Opposition Brief — Phillips Petroleum Co. v. Shutts

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In the Supreme Court of the Ui ited’ States *

OCTOBER TERM, 1987

PHILLIPS PETROLEUM COMPANY,

Petitioner,

VS.

IRL SHUTTS and ROBERT ANDERSON and BETTY

ANDERSON, individually and as representatives of all

royalty owners to whom Phillips Petroleum Company

made payment of suspended proceeds of royalties pur-

suant to Federal Power Commission Opinion Nos.

699, 749 and 770,

Respondents.

On PETITION FOR WRIT OF CERTIORARI TO THE

SUPREME COURT OF THE STATE OF KANSAS

BRIEF IN OPPOSITION TO PETITION FOR

CERTIORARI AND ANSWER TO PETITION

FOR WRIT OF MANDAMUS

W. Luke CHAPIN

(Counsel of Record)

CHAPIN & PENNY

P. O. Box 148

Medicine Lodge, Kansas 67104

(316) 886-5611

STEPHEN JONES

JONES & JENNINGS

Broadway Tower, Suite 1100

P. O. Box 472

Enid, Oklahoma 73702

HAROLD GREENLEAF

SMITH, GREENLEAF & BROOKS

400 North Washington Street

P. O. Box 1039

Liberal, Kansas 67901

(316) 624-6266

Attorneys for Respondents

A ae

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

QUESTIONS PRESENTED

1. Did the Kansas courts thoroughly review the

statutes and case law of other interested states per-

taining to interest on FERC suspended royalties and find

they would have decided this case just as did Kansas?

2. Did the specific application by Kansas of FERC

interest rate, which is essentially the bank prime rate,

violate any of Phillips’ constitutional rights?

3. Is there now or has there ever been any “federal

common law’’ issue in this case?

II

TABLE OF CONTENTS

COLERS TIONS Pr Dini scsesnstensenctes I

SARL GP Ate oi III

FP ss) | egy "een nnn TE 2

STATE. OF Tee CASE... 2

a) Ey aie gy St) tt 14, y anne em nnE EE 6

TERETE pabsintcsiienccredi eacciheses ine sthestenennstan snakins Secanincgbomehabiginh 7

I. Phillips’ Petitions Not Justified .................... 7

II. Federal Common Law Not an Issue ............ 10

III. Forum Shopping Not an Issue ........................ 11

IV. Judge Duckworth’s Opinion ............00.02....... 11

V. Kansas Supreme Court Decision. .................... 14

VE, FROG, GE RN ovine 17

VII. No Constitutional Principles Violated .......... 18

RIMINI: Sac tinnssdnccncanescisnessinsaasetiannalasneslee iain 21

Ill

TABLE OF AUTHORITIES

Cases:

Allstate Ins. Co. v. Hague, 449 U.S. 302 .........2....---.eeeee 18

Boutte v. Chevron Oil Company, 316 F. Supp. 524 .... 3,9

Brooklyn Union Gas Co. v. Transcontinental Gas P. L.

ee BG) 8

Continental Oil Co. v. FPC, 378 F.2d 510 ......000000000..... 8

Gray v. Amoco Production Co., 1 Kan. App.2d 388, 564

P.2d 579 (1977), modified, 223 Kan. 441 (1978) ... 9

Helmley v. Ashland Oil, Inc., 1 Kan. App.2d 532, 571

Neen ence bakdpcnstnenesenasedcnunsnsainessensoocess 9

In Re Permian Basin Area Rate Cases, 88 S. Ct. 1344

ee iil nsakanseesasvesiniciessasannnessanssacacasscness 8

Maddox v. Gulf Oil Corporation, 222 Kan. 733, 567 P.2d

1326 (1977), cert. denied, 434 U.S. 1065 (1978) ........ 9

Matzen v. Cities Service Oil Co., 233 Kan. 846, 667 P.2d

nde Lanny cehscabnsunansninncatseiacnecncessnennannneee 11

Mississippi River Fuel Corp. v. FPC, 281 F.2d 919 (1960) 8

Nix v. Northern Natural Gas Producing Co., 222 Kan.

739, 567 P.2d 1322 (1977), cert. denied, 434 U.S. 1067

Sidi heteiveicienensyananssnnsonstasancsesenvatpeccccencsncceeee 9

Phillips Petroleum Co. v Adams, 513 F.2d 355 (5th

Cir. 1975), cert. denied, 423 U.S. 930 (1979) ........12, 20-21

Phillips Petroleum Company v. Stahl Petroleum Com-

pany, 569 S.W.2d 480 (Texas, 1978) ............ 3, 8, 12, 19, 21

Phillips Petroleum Co. v. Hazelwood, 409 F. Supp. 1193 21

Shutts v. Phillips Petroleum Company, 235 Kan. 195,

DU OU asc srasccsesssnccecsevnsesscesesace 2, 3, 14, 15, 20

Shutts, Executor v. Phillips Petroleum Company, 222

Kan. 527, 567 P.2d 1292 (1977), cert. denied, 434 U.S.

