
was found not to be a sufficient reason to apply the law
of the forum.
“Kansas must have a ‘significant contact or ag-
gregation of contacts’ to the claims asserted by each
member of the plaintiff class, contacts ‘creating state
interests’ in order to ensure that the choice of Kan-
sas law is not arbitrary or unfair. Allstate [Ins. Co.
v. Hague, 449 U.S. 302, 312-13, 66 L. Ed. 2d 521,
101 S. Ct. 633, reh. denied 450 U.S. 971 (1981) ].
Given Kansas’ lack of ‘interest’ in claims unrelated
to that State, and the substantive conflict with juris-
dictions such as Texas, we conclude that application
of Kansas law to every claim in this case is suffi-
ciently arbitrary and unfair as to exceed constitu-
tional limits.” (Emphasis added.) 472 U.S. at 821-
22.
Again, those constitutional limitations are “that for a
State’s substantive law to be selected in a constitutionally
permissible manner, that State must have a significant
contact or significant aggregation of contacts creating
state interests, such that choice of its law is neither ar-
8a
bitrary nor fundamentally unfair.” Allstate Ins. Co. v.
Hague, 449 U.S. 302, 312-13, 66 L. Ed. 2d 521, 101 S.
Ct. 633, reh. denied 450 U.S. 971 (1981). It is important
to note the Court stated the following:
“We make no effort to determine for ourselves which
law must apply to the various transactions involved
in this lawsuit, and we reaffirm our observation in
Allstate that in many situations a state court may
be free to apply one of several choices of law. But
the constitutional limitations laid down in cases such
as Allstate and Home [Ins.] Co. v. Dick, [281 US.
397, 74 L. Ed. 926, 50 S. Ct. 338 (1930)], must be
respected even in a nationwide class action.” (Em-
phasis added.) Phillips, 472 U.S. at 823.
On remand, the district court of Seward County, Kan-
sas, reviewed the laws of the other states involved and
found no conflicts existed with the laws of Kansas on
the two issues of liability and applicable interest rate.
The decision made by this court in Shutts IJ was adopted
by the district court.
Phillips brings this appeal arguing (1) the district
court on remand failed to follow the decision of the
United States Supreme Court, (2) the laws of the other
states connected to this suit conflict with the laws of
Kansas, and (8) the district court erred in imposing
post-judgment interest of fifteen percent.
Here, the gas produced by Phillips is produced in
eleven different states: Kansas, Texas, Oklahoma, Loui-
siana, New Mexico, Wyoming, Arkansas, Illinois, Mis-
sissippi, Utah, and West Virginia. The leases located in
Texas and Oklahoma make up 82% of Phillips’ total
leases nationwide. The leases in Kansas, Louisiana, New
Mexico, and Wyoming total 17% of Phillips’ nationwide
leases. Following is a chart of the interests of the states
where 97% of the leases are located:
9a
No. Royalties
No. Royalties Royalty Paid to State
Leases to Owners Royalty
. inSta. State Leases in State Owners
TEXAS 11,595 $5,626,114.55 26,022 $4,677,541.43
OKLAHOMA 4,644 $ 797,997.37 8,928 $1,340,714.42
NEW MEXICO 1,882 $ 651,045.07 1,429 §$ 449,544.13
WYOMING 1,234 $1,161,918.03 722 $ 688,428.51
LOUISIANA 272 $3,056,335.64 2,345 $2,369,714.92
KANSAS 22 $ 2,887.22 1,553 $ 122,638.40
We will review the laws of each of these states as ap-
plicable to the two issues involved: (1) whether Phillips
is liable to the royalty owners for interest on the sus-
pended royalties; and (2) if Phillips is liable, what is
the applicable interest rate?
TEXAS
LIABILITY
The leading Texas case on liability for interest on sus-
pended royalties is Phillips Petroleum Co. v. Stahl Pe-
troleum Co., 569 S.W.2d 480 (Tex. 1978). There, Phil-
lips was a buyer and Stahl the seller under a casinghead
gas contract. Under the contract, the price Phillips paid
to the seller was based on what Phillips was receiving on
its sales to third parties. Phillips had requested price
increases with the FPC as to the sales it made to third
parties. Pending FPC approval, Phillips was collecting
the increased prices from those third parties, and placing
the increase in a general fund. Phillips, however, did not
increase its payments to Stahl. Upon final approval of
the price increases by the FPC on October 30, 1972, Phil-
lips recomputed the payments to Stahl and on December
7, 1972, paid it $24,000 without interest. Three years
later, Phillips sought a declaratory judgment that: (1)
under the contract, it was not liable to Stahl for the
$24,000; (2) if Phillips was liable, it was not liable for
interest; and (3) if Phillips was liable for interest, it
was not liable for interest prior to October 30, 1972, the
date of the FPC’s final approval. On June 28, 1976, the
10a
trial court ruled that, under the contract, Phillips was
not expressly, but was impliedly, obligated to pay Stahl
$24,000, and that Phillips was not liable for interest.
The case first came up for review before the Texas
Court of Civil Appeals in Stahl Petroleum Co. v. Phillips
Petroleum Co., 550 S.W.2d 360 (Tex. Civ. App. 1977).
There, Stahl argued it was entitled to $14,000 interest
accruing to the date of payment and it was entitled to
$3,000 interest on the $14,000 to the date of judgment.
The appellate court did not reiy on Phillips Petroleum
Company v. Adams, 513 F.2d 355 (5th Cir.), cert. de-
nied 423 U.S. 930 (1975), which will be discussed later,
but instead relied on a common-law principle to find
Phillips liable for interest on the $24,000. That common-
law principle is that “interest cannot be allowed eo
nomine—i.e., under that name—unless especially provided
for by statute, except where interest is assessed, sans
statutory sanction, as damages to indemnify a party for
a wrong done to him.” 550 S.W.2d at 365. The court
stated that, under the facts presented, the claim for in-
terest was not an element of damages for tortious injury,
but rather a claim under a contract and, therefore, had
to be authorized by statute. The applicable statute at
the time the contract was executed defined “interest” as
“the compensation allowed by law or fixed by the parties
to a contract for the use or forbearance or detention of
money.” 550 S.W.2d at 365. It was stated that Stahl
claimed interest because Phillips used Stahl’s money, and
the sum due was ascertainable and came within the
meaning of the statute. Stahl recovered $14,000 interest
and $3,000 interest on that sum.
On review by the Texas Supreme Court, that the court
stated the common-law rule that prejudgment interest
cannot be allowed eo nomine unless provided for by con-
tract or statute has not been rigidly or consistently ap-
plied in a manner which would deny a party legal com-
pensation for the use or detention of his money. Phillips
| _ |
lla
Petroleum Co. v. Stahl Petroleum Co., 569 S.W.2d 480.
The Supreme Court found the court of civil appeals had
reached the correct result, but did not agree with that
court that Stahl’s right to recover existed only under an
enabling statute. The Supreme Court relied on Phillips
Petroleum Company v. Adams, 513 F.2d 355, a federal
ease interpreting Texas law. In Adams, Phillips was
held liable for interest on delayed payments under the
equitable principle that Phillips should not be able to use
someone else’s money, thereby receiving a benefit, yet
paying nothing. Thus, the Texas Supreme Court ruled
that interest for the use of money is an equitable excep-
tion to the common-law rule of interest eo nomine. Stahl,
569 S.W.2d at 487. The court affirmed Stahl’s award of
$14,000 interest (six percent interest on the $24,000 sus-
pended payments) and the additional $3,000 interest
(six percent on the $14,000 interest liability).
Cases subsequent to Stahl have also awarded interest
based upon equitable principles. Fuller v. Phillips Petro-
leum Co., 408 F. Supp. 643, 646 (N.D. Tex. 1976) (Phil-
lips liable as a distributor to the gas producer for in-
terest on money it held and used for its own corporate
purposes); MCZ, Inc. v. Smith, 707 S.W.2d 672 (Tex.
App. 1986) (court can award prejudgment interest based
upon equity for compensation of another’s use of his
funds); Gulf Const. Co., Inc. v. Self, 676 S.W.2d 624
(Tex. App. 1984) prejudgment interest can be awarded
as damages under equitable principles) ; Behring Intern.
v. Greater Houston Bank, 662 S.W.2d 642 (Tex. App.
1983) (court may elect to fix prejudgment interest rate
by using equitable principles or statutory method) ;
Standard Fire Ins. Co. v. Fraiman, 588 S.W.2d 681 (Tex.
Civ. App. 1979) (insurance company retained money
that should have been paid to insured and court held
insurance company should not be unjustly enriched).
Phillips argues several points to show why, under
Texas law, it is not liable for the interest on the sus-
12a
pended royalties. (These arguments were rejected by this
Kansas court in Shutts II.)
First, Phillips argues that under its casinghead gas
contract, it is a purchaser rather than a producer of gas,
and, therefore, it pays royalties only when so ordered by
the producer of the gas. Phillips relies on the following
contract provision:
“For the account and on behalf of Seller, Buyer
agrees to disburse such royalties, overriding royal-
ties, bonus payments and production payments, as
Seller shall from time to time direct, accruing from
the production and sale of gas hereunder. Buyer
shall deduct such payments from the amounts due
Seller hereunder. Seller agrees to indemnify and
hold Buyer harmless from loss and damages result-
ing from payments made pursuant to Seller’s direc-
tion. Notwithstanding, Seller may elect initially to
make all payments accruing from the production and
sale of gas hereunder to the owners of all royalties,
overriding royalties, bonus payments and production
payments and to hold Buyer harmless therefrom in
which event Buyer shall have no obligation with
respect to disbursement of such payments as first
above provided.” :
Therefore, Phillips argues, the royalty owners should
be seeking recovery of interest from the producer, rather
than Phillips, upon a showing that Phillips did not dis-
tribute the monies as instructed by the producer. To
bolster this argument, Phillips cites Exxon Corp. v. Mid-
dleton, 613 S.W.2d 240 (Tex. 1981), where the Texas
Supreme Court wrestled with a clause in a lease agree-
ment whereby royalties paid would be based on the mar-
ket value of the gas “sold off” certain leases, Exxon ar-
gued the effective date on which the gas was “sold” was
when Exxon’s long-term gas contracts became effective.
The court found the gas was sold when it was delivered.
The court recognized that the transaction involved two
13a
agreements, the lease agreement and the gas contract,
and stated Exxon’s royalty obligations were determined
by the lease agreements which required royalties of one-
eighth of the market value of gas when delivered. The
lease agreements were made independent of, and were
unaffected by, the gas contracts. 613 S.W.2d at 245.
Phillips’ argument on this point, that it was a pur-
chaser and not a producer, lacks merit for two reasons.
First, it is noted that in a news release date March 20,
1975, Phillips had apparently agreed to make royalty
payments for its producers:
“Phillips Petroleum Company has announced the
following policy regarding payments to producers
from whom it purchases gas under percentage of
proceeds type contracts executed on or after Janu-
ary 1, 1973, and to royalty owners to whom it makes
payments for gas produced from wells commenced on
or after January 1, 1973, or from wells drilled prior
to January 1, 1978, and said gas sold pursuant to
contracts executed on or after January 1, 1973, based
upon Phillips resale rates authorized by the Federal
Power Commission’s Opinion No. 699, as amended.”
Additionally, in Phillips’ answers to interrogatories,
it indicated it had accepted the responsibility of the pro-
ducers’ royalty owners; Phillips was asked how many
class members had contractually released Phillips from
liability for interest, and Phillips answered: “The total
number is unknown at this time. Phillips has not yet
determined all of the producers, and through them, the
royalty owners involved.”
In any event, by agreeing to pay the royalty owners
of the producers, Phillips would again be retaining the
suspended royalties and using those funds until the ulti-
mate distribution was made on behalf of the producers.
Therefore, under these circumstances, it makes no differ-
ence that Phillips was the purchaser and not the pro-
ducer under the gas contracts.
14a
Next, Phillips argues that a special set of gas purchase
contracts existed which included a “without interest”
clause, as follows:
“The price per Mcf. that buyer receives under the
‘sales contract’ is, or may be, subject to regulation
by the Federal Power Commission. The phrase ‘price
per Mcf. that buyer receives,’ as used in this con-
tract, shall mean only that portion of the price ex-
clusive of any tax reimbursement then being col-
lected by buyer under the sales contract which is
not subject to possible future refund by buyer. If
buyer is later determined to be entitled to retain
all or part of any amount collected subject to refund
and is relieved from all further obligation to refund
with respect thereto, buyer shall retroactively recal-
culate the price payable hereunder and shall pay
seller the difference, without interest, between the
amount previously paid seller hereunder and the
amount which would have been payable based on the
price which buyer is so permitted to retain.” (Em-
phasis added. )
Phillips argues that because the contract allowed it to
recalculate retroactively the money due to the seller, the
money Phillips was holding belonged to Phillips and no
unjust enrichment can be found. Phillips cites Stahl as
approving this method to avoid liability for interest.
However, the court in Stahl recognized that the gas pur-
chase contract was subject to valid federal laws and regu-
lations. The alternative suggested by the Texas Supreme
Court did not include a “without interest” clause which
is contrary to federal laws which require the payment of
interest. Under its corporate undertaking, Phillips agreed
to comply with the refunding provisions of 18 C.F.R.
§ 154.102 (1986), which sets forth the interest rates ap-
plicable to refunds. The alternatives did not suggest
anything contrary to federal law, but suggested ways to
15a
pay producers while waiting for FPC approval. These
alternatives do not vitiate any interest on the refunds:
“On the contrary, the Court recognized that the con-
tract was subject to valid federal laws and regula-
tions. Since any portion of the increased prices re-
ceived by Phillips was subject to refund, with inter-
est, to its purchasers if finally disapproved by the
FPC, it follows as a matter of law that any portion
of the ‘refundable money’. which had been paid to
Stahl under its contract was likewise subject to re-
imbursement with interest to Phillips. Thus, if Phil-
lips had made its monthly payments to Stahl based
on its percentage of the weighted average ‘price re-
ceived’ by Phillips during all of the years pending
FPC action, the only amount necessary to be ascer-
tained as between Stahl and Phillips after the FPC
opinion became final on October 30, 1972, would have
been the portion of Stahl’s payments which were re-
fundable with interest, to Phillips. Only the ‘sustain-
able’ remainder would have been retainable by Stahl,
and having been paid when due, there would have
been no issue concerning interest.
“Phillips’ concern over this literal interpretation
of the unambiguous terms of the contract is under-
standable, but Phillips prepared the contract. It
knew that its receipts from interstate sales were
subject to regulation by the FPC. It would have been
a simple matter for the contract to have provided
that increased prices from interstate sales would not
be figured in the ‘weighted average price received’
until after approval by the FPC, if that had been
the intention of the parties. Or, it could have been
provided that the percentage of monthly payments
based on unapproved interstate price increases would
- be withheld unless Stahl indemnified Phillips by a
surety bond or other guarantee that Stahl would re-
fund to Phillips, with interest, any portion of its
16a
payments attributable to price increases which were
subsequently disapproved by a valid order of the
FPC.” Stahl, 569 S.W.2d at 484.
It does not appear from this language that the Texas
court would approve the “without interest” contracts
which are contrary to federal regulations.
Next, Phillips argues that as a user of the gas, it can-
not be held liable for interest. This argument makes
very little sense. Phillips argues that as much as 70%
of the gas it purchases is used by Phillips itself, and not
sold to interstate pipeline companies. Therefore, Phillips
argues, because it used the gas rather than sold it, Phil-
lips “did not necessarily make use of another’s money,
rather Phillips merely suspended payment of a small por-
tion of the purchase price until its final obligation be-
came certain.” First, it is noted that under the lease
agreement Phillips agreed to pay a royalty on gas “pro-
duced .. . and sold or used off the premises.” Second, the
argument that the transaction amounted to nothing more
than an unliquidated claim on which no interest accrues
lacks merit and was rejected in Stahl, where the court
stated the terms of the contract “provided the means for
ascertaining the sums due and payable to Stahl each
month.” 569 S.W.2d at 483. The lease agreements in-
volved here also include such a provision.