AEE 2, 3, 6, 9, 10, 11, 14, 15, 17

IV

Sid Richardson Carbon & Gas Co. v. Phillips Pet. Co.,

Bh BL, ¢ NCSI ARerenee nee een 9,13

Skelly Oil Co. v. FPC, 401 F.2d 726 (1968) ..............-..--- 8

Sterling v. Superior Oil Co., 222 Kan. 737, 567 P.2d

1325 (1977), cert. denied, 434 U.S. 1067 (1978) ........ 9

Texaco, Inc. v. FPC, 290 F.2d 149 (1961) ...........2...... 8

United Gas Improvement Co. v. Callery Properties,

382 U.S. 223, 15 L.Ed. 284, 86 S. Ct. 360, Syl. 9 ........ 8

United States v. L. A. Tucker Truck Lines, 344 U.S.

i ee as i AE Be le hater erie 19

United States v. Mitchell, 271 U.S. 9, 70 L.Ed. 799,

IF ihe MEM MIE: cactavsracabiosiiabiesbaceasangerusaciGbaanetcukablanaignnbniesinonensias 20

United States v. More, (U.S.) 3 Cranch 159, 2 L.Ed.

HI sicaceccdsscorcesti cas cactatiitbctnocectpidcedtasacicpcGsieadincaeniaaanaheeecnacteliia 19

Webster v. Fall, 266 U.S. 507, 69 L.Ed. 411, 45 S. Ct.

IRUED cssnsnsssciniccnonssccaliipvenbcsnciesadirspplanbliasAbecedeianesdddapinbiaibeliemmsenansiaes 20

West Edmond Hunton Line Unit v. Young, 325 P.2d

RENEE scchiecictactsinctinsscbithsacdctaigabcuaetetadentevigaant sateen atest inate 12

Wortman v. Sun Oil Co., 236 Kan. 266, 690 P.2d 385

(1984), vacated, ........ ke eeaeaaes , 88 L.Ed.2d 33

SUITED: scsdsated-nlvitiescinsthidesieiaitebteraiasespasiinclapatiasoseeieiauaancmminiaegebcead 9,11

Other Authorities:

I 6

a I aa i ohn sd eletiods anaes 17

I III dh hn arinascbttntnndntricmncestakesAsenipmspisciiasguatascoeas dae 10

20 Am Jur 2d, Courts, Section 190 .................0.0000000000... 19

Corpus Juris Secundurm, Courts, Section 186

No. 87-384

In the Supreme Court of the United States

OCTOBER TERM, 1987

PHILLIPS PETROLEUM COMPANY,

Petitioner,

VS.

IRL SHUTTS and ROBERT ANDERSON and BETTY

ANDERSON, individually and as representatives of all

royalty owners to whom Phillips Petroleum Company

made payment of suspended proceeds of royalties pur-

suant to Federal Power Commission Opinion Nos.

699, 749 and 770,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI TO THE

SUPREME COURT OF THE STATE OF KANSAS

BRIEF IN OPPOSITION TO PETITION FOR

CERTIORARI AND ANSWER TO PETITION

FOR WRIT OF MANDAMUS

Petitioner will be referred to as “Phillips.” Plaintiff

class consists of all of to whom Phillips pays gas royalties,

excepting those who have “opted out” and a few who

signed indemnity agreements and were paid currently.

They will be referred to as “gas royalty owners,” “land-

owners,” “royalty owners” or “respondents.”

The opinions below are as set forth in Phillips’ Ap-

pendix to Petition.

NATURE OF THE CASE

This is an action in equity, a class consisting of Phil-

lips’ gas royalty owners against Phillips to collect interest

or damages for the use by Phillips of the royalty owners’

money, ordinarily paid out to the royalty owners monthly.

Phillips instead notified its royalty owners that it was

suspending certain increased royalties pending approval

by the courts of gas rate increases allowed by FERC.

Phillips did not suspend the increased royalties by placing

them in a suspense account which would draw interest,

but, instead, placed them in their general cash account,

just as other income from royalty owners’ leases, and

used them to make a profit for Phillips and its share-

holders.

This is a reversal and remand by the U. S. Supreme

Court to re-examine the interest laws of other states

where Phillips has the oil and gas leases giving rise to

the royalties “suspended” and used by Phillips. The

exact same set of facts, except for numbers and territory

involved, was before the Kansas Supreme Court twice

before. (Shutts I and Shutts II.)'

STATEMENT OF THE CASE

On remand from the U. S. Supreme Court, the Kansas

Supreme Court first sent the case back to the trial court

for re-examination in the light of the U. S. Supreme Court

opinion. The Trial Court re-examined interest laws of

1. Shutts, Executor v. Phillips Petroleum Company, 222

Kan. 527, 567 P.2d 1292 (1977), cert. denied, 434 U.S. 1068

(1978); and Shutts v. Phillips Petroleum Company, 235 Kan.

195, 679 P.2d 1159 (1984).

3

other states and came to the same conclusion as before

regarding interest allowable in those states and the in-

terest rate.

The Kansas Supreme Court affirmed the Trial Court

again, saying, “this is the third time this case has been

before us.” True. The first case was Shutts, Executor

v. Phillips, involving the Hugoton-Anadarko area, and

6,400 of Phillips’ royalty owners of whom only 264 re-

sided in Kansas. In Shutts, Executor, FPC Opinion 586,

an area consisting of all of the State of Kansas and parts

of the States of Texas and Oklahoma were involved. This

was one of seven pricing areas of the FPC at the time.