Finally, Phillips argues that under Texas law its obli-
gation for interest stopped as of the dates it offered in-
demnity agreements to the royalty owners. Under the
indemnity agreements, Phillips agreed to pay the royalty
owners the increased royalties pending FPC approval
and, in exchange, the royalty owners agreed to refund to
Phillips, with interest, any amount of the increased roy-
alties not approved by the FPC.
In Phillips Petroleum Company v. Adams, 518 F.2d
355, Adams had a lease agreement with Phillips. Adams
later assigned that lease to Schnell. A dispute developed
> intervie
emi aes
Lee Nad ara
17a
over whether Schnell or Adams should get the suspended
royalties held by Phillips. The court ruled Phillips was
liable to Adams under equitable principles of unjust en-
richment for interest on the suspended royalties. That
interest, however, stopped running as of the date that
Phillips, as stakeholder of the funds, offered to pay the
suspense money into court even though the funds were
not actually paid until some months later. The court
cited authority that:
“once a stakeholder makes an unconditional offer to
give up possession of a disputed fund, it ceases to
exert that dominion over the money sufficient to
justify an obligation to pay interest thereon, and
the rule is that once such an unconditional tender is
made, any liability for interest ceases as of the date
of tender.” (Emphasis added.) 513 F.2d at 370.
A similar situation arose in Phillips Petroleum Co. v.
Hazlewood, 409 F. Supp. 1193 (N.D. Tex. 1975), aff'd
534 F.2d 61 (5th Cir. 1976), where Hazlewood assigned
his leasehold estate to Alstar Production Corporation.
Phillips was holding suspense monies totaling $57,000.
Phillips paid that money to Alstar on June 30, 1971,
under an agreement that Alstar would repay Phillips
the money and indemnify it for any loss, together with
interest. Alstar repaid Phillips the money and Phillips
deposited the money with the court. The court held,
under Adams, Phillips’ interest obligation to Hazlewood
ended as of June 30, 1971, because after that date Phil-
lips no longer had the free use of the money.
In Fuller v. Phillips Petroleum Co., 408 F. Supp. 643,
Fuller, the producer of the gas, sued Phillips, its dis-
tributor, for monies held in suspense by Phillips pending
FPC approval. Eventually, Fuller and Phillips entered
into an indemnity agreement whereby the Fullers would
receive the higher prices and, if the FPC later denied
the price increases, the Fullers would refund the same
to Phillips with interest. The indemnity agreements
18a
were silent on the question of interest Phillips would pay
to the Fullers if the price increase was approved. The
Fullers sought to recover interest on the funds held by
Phillips up to the time that they were paid to the Fullers
under the indemnity agreements. Citing Adams, the
court iuled the Fuilers were entitled to payment of in-
terest until the time Phillips lost the reasonably free use
of the money—the dates of the indemnity agreements.
408 F. Supp. at 646.
Finally, Phillips Petroleum v. Riverview Gas Compres-
sion, Co., 409 F. Supp. 486 (N.D. Tex. 1976), involved
indemnity agreements between the producers of gas and
Phillips, the distributor. Under the agreements, the
monies would be paid to the producers, and if the FPC
ruling required a refund, then the producers agreed to
refund the monies to Phillips together with interest.
Consistent with Adams, the court ruled that the interest
liability ceased when Phillips lost the reasonably free use
of the money—the date Phillips offered pay-out. The case
was remanded to determine the dates the offers of in-
demnity agreements were made.
There are two flaws in the analysis of the federal dis-
trict court in Riverview. First, although an offer to pay
out has been made, when indemnity agreements are never
executed Phillips retains the money and its reasonably
free use. Second, the indemnity agreements in both
Riverview and Fuller do not appear to be the uncondi-
tional type of offer upon which Adams is based. Under
the indemnity agreements involved in the instant case,
the royalty owners would receive an early payout only if
they agreed to refund the money to Phillips with seven
percent interest, or the same rate which Phillips is re-
quired to pay by any applicable FPC order, whichever
is the higher rate. Additionally, the royalty owners or
producers had to obtain an acceptable and irrevocable
letter of credit issued by a bank to secure the amount
of the refund together with interest. No Texas state
19a
court has ruled on this particular situation. However,
it does not appear that the offers of the indemnity agree-
ments in this case are unconditional offers of pay-out.
To summarize, Texas law would clearly impose lia-
bility on Phillips for interest on the suspended royalties
based upon equitable principles hereafter more fully dis-
cussed. We do not think the Texas Supreme Court
would hold the liability for interest ceased as of the date
Phillips offered conditional indemnity agreements to its
royalty owners when no agreement was executed.
INTEREST RATE
In the above cases where liability for interest was ac-
cessed, the applicable interest rate was the Texas statu-
tory legal rate of interest, six percent. Tex. Rev. Civ.
Stat. Ann. art. 5069--1.03 (Vernon 1971) states:
“When no specified rate of interest is zgreed
upon by the parties, interest at the rate of six per-
cent per annum shall be allowed on all written con-
tracts ascertaining the sum payable, from and after
the time when the sum is due and payable; and on
all open accounts, from the first day of ./anuary
after the same are made.”
This statute was amended in 1979 to read as follows:
“When no specified rate of interest is agreed upon
by the parties, interest at the rate of six percent
per annum shall be allowed on all accounts and con-
tracts ascertaining the sum payable, commencing on
the thirtieth (30th) day from all after the time
when the sum is due and payable.”
When there is proof of an oral agreement as to a specific,
determinable rate of interest, the transaction is governed
by Tex. Rev. Civ. Stat. Ann. art. 5069-1.02 (Vernon
1971), which provides for a maximum interest rate of
ten percent. Moody v. Main Bank of Houston, 667
S.W.2d 613 (Tex. App. 1984).
20a
No Texas court ever mentioned the higher rates set
by federal regulations to which Phillips had agreed to
comply in its corporate undertaking. See Phillips Petro-
leum Company v. Adams, 513 F.2d 355 (5th Cir. 1975),
cert. denied 423 U.S. 930 (1979); Phillips Petroleum Co.
v. Hazlewood, 409 F. Supp. 1198; Phillips Petroleum Co.
v. Stahl Petroleum Co., 569 S.W.2d 480, 488 (Tex. 1978).
This issue has not been determined by the Texas Supreme
Court.
Post-judgment interest, or interest on the interest, was
awarded at the rate of six percent in Fuller v. Phillips
Petroleum Co., 408 F. Supp. 643, 648 (N.D. Tex. 1976).
OKLAHOMA
LIABILITY
There are no Oklahoma cases involving liability for in-
terest on suspended royalties. However, in West Edmond
Hunton Lime Unit v. Young, 325 P.2d 1047 (Okla.
1958), royalty owners sued a unit organization for fail-
ing to get the highest prices for oil produced. Under
the plan, the unit was the agent and trustee of all roy-
alty owners and had a duty to sell all royalty oil for the
highest market value or posted price. The Oklahoma Su-
preme Court ruled that, based upon principles of equity
and the Oklahoma statute requiring prejudgment inter-
est on liquidated claims, the royalty owners were en-
tiled to the difference between what the oil was sold for
and the highest available price. Prejudgment interest on
that amount was assessed from the last day of the sale
of the oil for less than the highest available price. 325
P.2d at 1052.
Additionally, in First Nat. Bank v. Iowa Beef Proces-
sors, 626 F.2d 764 (10th Cir. 1980), prejudgment inter-
est was awarded in a situation where one party had the
use of another’s money. There, Wheatheart owed IBP
money from a dishonored check, and IBP owed Wheat-
heart money for cattle purchased. Wheatheart declared
ee
aS Cae rt ert ns nh nn
2la
bankruptcy before IBP paid for the cattle, and IBP never
paid anyone for the cattle. The bank had a security in-
terest in the cattle and IBP’s claim of setoff for the dis-
honored check was in conflict with the bank’s security
interest. The court first ruled the bank had priority over
IBP. Second, the court ruled the bank had a right to
proceed against IBP for the amount due on the cattle
purchased together with interest. The court stated
“this result is not unfair to IBP; it had the use of
the money during all of this time.” 626 F.2d at 771.
See Rendezvous Trails of America, Inc. v. Ayers, 612
P.2d 1384, 1385 (Okla. App. 1980), where it is stated
the traditional market place function of interest is to
compensate another for the use of the money.
Phillips cites the Oklahoma statute concerning the
statutory rate of interest as authority that Phillips can-
not be held liable for interest under Oklahoma law. Okla.
Stat. tit. 23, § 6 (1981), provides as follows:
“Any person who is entitled to recover damages
certain, or capable of being made certain by calcula-
tion, and the right to recover which is vested in him
upon a particular day, is entitled also to recover in-
terest thereon from that day, except during such
time as the debtor is prevented by law, or by the act
of the creditor from paying the debt.”
Phillips argues “prejudgment interest would not accrue
on Phillips’ obligation to pay suspended royalties since,
until final approval of an increased FPC price that would
justify payment of those suspended royalties, the amount
of the ultimate obligation is not capable of being deter-
mined.”
There is no Oklahoma case addressing the issue of
whether claims for suspended royalties are unliquidated
claims. However, a survey of Oklahoma law shows where
Oklahoma courts have drawn the line as to certainty for
damages in order to recover prejudgment interest. In
22a
cases where the court must make a determination of an
object’s market value, or the amount of damages in-
volved, the damages have been ruled unliquidated and
prejudgment interest is denied. Jesko v. American-First
Title & Tr. Co., 608 F.2d 815 (10th Cir. 1979) (in a
suit against a title insurer for failure to defend title,
the insured was not entitled to prejudgment interest
based on loss of one-third of insured’s land since the ex-
tent of such loss was not mathematically ascertainable
until the court placed a value on the land) ; Liberty Nat.
Bank & Tr. Co. of Okl. City v. Acme Tool, 540 F.2d 1375
(10th Cir. 1976) (involving the negligent conduct of a
sale by a bank, damages were not certain because de-
termination of market value of property to be sold had
to be made; Wilshire Oil Co. of Texas v. Riffe, 406 F.2d
1061 (10th Cir.), cert. denied 396 U.S. 843 (1969) (cor-
poration sued former. corporate officer for profits made
while officer participated in competitive enterprises, dam-
ages held to be unliquidated) ; Sandpiper North Apart-
ments v. Am. Nat. Bank, 680 P.2d 983 (Okla. 1984)
(contractor sued subcontractor’s bank for misapplication
of funds of progress payments contractor made to sub-
contractor; no judgment interest awarded because the
amount of the fund involved was unknown until judg-
ment was entered).
However, as to claims arising under contracts, express
or implied, the rule that prejudgment interest is denied
on unliquidated damages has been modified. See Note,
Prejudgment Interest in Oklahoma, 34 Okla. L. Rev. 643
(1981). In Frankfurt v. Bunn, 408 P.2d 785 (Okla.
1965), the court ruled that where the amount sued for
was capable of ascertainment by computation, even
though the amount is unliquidated, prejudgment interest
will not be denied. Frankfurt involved an action for
recovery of money under an oral contract for electrical
work and materials furnished by the plaintiff in repair-
ing the defendant’s hotel. The oral contract provided the
23a
defendant would “pay along on his bill” as the work
progressed, and the court ruled the damages were ascer-
tainable by computation. See also First Nat. Bank v.
Iowa Beef Processors, 626 F.2d at 770 (“Almost any
lawsuit involves some dispute over defendant’s liability.
As to the sum certain aspect, the correct inquiry is
whether ‘the amount sued for’ can be ascertained prior
to judgment.”’)
The rule regarding prejudgment interest is also given
flexible treatment. In Robberson Steel Co. v. Harrell,
177 F.2d 12 (10th Cir. 1949), it was stated:
“It is the general rule of law in Oklahoma that in-
terest on an unliquidated account or claim is not
recoverable until the amount due is fixed by judg-
ment. (Citations omitted.) But compensation is a
fundamental principle of damages, whether the ac-
tion be in contract or tort; and one who fails to per-
form his contract is justly bound to make good all
damages which naturally and reasonably accrue from
the breach. And while generally interest is not al-
lowed upon unliquidated damages prior to the entry
of judgment, the court may in the exercise of a
sound discretion include interest or its equivalent as
an element of damages when it is necessary in order
to arrive at fair compensation.” 177 F.2d at 17.
Here, although the specific amount of royalties due is
not known until the FPC grants final approval of the
rate increases, Phillips is aware that the amount due
will be in the range between the price increases it re-
quested and the prices actually being collected. If the
Oklahoma courts were faced with this issue, having no
Oklahoma precedent on point, they would probably look
to see how other jurisdictions have ruled. It should be
noted that the Texas Supreme Court rejected an argu-
ment made by Phillips in Phillips Petrolewm Co. v. Stahl
Petroleum Co., 569 S.W.2d 480, that the sum payable
under the contrart was not ascertainable until the FPC
24a
granted final approval. The Oklahoma Supreme Court
cited with approval the rationale of the Texas Court of
Appeals, holding the sum due was ascertainable:
“ ‘At the time the contract was executed, Phillips,
as permitted during the pendency of its applications
for increases in the interstate commerce rates for its
gas sales, was receiving from its purchasers and ac-
cepting as payment for its gas an amount of money
in excess of the then established rates. Albeit the
excess was subject to possible refund, none of the ex-
cess was contractually excluded from the “price re-
ceived” by Phillips and on which payment to Stahl
was contractually based. Phillips candidly concedes
that neither statutory or decisional law nor the rules
and regulations of the Federal Power Commission
prohibit Phillips from including the excess in the
amount on which calculation of payment to Stahl
was made. It naturally follows that the portion of
the rrices exceeding the then approved interstate
commerce rate received by Phillips from its gas sales
in the Panhandle Field was, under the plain mean-
ing of the language of the contract, a part of the
“price received” on which the month-by-month pay-
ments to Stahl were to be based. Hence, within the
meaning of the statute, the written contract is one
ascertaining the sum payable, and interest is allow-
able on each unpaid sum which was due and payable
monthly under the contract. And there is nothing in
the contract to alter this legal consequence even
though it later developed that Phillips was required
to refund to its purchasers a portion of the purchase
price it has received.’ 550 S.W.2d at 366-67.” 569
S.W.2d at 484.
Next, Phillips makes the same argument that because
Phillips was a purchaser, it cannot be held liable for
interest. This time Phillips relies on Tara Petroleum
Corp. v. Hughey, 630 P.2d 1269 (Okla. 1981). There,
P Wane at
eee ee eee | -
an san Ae
25a
Tara, the lessee, assigned the lease to Brown, who as-
signed it to Wilcoy. Wilcoy, as producer and seller, en-
tered into a gas purchase contract with Jarrett Oil Com-
pany, buyer. Although the contract required Wilcoy to
pay royalties, Jarrett made the actual royalty payments.
Jarrett then turned around and sold the gas to El Paso
Natural Gas under a contract which allowed Jarrett to
get the FPC ceiling price. Jarrett was selling the gas
at a higher price to El] Paso than the price it was paying
Wilcoy. The royalty owners sued for additional royal-
ties, arguing their royalties should be measured by the
price El] Paso paid Jarrett, rather than the contract price
Jarrett paid Wilcoy. The court ruled that as long as the
contract between Jarrett and Wilcoy was reasonable when
entered into, Wilcoy was not responsible for the addi-
tional royalties. The court also stated that neither Jar-
rett nor Tara was responsible for the additional royalties
because, when the producer is not responsible for the
additional royalties, the lessors are not entitled to addi-
tional royalties from any other party. The royalty own-
ers argued under equity that Tara and Jarrett should
not profit to the detriment of the royalty owners, assert-
ing the two organizations were owned by the same men.
The court stated that “[w]henever a lessee or assignee
is paying royalty on one price, but on resale a related
entity is obtaining a higher price, the lessors are entitled
to their royalty share of the higher price. The key is
common control of the two entities.” (Emphasis added.)
630 P.2d at 1275. However, the royalty owners failed to
show the common control and were denied the additional
royalties.
In the above case, the producers were not liable for
the additional royalties because the gas purchase contract
they had entered into with Jarrett was reasonable.