Later, with Opinion 699, involved in this case, the FERC

(formerly FPC) abandoned area-wide pricing and began

nation-wide pricing because natural gas was bought, dis-

tributed and sold nation-wide, not just area-wide. Pricing

being nation-wide, the class affected by Phillips’ actions

became nation-wide rather than area-wide.

Kansas in a number of cases and all other states

that have examined the question of equity in requiring

gas producers to pay interest on their royalty owners’

money held and used rather than being paid out, have

required the gas producers to pay interest to their royalty

owners.”

Phillips raises no defense to the general and uni-

versal proposition in equity that where one makes use

of another’s money to make a profit for himself, he must

pay for its use.

2. Shutts, Executor v. Phillips Petroleum Company, 222

Kan. 527; Shutts v. Phillips Petroleum Company, 235 Kan. 195:

Phillips Petroleum Company v. Stahl Petroleum Company, 569

S.W.2d 480; Boutte v. Chevron Oil Company, 316 F. Supp. 524.

4

Rather, Phillips fabricates defenses based on techni-

calities of laws of other states and alleged constitutional

infirmities of the actions of the Kansas courts, as will

be discussed more later in this brief.

Plaintiff class consists of the landowners, those who

originally owned the oil, gas and other minerals in and

under the land, and also certain assignees of interest in

the oil, gas and minerals. They have leased either di-

rectly to Phillips Petroleum Company or to oil and gas

brokers who have assigned to other producers or to Phil-

lips, and Phillips, under the terms of the oil and gas leases,

customarily pays out 1/8th of the proceeds of sale of gas

produced to those royalty owners monthly. Phillips and

in some cases other gas producers receive the 7/8ths of

the proceeds of production.

In order to obtain a price increase for gas sold by

Phillips to gas purchasers, certain rate schedules had to

be filed with the FERC, setting forth the increase, and

in Opinions 699, 749 and 770, FERC did approve certain

rate increases. Phillips collected the rate increases. Phil-

lips now calls the 1/8th of the increases as to royalty

owners “additional royalties.” This they are, but here-

tofore they have been called “suspense” royalties by Phil-

lips. This is a misnomer because the royalty money itself

never was suspended. It was put in Phillips’ cash account

and used by Phillips to make a profit.

Phillips exaggerates: it convinced this Court that

the difference between the Texas 6% statutory rate and

the FERC rate of 9% (up until October 1, 1979) would

amount to “millions of dollars.” (Appendix, U. S. Su-

preme Court Opinion, Page 80a.) Attached is copy of

letter from T. L. Cubbage, head of Phillips Legal Depart-

)

ment, pertaining to total interest due at FERC rates until

the end of 1987. Total interest due under all rate sched-

ules when this case was filed in August, 1979, was only

about $1 million. The increase to $2.4 million is accounted

for by Phillips’ continuing to contest the payment of

interest, even after it had paid interest under almost

identical facts and circumstances in Shutts I. Payment

of $1.00 interest to its royalty owners in 1979 would have

prevented the payment now of approximately $2.50. Pay-

ment of $300,000.00 to royalty owners at the time this

suit was filed - not “millions of dollars” - would have

satisfied the difference. The Texas statutory rate is dis-

cussed later in this argument.

The following are the essential facts as quoted from

the Kansas Supreme Court Opinion, Appendix to Petition,

Page 116a.

“This is a class action suit brought against Phillips

... by Irl Shutts, Robert Anderson and Betty Ander-

son, individually and on behalf of 28,100 royalty

owners, including those who are not residents of

Kansas, for recovery of interest on ‘suspense roy-

alties’ on gas produced from leases in 11 states. These

royalties were withheld by Phillips at various times

from July, 1974 to February, 1978, under three Fed-

eral Power Commission (FERC) Opinions pertaining

to gas rates in nation-wide gas rate proceedings (em-

phasis supplied), and later paid by Phillips to the

royalty owners without interest. The Trial Court

determined (1) the class consisted of all royalty own-

ers and overriding royalty owners who received sus-

pense royalties from Phillips, whether or not they

were residents of Kansas (2) Phillips was liable for

for interest on all royalties and overriding royalties

6

retained by it under the FPC Opinions, and (3) the

applicable rate of interest owed on the suspense roy-

alty payments (seven percent (7%) per annum until

October 10, 1974, nine percent (9%) per annum there-

after until September 30, 1979, and thereafter at the

average prime rate, compounded quarterly, as pro-

vided by 18 C.F.R. 154.67).”

SUMMARY OF ARGUMENT

1. Phillips’ Petitions are not justified and are not

legally responsible.

2. Phillips raises for the first time an issue it calls

“federal common law.” This issue has not been raised

before. It should not be raised now. The decisions of the

Kansas Trial Court and of the Kansas Supreme Court have

nothing to do with federal common law. They apply the

same interest rate, the bank prime rate, the FERC rate, to

this same money refunded to its royalty owners that Phil-

lips would have had to pay to its gas purchasers if the

money had been refunded to them. It is an equitable rate.

It is a proper rate. It is not an attempt to extend federal

regulation, but simply using a rate that Phillips would have

had to pay if it had borrowed the money rather than using

the royalty owners’ money.

3. Forum shopping is not an issue. There has been

no forum shopping in Kansas in the 10 years since the

Shutts I Kansas decision.