And, because the producers were not liable, the pur-
chaser, Jarrett, was not liable. Here, in the instant case,
are the producers liable to the royalty owners? If yes,
then the purchaser would also be liable. Under the cas-
ee NT
26a
inghead gas contract, the producer/seller had an agree-
ment with Phillips, as purchaser, that the price paid by |
Phillips to the producer was set out in the “sales con-
tract.” The casinghead gas contract included the “with-
out interest” clause previously referred to in this opinion.
In that clause, it is noted that the price Phillips receives
is subject to FPC regulation. On this point the Oklahoma
Supreme Court would undoubtedly follow Texas and hold
the gas purchase contract was subject to valid federal
laws and regulations. Phillips Petroleum Co. v. Stahl
Petroleum Co., 569 S.W.2d 480. .
Next, Phillips argues that under Okla. Stat. tit. 15,
§ 264A (1981), which defines interests as “the com-
pensation allowed for the use or forbearance or deten-
tion of money, or its equivaient,”’ Phillips cannot be liable
for interest. This argument has been previously dis-
cussed. Phillips contends that a significant amount of
gas produced or purchased by Phillips was used by Phil-
lips and, as a user, Phillips was not holding money be-
longing to someone else. For the reasons previously dis-
cussed, this argument is without merit.
Finally, Phillips argues that under Okla. Stat. tit. 23,
§8 (1981), Phillips is not liable for interest. That stat-
ute provides “[a]ccepting payment of the whole principal,
as such, waives all claim to interest.” Phillips contends
that, because the royalty owners accepted the principal
amounts due as a result of the FPC order, they are
prevented from seeking interest. Phillips relies on Web-
ster Drilling Co. v. Sterling Oil of Oklahoma, Inc., 376
P.2d 236 (Okla. 1962). There, Webster drilled an oil
well for Sterling and billed Sterling. Sterling made par-
tial payments, leaving $12,000 unpaid. Over a year after
the sum was due, Webster sent Sterling a bill for the
$12,000 plus interest. A year later, Sterling paid the
$12,000 and Webster sued to recover the interest. Web-
ster asserted it was an accepted custom in the industry
that amounts due under contracts would bear interest at
———— SS eee
27a
the rate of six percent until paid. Webster was suing to
recover money which Sterling had agreed to pay. Web-
ster was not seeking interest as damages for the breach
of an obligation to pay money. The court ruled Webster’s
cause of action was not an action for interest, but was
for an “account stated” (defined as arising ‘where there
have been transactions between debtor and creditor re-
sulting in the creation of matured debts and the parties
by agreement compute a balance which the debtor
promises to pay and the creditor promises to accept in
full payment for the items of the account,” Black’s Law
Dictionary 17 [5th ed. 1979]). Therefore, Webster’s suit
was based upon a new and independent obligation which
rested upon the new agreement of the parties, express or
implied, that Sterling would pay Webster the $12,000
plus interest. Thus, Okla. Stat. tit. 23, §8 (1981) did
not bar Webster’s suit.
Here, Phillips agreed in its corporate undertaking with
the FPC that it would comply with the requirements of
18 C.F.R. § 154.102 (1986), which sets for the applicable
rates of interest refundable monies held in suspense.
Additionally, it is noted that in the indemnity agreements
Phillips offered to its royalty owners and producers this
requirement under the corporate undertaking is men-
tioned:
“From time to time and by various orders issued
since June 7, 1954, the Federal Power Commission
(FPC) has suspended increases in price for sales
of gas filed by Phillips and has permitted such in-
creases to be collected, beginning at some date sub-
sequent to the original date proposed by Phillips,
only upon Phillips filing a corporate undertaking
with the FPC to refund all or any portion of such
increase which the FPC may find not to have been
justified, together with interest at the rate prescribed
by the FPC. It is expected that future increase in
price for the sale of gas may also be suspended and
28a
collection of such increases. permitted only upon
Phillips filing a similar undertaking.” (Emphasis
added. )
The Oklahoma courts would probably view the above as
similar to an industry practice whereby a new obligation
is created at the time of. payment, similar to the circum-
stances in Webster, and Okla. Stat. tit. 23, §8 (1981)
would not bar recovery by the royalty owners.
Furthermore, Oklahoma has adopted the United States
rule, discussed more fully later in this opinion, on partial
payment of an interest-bearing debt. Landess v. State,
335 P.2d 1077, 1079 (Okla. 1958).
To summarize, the Oklahoma courts have not ruled on
the issues presented in this case. However, the Oklahoma
Court of Appeals has recognized that the function of
interest is to compensate another for the use of his
money, and the Fifth Circuit has awarded prejudgment
interest where one party has had the use of another’s
money. Prejudgment interest, by statute, is awarded
where the damages are certain or are ascertainable by
mere calculation, as here.
INTEREST RATE
Okla. Stat. tit. 15, § 266 (1981) provides as follows:
“The legal rate of interest shall be six percent
(6%) in the absence of any contracts as to the rate
of interest, and by contract the parties may agree
to any rate as may be authorized by law, now in
effect or hereinafter enacted.”
In the above cases where interest was awarded, the
applicable rate was six percent. However, in First Nat.
Bank v. Cit. & So. Bank, 651 F.2d 696 (10th Cir. 1981),
applying Oklahoma law, a federal circuit court awarded
interest at the rate of ten percent as provided in the
promissory note and rejected the argument that the in-
29a
terest must be limited to Oklahoma’s legal rate of six
percent. Therefore, in equity, the corporate undertaking
entered into by Phillips and the FPC would probably be
viewed by implication as contractual by the Oklahoma
courts and the rates required in 18 C.F.R. § 154.102
(1986) would be imposed, rather than the statutory six
percent.
LOUISIANA
LIABILITY
Phillips relies on Whitehall Oil Company v. Boagni,
217 So. 2d 707 (La. App. 1968), modified 217 So. 2d
716 (1969) (party substituted), to support its argument
that under Louisiana law Phillips is not liable for in-
terest. There, the lessees of oil and gas leases were
granted authority by the FPC to sell gas to pipeline
purchasers at a price of 23.25 cents per 1,000 cubic feet
(Mcf). This was conditioned on the lessees’ agreement
to refund to the pipeline purchasers any difference be-
tween the 23.25 cents price and the price finally approved
by the FPC, plus seven percent interest. The lessee
(plaintiff Whitehall) paid royalties to the lessors (de-
fendants royalty owners) based upon this higher rate of
23.25 cents per Mcf. The lessors were never informed,
however, that if the FPC denied the rate increase, the
royalty owners would be required to refund to the lessee
the difference between the 23.25 cents and the price ap-
proved.
The FPC approved a price at 20 cents per Mcf. The
lessee then refunded the difference to the pipeline pur-
chasers and demanded reimbursement from the royalty
owners. The royalty owners refused to pay and the lessee
filed suit relying on the equitable principles of unjust
enrichment and a code provision dealing with “Payment
of a Thing Not Due.” La. Civ. Code Ann. art. 2301
(West 1979). Under the statute, if the payments to the
royalty owners were not due under the lease agreement,
Whitehall could recover the overpayment. It was found
30a
that the payments were not due. As to the equity argu-
ment, Whitehall argued it had to make the overpayment
of royalties based on the price fixed by the FPC in order
to protect its leases. Therefore, it argued, as the pay-
ments were made under business duress, the royalty
owners should not be allowed to retain them under prin-
ciples of equity. The Court of Appeals ruled that equity
favored Whitehall. The court noted the overpayments
were not large sums, and defendants had failed to show
how they would be injured by their refund. Whitehall
also argued it was entitled to a refund of both principal
and interest which it had to pay to the pipeline pur-
chaser. The court denied such interest without much
comment. The court also rejected the lessors’ argument
that forcing them to refund the overpayment to White-
hall resulted in the price being uncertain and violated the
lease. The court ruled the action was based on a quasi-
contractual obligation, 7.e., that a payment made which
was not due can be recovered based upon the rationale
that every payment presupposes a debt. Post-judgment
interest was awarded to Whitehall, although the opinion
does not indicate the interest rate.
The Louisiana Supreme Court granted certiorari in
Whitehall Oil Company v. Boagni, 255 La. 67, 229 So. 2d
702 (1969). Responding to the lessors’ arguments that
the statutory provisions of “Payment of a Thing Not
Due” were inapplicable, the court stated that, because
the lease contract was silent on the issue of overpayments,
equity would decide the case. 255 La. at 73-74. It was
stated the royalty owners would be unjustly enriched at
the expense of Whitehall if they were allowed to retain
the overpayments. The court ruled Whitehall had no
obligation to withhold part of the payments, or place the
amounts in escrow, or file a concursus proceeding be-
cause “the proper amounts to be paid by [Whitehall] to
the [royalty owners] was not known and could not be
determined until such time as the Commission fixed the
fair market value in its permanent rate authorization.”
tn
Bla
255 La. at 76. Phillips argues that here, as above, the
amount in question is not certain until final approval by
the FPC and, therefore, Phillips is not liable for interest.
Louisiana law is confusing on this issue. Hicks v.
Rucker Pharmacal Co., Inc., 367 So. 2d 399 (La. App.
1978), writ denied 369 So. 2d 1360 (La. 1979), relied
on by Phillips, stated that all debts bear interest from
the time they become due; an unliquidated claim, how-
ever, becomes due at the time it is ascertainable.
In Wurzlow v. Placid Oil Company, 279 So. 2d 749
(La. App. 1973), interest was allowed on an unliquidated
claim from the date the defendant received the funds,
rather than from the date of judgment (the ascertain-
able date). There, a declaratory action was brought by
an oil and gas broker and his assignees to be recognized
as owners of an overriding royalty interest. The court
reviewed Louisiana law regarding interest on unliqui-
dated debts and noted a Louisiana Supreme Court case
which had reviewed the statutory changes and had
stated:
“Tt is obvious that both changes indicate an inten-
tion that interest shall be allowed on unliquidated,
as well as on liquidated, claims, and that interest
shall commence to run at the time the debt due,
regardless of putting in defauit.’” (Emphasis in
original.) 279 So.2d at 773 (quoting Friede v. Myles
Salt Co., 177 So. 105 [La. App. 1937]).
Therefore, in Louisiana, interest does run on an un-
liquidated debt once the debt is ascertainable.
Phillips also relies on Alexander v. Burroughs Corp.,
359 So. 2d 607 (La. 1978), for the proposition that in-
terest on a debt becomes due and payable only on the
date it becomes liquid and ascertainable. Alexander in-
volved a redhibitory action. Peerless, a company, had
purchased a computer from Burroughs. The purchase
was financed by General Electric Credit Corporation
32a
(GECC). The computer never operated properly and
cost Peerless a substantial amount of money and time
because employees had to doube-check the computer’s
work. One of the items the receiver of Peerless sought
to recover (Peerless had declared bankruptcy) was the
finance charge of $5,100 Peerless had paid on the $17,000
loan from GECC. The Louisiana Court of Appeals ruled
that the $5,100 was not recoverable because, under the
transaction, Burroughs got the use of the purchase price
at the same time that Peerless got the use of the com-
puter. The Louisiana Supreme Court, however, dis-
agreed and found that Burroughs was liable for the
$5,100 “interest”? because the use of the computer did
not bring any value to Peerless.
Certain language in Alexander has been questioned.
There, it was stated:
“The decisions involving interest on sums recovered
by suit are naturally myriad and because of their
great number, if for no other reason, inconsistent.
There is, however, a thread of consistency among
the cases. Article 554, of the Louisiana Code of
Practice of 1825 provided that interest should not
run on accounts or unliquidated claims, but was re-
pealed by La. Acts 1839, No. 53 § 1. This Court once
commented,
“We have uniformly held that, since the passage
of that act, all sums due on contracts bear interest
from judicial demand, even where none has been
stipulated, and the demand is unliquidated.’ Sullivan
v. Williams, 2 La, Ann. 876, 878 (1847).
See also Petrie v. Wofford, 3 La. Ann. 562 (1848);
Calhoun v. Louisiana Materials Co., 206 So. 2d 147,
151-52 (4th Cir. 1968), writ denied, 251 La. 1050,
208 So. 2d 324 (1968); Friede v. Myles Salt Co.,
177 So. 105, 108 (Orl. La. App. 1937).” (Emphasis
added.) 359 So. 2d at 613.
33a
The later case of Meeks v. Huntington School, Inc.,
489 So. 2d 435 (La. App. 1986), questioning the above
language, involved La. Civ. Code Ann. art 2000 (West
1987 Supp.), which replaced La. Civ. Code Ann. art.
1938 (West 1977). The new statute provided:
“When the object of the performance is a sum of
money, damages for delay in performance are meas-
ured by the interest on that sum from the time it is
due, at the rate agreed by the parties or, in the ab-
sence of agreement, at the rate of twelve percent
per annum.” (Emphasis added. )
The question was whether the interest ran from the
due date or the date of judgment. The court did not
agree with the above-cited passage from Alexander that
interest ran from the date of judicial demand, and it
distinguished Alexander on the basis that it was a
redhibitory action, while the case before it was a con-
tract case. In Meeks, a former principal sued the school
to recover salary due under his contract. No argument
was made that the amount was unliquidated. Meeks
recovered legal interest on each salary payment as it
became due, rather than from the date of judicial de-
mand.
Next, Phillips argues Boutte v. Chevron Oil Company,
316 F. Supp. 524 (E.D. La. 1970), aff'd 442 F.2d 1337
(5th Cir. 1971), is contrary to Whitehall. In Boutte,
lessors filed a class action suit to set aside a mineral lease
held by Chevron. One of the reasons to set aside the
lease, asserted by the lessors, was that Chevron had failed
to pay royalties as required by the lease. In its findings
of fact the court stated:
“Chevron applied to the FPC for approval of an
increased rate of 23.675 cents and, on June 4, 1959,
the FPC_entered an order permitting the increased
rate to become effective April 1, 1959, without, how-
ever, approving the rate, and subject to the limita-
tion that
84a
“Chevron shall, in accordance with its agree-
ment and undertaking, refund at such time and
in such amounts to the parties entitled thereto,
and in such manner as may be required by final
order of the Commission, the portion of the in-
creased rates found by the Commission in this
proceeding not justified, together with interest
thereon.’”’ (Emphasis in original.) 316 F. Supp.
at 527.
Chevron withheld royalties on the increased prices it was
receiving pending final FPC approval. This suit was
filed prior to, and the case was heard prior to, FPC final .
approval of rate increases requested by Chevron.
In its conclusions of law, the court ruled Chevron’s
royalties calculations were correct, i.e., the royalties were
calculated by not including the increased prices received
by Chevron pending FPC approval. The court stated: 1
“A judgment which would impose on Chevron an
obligation to pay royalties on that part of the funds ;
received from the sale of gas which is subject to |
possible refund to pipeline purchasers, before Chev- |
ron’s refund obligation has been determined by final .
order of the FPC, would deprive Chevron of its
property without due process of law and subject it
to a multiplicity of legal actions. Therefore, Chev-
ron’s calculation of the payment of rejyalties to plain-
tiffs is correct.
“Whitehall Oil Co. v. Boagni is distinguishable on
its facts, particularly in view of the fact that the
lease in that case provided that:
“In any case where Lessee sells gas or plant
products of his and Lessor’s, Lessor shall receive the
same price and terms as Lessee... .’” 316 F.
Supp. at 531.
85a
It is important to note that the court stated that if
the FPC granted approval, the royalty owners were en-
titled to recover interest as set forth by the FPC:
“In the event that the FPC approves the provi-
sionally increased rates or any part thereof, interest
shall be due and payable, at the rate finally adopted
by the FPC, to the royalty owners on the difference
between any increase in rate, as finally determined
by the FPC, and the amounts previously paid to the
royalty owners.” (Emphasis added.) 316 F. Supp. at
531.
Whitehall and Boutte are not contrary in law, but are
distinguishable upon their facts. In Whitehall, the lessee
paid royalties based upon the increased rate pending FPC
: approval as was required in the lease while in Boutte,
: the lessee did not pay royalties upon the increased rate
) but was withholding royalties until final FPC approval.
In Boute, the federal court found that once fina] approval
of the FPC order was granted, interest would be due.
In Whitehall, the state court found that no interest was
due because the amount due was not ascertainable until
the FPC gave final approval.
Thus, it appears first that if the royalty owners were
required under equity to refund overpayments in White-
hall, that same rationale applied here would require Phil-
lips to refund the suspense royalties to the royalty own-
ers and producers involved. The court also found it sig-
nificant to note in Whitehall that the amounts of the
refunds were relatively small. Here, the refunds held
by Phillips are substantial. Second, the statement in
Whitehali that no interest would be awarded on unliqui-
dated claims is no longer the law. Interest is due at the
time the unliquidated amount becomes ascertainable.
Hicxs v. Rucker Pharmacal Co., Inc., 367 So. 2d 399.
Third, in Alexander, interest was awarded to compensate
one for another’s use of his money. And fourth, although
dicta, the court in Boutte v. Chevron Oil Company, 316
36a
F. Supp. 624, recognized the royalty owners’ right to
interest on suspended royalties under federal regulations.
Next, Phillips again argues that as a purchaser of gas,
it is not liable for interest. The case relied on by Phil-
lips is New Orleans Public Service v. United Gas Pipe
Line, 732 F.2d 452 (5th Cir.), cert. denied 469 U.S.
1019 (1984), where it is stated that, under Louisiana -
law, to have a stipulation pour autrui (a third party
beneficiary contract), there must be a benefit to a third
party and that benefit cannot be merely incidental to the
contract. The benefit must form the condition or con-
sideration of the contract. 732 F.2d at 467.
As to the contract between Phillips, as purchaser, and
the producers, whereby Phillips agrees to pay royalties as
the producers direct, Phillips relies on the following lan-
guage from that case:
“Where the promisor’s performance is to be made
to, and is subject to the control of, the promisee, the
Louisiana courts have refused to find a stipulation
pour autrui despite the fact that the promisor and
promisee may have contemplated that the promisor’s
performance would as a practical matter enable or
facilitate the promisee’s performance of its obliga-
tions to a third party. See Fontenot v. Marquette
Casualty Co., 258 La. 671, 247 So. 2d 572, 579
(1971) (reinsurance contract); Oswalt v. Irby
Const. Co., 424 So. 2d 348, 354 (La. App. 1982)
(agreement of grantee in right-of-way deed, where
grantor reserved right to grow crops in right-of-way,
to pay grantor for any future damage to crops on
submittal of bill by grantor, was not stipulation pour
autrui in favor of grantor’s lessee; distinguishing
cases in which promisor’s agreement to pay is not
stated in terms of payment to promise of claims sub-
mitted by promisee) ; Crowley v. Hermitage Health
and Life Ins. Co., 391 So. 2d 53 (La. App. 1980)
(health and accident insurance policy in which em-
Piette me ee ee es
87a
ployer is insured, providing for benefits in the event
of employee work-related injury to be paid to em-
ployer or persons furnishing services to employees,
is not stipulation pour autrui in favor of employee
injured on job). Even when the payments may be
directly to the third party, but require the claim of
the promisee, a stipulation pour autrui has not been
found. Logan v. Hollier, 424 So. 2d 1279, 1282 (La.
App. 1982); Logan v. Hollier, 699 F.2d 758, 759
(5th Cir. 1983) (per curiam).” 732 F.2d at 468-69.
We find that, under Louisiana law, the corporate un-
dertaking between Phillips and the FPC would be viewed
as a stipulation pour autrui. In order for Phillips to
receive the increased prices, pending FPC approval, Phil-
lips, as consideration, agreed to comply with 18 C.F.R.
§ 154.102, which sets the applicable interest rates apply-
ing equitable principles. The royalty owners and pro-
ducers would benefit from the agreement.
Next, Phillips cites Star Elec. Supply v. Fidelity &
Deposit Co., 354 So. 2d 647 (La. App. 1977), writ de-
nied, 356 So. 2d 1011 (La. 1978), and Waguespack Pratt,
Inc. v. de Salvo, 225 So. 2d 269 (La. App. 1969), writ
refused 254 La. 846 (1969), for the proposition that
Louisiana law would not impose liability upon a person
for holding the funds belonging to another. These two
cases were concursus proceedings, a form of interpleader
action in Louisiana. In both cases, the money had been
deposited into court and the owner of the money was in
dispute. The court ruled the interpleader could not
safely pay the money to either party and denied interest
on the amount in dispute.
Those cases must be distinguished because here, Phil-
lips did not deposit the money into court and could have
paid the suspense royalties to the royalty owners pend-
ing FPC approval. The cause of action here is based
in contract and, under Whitehall Oil Company v. Boagni,
38a
255 La. 67, when the contract is silent concerning the
issue in dispute, equity decides the case.
Next, Phillips cites Smith v. Burden Const. Co., 379
So. 2d 1135 (La. App. 1980), for the proposition that
under Louisiana law there is no legal basis for the re-
covery of interest as an item of damage. There, an em-
ployee’s fraud scheme was discovered and the company
fired him. The employee sued the company for unpaid
wages and vacation pay. The company brought a recon-
ventional demand for losses and expenses incurred by the
employee’s fraud. One of the company’s claims for dam-
ages was eleven percent interest. The court stated
“Tt]here is no legal basis for the recovery of interest as
an item of damage.” 379 So. 2d at 1138.
Smith, however, did not involve an action based on
contract. It is important to note that former La. Civ.
Code Ann. art. 1938 (West 1977), stated that “[al]ll
debts shall bear interest at the rate of seven percent per
annum from the time they become due, unless otherwise
stipulated.” Thus, the statement from Smith is mislead-
ing.
INTEREST RATE
As previously stated, La. Civ. Code Ann. art. 1938
(West 1977) provided for a legal rate of interest of
seven percent on all debts from the time they become
due, unless the parties have stipulated otherwise. That
statute was replaced with La. Civ. Code Ann. art. 2000
(West 1987 Supp.) which provides for twelve percent
interest, effective January 1, 1985. In Silver v. Nelson,
610 F. Supp. 505 (E.D. La. 1985), twelve percent inter-
est was assessed as that was the rate in effect at the
time the obligation matured, even though the seven per-
cent rate of interest was in effect at the time of the judi-
cial demand. Phillips argues that if it is liable for in-
terest under Louisiana law, the rate of seven percent
controls rather than the rates required by 18 C.F.R.
§ 154.102(c) (1986), which provides:
39a
“Refunds. (1) Any independent producer that
collects rates and charges pursuant to this section
shall refund at such times, in such amounts to the
persons entitled thereto and in such manner as may
be required by final order of the Commission the
portion of any increased rates or charges found by
the Commission in that proceeding not be justified,
together with interest thereon as required in para-
graph (c) (2) of this section.
“(2) Interest shall be computed from the date of
collection until refunds are made as follows:
“(i) At a rate of seven percent simple interest
per annum on all excessive rates or charges held
prior to October 10, 1974;
“(ii) At a nine percent simple interest per annum
on all excessive rates or charges held between Octo-
ber 10, 1974, and September 30, 1979; and
“(jii) (A) At an average prime rate for each
calendar quarter on all excessive rates or charges
held (including all interest applicable to such rates
or charges) on or after October 1, 1979... .
“(B) The interest required to be paid under para-
graph (c) (2) (iii) (A) of this section shall be com-
pounded quarterly.”
As stated above, these rates run from the date of collec-
tion until the refunds are made.
Again, in Boutte v. Chevron Oil Company, 316 F.
Supp. at 531, a Louisiana federal district court stated in
dictum that if the FPC granted approval of all or a por-
tion of the price increases requested by Chevron, interest
would be due and payable on the suspended royalties
held by Chevron at the rates established by the FPC.
These rates were questioned by an oil company in United
Gas Pipe Line v. Federal Energy Reg. Com’n, 657 F.2d
790 (5th Cir. 1981). In particular, the average prime
40a
rate of interest was challenged, as was the compounding
of interest provision. The pipeline company argued it
should not have to pay interest on the entire amount of
the refund because it did not have use of all the monies
subject to refund due to the company’s tax obligations.
The court stated:
“The problem arises because the Treasury has the
use of part of the collection while the Commission
decides whether the rates are reasonable. A question
arises as to who should pay the time-cost of that
money while the Commission makes its decision—the
filing company or its customers?
“It follows from what was said before that the
burden should be on the company. When a gas com-
pany accepts money subject to refund it becomes a
stakeholder, and the Commission then determines
who owns the stakes. Interest can be required only
when it is determined that the money belongs to the
consumers. As between passive consumers and ac-
tive sellers, there seems to be no reason to place this
burden on the eventual user, so the Commission’s
decision in that respect is certainly reasonable.
While the result we reach does not depend on it, we
agree with the Commission’s conclusion that gas
companies can avoid this expense by acting pru-
dently in submitting rate requests. We reject the
petitioners’ suggestion that this is an inappropriate
consideration. On the contrary, Congress proscribed
even a demand for unreasonable prices, and the re-
turn a company earns on unreasonable charges, al-
beit collected by permission of Congress, cannot con-
trol the rate of interest to be paid to consumers.”
657 F.2d at 796.
We find Louisiana would apply the FPC rates of in-
terest under equitable principles. Whitehall Oil Co. v.
Boagni, 225 La. 67. 18 C.F.R. § 154.102 provides interest
. titi
4la ~
runs from the date Phillips collected the funds until it
made the refunds.
NEW MEXICO
LIABILITY
New Mexico appellate courts have not been presented a
case involving interest liability on suspended royalties.
However, in Shaeffer v. Kelton, 95 N.M. 182, 619 P.2d
1226 (1980), prejudgment interest was awarded where
one party was deprived of the use of his money. A con-
struction contract for the development of property was
involved. After the plaintiff had substantially completed
the project and was ready to close, the defendant refused
to close, saying he wanted out of the deal. The plaintiff
sought damages, not based on the contract, but in the
form of interest accruing daily on the amount owed to
him. The trial court denied the plaintiff interest and the
Supreme Court of New Mexico reversed, stating:
“In this case, the plaintiff has not only been unable
to discharge a sizeable construction loan, but he has
also been forced to make costly interest payments
while attempting to locate another willing buyer.
In addition, he has lost the use and earning power
of $17,000 of his own funds used to finance the proj-
ect. Simple interest is allowed as a means of esti-
mating these probable gains and as compensation
for their prevention.” (Emphasis added.) 95 N.M.
at 187.
The New Mexico court has ruled that the statute al-
lowing interest at six percent is construed according to
the Restatement of Contract § 337 (1932):
“In New Mexico, the allowance of interest is gov-
erned by Section 56-8-3, N.M.S.A. 1978, which pro-
vides in part that:
“The rate of interest, in the absence of written
contract fixing a different rate, shall be six percent
per annum, in the following cases:
42a
“A. on money due by contract;
“B. on judgments and decrees for the payment of
money when no other rate is expressed.
This Court indicated in O’Meara v. Commercial In-
surance Company, 71 N.M. 145, 376 P.2d 486
(1962), that the New Mexico statute should be con-
strued according to Restatement, Contracts § 337
(1932), wherein the rule is stated as follows:
“If the parties have not by contract deter-
mined otherwise, simple interest at the statu-
tory legal rate is recoverable as damages for
breach of contract as follows:
“(a) Where the defendant commits a breach
of a contract to pay a definite sum of money,
or to render a performance the value of which
in money is stated in the contract or is ‘ascer-
tainable by mathematical calculation from a
standard fixed in the contract or from estab-
lished market prices of the subject matter, in-
terest is allowed on the amount of the debt or
money value from the time performance was
due, after making all the deductions to which
the defendant may be entitled.
“(b) Where the contract that is broken is of
a kind not specified in Clause (a), interest may
be allowed in the discretion of the court, if jus-
tice requires it, on the amount that would have
been just compensation if it had been paid when
performance was due.
“In previous cases, where the amount of damages
was not fixed or determinable, this Court applied
the rule of subsection (b) and held that the allow-
ance of interest was not mandatory but should be
left to the discretion of the trial court.” 95 N.M.
at 187.
43a
Thus, according to New Mexico law, if the amount in-
volved is not ascertainable under subsection (a) above,
then, under subsection (b), the trial court may still
award prejudgment interest in the exercise of its discre-
tion. See Navajo Tribe v. Bank of New Mexico, 700 F.2d
1285 (10th Cir.1983) (the award of prejudgment inter-
est is a question of law solely within the sound discretion
of the court). Interest is allowable on unliquidated
claims which can be calculated, even though the claim is
disputed. Fanderlik-Locke Co. v. United States, 285 F.2d
939, 948 (10th Cir. 1960).
Again, Phillips argues that a purchaser it is not liable
for interest and relies on Western Farm Bureau Mutual
Ins. Co. v. Barela, 79 N.M. 149, 441 P.2d 47 (1968).
This case does not support Phillips’ position. The argu-
ment that Phillips is a purchaser and therefore owes no
interest has no merit for reasons heretofore stated.
WYOMING
LIABILITY
There is no Wyoming case law concerning liability for
interest on suspended royalties. Phillips relies on Rissler
& McMurray Co. v. Atlantic Richfield C)., 559 P.2d 25
(Wyo. 1977), for its argument that, because the amount
in question here is unascertainable until the final FPC
order, under Wyoming law, no prejudgment interest can
be awarded. That case involved a construction contract
dispute where the trial court denied prejudgment interest
to the prevailing party. The Supreme Court of Wyoming
reviewed the history of the statutes authorizing interest
in cases where contracts make no such provision. The
court noted that, first, interest is recoverable on liqui-
dated claims; however, interest on unliquidated claims is
not recoverable until the claim is “readly computable by
simple mathematical computation.” Second, the court
stated the statutory interest rate is “adopted only as a
convenient measure of damage for loss of use of money
44a
and recognizes the legislative view that money has value
beyond its intrinsic worth.” 559 P.2d at 31. (See aiso
Western Plains Service v. Ponderosa Development, 769
F.2d 654 [10th Cir. 1985], stating interest is compensa-
tion for use of money.) Ruling that the plaintiff was
entitled to recover prejudgment interest, the Wyoming
court stated the following:
“Rissler was entitled to the use of money which
it had earned on its contract with ARCO from the
date it became due; its cause of action accrued at
that time. Rissler was also entitled to the use of
money to which it is entitled from Certified from the
date it became due. The use of money has real eco-
nomic value of which Rissler has been deprived.
Money has the ability to reproduce in terms of earn-
ing interest. Withholding interest when inappropri-
ate causes the loss of use of a contractor’s capital.
Interest is a fact of commercial life. In that sense,
prejudgment interest is necessary to compensate the
plaintiff, not only for the amount by which it has
suffered damages in the usual sense for breach of
contract but also for the loss of use of the money to
which it is entitled. ARCO and Certified have gained
the use of money which Rissler has lost and to that
extent have been unjustly enriched.” (Emphasis
added.) 559 P.2d at 32.
The court then ruled that the claim involved was a liqui-
dated claim. The defendant was aware of the plaintiff’s
prices for paving—$1.75 per square yard, three inches
thick—and the contract even included that unit stand-
ard. The court stated, “Where there is a standard fixed
in the contract, from which the amount earned may be
computed, there is a liquidated figure, which should bear
interest from the date due.” 559 P.2d at 33. The court
cautioned, however, that before interest starts to run,
the debtor must receive notice of the amount due. 559
P.2d at 34.
rns
45a
Applying these principles to the case before us, we
first note that Wyoming would likely recognize Phillips’
liability for interest under equitable principles on the
use of the money belonging to the royalty owners. How-
ever, there are two other conditions to bet met: (1) The
claim must be liquidated, or if unliquidated, ascertainable
by mere mathematical calculation; and (2) Phillips ordi-
narily should receive notice for the amount due from the
royalty owners.
As previously discussed, the Texas courts have re-
jected the argument that the amount involved here is
not ascertainable, but there is no Wyoming case on point.
The requirement that the debtor receive notice of the
amount due before interest starts to run seems imprac-
tical in the situation before us. Here, it is Phillips, the
debtor, that notifies the royalty owners it is keeping a
portion of their royalties. Those royalties are computed
by Phillips and involve a detailed computation not avail-
able to the royalty owners. The average royalty owner
would find it difficult to arrive mathematically at the
sum he or she is owed by Phillips in order to give proper
notice. Equitable considerations applied by Wyoming to
the facts in this case would not require notice by the
royalty owners to Phillips of the amount due.