4. The decision of the trial judge, Honorable Keaton

G. Duckworth is fair and impartial. He reviewed cases

and statutes in other states cited by Phillips. He came

to the same conclusion as before, Phillips would have been

7

liable had all of the facts and circumstances of this case

been presented to the Supreme Courts of the other states

involved, and at the bank prime rate, the FERC rate.

5. The Kansas Supreme Court decision was fair and

impartial. It indicated a thorough review of cases and

statutes of other states pertaining to interest as a matter

of equity. It found that the antique 6% statutory interest

laws were not applicable here, but that Phillips should pay

interest the same as banks would have charged their good

customers, the prime rate, the FERC rate.

6. National gas pricing is not an issue in this case.

7. The decisions of the Kansas Courts are not arbi-

trary or unfair as far as Phillips is concerned, are responsive

to the opinion of this Court and violate no constitutional

principles.

ARGUMENT

I. Phillips’ Petitions Not Justified

Phillips’ Petition for Mandamus and Certiorari is based

on fabrication. Its accusations against the Kansas Supreme

Court are in error, not responsible, and, at best, undig-

nified:

1. “The Kansas courts’ repeated reliance on...

‘equitable considerations’ . . . only reflect their own

parochial interest.” (Phillips’ Petition, Page 14.)

2. “The Kansas Supreme Court seems pathologically

determined to maximize Phillips’ liability . . .” (Pe-

tition, Page 14.)

3. “Its latest technique is simply to ‘FERC’em’.”

(Petition, Page 14.)

8

The Kansas court has been well respected for many

years and still stands high among the Supreme Courts of

the various states. Its opinions are fair and impartial. In

this case, it affirmed judgment for interest equitably due

Phillips’ own royalty owners for money used for the bene-

fit of Phillips and its shareholders. The Supreme Court

of Kansas does not deserve treatment such as the above

at the hands of Phillips.

Phillips further demonstrates its bad faith in its argu-

ment by such allegations as:

“The (Kansas) court’s lack of good faith also can be

seen by the bald fabrication of ‘industry practice’ to

defeat the effect of a controlling Oklahoma statute.”

(Petition, Page 17.)

The term “industry practice’ was taken from an Oklahoma

case. The Kansas court did not make bald fabrications

about the statute, but did cite Oklahoma cases to show

the statute was not applicable in this case.

In Texas, Phillips Petroleum Co. v. Stahl, equity prin-

ciples were applied but the statutory 6% rate rather than

the 7% FPC rate at the time was applied. The most

equitable interest rate obviously is not the statutory rate.

The FERC rate has been held many times to be an equitable

interest rate to prevent unjust enrichment.®

The Kansas court applied the FPC rate in seven sim-

ilar class action cases in Kansas, and it was paid by the gas

3. United Gas Improvement Co. v. Callery Properties, 382

U.S. 223, 15 L.Ed. 284, 86 S. Ct. 360, Syl. 9; Texaco, Inc. v.

Federal Power Commission, 290 F.2d 149 (1961); Mississippi

River Fuel Corp. v. FPC, 281 F.2d 919 (1960); Brooklyn Union

Gas Co. v. Transcontinental Gas P. L. Corp., 201 F. Supp. 679

(1960); Continental Oil Co. v. FPC, 378 F.2d 510; In Re Permian

Basin Area Rate Cases, 88 S. Ct. 1344 (1968); Skelly Oil Co.

v. FPC, 401 F.2d 726 (1968).

9

producers.* The Louisiana court in Boutte v. Chevron, 316

F. Supp. 524, said that FERC interest would be payable

on the suspense royalties by Chevron when paid.

Wortman was a case quite similar to this one. Phillips

did not opt out, but elected to stay in the case. (See letter

from T. L. Cubbage, general counsel for Phillips, dated

March 31, 1983, and hereto attached.)

In Texas, in Sid Richardson Carbon & Gas Co. v.

Phillips Pet. Co., 456 F.2d 203 (1972), Phillips was ordered

to pay interest on suspense royalties at FERC rates. The

court further said:

“Phillips contends that the Texas law prohibits the

award of interest on interest... We think Phillips

misses the mark on this argument... The sum found

due is technically interest. In substance, however,

it is a part of the sum necessary under the holding

of the District Court to place Richardse~ in parity

with El Paso under the contract. Once that sum

was determined, it became a part of the whole. In-

terest was due on so much of the whole as remained

unpaid after January 31, 1969.” (Emphasis supplied.)

Phillips’ royalty owners had a legal and equitable

right to expect Phillips to pay for the use of their money.

4. Nix v. Northern Natural Gas Producing Co., 222 Kan.

739, 567 P.2d 1322 (1977), cert. denied, 434 U.S. 1067 (1978);

Sterling v. Superior Oil Co., 222 Kan. 737, 567 P.2d 1325 (1977),

cert. denied, 434 U.S. 1067 (1978); Maddox v. Gulf Oil Corpora-

tion, 222 Kan. 733, 567 P.2d 1326 (1977), cert. denied, 434 U.S.