Next, Phillips argues again that as a purchaser it can-
not be held liable for interest because the royalty owners
were not parties to the casinghead gas contracts, nor
were they third party beneficiaries under these contracts.
Phillips relies on Larsen Sheep Co. v. Sjogren, 67 Wyo.
447, 226 P.2d 177 (1951), where a partnership sued for
specific performance of a contract to convey certain real
estate pursuant to an option contained in a lease. The
original partnership of three people dissolved and a new
partnership consisting of two of the original three part-
ners was formed. The dissolution agreement provided for
the lease in question to be assigned to the partner who
was leaving. The assignment was never completed; how-
46a
ever, the dissolution agreement was orally modified and
the old partnership retained the lease. The defendants
complained that the written dissolution agreement con-
trolled, but the court rejected that argument, stating:
“As stated in Williams vs. Eggleston, 170 U.S. 304,
18 S. Ct. 617, 619, 42 L. Ed. 1047: ‘The parties
to a contract are the ones to complain of a breach,
and if they are satisfied with the disposition which
has been made of it and of all claims under it, a
third party has no right to insist that it has been
broken.’ ”’ 67 Wyo. at 472.
This case involving a partnership dissolution agree-
ment is easily distinguishable from the instant case in-
volving an oil and gas transaction which involves many
different parties, and where one party, in fact, can wear
many hats. (Phillips is a producer, distributor, and user
of gas.) The royalty owners here are not insisting that
the contracts made between Phillips and the producers be
broken. They merely want to recover from Phillips in-
terest for the use cf their suspended royalties held by
Phillips as stakehoider and used by Phillips in its busi-
ness.
INTEREST RATE
Wyo. Stat. Ann. § 40-14-106(e) (1977) provides for
a seven percent interest rate if no agreement or statute
provides for a different rate. The rate of seven percent
was imposed in Rissler & McMurray Co. v. Atlantic Rich-
field Co., 559 P.2d 25, discussed above.
There is no Wyoming case law to indicate whether the
Wyoming courts would recognize the corporate undertak-
ing filed by Phiilips with the FPC and impose those rates
rather than the rate of seven percent. Under equitable
principles, however, Wyoming would look to the law of
other states and would apply the FPC rates.
In conclusion, Phillips has not briefed the conflict of
laws issue for any jurisdictions other than Texas, Okla-
a ee
47a
homa, Louisiana, New Mexico, and Wyoming. We con-
strue this to be an abandonment of any claim of error
regarding jurisdictions other than the five states enumer-
ated. Accordingly; Kansas law will be construed as ap-
plying to the disposition of all jurisdictions other than
the five states enumerated.
Five of the six states involved have adopted the United
States rule, Wyoming being the one state that has no law
on this point.. See Jones v. Nossaman, 114 Kan. 886, 894,
221 Pac. 271 (1923); Lambert v. Cronvich, 373 So. 2d
554, 562 (La. App. 1979); Savage v. Howell, 45 N.M.
527, 588, 118 P.2d 1113 (1941); Landess v. State, 335
P.2d 1077, 1079 (Okla. 1958); Community Savings and
Loan Association v. Fisher, 409 S.W.2d 546, 550 (Tex.
1966). According to the United States rule, in the ab-
sence of an agreement or a statute to the contrary, par-
tial payments to an interest-bearing debt which is due
are first applied to the interest due. If the payment ex-
ceeds the interest, the surplus goes toward discharging
the principal, and the subsequent interest is computed on
the remaining principal due. If the payment does not
discharge the interest that is due, the balance of interest
is not generally added to the principal so as to produce
interest. Rather, the interest continues on the former
principal until the period when the payments, taken to-
gether, exceed the interest due. Then the surplus is ap-
plied toward discharging the principal, and the subse-
quent interest is computed on the remaining principal
due. See 45 Am. Jur. 2d, Interest and Usury § 99.
The United States Supreme Court, in remanding this
ease to Kansas for further consideration in accordance
with the law stated therein, has recognized the salient
facts controlling this class action as follows:
“Because petitioner sold the gas to its customers
in interstate commerce, it was required to secure
approval for price increases from what was then the
Federal Power Commission, and is now the Federal
48a
Energy Regulatory Commission. Under its regula-
tions the Federal Power Commission permitted pe-
titioner to propose and collect tentative higher gas
prices, subject to final approval by the Commission.
If the Commission eventually denied petitioner’s pro-
posed price increase or reduced the proposed in-
crease, petitioner would have to refund to its cus-
tomers the difference between the approved price
and the higher price charged, plus interest at a rate
set by statute. See 18 CFR § 154.102 (1984).
“Although petitioner received higher gas prices
pending review by the Commission, petitioner sus-
pended any increase in royalties paid to the royalty
owners “ause the higher price could be subject to
recoupment by petitioner’s customers. Petitioner
agreed t» pay the higher royalty only if the royalty
owners would provide petitioner with a bond or in-
demnity for the increase, plus interest, in case the
price increase was not ultimately approved and a re-
fund was due to the customers. Petitioner set the
interest rate on the indemnity agreements at the
same interest rate the Commission would have re-
quired petitioner to refund to its customers. A small
percentage of the royalty owners provided this in-
demnity and received royalties immediately from the
interim price increases; these royalty owners are
unimportant to this case.
“The remaining royalty owners received no royalty
on the unapproved portion of the prices until the
Federal Power Commission approval of those prices
became final. Royalties on the unapproved portion
of the gas were suspended three times by petitioner,
corresponding to its three proposed price increases
in the mid-1970’s. In three written opinions the
Commission approved all of petitioner’s tentative
price increases, so petitioner paid to its royalty
owners the suspended royalties of $3.7 million in
49a
1976, $4.7 million in 1977, and $2.9 million in 1978.
Petitioner paid no interest to the royalty owners
although it had the use of the suspended royalty
money for a number of years.” (Emphasis added.)
Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 799-
800, 86 L. Ed. 2d 628, 105 S. Ct. 2965 (1985).
These suspense royalties withheld by Phillips could
in no event be retained by Phillips because under fed-
eral law it was merely a stakeholder of these funds until
the FPC issued its final rulings on Phillips’ application
for price increases. Then the funds would be distributed
either to Phillips’ purchasers, from whom Phillips col-
lected the increased price pending FPC approval together
with interest in accordance with its corporate undertak-
ing in compliance with federal regulations, if a refund
was requested, or to the royalty owners. Had the royalty
owners complied with all conditions imposed by Phillips,
they could have received the increased royalty pending
FPC approval but only if they agreed to pay interest in
accordance with the amount specified by the federal reg-
ulations if Phillips’ price increase was not approved.
After reviewing the law of the five enumerated states
in accordance with the proper due process constitutional
standard, we find all of the five states enumerated would
find interest payable when the FPC approved the various
rate increases because the amount due the royalty own-
ers was then ascertainable or capable of calculation from
the facts then available to Phillips.
The amount of interest payable on the royalties held in
suspense which were not paid to the royalty owners, when
the FPC approved Phillips’ rate increases, is the only
remaining issue presented by this litigation on remand.
Based upon the law of the five enumerated jurisdictions
as above reviewed, and up all of the facts, conditions, and
circumstances presented by this case, we find all juris-
dictions would apply equitable principles of unjust en-
50a
richment to hold Phillips liable for interest on the royal-
ties held in suspense by Phillips as a stakeholder. Under
equitable principles, the states would imply an agreement
binding Phillips to pay the funds held in suspense to the
royalty owners when the FPC approved the respective
rate increases sought by Phillips, together with interest
at the rates and in accordance with the FPC regulations
found in 18 C.F.R. § 154.102 (1986) to the time of judg-
ment herein. These funds held by Phillips as stakeholder
originated in federal law and are thoroughly permeated
with interest fixed by federal law in the FPC regulations
as heretofore set forth in this opinion.
POST-JUDGMENT INTEREST
When was judgment entered in this case?
Here, the original judgment against Phillips was en-
tered by the district court on May 20, 1983. That deci-
sion was affirmed as modified by this court on March 24,
1984. The district court had awarded post-judgment in-
terest at the rate of the average prime rate pursuant to
FPC regulations. That award of post-judgment interest
was modified by this court to the Statutory rate of fif-
teen percent from the date of judgment until paid. On
June 26, 1985, the United States Supreme Court reversed
and remanded the holding of this court in Shutts II con-
cerning the choice of law issue. On our remand of this
case to the district court for compliance with the United
States Supreme Court decision, the district court ruled on
April 30, 1986, that Phillips was liable for prejudgment
interest on the suspended royalties at the FPC rates up
to the time of judgment, and post-judgment interest at
fifteen percent on the judgment until paid.
Phillips argues if post-judgment interest is awarded, it
should run from April 30, 1986, the date of the new
judgment, rather than May 20, 1983, the date of the
original judgment.
=e ’ eye
- 5la
In Lippert v. Angle, 215 Kan. 626, 527 P.2d 1016
(1974), this court addressed the issue of post-judgment
interest on a judgment that had been successfully at-
tacked on appeal. It stated:
“Where the action of the appellate court can be
regarded as a full reversal, the action of the appel-
late court as the effect of wiping out the original
judgment and interest on the new judgment then
runs only from the time when the amount of the new
judgment is fixed.” 215 Kan. at 628.
In First National Bank v. Bankers Dispatch Corpora-
tion, 221 Kan. 528, 587, 562 P.2d 32 (1977), it was
stated:
“Where a money award has been modified on ap-
peal and the only action necessary in the trial court
is compliance with the mandate of the appellate
court, the majority view is that interest on the
award as modified should run from the date of entry
of the original judgment. It has been so held regard-
less of whether the appellate court reduced or in-
creased the original award.”
We hold the decision of the United States Supreme
Court on the conflict of laws issue constitutes a “full
reversal” of the original judgment in this case, which
was May 20, 1988. The United States Supreme Court
ruled that it was unconstitutional to apply the laws of
Kansas to all claims involved. This we construe as vacat-
ing the original judgment on the amount of interest due.
The Court ruled that on remand the putative conflicts”
in laws asserted by Phillips should be addressed by this
court.
On our review of the lower court’s decision entered on
April 30, 1986, we affirm the ruling as to interest pay-
able on royalties held in suspense to the date of judgment,
but reverse the ruling insofar as it applied the Kansas
post-judgment interest rate to the states of Texas, Okla-
homa, Louisiana, New Mexico, and Wyoming.
52a
Our decision herein, modifying the decision of the dis-
trict court, requires that post-judgment interest be paid
from April 30, 1986.
The following shows the five states’ statutory post-
judgment interest rates, effective on the rate of the new
judgment, April 30, 1986, to be applied on remand to the
judgment of royalty owners having leases in these states:
Texas:
Tex. Rev. Civ. Stat. Ann. art. 5069-1.05 (Ver-
non 1987) 18%
Oklahoma:
Okla. Stat. tit. 12 § 727 (1985 Supp.) 15%
Louisiana:
La. Civ. Code Ann. art. 2924 (West 1987 Supp.) 7%
New Mexico:
N.M. Stat. Ann. § 56-8-4 (1986) 15%
Wyoming:
Wyo. Stat. § 1-16-102 (1977) 10%
Accordingly, the interest payable to the royalty owners
in this case is the rate of interest set forth in Phillips’
corporate undertaking with the FPC from the time Phil-
lips first began holding royalties in suspense to the date
of judgment entered by the district court, April 30, 1986,
and post-judgment interest for royalty owners having
leases in Texas, Oklahoma, Louisiana, New Mexico, and
Wyoming at the statutory rates set forth above, and 15%
post-judgment interest for royalty owners having leases
in Kansas (K.S.A. 1986 Supp. 16-204[c]) and all other
jurisdictions.
The judgment of the lower court is affirmed as modified
and remanded to calculate the interest due the various
plaintiffs in accordance with this opinion and to enter
judgment thereon.
ALLEGRUCCI, J., not participating.
53a
IN THE SUPREME COURT
OF THE STATE OF KANSAS
No. 86-59588-AS
IRL SHUTTS, et al.,
Appellees,
v.
PHILLIPS PETROLEUM COMPANY,
- Appellant,
ORDER
The motion for rehearing of the appellant, Phillips
Petroleum Company, is considered by the Court and is
denied, except for the clarification of postjudgment in-
terest rates as follows:
On page 56 of the slip opinion, the postjudgment in-
terest rate for Texas is modified to read:
“Tex, Rev. Civ. Stat. Ann. art. 5069-1.05 (Ver-
non 1987)
“The lesser of the rate specified in the im-
plied contract (FERC rate); or 18 per-
cent.”
BY ORDER OF THE COURT this 11th day of May,
1987.
/s/ David Prager
DAVID PRAGER
Chief Justice
54a
IN THE DISTRICT COURT
OF SEWARD COUNTY, KANSAS
Case No. 79-C-113
IRL SHUTTS and ROBERT ANDERSON and BETTY ANDER-
SON, individually and as representatives of all pro-
ducers and royalty owners to whom Phillips Petroleum
Company made payment of Suspended proceeds or roy-
alties pursuant to Federal Power Commission Opinions
Nos. 699, 699H, 749, 749C, 770 and 770A,
Plaintiffs,
vs.
PHILLIPS PETROLEUM COMPANY,
Defendant.
MEMORANDUM DECISION ON REMAND
This matter comes on for determination of the remand
by the United States Supreme Court to the Kansas Su-
preme Court and then to this Court as the original trial
court. The jurisdiction of the class ordered by this Court
has been affirmed, and the remaining issue is the liability
of the defendant, if any, for interest on suspended royalty
payments.
The facts of the case are recited in the appellate opin-
ions and need not be repeated here.
The issue presented is whether the liability for inter-
est decided by the Kansas Supreme Court in Shutts I and
Shutts II are, as defendant alleges “unique notions of
contract and oil and gas law”, or is compatible with some
or all of the laws of the states where the leases are lo-
cated. If liability is found under the laws of any state,
there is then a remaining issue of what interest rate
would be applied.
errant ae
55a
Kansas: Shutts Executor v. Phillips Petroleum
Company, 222 Kan. 527; and Shutts v.
Phillips Petroleum Company, 285 Kan.
195.
Texas: Phillips Petroleum Company v. Stahl
Petroleum Company, 569 SW 2d 480.
Louisiana: Boutte v. Chevron Oil Company, 315 F.
Supp. 524.
These are the only states to have been presented this
issue directly, and all have reached the same conclusion
as the Kansas Supreme Court.
It may bear repeating that the issue to be decided in
each state where the question arises is whether or not the
defendant, as a producer, or with royalty obligations of
a producer, may take advantage of the Federal Energy
Regulatory Commission to withhold suspended royalties
belonging to royalty owners or to buyers, and thus gain
the free use of such money.
The question really presented is whether or not FERC
regulations, which permit the producer to file the in-
creased rates and collect that amount, subject to a refund
of any of the amount disallowed, can be used to avoid a
reasonably prompt payment of the royalty proceeds gen-
erally required of oil and gas leases in all states.
As the Texas Court noted in the Stahl case, quoting
Phillips Petroleum Company v. Adams, 513 F.2d 344,
“Phillips may say that its possession and utilization of
funds to which it had no pretense of claim was reason-
able, or even that its actions were necessary, but Phillips
cannot be heard to say that is fair and equitable that it
should enjoy such a finanical advantage for so long, and
pay not a cent for it.” (Emphasis in original)
Phillips still tries to use the FERC to shield its liability
herein, but FERC has no jurisdiction of royalty shares
or obligations, (Mobil Oil Corporation v. Federal Power
56a
Commission, 463 F.2d 256) and thus, the FERC regula-
tions should not be available to provide a windfall for
the free use of money to the defendant.
The Supreme Court of Oklahoma has provided a good
indication of its position in the matter in the case of
West Edmond Hunton Line Unit v. Young, 325 P2d
1047, in which that Court allowed royalty owners judg-
ment for interest from the date of sale of oil sold for less
than the market value. In that case, the Supreme Court
of Oklahoma allowed prejudgment interest for royalty
that should have been paid but was not collected.
This case would require, a priori, that royalties col-
lected but unpaid to the royalty owners should accrue
interest from the date of receipt by the producer. Also in
that case, the defendant contended that the royalty own-
ers had only a claim for unliquidated damages prior to
judgment, and hence, under the Oklahoma law, would
not be allowed prejudgment interest. The Supreme Court
of Oklahoma answered this contention, finding that it
was not applicable because the amount due was certain,
or could be made certain by a mathematical calculation.
Thus, this Court concludes that if the issue were
squarely presented to the Courts of Oklahoma, those
Courts would follow the rules announced in the Shutts
cases.
It is noted that Oklahoma follows the rule that interest
cannot be recovered upon an unliquidated claim where
trial is necessary in order to determine the amount due.
This is a prevailing rule, but has no application to the
mere mathematical calculation required in this case.
Oklahoma has a statute (23 O.S. 1971 Sec. 22) which
provides that “the detriment caused by the breach of an
obligation to pay money only is deemed to be the amount
due by the terms of the obligation, with interest thereon.”
The Supreme Court of Oklahoma in Rendezvous Trails of
America, Inc. v. Ayers, 612 P2d 1384, noted that “This
te a and Rein Cha ae thd Ae
ee ee Cee en ek Ce ne ne Bie
57a
(statute) is, of course, no more than fair and merely in-
corporates the traditional market place function of inter-
est to compensate another for the use of his money.”
Thus, it is concluded that Oklahoma would rule the
same as have the courts in Kansas, Texas and Oklahoma
on the liaiblity for interest issue.
No cases have been cited (although counsel have cour-
teously supplied copies of all cases they refer to) and
none have been found bearing on the liability issue in
New Mexico and Wyoming.
The State of Wyoming in 1982 adopted statutory pro-
visions awarding interest to royalty owners within set
guidelines, Wy. Stat. Ann. 30-4-301 Et Seq., but these
statutes are subsequent to the cause of action in this
case. No cases have been cited which would suggest that
either of these states, under legal or equitable basis, or
both, would refuse to award interest on the suspended
royalties at issue in this case. Hence, I conclude that
these states would follow the precedents of those states
cited herein which have decided this issue.
No attempt has been made to address the laws of Illi-
nois, Arkansas, Mississippi, Utah or West Virginia, since
these states represent less than .15 percent of royalties
here involved. Thus, there has been no affirmative show-
ing that the law found in the Shutts case would contra-
dict the law of any of these states. I therefore conclude
that these states would also follow the logic and equitable
principles announced in Shutts.
On the question of the rate of interest to be applied,
Kansas has, of course, established this in the Shutts case
as the applicable FERC rates.
Texas, in Sid Richardson Carbon & Gas Co. v. Phillips
Petroleum Company, 456 F2d 203, allowed FERC rates
based upon the contract price involved therein. In the
Stahl case no issue was raised as to the rate of interest
58a
by the pleadings or contentions of the parties, but re-
covery for interest was allowed upon an equitable basis.
It is therefore concluded that Texas would apply the
FERC rates to which the various opinions were subjected
to possible refund, if the issue were properly presented.
It should be noted that under the FERC regulatory
scheme, defendant was allowed to collect the increased
rates, subject to its obligation to repay disapproved por-
tions at the FERC rates applicable during this period,
which closely follows money market rate.
The defendant, in the few instances in which indem-
nity agreements were obtained from royalty owners, and
the increased rates were paid directly, required those
royalty owners to agree to possible repayment at the
FERC rates. The defendant thus treated the entire gas
stream composed of the working interest and the royalty
interest to be subjected to possible refunds at the FERC
rates. It is entirely inconceivable that they should now
be heard to contend that they should only be liable for
statutory rates in each of the states, which were estab-
lished, for the most part, prior to the 1940’s, and at what
best could be described as post-depression rates.
The statute in each of the states generally provides for
the statutory rate, being generally six percent, but being
seven percent in the State of Louisiana, in the absence
of some contract, agreement, regulation, or law to the
contrary. This Court finds no cases directly bearing on
this matter, except the Shutts case in Kansas and the
Richardson case in Texas, which are in accord. Since
these cases represent the only precedents available, it is
concluded that all of the states involved in this litigation
would rule the FERC rates to be applicable to the inter-
est liability imposed hereby.
Examples of interest rate statutes are as follows:
K.S.A. 16-201 (1974) “Creditors shall be allowed to
receive interest at the rate of six percent per annum,
when no other rate of interest is agreed upon”;
59a
O.S. Tit 15 Sec. 266 (1971) “The legal rate of inter-
est shall be six percent in the absence of any contract
as to the rate of interest” ;
Tex. Rev. Civ. Stat. Ann., Art. 5069-1.03 (Vernon
1971) “When no specified rate of interest is agreed upon
by the parties, interest at the rate of six percent per
annum shall be allowed”) (all emphasis added).
These are typical of those in all states involved in this
action and all allow rates other than that specified by
agreement of parties, by contract or by other law. Thus,
none are mandated to apply in the facts of this case.
The issues raised by the defendant, such as requiring
a demand, are adequately answered in the plaintiffs’
briefs herein, and which are adopted by this Court on
this issue, are found to be without merit.
This Court also adopts plaintiffs’ briefs by reference
on the rate of interest to be imposed.
After a survey of all the cases cited by the parties
hereto and applicable statutes, I find no basis to conclude
that any state court would be any less logical or fair than
the Kansas Supreme Court has been in the Shutts case.
And I find no legal basis for concluding that these states
would produce results other than those reflected in the
Shutts case.
I therefore affirm the previous judgment awarded to
plaintiffs against the defendant in this case.
Dated: April 30, 1986
/s/ Keaton G. Duckworth
KEATON G. DUCKWORTH
District Judge
60a
SUPREME COURT OF THE UNITED STATES
No. 84-233
PHILLIPS PETROLEUM COMPANY,
Petitioner
Vv.
IRL SHUTTs, et al.
ON WRIT OF CERTIORARI TO THE
SUPREME COURT OF KANSAS
| June 26, 1985]
REHNQUIST, J., delivered the opinion of the Court, in
which Burcer, C.J., and BRENNAN, WHITE, MARSHALL,
BLACKMUN, and O’CoNNOoR, JJ., joined, and in Parts I
and II of which STEvENs, J., joined. STEVENS, J., filed
an opinion concurring in part and dissenting in part.
POWELL, J., took no part in the decision of the case.
JUSTICE REHNQUIST delivered the opinion of the Court.
Petitioner is a Delaware corporation which has its
principal place of business in Oklahoma. During the
1970’s it produced or purchased natural gas from leased
and land located in 11 different States, and sold most
of the gas in interstate commerce. Respondents are some
28,000 of the royalty owners processing rights to the
6la
leases from which petitioner produced the gas; they re-
side in all 50 States, the District of Columbia, and sev-
eral foreign countries. Respondents brought a class ac-
tion against petitioner in the Kansas state court, seeking
to recover interest on royalty payments which had been
delayed by petitioner. They recovered judgment in the
trial court, and the Supreme Court of Kansas affirmed
the judgment over petitioner’s contentions that the Due
Process Clause of the Fourteenth Amendment prevented
Kansas from adjudicating the claims of all the respond-
ents, and that the Due Process Clause and the Full Faith
and Credit Clause of Article IV of the Constitution pro-
hibited the application of Kansas law to all of the trans-
actions between petitioner and respondents. 235 Kan.
195, 679 P. 2d 1159 (1984). We granted certiorari to
consider these claims. 469 U.S. 879 (1984). We reject
petitioner’s jurisdictional claim, but sustain its claim
regarding the choice of law.
Because petitioner sold the gas to its customers in in-
terstate commerce, it was required to secure approval for
price increases from what was then the Federal Power
Commission, and is now the Federal Energy Regulatory
Commission. Under its regulations the Federal Power
Commission permitted petitioner to propose and collect
tentative higher gas prices, subject to final approval by
the Commission. If the Commission eventually denied
petitioner’s proposed price increase or reduced the pro-
posed increase, petitioner would have to refund to its
customers the difference between the approved price and
the higher price charged, plus interest at a rate set by
statute. See 18 CFR § 154.102 (1984).
Although petitioner received higher gas prices pending
review by the Commission, petitioner suspended any in-
crease in royalties paid to the royalty owners because
the higher price could be subject to recoupment by peti-
tioner’s customers. Petitioner agreed to pay the higher
royalty only if the royalty owners would provide peti-
62a
tioner with a bond or indemnity for the increase, plus
interest, in case the price iricrease was not ultimately
approved and a refund was due to the customers. Peti-
tioner set the interest rate on the indemnity agreements
at the same interest rate the Cothmission would have re-
quired petitioner to refund to its customers. A small
percentage of the royalty owners provided this indemnity
and received royalties immediately from the interim price
increases; these royalty owners are unimportant to this
case.
The remaining royalty owners received no royalty on
the unapproved portion of the prices until. the Federal
Power Commission approval of those prices became final.
Royalties on the unapproved portion of the gas price
were suspended three times by petitioner, corresponding
to its three proposed. price increases in the mid-1970’s.
In three written opinions the Commission approved all of
petitioner’s tentative price increases, so petitioner paid
to its royalty owners the suspended royalties of $3.7
million in 1976, $4.7 million in 1977, arid $2.9 million in
1978. Petitioner paid no interest to the royalty owners
although it had the use of the susperided royalty money
for a number of years.
Respondents Irl Shutts, Robert Anderson, and Betty
Anderson filed suit against petitioner in Kansas state
court, seeking interest payments on their suspended royai-
ties which petitioner had possessed pending the Com-
mission’s approval of the price increases. Shutts is a
resident of Kansas and the Andersons live in Oklahoma.
Shutts and the Andersons own’ gas leases in Oklahoma
and Texas. Over petitioner’s objection the Kansas trial
court granted respondents’ motion to certify the suit as
a class action under Kansas law. Kan. Stat. Ann. § 60-
223 et seq. (1983). The class as certified was comprised
of 33,000 royalty owners who had royalties suspended
by petitioner. The average claim of each royalty owner
for interest on the suspended royalties was $100.
63a
After the class was certified respondents provided each
class member with notice through first-class mail. The
notice described the action and informed each class mem-
ber that he could appear in person or by counsel; other-
wise each member would be represented by Shutts and
the Andersons, the named plaintiffs. The notices also
stated that class members would be included in the class
and bound by the judgment unless they “opted out” of
the lawsuit by executing and returning a “request for
exclusion” that was included with the notice. The final
class as certified contained 28,100 members; 3,400 had
“opted out” of the class by returning the request for
exclusion, and notice could not be delivered to another
1,500 members, who were also excluded. Less than 1,000
of the class members resided in Kansas. Only a minis-
cule amount, approximately one quarter of one percent,
of the gas leases involved in the lawsuit were on Kansas
land.
After petitioner’s mandamus petition to decertify the
class was denied, Phillips Petroleum v. Duckworth, No.
82-54608 (Kan. June 28, 1982), cert. denied, 459 US.
1103 (1983) the case was tried to the court. The court
found petitioner liable under Kansas law for interest on
the suspended royalties to all class members. The trial
court relied heavily on an earlier, unrelated class action
involving the same nominal plaintiff and the same de-
fendant, Shutts, Executor v. Phillips Petroleum Co., 222
Kan. 527, 567 P. 2d 1292 (1977), cert. denied, 434 US.
1068 (1978). The Kansas Supreme Court had held in
Shutts, Executor that a gas company owed interest to
royalty owners for royalties suspended pending final Com-
mission approval of a price increase. No federal statutes
touched on the liability for suspended royalties, and the
court in Shutts, Executor held as a matter of Kansas
equity law that the applicable interest rates for compu-
tation of interest on suspended royalties were the inter-
est rates at which the gas company we ild have had to
_ 64a
reimburse its customers had its interim price increase
been rejected by the Commission. The court in Shutts,
Executor viewed these as the fairest interest rates be-
cause they were also the rates that petitioner required
the royalty owners to meet in their indemnity agree-
ments in order to avoid suspended royalties.
The trial court in the present case applied the rule
from Shutts, Executor, and held petitioner liable for pre-
judgment and postjudgment interest on the suspended
royalties, computed at the Commission rates governing
petitioner’s three price increases. See 18 CFR § 154.102.
The applicable interest rates were: 7% for royalties re-
tained until October 1974; 9% for royalties retained be-
tween October 1974 and September 1979; and there-
after at the average prime rate. The trial court did not
determine whether any difference existed between the
laws of Kansas and other States, or whether another
State’s laws should be applied to non-Kansas plaintiffs
or to royalties from leases in states other than Kansas.
235 Kan., at 221, 679 P. 2d, at 1180.
Petitioner raised two principal claims in its appeal
to the Supreme Court of Kansas. It first asserted that
the Kansas trial court did not possess personal jurisdic-
tion over absent plaintiff class members as required by
International Shoe Co. v. Washington, 326 U.S. 310
(1945), and similar cases. Related to this first claim
was petitioner’s contention that the “opt-out” notice to
absent class members, which forced them to return the
request for exclusion in order to avoid the suit, was
insufficient to bind class members who were not residents
of Kansas or who did not possess “minimum contacts”
with Kansas. Second, petitioner claimed that Kansas
courts could not apply Kansas law to every claim in the
dispute. The trial court should have looked to the laws of
each State where the leases were located to determine,
on the basis of conflict of laws principles, whether in-
65a
terest on the suspended royalties was recoverable, and at
what rate.
The Supreme Court of Kansas held that the entire
cause of action was maintainable under the Kansas class-
action statute, and the court rejected both of petitioner’s
claims. 235 Kan. 195, 679 P. 2d 1159 (1984). First, it
held that the absent class members were plaintiffs, not
defendants, and thus the traditional minmium contacts
test of International Shoe did not apply. The court held
that nonresident class action plaintiffs were only entitled
to adequate notice, an opportunity to be heard, an op-
portunity to opt out of the case, and adequate representa-
tion by the named plaintiffs. If these procedural due
process minima were met, according to the court, Kansas
could assert jurisdiction over the plaintiff class and bind
each class member with a judgment on his claim. The
court surveyed the course of the litigation and concluded
that all of these minima had been met.
The court also rejected petitioner’s contention that
Kansas law could not be applied to plaintiffs and royalty
arrangements having no connection with Kansas. The
court stated that generally the law of the forum con-
trolled all claims unless “compelling reasons” existed to
apply a different law. The court found no compelling
reasons, and noted that “[t]he plaintiff class members
have indicated their desire to have this action determined
under the laws of Kansas.” 235 Kan., at 222, 679 P. 2d,
at 1181. The court affirmed as a matter of Kansas
equity law the award of interest on the suspended royal-
ties, at the rates imposed by the trial court. The court
set the postjudgment interest rate on all claims at the
Kansas statutory rate of 15%. Id., at 224, 679 P. 2d, at
1183.
I
As a threshold matter we must determine whether pe-
titioner has standing to assert the claim that Kansas
66a
did not possess proper jurisdiction over the many plain-
tiffs in the class who were not Kansas residents and had
no connection to Kansas. Respondents claim that a party
generally may assert only his own rights, and that pe-
titioner has no standing to assert the rights of its ad-
versary, the plaintiff class, in order to defeat the judg-
ment in favor of the class.
Standing to sue in any Article III court is, of course,
a federal question which does not depend on the party’s
prior standing in state court. Doremus v. Board of Edu-
cation, 342 U.S. 429, 484 (1952); Baker v. Carr, 369
U.S. 186, 204 (1962). Generally stated, federal standing
requires an allegation of a present or immediate injury
in fact, where the party requesting standing has “al-
leged such a personal stake in the outcome of the con-
troversy as to assure that concrete adverseness which
sharpens the presentation of issues.” Ibid. There must
be some causal connection between the asserted injury and
the challenged action, and the injury must be of the type
“likely to be redressed by a favorable decision.” Valley
Forge Christian College v. Americans United for Separa-
tion of Church and State Inc., 454 U.S. 464, 472 (1982).
See Simon v. Eastern Kentucky Welfare Rights Org.,
426 U.S. 26, 41-42 (1976) ; Village of Arlington Heights
Vv. Metropolitan Housing Dev. Corp., 429 U.S. 252, 261
(1977).