1065 (1978); Shutts, Executor v. Phillips Petroleum Co., 222

Kan. 527, 567 P.2d 1292 (1977), cert. denied, 434 U.S. 1068

(1978); Wortman v. Sun Oil Co., 236 Kan. 266, 690 P.2d 385

(1984), vacated, ........ USS. ........, 88 L.Ed.2d 33 (1985); Helmley

v. Ashland Oil, Inc., 1 Kan. App.2d 532, 571 P.2d 345 (1977);

Gray v. Amoco Production Co., 1 Kan. App.2d 388, 564 P.2d

579 (1977), modified, 223 Kan. 441 (1978).

10

Phillips should have expected to pay for the use of the

money. Payments of suspense royalties without interest

or mention of interest by Phillips was done deliberately,

intentionally and knowingly in violation of its royalty

owners’ rights and interests. Certainly the rulings in

this case were no surprise to Phillips and it would have

been arbitrary and unfair to the royalty owners had they

not been allowed interest as was done in Shutts I prior

to the payouts in this case.

II. Federal Common Law Not an Issue

Phillips now contends that the Kansas courts treated

the issues as though they were governed by a “wholly

inapposite federal regulation, 18 C.F.R. Section 154.162.”

(Petition, Page 8.)

Not so. The Kansas court found that the royalty

owners’ share of the gas purchase money, 1/8th, was

governed by federal regulation if it had to be refunded

to the gas purchaser. The FERC interest rate had been

determined by this and other cases to be an equitable

rate, so what more equitable than to apply the same

rate to refunds by Phillips to its own royalty owners?

Other state law did not differ from Kansas law.

Kansas law and other state’s law had a low statutory

rate, when no other rate was applicable by contract or

other law. The Kansas court found no federal common

‘law surrounding the FERC interest regulation. It did

find that the average bank prime rate, the best rates

charged by banks to their good customers, which was

the FERC rate, would be an equitable rate.

It is an admitted fact that royalty obligations of

producers to their royalty owners are controlled not by

11

FERC but by the oil and gas leases and state law. Other-

wise, this case would not be here. Phillips would have

paid its royalty owners interest at FERC rates if the

matter had been subject to FERC regulation. Phillips

did in its request for indemnity from its royalty owners

ask for refund of suspense royalties paid with interest

at FERC rates, if refund were ordered.

III. Forum Shopping Not an Issue

Phillips is mistaken in its argument on “forum shop-

ping”. The seven cases referred to on Page 20 of its

Petition all were filed by royalty owner clients of the

firm of Chapin & Penny, who represent plaintiff class

in this action, and of Hathaway & Kimball of Ulysses,

Kansas, their co-counsel. All plaintiffs were Kansas res-

idents. All cases were filed not after the Shutts I deci-

sion, but at about the same time as Shutts I was filed.

Wortman v. Sun Oil Co., 236 Kan. 266, 690 P.2d 385,

was filed by a Kansas resident, a royalty owner client

of Chapin & Penny at about the same time this case was

filed. The helium case was filed in 1971. Matzen v.

Cities Service Oil Co., 233 Kan. 846, 667 P.2d 337, was

a case concerned only with the market value of gas pro-

duced in Kansas.

There is no evidence that Kansas is a “magnet at-

tracting class actions.”

IV. Judge Duckworth’s Opinion

The Kansas Supreme Court remanded this case to

the trial judge for retrial in the light of the U. S. Su-

preme Court’s reversal and mandate. The Honorable

Keaton G. Duckworth lives in Elkhart, Kansas, in a part

12

of the Hugoton-Anadarko area adjoining Oklahoma and

near Texas. He has had many years of experience on

the bench and has heard many oil and gas cases. He

is well respected throughout the State of Kansas for his

decisions in oil and gas matters. He thoroughly re-exam-

ined cases and statutes in other states cited by Phillips

and by plaintiff class. He said, among other things, the

following:

“Kansas ... Texas... and Louisiana... are the

only states to have been presented this issue directly,

and all have reached the same conclusion as the

Kansas Supreme Court.” (Appendix, Memorandum

Opinion, Page 55a.)

“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 the royalty owners

or to the buyers, and thus came the use of such

money.”

“As the Texas Court noted in the Stahl case, quoting

Phillips Petroleum Co. v. Adams, 513 F.2d 355, Phil-

lips may say that the possession and utilization of

funds to which it had no pretense of claim was rea-

sonable, or even that the actions were necessary, but

Phillips cannot be heard to say that is fair and equi-

table that it should enjoy such a financial advantage

for so long, and pay not a cent for it.” (Emphasis

in original.) (Appendix, Page 55a.)

Judge Duckworth went on to review the case of West

Edmond Hunton Line Unit v. Young, 325 P.2d 1047, which

13

allowed royalty owners prejudgment interest from date

of sale of oil, and further said:

“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.”

Judge Duckworth cites the Sid Richardson case as

further authority for the Texas Supreme Court to allow

interest at FERC rates.

He further said:

“The defendant, in the few instances in which indem-

nity agreements -vere obtained from royalty owners,

and the increased rates were paid directly, required

those royalty owners to agree to possible repayment

at the FERC rate.” (Appendix, Page 58a.)

Judge Duckworth quotes from interest laws of Texas,

Oklahoma and Kansas, the statutes which call for 6% in-

terest in the absence of any contract as to the rate of in-

terest, and further says:

“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 to the facts of this

case.”

He concluded:

“TI 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.”