Additional prudential limitations on standing may ex-
ist even though the Article III requirements are met
because “the judiciary seeks to avoid deciding questions
of broad social import where no individual rights would
be vindicated and to limit access to the federal courts
to those litigants best suited to assert a particular claim.”
Gladstones Realtors v. Village of Bellwood, 441 U.S. 91,
99-100 (1979). One of these prudential limits on stand-
ing is that a litigant must normally assert his own legal
interests rather than those of third parties. See Singleton
67a
v. Wulff, 428 U.S. 106 (1976); Craig v. Boren, 429 US.
190 (1976).
Respondents claim that petitioner is barred by the rule
requiring that a party assert only his own rights; they
point out that respondents and petitioner are adversaries
and do not have allied interests such that petitioner
would be a good proponent of class members’ interests.
They further urge that petitioner’s interference is un-
needed because the class members have had opportunity
to complain about Kansas’ assertion of jurisdiction over
their claim, but none have done so. See Singleton, supra,
at 113-114.
Respondents may be correct that petitioner does not
possess standing jus tertii, but this is not the issue. Peti-
tioner seeks to vindicate its own interests. As a class-
action defendant petitioner is in a unique predicament.
If Kansas does not possess jurisdiction over this plaintiff
class, petitioner will be bound to 28,100 judgment holders
scattered across the globe, but none of these will be bound
by the Kansas decree. Petitioner could be subject to nu-
merous later individual suits by these class members be-
cause a judgment issued without proper personal juris-
diction over an absent party is not entitled to full faith
and credit elsewhere and thus has no res judicata effect
as to that party. Whether it wins or loses on the merits,
petitioner has a distinct and personal interest in seeing
the entire plaintiff class bound by res judicata just as
petitioner is bound. The only way a class action defend-
ant like petitioner can assure itself of this binding effect
of the judgment is to ascertain that the forum court has
jurisdiction over every plaintiff whose claim it seeks to
adjudicate, sufficient to support a defense of res judicata
in a later suit for damages by class members.
While it is true that a court adjudicating a dispute
may not be able to predetermine the res judicata effect
of its own judgment, petitioner has alleged that it would
be obviously and immediately injured if this class-action
68a
judgment against it became final without binding the
plaintiff class. We think that such an injury is sufficient
to give petitioner standing on its own right to raise the
jurisdiction claim in this Court.
Petitioner’s posture is somewhat similar to the trust
settlor defendant in Hanson v. Denckla, 357 U.S. 235
(1958), who we found to have standing to challenge the
forum’s personal jurisdiction over an out-of-state trust
company which was an indispensable party under the
forum State’s law. Because the court could not proceed
with the action without jurisdiction over the trust com-
pany, we observed that “any defendant affected by the
court’s judgment ha[d] that ‘direct and substantial per-
sonal interest in the outcome’ that is necessary to chal-
lenge whether that jurisdiction was in fact acquired.”
Id., at 245, quoting Chicago v. Atchison, T. & S. F. R.
Co., 357 U.S. 77 (1958).
II
Reduced to its essentials, petitioner’s argument is that
unless out-of-state plaintiffs affirmatively consent, the
Kansas courts may not exert jurisdiction over their
claims. Petitioner claims that failure to execute and re-
turn the “request for exclusion” provided with the class
notice cannot constitute consent of the out-of-state plain-
tiffs; thus Kansas courts may exercise jurisdiction over
these plaintiffs only if the plaintiffs possess the sufficient
“minimum contacts” with Kansas as that term is used in
cases involving personal jurisdiction over out-of-state
defendants. E.g., International Shoe Co. v. Washington,
326 U.S. 310 (1945); Shaffer v. Heitner, 433 U.S. 186
(1977) ; World-wide Volkswagen Corp. v. Woodson, 444
U.S. 286 (1980). Since Kansas had no pre-litigation con-
tact with many of the plaintiffs and leases involved, peti-
tioner claims that Kansas has exceeded its jurisdicational
reach and thereby violated the due process rights of the
absent plaintiffs.
69a
In International Shoe we were faced with an out-of-
state corporation which sought to avoid the exercise of
personal jurisdiction over it as a defendant by Washing-
ton state court. We held that the extent of the defend-
ant’s due process protection would depend “upon the
quality and nature of the activity in relation to the fair
and orderly administraton of the laws... .” 326 US.,
at 319. We noted that the Due Process Clause did not
permit a State to make a binding judgment against a
person with whom the State had no contacts, ties, or rela-
tions. Ibid. If the defendant possessed certain minimum
contacts with the State, so that it was “reasonable and
just, according to our traditional conception of fair play
and substantial justice’ for a State to exercise personal
jurisdiction, the State could force the defendant to defend
himself in the forum, upon pain of default, and could
bind him to a judgment. Id., at 320.
The purpose of this test, of course, is to protect a
defendant from the travail of defending in a distant
forum, unless the defendant’s contacts with the forum
make it just to force him to defend there. As we
explained in Woodson, supra, the defendant’s contacts
should be such that “he should reasonably anticipate be-
ing haled” into the forum. 444 U.S., at 297. In Jnsur-
ance Corp. of Ireland v. Compagnie Des Bauxites De
Guinee, 456 U.S. 694, 702-703, and n. 10 (1982) we ex-
plained that the requirement that a court have personal
jurisdiction comes from the Due Process Clause’s pro-
tection of the defendant’s personal liberty interest, and
said that the requirement “represents a restriction on
judicial power not as a matter of sovereignty, but as a
matter of individual liberty.” (Footnote omitted).
Although the cases like Shaffer and Woodson which
petitioner relies on for a minimum contacts requirement
all dealt with out-of-state defendants or parties in the
procedural posture of a defendant, cf. New York Life
Ins. Co. v. Dunlevy, 241 U.S. 518 (1916) ; Estin v. Estin,
70a
334 U.S. 541 (1948), petitioner claims that the same
analysis must apply to absent class-action plaintiffs. In
this regard petitioner correctly points out that a chose
in action is a constitutionally recognized property inter-
est possessed by each of the plaintiffs. Mullane v. Central
Hanover Bank & Trust Co., 339 U.S. 306 (1950). An
adverse judgment by Kansas courts in this case may ex-
tinguish the chose in action forever through res judicata.
Such an adverse judgment, petitioner claims, would be
every bit as onerous to an absent plaintiff as an adverse
judgment on the merits would be to a defendant. Thus,
the same due process protections should apply to absent
plaintiffs: Kansas should not be able to exert jurisdic-
tion over the plaintiffs’ claims unless the plaintiffs have
sufficient minimum contacts with Kansas.
We think petitioner’s premise is in error. The burdens
placed by a State upon an absent class-action plaintiff
are not of the same order or magnitude as those it places
upon an absent defendant. An out-of-state defendant
summoned by a plaintiff is faced with the full powers of
the forum State to render judgment against it. The de-
fendant must generally hire counsel and travel to the
forum to defend itself from the plaintiff’s claim, or suffer
a default judgment. The defendant may be forced to
participate in extended and often costly discovery, and
will be forced to respond in damages or to comply with-
some other form of remedy imposed by the court should
it lose the suit. The defendant may also face liability for
court costs and attorney’s fees. These burdens are sub-
stantial, and the minimum contacts requirement of the
Due Process clause prevents the forum State from un-
fairly imposing them upon the defendant.
A class-action plaintiff, however, is in quite different
posture. The Court noted this difference in Hansberry v.
Lee, 311 U.S. 32, 40-41 (1940), which explained that a
“class” or “representative” suit was an exception to the
rule that one could not be bound by judgment in per-
Tla
sonam unless one was made fully a party in the tradi-
tional sense. IJbid., citing Pennoyer v. Neff, 95 U.S. 714
(1878). As the Court pointed out in Hansberry, the class
action was an invention of equity to enable it to proceed
to a decree in suits where the number of those interested
in the litigation was too great to permit joinder. The
absent parties would be bound by the decree so long as
the named parties adequately represented the absent class
and the prosecution of the litigation was within the com-
mon interest. 311 U.S., at 41.
Modern plaintiff class actions follow the same goals,
permitting litigation of a suit involving common ques-
tions when there are too many plaintiffs for proper join-
der. Class actions also may permit the plaintiffs to pool
claims which would be uneconomical to litigate individ-
ually. For example, this lawsuit involves claims aver-
aging about $100 per plaintiff; most of the plaintiffs
would have no realistic day in court if a class action
were not available.
In sharp contrast to the predicament of a defendant
haled into an out-of-state forum, the plaintiffs in this
suit were not haled anywhere to defend themselves upon
pain of a default judgment. As commentators have noted,
from the plaintiffs’ point of view a class action resembles
a “quasi-administrative proceeding, conducted by the
judge.” 8B J. Moore & J. Kennedy, Moore’s Federal
Practice {] 23.45 [4.-5] (1984) ; Kaplan, Continuing Work
of the Civil Committee: 1966 Amendments to the Federal
Rules of Civil Procedure (I), 81 Harv. L. Rev. 356, 398
(1967).
1The holding in Hansberry, of course, was that petitioners in
that case had not a sufficient common interest with the parties to
a prior lawsuit such that a decree against those parties in the prior
suit would bind the petitioners. But in the present case there is
no question that the named plaintiffs adequately represent the
class, and that all members of the class have the same interest in
enforcing their claims against the defendant.
72a
A plaintiff class in Kansas and numerous other juris-
dictions cannot first be certified unless the judge, with
the aid of the named plaintiffs and defendants, conducts
an inquiry into the common nature of the named plain-
tiff’s and the absent plaintiffs’ claims, the adequacy of
representation, the jurisdiction possessed over the class,
and any other matters that will bear upon proper repre-
sentation of the absent plaintiffs’ interest. See, e.g., Kan.
Stat. Ann. § 60-223 (1983); Fed. Rule Civ. Proc. 23.
Unlike a defendant in a civil suit, a class-action plaintiff
is not required to fend for himself. See Kan. Stat. Ann.
§ 60-223(d) (1983). The court and named plaintiffs
protect his interests. Indeed, the class-action defendant
itself has a great interest in ensuring that the absent
plaintiff’s claims are properly before the forum. In this
ease, for example, the defendant sought to avoid class
certification by alleging that the absent plaintiffs would
not be adequately represented and were not amenable to
jurisdiction. See Phillips Petroleum v. Duckworth, No.
82-54608 (Kan., June 28, 1982).
The concern of the typical class-action rules for the
absent plaintiffs is manifested in other ways. Most juris-
dictions, including Kansas, require that a class action,
once certified, may not be dismissed or compromised with-
out the approval of the court. In many jurisdictions such
as Kansas the court may amend the pleadings to ensure
that all sections of the class are represented adequately.
Kan. Stat. Ann. § 60-223(d) (1983); see also e.g., Fed.
Rule Civ. Proc. 23(d).
Besides this continuing solicitude for their rights,
absent plaintiff class members are not subject to other
burdens imposed upon defendants. They need not hire
counsel or appear. They are almost never subject to
counterclaims or cross-claims, or liability for fees or
costs.2. Absent plaintiff class members are not subject to
-
2 Petitioner places emphasis on the fact that absent class mem-
bers might be subject to discovery, counterclaims, cross-claims or
73a
coercive or punitive remedies. Nor will an adverse judg-
ment typically bind an absent plaintiff for any damages,
although a valid adverse judgment may extinguish any
of the plaintiff’s claim which were litigated.
Unlike a defendant in a normal civil suit, an absent
class-action plaintiff is not required to do anything. He
may sit back and allow the litigation to run its course,
content in knowing that there are safeguards provided
for his protection. In most class actions an absent plain-
tiff is provided at least with an opportunity to “opt out”
of the class, and if he takes advantage of that oppor-
tunity he is removed from the litigation entirely. This
was true of the Kansas proceedings in this case. The
Kansas procedure provided for the mailing of a notice
to each class member by first-class mail. The notice, as
we have previously indicated, described the action and
informed the class member that he could appear in per-
son or by counsel, in default of which he would be repre-
sented by the named plaintiffs and their attorneys. The
notice further stated that class members would be in-
cluded in the class and bound by the judgment unless
they “opted out” by executing and returning a “request
for exclusion” that was included in the notice.
Petitioner contends, however, that the “opt out” pro-
cedure provided by Kansas is not good enough, and that
an “opt in” procedure is required to satisfy the Due Proc-
ess Clause of the Fourteenth Amendment. Insofar as
plaintiffs who have no minimum contacts with the forum
State are concerned, an “opt in” provision would require
that each class member affirmatively consent to his inclu-
sion within the class.
Because States place fewer burdens upon absent class
plaintiffs than they do upon absent defendants in non-
court costs. Petitioner cites no cases involving any such imposi-
tion upon plaintiffs, however. We are convinced that such burdens
are rarely imposed upon plaintiff class members, and that the dis-
position of these issues is best left to a case which presents them
in a more concrete way.
74a
class suits, the Due Process Clause need not and does not
afford the former as much protection from state-court
jurisdiction as it does the latter. The Fourteenth Amend-
ment does protect “persons,” not “defendants,” however,
so absent plaintiffs as well as absent defendants are en-
titled to some protection from the jurisdiction of a forum
State which seeks to adjudicate their claims. In this case
we hold that a forum State may exercise jurisdiction
over the claim of an absent class-action plaintiff, even
though that plaintiff may not possess the minimum con-
tacts with the forum which would support personal juris-
diction over a defendant. If the forum State wishes to
bind an absent plaintiff concerning a claim for money
damages or similar relief at law,* it must provide min-
imal procedural due process protection. The plaintiff
must receive notice plus an opportunity to be heard and
participate in the litigation, whether in person or through
counsel. The notice must be the best practicable, “‘reason-
ably calculated, under all the circumstances, to apprise
interested parties of the pendency of the action and af-
ford them an opportunity to present their objections.”
Mullane, 399 U.S., at 314-315; cf. Eisen v. Carlisle &
Jacquelin, 417 U.S. 156, 174-175 (1974). The notice
should deseribe the action and the plaintiffs’ rights in it.
Additionally, we hold that due process requires at a min-
imum that an absent plaintiff be provided with an oppor-
tunity to remove himself from the class by executing and
returning an “opt out” or “request for exclusion” form
to the court. Finally, the Due Process Clause of course
requires that the named plaintiff at all times adequately
represent the interests of the absent class members.
Hansberry, 311 U.S., at 42-43, 45.
3 Our holding today is limited to those class actions which seek
to bind known plaintiffs concerning claims wholly or predominately
for money judgments. We intimate no view concerning other types
of class actions such as those seeking equitable relief. Nor, of
course, does our discussion of personal jurisdiction address class
actions where the jurisdiction is asserted against a defendant class.
. 75a
We reject petitioner’s contention that the Due Process
Clause of the Fourteenth Amendment requires that ab-
sent plaintiffs affirmatively “opt in” to the class, rather
than be deemed members of the class if they do not “opt
out.” We think that such a contention is supported by
little, if any precedent, and that it ignores the differ-
ences between class action plaintiffs, on the one hand, and
defendants in non-class civil suits on the other. Any
plaintiff may consent to jurisdiction. Keeton v. Hustler
Magazine, Inc., 465 U.S. 770 (1984). The essential
question, then, is how stringent the requirement for a
showing of consent will be.
We think that the procedure followed by Kansas, where
a fully descriptive notice is sent first-class mail to each
class member, with an explanation of the right to “opt
out,” satisfies due process. Requiring a plaintiff to affirm-
atively request inclusion would probably impede the pros-
ecution of those class actions involving an aggregation of
small individual claims, where a large number of claims
are required to make it economical to bring suit. See,
e.g., Eisen, supra, at 161. The plaintiff’s claim may be
so small, or the plaintiff so unfamiliar with the law, that
he would not file suit individually, nor would he affirma-
tively request inclusion in the class if such a request were
required by the Constitution.* If, on the other hand, the
plaintiff’s claim is sufficiently large or important that he
wishes to litigate it on his own, he will likely have re-
tained an attorney or have thought about filing suit, and
should be fully capable of exercising his right to “opt
out.”