(Appendix, Page 59a.)

14

V. Kansas Supreme Court Decision

Phillips appealed from Judge Duckworth’s decision and

order. Briefs were filed by both parties. Oral argument

was had before the entire court. The case was argued by

the parties and decided in conference by the Kansas Su-

preme Court prior to the retirement of Chief Justice

Schroeder. The decision of the Kansas Supreme Court

was unanimous in favor of plaintiff class allowing in-

terest on the money used by Phillips at an equitable rate

which was found to be the FERC rate. Chief Justice

Schroeder, who had written the opinions in Shutts I and

Shutts II was assigned to write this opinion.

The Chief Justice writes opinions that are scholarly,

thorough and decisive of the applicable law. He was Dis-

trict Judge of Harvey County, Kansas, an oil and gas

county, before going to the Supreme Court a number of

years ago.

The Supreme Court of Kansas is one of the better state

courts, and they have dealt with oil and gas litigation many

times.

Highlights from Chief Justice Schroeder’s opinion this

time are as follows:

“This is the third time this class action case has come

before the Supreme Court for review.” (Appendix,

Page 3a.)

“(In Shutts I) ... plaintiffs sought to recover in-

terest on ‘suspense royalties’ attributable to gas pro-

duced from leases in the three state Hugoton-Anadarko

area... 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.

15

This court ruled it could exercise in personam juris-

diction over unnamed nonresident class plaintiffs

where procedural due process was satisfied by notice,

an opportunity to be heard, and adequate representa-

tion. Having found the class action was proper and

binding on resident plaintiffs, this court also ruled

that, under the equitable principle of unjust enrich-

ment, Phillips was liable to the plaintiffs for interest

on the suspended royalties in the amount set forth

under Phillips’ corporate undertaking with the Federal

Power Commission (FPC), seven percent per annum,

with an additional statutory post-judgment interest

of eight percent per annum.” (Emphasis supplied.)

The opinion goes on to show that Shutts II “was fac-

tually similar to Shutts I.” It further quoted from Shutts

II as follows:

“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 Phillips from the

use of the plaintiffs’ money.” (Appendix, Page 5a.)

The opinion then refers to the findings of his Court

on jurisdiction over nonresident plaintiffs, the matter of

whether or not there was a conflict in the laws of Kansas

and the laws of other states involved and whether or not

the conflicts alleged by Phillips actually existed. The

opinion quotes from the U. S. Supreme Court opinion, 472

U.S. at 816-18 as follows:

“These putative conflicts range from the direct to the

tangential and may be addressed by the Supreme

Court of Kansas on remand under the correct consti-

tutional standard:

16

“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 awarded them by the Supreme Court of

Kansas - certainly amounted to millions of dollars in

liability.” (Appendix, Pages 6a and 80a.)

“It is important to note the court stated the follow-

ing:

“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 . . . must be respected even in a

nation-wide class action.”

The decision then points out that Judge Duckworth’s

opinion “found no conflicts existed with the laws of Kansas

on the two issues of liability and applicable interest rate”

and the opinion goes on to say “we will review the laws

of each of these states (Texas, Oklahoma, New Mexico,

Wyoming, Louisiana and Kansas) as applicable to the two

issues involved: (1) whether Phillips is liable to the

royalty owners for interest on the suspense royalties and

(2) if Phillips is liable, what is the applicable interest

rate?

The opinion then reviews thcroughly and in detail the

laws of each of the five principal states involved and the

interest rate applicable.

The opinion concludes:

“Under equitable principles, the states would imply

an agreement binding Phillips to pay the funds held

A

17

in suspense to the royalty owners when the FPC ap-

proved the respective rate increases sought by Phil-

lips, together with interest at the rates and in ac-

cordance with the FPC regulations found in 18 C.F.R.

Section 154.102 (1986) to the time of judgment herein.

These funds held by Phillips as stakeholder originated

in federal law and are thoroughly permeated with in-

terest fixed by federal law in the FPC regulations as

heretofore set forth in this opinion.” (Appendix, Page

50a.)

Although having done considerable research into in-

terest laws and rates of other states involved before,® the

Kansas Courts now thoroughly have reviewed and consid-

ered the interest laws of Texas, Oklahoma, Louisiana, New

Mexico and Wyoming, the cases and statutes cited by

Phillips, and have come to the conclusions that there is

no question about liability for interest as an equity matter

and that the FERC rate is the proper rate in Kansas and

other states.

The opinions should not call for wild speculations by

Phillips about federal common law, nor should they call

for Phillips to say in an almost vulgar manner that Kansas

Courts are trying to “FERC’em”.

VI. National Gas Pricing

Phillips complains about having to pay interest for the

use of its royalty owners’ money might have an adverse

impact on interstate natural gas pricing. Records in this

case show that Phillips’ net profits for some of the years

5. Shutts v. Phillips Petroleum Co., 222 Kan. 527, 567 P.2d

1292 (1977), cert. denied, 434 U.S. 1068 (1978), and cases there

cited.

18

in question were in excess of $2 million per day. Paying

out a little money for interest to its royalty owners should

not affect price of natural gas Phillips charges to its gas

purchasers and would affect net profits to Phillips and

its shareholders only minimally.

VII. No Constitutional Principles Violated

The application of basic equitable principles of restitu-

tion to the facts of this case violated no constitutional pro-

scription concerning choice of law. The measure of dam-

ages authorized by the Kansas Courts can hardly be said

to be “arbitrary or fundamentally unfair” in any constitu-

tional sense. (See Allstate Ins. Co. v. Hague, 449 U.S.

302.) It was based solely on Phillips’ undertaking with the

FPC and its indemnity offer to its own royalty owners.

Despite Phillips’ suggestion to the contrary, there is no

real basis for this court to determine that this case, tried

in the courts of one of the other states involved, would

have led to a different result.

The Kansas Supreme Court has painstakingly reviewed

the laws of the states involved and has determined that

each of the states involved would require Phillips to pay

interest on the money-it-withheld from royalty owners.

The Kansas Court also reviewed the laws of the states

involved and determined that each of the states would

require that interest be paid at the same rates required of

Phillips by FERC regulation. This rate is the same rate

as required by Phillips in the indemnity agreements signed

by some royalty owners.

The Kansas Court faithfully applied the laws of the

several states involved to the unique facts of this case.

There is no substantial federal question for decision by

this Court.

ee Ste ow ete

19

Phillips contends that the Kansas Supreme Court ig-

nored contrary Texas law as set out in Phillips Petroleum

Co. v. Stahl, 569 S.W.2d 480 (Texas, 1978). In Stahl the

plaintiff asked for and was awarded interest at the rate

of 6% per annum. Phillips’ liability for interest at a higher

rate was not presented to the Texas Supreme Court, nor

did the Texas Supreme Court rule on that point. The Stahl

case is simply not authority for a limit of 6% interest. The

issue of whether interest should be allowed at the 6%

statutory rate or at FERC rates was not presented in the

Stahl case and was not ruled on by the Texas Courts.

As to the statutory interest rate in Stahl, a decision

is not a precedent unless the issue is argued and presented

to the court. (Corpus Juris Secundum, Courts, Section

186.) In United States v. L. A. Tucker Truck Lines, 344

U.S. 33, 97 L.Ed. 54, 73 S. Ct. 67, it is said:

“Even as to our own judicial power or jurisdiction,

this court has followed the lead of Mr. Chief Justice

Marshall who held that this Court is not bound by

prior exercise of juiisdiction in a case where it was

not questioned and it was passed sub silentio.”

See also United States v. More, (U.S.) 3 Cranch 159,

2 L.Ed. 397. In 20 Am Jur 2d, Courts, Section 190, it is

stated:

“It is only a judicial decision on a point of law that

is stare decisis, and it is not enough that the point was

considered in the prior case; it must have been decided.

Stated otherwise no opinion is an authority beyond

the point actually decided. It follows that a case can-

not be considered as a binding precedent on a legal

point that was not argued in the case and not men-

tioned in the opinion.”

20

See United States v. Mitchell, 271 U.S. 9, 70 L.Ed.

799, 46 S. Ct. 418, where it is said:

“That question was not presented to the court for

decision, and no such question was considered or de-

cided. It is not to be thought that a question not

raised by counsel or discussed in the opinion of the

court has been decided merely because it existed in

the record and might have been raised and considered.”

See also, Webster v. Fall, 266 U.S. 507, 69 L.Ed. 411,

45 S. Ct. 148:

“Counsel for appellant directs our attention to other

cases, where this court proceeds to determine the

merits notwithstanding the suits were brought against

inferior or subordinate officials without joining the

superior. We do not stop to inquire whether all or

any of them can be differentiated from the case now

under consideration, since in none of them was the

point here at issue suggested or decided. The most

that can be said is that the point was in the cases if

anyone had seen fit to raise it. Questions which merely

lurk in the record, neither brought to the attention

of the court nor ruled upon, are not to be considered

as having been so decided as to constitute precedents.”

—

Chief Justice Schroeder in the last Shutts opinion for

which Phillips is asking cert. and mandamus, pointed out

that the issue of 6% versus 7% or higher has not been

determined by the Texas Supreme Court. He said:

“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

Petroleum Co. v. Adams, 513 F.2d 355 (5th Cir. 1975),

Aa

21

cert. denied, 423 U.S. 930 (1979); Phillips Petroleum

Co. v. Hazelwood, 409 F. Supp. 1193; Phillips Petroleum

Co. v. Stahl Petroleum Co., 569 S.W.2d 480, 488 (Texas,

1978). This issue has not been determined by the Texas

Supreme Court.” (Appendix to Phillips’ Brief, Kan-

sas Supreme Court Opinion, 20a).

Surely, there can be no constitutional question in-

volved in the Kansas Courts’ applying the FERC rate, the

equitable rate, rather than the statutory rate, when the

issue of statutory rate versus equitable rate was not de-

cided in the Stahl case.

CONCLUSIONS

The U. S. Supreme Court reversed and remanded and

ordered the Kansas Courts thoroughly to consider the

statutes and case law of the other states involved pertain-

ing to interest. They have done so.

They find that the statutory rates, some of them

enacted in the 1930’s, would not be fair and equitable, but

that the bank prime rate during the periods in question,

the FERC rate, would be fair and equitable.

The opinions do not touch upon “federal common law”

now alleged by Phillips to be an issue because it was not

and is not an issue. The application by the Kansas Courts

of FERC interest rate, the rate applied by Federal regu-

lation to this same money if it were refunded to gas pur-

chasers, is not creating federal common law.