*In this regard the Reporter for the 1966 amendments to the
Federal Rules of Civil Procedure stated:
“(RJjequiring the individuals affirmatively to request inclusion in
the lawsuit would result in freezing out the claims of people—
especially small claims held by small people—who for one reason or
another, ignorance, timidity, unfamiliarity with business or legal
matters, will simply not take the affirmative step.” Kaplan, Con-
tinuing Work of the Civil Committee: 1966 Amendments of the
Federal Rules of Civil Procedure (I), 81 Harv. L. Rev. 356, 397-398
(1967).
76a
In this case over 3,400 members of the potential class
did “opt out,” which belies the contention that “opt out”
procedures result in guaranteed jurisdiction by inertia.
Another 1,500 were excluded because the notice and “opt
out” form was undeliverable. We think that such results
show that the “opt out” procedure provided by Kansas
is by no means pro forma, and that the Constitution does
not require more to protect what must be the somewhat
rare species of class member who is unwilling to execute
an “opt out” form, but whose claim is nonetheless so im-
portant that he cannot be presumed to consent to being a
member of the class by his failure to do so. Petitioner’s
“opt in” requirement would require the invalidation of
scores of state statutes and of the class-action provision
of the Federal Rules of Civil Procedure,» and for the
reasons stated we do not think that the Constitution
requires the State to sacrifice the obvious advantages in
judicial efficiency resulting from the “opt out” approach
for the protection of the rara avis portrayed by peti-
tioner.
5 The following statutes or procedural rules permit “opt out”
notice in some types of class actions:
Fed. Rule Civ. Proc. 23(c)(2)(A); Ala. Rule Civ. Proc. 23(c)
(2)(A); Alaska Rule Civ. Proc. 23(c)(2)(A); Ariz. Rule Civ.
Proc. 23(c)(2)(A); Cal. Civ. Code Ann. §1781(e)(1) (West
1973) (consumer class action) ; Colo. Rule Civ. Proc. 23(c) (2) (A);
Del. Ch. Ct. Rule 23(c) (2) (A); D. C. Super. Ct. Rule Civ. Proc.
23(c) (2) (A); Fla. Rule Civ. Proc. 1.220(d)(2)(A); Idaho Rule
Civ. Proc. 23(c)(2)(A); Ind. Rule Trial Proc. 23(C) (2) (A);
Iowa Rule Civ. Proc. 42.8(b); Kan. Stat. Ann. § 60-223(c) (2)
(1983); Ky. Rule Civ. Proc. 23.03(2)(a); Me. Rule Civ. Proc.
23(c) (2) (A); Md. Rule Civ. Proc. 2-231(e) (1); Mich. Ct. Rule
3.501(C) (5) (b); Minn. Rule Civ. Proc. 23.03(2)(A); Mo. Rule
Civ. Proc. 52.08; Mont. Rule Civ. Proc. 23(c)(2)(A); Nev. Rule
Civ. Proc. 23(c)(2)(A); N.J. Civ. Prac. Rule 4:32-2; N.Y. Civ.
Prac. Law § 904 (McKinney 1976); N.D. Rule Civ. Proc. 23(g) (2)
(B); Ohio Rule Civ. Proc. 23(C)(2)(a); Okla. Stat., Tit. 12,
§ 2023(C)(2)(a) (Supp. 1984-1985); Ore. Rule Civ. Proc. 32F
(1) (b) (ii); Pa. Rule Civ. Proc. 1711(a); Tenn. Rule Civ. Proc.
23.032) (a); Vt. Rule Civ. Proc. 23(c)(2)(A); Wash. Ct. Rule
23(C) (2) (i); Wyo. Rule Civ. Proc. 23(c) (2) (A).
77a
We therefore hold that the protection afforded the plain-
tiff class members by the Kansas statute satisfies the
Due Process Clause. The interests of the absent plain-
tiffs are sufficiently protected by the fourm State when
those plaintiffs are provided with a request for exclusion
that can be returned within a reasonable time to the
court. See Insurance Corp. of Ireland, 456 U.S., at 702-
703, and n. 10. Both the Kansas trial court and the Su-
preme Court of Kansas held that the class received ade-
quate representation, and no party disputes that conclu-
sion here. We conclude that the Kansas court properly
asserted personal jurisdiction over the absent plaintiffs
and their claims against petitioner.
IIT
The Kansas courts applied Kansas contract and Kansas
equity law to every claim in this case, notwithstanding
that over 99% of the gas leases and some 97% of the
plaintiffs in the case had no apparent connection to the
State of Kansas except for this lawsuit.* Petitioner pro-
® The Commission approved petitioner’s price increases in Opinion
Nos. 699, 749, and 770. Petitioner reimbursed royalty owners $3.7,
$2.9, and $4.7 million in suspended royalties, respectively. The
States where the leases were located and their resident plaintiffs
are as follows.
OPINION 699
# Royalty
# Leases Royalties to Owners
States in state state leases in state
Oklahoma 1,266 $ 83,711.35 2,653
Texas 4,414 839,152.73 9,591
Kansas 3 152.88 496
Arkansas 6 3,228.22 173
Louisiana 68 2,187,548.06 1,244
New Mexico 941 433,574.85 621
Illinois ee —. 397
Wyoming 690 148,906.93 413
Mississippi oe — 67
Utah — —_— 29
eT
W. Virginia
No State Code
States
Oklahoma
Texas
Kansas
Arkansas
Louisiana
New Mexico
Illinois
Wyoming
Mississippi
Utah
W. Virginia
No State Code
States
Oklahoma
Texas
Kansas
Arkansas
Louisiana
New Mexico
Illinois
Wyoming
Mississippi
Utah
W. Virginia
No State Code
78a
# Leases Royalties to
in state state leases
1 [.05]
7,389 $3,696,274.97
OPINION 749
# Leases Royalties to
in state state leases
1,948 $ 243,163.49
8,479 2,171,217.36
15 2,619.24
32 1,769.33
178 852,539.45
350 22,670.27
1 1.30
68 67,570.01
3 694.93
1 184.60
32 10,364.61
2 1,032.59
6,109 $2,873,827.18
OPINION 770
# Leases Royalties to
in state state leases
1,430 $ 471,122.53
8,702 2,615,744.46
4 115.10
2 552.83
26 516,248.13
591 194,799.95
1 01
476 945,441.09
6,232 $4,744,024.10
# Royalty
Owners
in state
20
1,025
# Royalty
Owners
in state
3,591
7,881
553
171
740
339
357
37
88
18
246
# Royalty
Owners
in state
2,684
8,550
504
162
361
469
353
272
36
18
©
1,046
a en
79a
tested that the Kansas courts should apply the laws of the
States where the leases were located, or at least apply
Texas and Oklahoma law because so many of the leases
came from those States. The Kansas courts disregarded
this contention and found petitioner liable for interest on
the suspended royalties as a matter of Kansas law, and
set the interest rates under Kansas equity principles.
Petitioner contends that total application of Kansas
substantive law violated the constitutional limitations on
choice of law mandated by the Due Process Clause of the
Fourteenth Amendment and the Full Faith and Credit
Clause of Article IV, §1. We must first determine
whether Kansas law conflicts in any material way with
any other law which could apply. There can be no injury
in applying Kansas law if it is not in conflict with that
of any other jurisdiction connected to.this suit.
Petitioner claims that Kansas law conflicts with that
of a number of States connected to this litigation, es-
pecially Texas and Oklahoma. These putative conflicts
range from the direct to the tangential, and may be ad-
dressed by the Supreme Court of Kansas on remand un-
der the correct constitutional standard. For example,
there is no recorded Oklahoma decision dealing with in-
terest liability for suspended royalties: whether Okla-
homa is likely to impose liability would require a survey
of Oklahoma oil and gas law. Even if Oklahoma found
such liability, petitioner shows that Oklahoma would
most likely apply its constitutional and statutory 6%
interest rate rather than the much higher Kansas rates
applied in this litigation. Okla. Const. Art XIV, § 2;
Okla. Stat., Tit. 15, § 266 (Supp. 1984-1985) ; Rendezvous
Trails of America, Inc. v. Ayers, 612 P. 2d 1884, 1385
(Ok. App. 1980); Smith v. Robinson, 594 P. 2d 364
(Okla. 1979) ; West Edmond Hunton Lime Unit v. Young,
325 P. 2d 1047 (Okla. 1958).
Additionally, petitioner points to an Oklahoma statute
which excuses liability for interest if a creditor accepts
80a
payment of the full principal without a claim for inter-
est, Okla. Stat. Tit. 28, § 8 (1951). Cf. Webster Drilling
Co. v. Sterling Oil of Oklahoma, Inc., 376 P. 2d 236
(Okla. 1962). Petitioner contends that by ignoring this
statute the Kansas courts created liability that does not
exist in Oklahoma.
Petitioner also points out several conflicts between
Kansas and Texas law. Although Texas recognizes in-
terest liability for suspended royalties, Texas has never
awarded any such interest at a rate greater than 6%,
which corresponds with the Texas constitutional and
statutory rate." Tex. Const., Art. 16, §11; Tex. Rev.
Civ. Stat. Ann., Art. 5069-1.03 (Vermont 1971). See
Phillips Petroleum Co. v. Stahl Petroleum Co., 569 S. W.
2d 480 (Tex. 1978) ; Phillips Petrolewm Co. v. Adams, 513
F. 2d 355 (CA5), cert. denied, 423 U.S. 930 (1975); ef.
Maxey v. Texas Commerce Bank, 580 8. W. 2d 340, 341
(Tex. 1979). Moreover, at least one court interpreting
Texas law appears to-have held that Texas excuses in-
terest liability once the gas company offers to take an
indemnity from the royalty owner and pay him the sus-
pended royalty while the price increase is still tentative.
Phillips Petroleum Co. v. Riverside Gas Compression Co.,
409 F. Supp. 486, 495-496 (N. D. Tex. 1976). Such a
rule is contrary to Kansas law as applied below, but if
applied to the Texas plaintiffs or leases in this case,
would vastly reduce petitioner’s liability.
The conflicts on the applicable interest rates, alone—
which we do not think can be labeled “false conflicts”
without a more thoroughgoing treatment than was ac-
corded them by the Supreme Court of Kansas—certainly
amounted to millions of dollars in liability. We think
7™The Kansas interest rate also conflicts with the rate which is
applicable in Louisiana. At the time this suit was filed that rate
was 7%. See La. Civ. Code Ann., Art. 1938 (1977) (amended in
1982); Wurzlow v. Placid Oil Co., 279 So. 2d 749, 772-774 (La.
App. 1973) (applying Art. 1938 to oil and gas royalties).
8la
that the Supreme Court of Kansas erred in deciding on
the basis that it did that the application of its laws to
all claims would be constitutional.
Four Terms ago we addressed a similar situation in
Allstate Ins. Co. v. Hague, 449 U.S. 302 (1981). In that
case we were confronted with two conflicting rules of
state insurance law. Minnesota permitted the “stacking”
of separate uninsured motorist policies while Wisconsin
did not. Although the decedent lived in Wisconsin, took
out insurance policies and was killed there, he was em-
ployed in Minnesota and after his death his widow moved
to Minnesota for reasons unrelated to the litigation, and
was appointed personal representative of his estate. She
filed suit in Minnesota courts, which applied the Minne-
sota stacking rule.
The plurality in Allstate noted that a particular set
of facts giving rise to litigation could justify, constitu-
tionally, the application of more than one jurisdiction’s
laws. The plurality recognized, however, that the Due
Process Clause and the Full Faith and Credit Clause
provided modest restrictions on the application of forum
law. These restrictions required “that for a State’s sub-
stantive law to be selected in a constitutionally permis-
sible manner, that State must have a significant contact
or significant aggregation of contacts, creating state in-
terests, such that choice of its law is neither arbitrary
nor fundamentally unfair.” Jd., at 312-313. The dis-
senting Justices were in substantial agreement with this
principle. Jd., at 332 (opinion of POWELL, J., joined by
BuRGER, C.J., and REHNQUIST, J.). The dissent stressed
that the Due Process Clause prohibited the application
of law which was only casually or slightly related to the
litigation, while the Full Faith and Credit Clause re-
quired the forum to respect the laws and judgments of
other States, subject to the forum’s own interests in
furthering its public policy. Jd., at 335-336.
The plurality in Allstate affirmed the application of
Minnesota law because of the forum’s significant contacts
82a
to the litigation which supported the State’s interest in
applying its law. See id., at 313-329. Kansas’ contacts
to this litigation, as explained by the Kansas Supreme
Court, can be gleaned from the opinion below.
Petitioner owns property and conducts substantial bus-
iness in the State, so Kansas certainly has an interest in
regulating petitioner’s conduct in Kansas. 235 Kan.,
at 210, 679 P. 2d, at 1174. Moreover, oil and gas ex-
traction is an important business to Kansas, and al-
though only a few leases in issue are located in Kansas,
hundreds of Kansas plaintiffs were affected by petition-
er’s suspension of royalties; thus the court held that the
State has a real interest in protecting “the rights of these
royalty owners both as individual residents of [Kansas]
and as members of this particular class of plaintiffs.”
Id., at 211-212, 679 P. 2d at 1174. The Kansas Supreme
Court pointed out that Kansas courts are quite familiar
with this type of lawsuit, and “[t]he plaintiff class mem-
bers have indicated their desire to have this action de-
termined under the laws of Kansas.” J/d., at 211, 222,
679 P. 2d, at 1174, 1181. Finally, the Kansas court but-
tressed its use of Kansas law by stating that this lawsuit
was analogous to a suit against a “common fund” lo-
cated in Kansas. /d., at 201, 211-212, 679 P. 2d, at 1168,
1174.
We do not lightly discount this description of Kansas’
contacts with this litigation and its interest in applying
its law. There is, however, no “common fund” located
in Kansas that would require or support the application
of only Kansas law to all these claims. See, ¢.g., Hart-
ford Life Ins. Co. v. Ibs, 287 U.S. 662 (1915). As the
Kansas court noted, petitioner commingled the suspended
royalties with its general corporate accounts. 235 Kan.
201, 679 P. 2d, at 1168. There is no specific identifiable
res in Kansas, nor is there any limited amount which
may be depleted before every plaintiff is compensated.
Only by somehow aggregating all the separate claims in
83a
this case could a “common fund” in any sense be created,
and the term becomes all but meaningless when used in
such an expansive sense.
We also give little credence to the idea that Kansas
law should apply to all claims because the plaintiffs, by
failing to opt out, evinced their desire to be bound by
Kansas law. Even if one could say that the plaintiffs
“consented” to the application of Kansas law by not opt-
ing out, plaintiff’s desire for forum law is rarely, if ever
controlling. In most cases the plaintiff shows his obvious
wish for forum law by filing there. “If a plaintiff could
choose the substantive rules to be applied to an action
. . . the invitation to forum shopping would be irresist-
able.” Allstate, 449 U.S., at 337 (opinion of POWELL,
J.). Even if a plaintiff evidences his desire for forum
law by moving to the forum, we have generally accorded
such a move little or no significance. John Hancock Mut.
Life Ins. Co. v. Yates, 299 U.S. 178, 182 (1936) ; Home
Ins. Co. v. Dick, 281 U.S. 397, 408 (1930). In Allstate
the plaintiff’s move to the forum was only relevant be-
cause it was unrelated and prior to the litigation. 449
U.S., at 318-319. Thus the plaintiffs’ desire for Kansas
law, manifested by their participation in this Kansas
lawsuit, bears little relevance.
The Supreme Court of Kansas in its opinion in this
case expressed the view that by reason of the fact that
it was adjudicating a nationwide class action, it had
much greater latitude in applying its own law to the
transactions in question than might otherwise be the
case:
“The general rule is that the law of the forum ap-
plies unless it is expressly shown that a different law
governs, and in case of doubt, the law of the forum
is preferred. . . . Where a state court determines
it has jurisdiction over a nationwide class action and
procedural due process guarantees of notice and ade-
84a
quate representation are present, we believe the law
of the forum should be applied unless compelling rea-
sons exist for applying a different law. . . . Com-
pelling reasons do not exist to require this court to
look to other state laws to determine the rights of
the partie
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