Petition for Mandamus should be denied.

22

Petition for a Writ of Certiorari should be denied.

Respectfully submitted,

W. Luke CHAPIN

(Counsel of Record)

CHAPIN & PENNY

P. O. Box 148

Medicine Lodge, Kansas 67104

(316) 886-5611

STEPHEN JONES

JONES & JENNINGS

Broadway Tewer, Suite 1100

P. O. Box 472

Enid, Oklahoma 73702

HAROLD GREENLEAF

SMITH, GREENLEAF & BROOKS

400 North Washington Street

P. O. Box 1039

Liberal, Kansas 67901

(316) 624-6266

Attorneys for Respondents

bran A A ie

Al

(Received July 2, 1987)

PHILLIPS PETROLEUM COMPANY

Bartlesville, Oklahoma 74004 918 661-6600

Legal

16 June 1987

AIRBORNE

Mr. W. Luke Chapin

Chapin & Penny

124 East Kansas

Medicine Lodge, KS 67104

Re: Shutts II

Dear Luke:

Reference is again made to your pending Motion to

Require Phillips to Account for Judgment. I am at last

able to give your some definitive figures with regard to

what the judgment against Phillips will be—as of 31

December 1987—if the United States Supreme Court does

not grant Phillips’ appeal in the fall of this year when

the Justices return from vacation.

The computed liability, set out by state is as shown

here and in the attached detail sheets:

@ Arkansas $ 2,252.20

@ Kansas 1,012.42

@ Louisiana 401,599.66

@ Mississippi 167.53

@ New Mexico 88,245.48

@ Oklahoma 155,540.67

@ Texas 1,472,936.19

@® Utah 76.65

@ West Virginia 3,904.87

@ Wyoming 240,691.38

Total Interest $2,366,427.05

A2

This is a definitive number as to the interest liability, but

it is not all that will be owed.

Total Interest $2,366,427.05

Unpaid Royalty 130,578.81

Total Judgment $2,497,005.86

In doing the roll-back audits necessary to generate the

interest numbers, we found that some of additional royalty,

the “principal,” was never paid. Some $113,682.33 went

into suspense accounts—dont’s ask me why, and another

$16,896.48 never got paid because of simple accounting

errors. We figured the interest as though the unpaid

royalty was paid and the total above includes interest on

the unpaid royalty. We plan to pay the unpaid principal

to the rightful owners when the interest is paid. As yet,

I do not have the detail sheets to show me how the addi-

tional $130,578.81 is split out on a state by state basis, and

I don’t think that I can get it anytime soon. But, when

the unpaid principal is added to the interest set out above,

the grand total is $2,497,005.86.

This final total is less than shown in my letter dated

on 16 June. The difference is accounted for by the fact

that the earlier number did not have all of the indemnity

money taken out of the equation. There was some in-

demnity agreement money paid out after the accruals

bagan and we had to run the program first with that money

still in before we could exclude for the periods after the

various indemnity agreement were each signed. Anyway,

pulling out the indemnity money dropped the total about

$350,000.00 from the rought figure of about $2.85 million

that I mentioned in my 16 June letter.

For the purpose of filing the supersedeas bond that

you have indicated that you want, I suggest that we agree

A3

on a bond in the amount of an even $2.5 million. This will

cover the estimated total that would be due at the year’s

end.

I presume that the attached form of a Supercedeas

Bond will be satisfactory to you.

Very truly yours,

/s/ Tom

T. L. Cubbage II

(918) 661-7026

TLC/tle - RC

encl: (as)

cc: John L. Williford

Joseph Kennedy

Judge Keaton G. Duckworth

District Court

Seward County

Liberal, KS 67901

|

A4

(Received April 4, 1983)

PHILLIPS PETROLEUM COMPANY

Bartlesville, Oklahoma 74004 918 661-6600

Legal

March 31, 1983

Mr. W. Luke Chapin Mr. Gerald Sawatzky

Chapin, Penny & Goering Foulston, Siefkin, Powers

P. O. Box 148 & Eberhardt

Medicine Lodge, KS 67104 700 Fourth Financial Center

Wichita, Kansas 67202

Mr. Ed Moore Mr. William C. Phelps

Ginder & Moore Sun Gas Company

202 S. Grand Three North Park East

Cherokee, Oklahoma 73728 Dallas, Texas 75221

Re: Richard Wortman et al. v. Sun Oil

Company, No. 79C40, District Court,

Barber County, Kansas

Gentlemen:

Several Notices of Class Action Suit have been re-

ceived by Phillips Petroleum Company, having been mailed

to the company in care of P. O. Box 84616 in Dallas, Texas.

Please send all further communications to Phillips

Petroleum Company in regard to the captioned case to the

undersigned who is acting as counsel for the company in

regard to this litigation.

A5

This is not a request for exclusion.

Very truly yours,

/s/ T. L. Cubbage

T. L. Cubbage II

Office of General Counsel - Legal

Phillips Petroleum Company

1256 Adams Building

Bartlesville, Oklahoma 74004

TLC/ej

Encl. (as)

ee: Clerk of the District Court

Barber County, Kansas

Medicine Lodge, Kansas 67104