Appendix — Hilliard v. Shell Western E & P, Inc.

APPENDIX A

96-1530

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

FILED

July 6, 1998

LEONARD GREEN, Clerk

KENNETH R. HILLIARD, ET AL.,

Plaintiffs-Appellees,

V.

SHELL WESTERN E & P, INC.,

ET AL.,

Defendant-Appellant.

i i i

ORDER

BEFORE: MERRITT, RYAN, and HILL,” Circuit Judges.

The court having received a petition for rehearing en

banc, and the petition having been circulated not only to the

' Hon. James C. Hill, Senior United States Circuit Judge for the

Eleventh Circuit Court of Appeals, sitting by designation.

la

original panel members but also to all other active” judges of

this court, and no judge of this court having requested a vote

on the suggestion for rehearing en banc, the petition for

rehearing has been referred to the original panel.

The panel has further reviewed the petition for

rehearing and concludes that the issues raised in the petition

were fully considered upon the original submission and

decision of the case. Accordingly, the petition is denied.

ENTERED BY ORDER OF THE COURT

/s/

Leonard Green, Clerk

2 Judge Nelson recused himself from participation in this ruling.

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SS

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

KENNETH R. HILLIARD and ) Case No. 96-1530

GREGORY D. STYLES, ) Trial Court No.

Trustee under Trust ) §:93-CV-21

Agreement dated May 5, 1979, )

Plaintiffs, ) Appeal from the

) United States District

vs. ) Court for the Western

) District of Michigan

SHELL WESTERN E & P, INC., )

a Delaware corporation, )

Defendant. )

/

MOTION OF PLAINTIFFS-APPELLEES

FOR REHEARING AND

FOR REHEARING EN BANC

The Plaintiff-Appellee Class moves this Court for

Rehearing in accordance with Rule 40, Federal Rules of

Appellate Procedure, and for Rehearing en Banc in

accordance with Rule 35, Federal Rules of Appellate

Procedure, of this Court’s May 22, 1998 Decision and Order

relating to this case. As grounds for this Motion, and in

support hereof, Plaintiff-Appellees state that this Court erred

in (1) making erroneous factual determinations unsupported

by the record, (2) finding that the res judicata doctrine applied

contrary to fact and law, and (3) determining that Plaintiffs

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are subject to the Act 6] fee in the absence of a legal or

constitutional bases to do so. In support of this motion,

Plaintiffs state as follows:

I. THIS COURT ERRONEOUSLY MADE

FACTUAL DETERMINATIONS WHICH WERE

NOT SUPPORTED BY THE RECORD

The May 22, 1998 Opinion of this Court contains

factual references that are both unsupported by and

contradictory to the record. These factual determinations are

pivotal to this case and have led this Court to incorrect

conclusions. These incorrect and unsupported factual

references are as follows.

A. On page 2 of the Opinion, this Court stated that

“The representatives of the current class were previously part

of another class which sued Shell Western, claiming that the

Act 48 deductions breached the parties’ lease.” This is

incorrect and unsupported because: (1) no certified class ever

existed to consider the Act 48 issue, (2) the Act 48 issue was

severed from the other issues in Brown v. Shell, (3) the Act

48 issue was conclusively decided before the Brown v. Shell

class was certified to consider the remaining issues in the

case, and (4) the Act 48 issue was never part of the Brown v.

Shell class settlement.

The original Brown v. Shell case was filed in 1981

seeking a class action. No class was certified until 1984.

Much happened during the intervening three years. By

stipulation of the parties (See Motion, Stipulation ard Order

attached as Composite Exhibit A), a First Amended

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Complaint was filed on February 6, 1981. (App™” 241-6).

That pleading only named 13 specific plaintiffs. On

December 16, 1981, Shell Western filed a Motion for Partial

Summary Judgment relating to the First Amended Complaint.

(App 253-8). That Motion dealt specifically and exclusively

with the Act 48 severance tax issue. The remaining issues

were left to be litigated between Shell Western and the

thirteen original plaintiffs. The State Circuit Court entered an

Order on the Partial Summary Judgment on April 6, 1982.

(App 273-4). By another Order dated April 6, 1982, the

Circuit Court severed Count I dealing with the Act 48

severance tax issue. (See for example text of App 188). The

Order, specifically relating only to the Act 48 severance tax

issue, was then appealed to the Michigan Court of Appeals,

which returned its opinion and order in Brown v. Shell, 128

Mich App 111, 339 NW2d 709 (1983). On March 20, 1984,

as part of an agreed settlement with Shell, the thirteen named

plaintiffs filed a Second Amended Complaint which did not

deal in any way with the Act 48 severance tax issue. (App

189-198, see also App 181-187). Thereafter, on March 29,

1984, the parties filed a Motion to Approve a Settlement.

(App 181-187). That Joint Motion specifically indicated in

paragraph 2, entitled “SUBJECT MATTER OF

SETTLEMENT,” that “[t]he proposed settlement shall have

no substantive effect on the [Act 48] severance tax issue”.

(App 183). The settlement on page 4 demonstrates that the

parties agreed to class certification, but, by virtue of the

remaining terms, the class certification dealt only with the

remaining issues in the case. Tax issues were not then and

3

“App” refers to the Joint Appendix previously filed by the

parties in this case.

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Motion Rehearing, No. 96-1530 - 6/3/98

never were any part of the Brown v. Shell class issues, and

that was by consent of Shell Western. On May 31, 1984, the

Circuit Court entered a consent Final Judgment on the

remaining issues in the case, which, pursuant to the

settlement, excluded any Act 48 severance tax issue. (App

479-486). Consequently, the Act 48 severance tax issue was

never litigated by or made part of the Brown v. Sheil class.

Even the notice to the Class Members expressly excluded the

Act 48 severance tax issue. (See Motion to Approve

Settlement at { C, p 5, App 181-187). Accordingly, to say

that the 864 current class members were part of “another

class which sued Shell Western, claiming that the Act 48

[severance tax] deductions breached the parties’ lease,” is

contrary to the record before this court. The Act 48

severance tax issue only involved thirteen parties, and was

fully decided years before the Brown v. Shell class was ever

certified, by consent, to cover the remaining issues.

B. On Page 3 of the Opinion, this Court

incorrectly states that “plaintiffs claim that Shell Western has

breached the same leases by deducting the Act 6] fee ...”

The lease forms are the same, but the breaches in the 13

Brown v. Shell leases in no way covered the 864 leases here.

(See also argument in II.D., infra).

c. On page 5 of the opinion, this Court writes

“Although the fact that Shell Western was deducing for Act 48

taxes is different from the fact that it was also deducting for

Act 61 fees, both assessments were deducted from plaintiffs’

royalties at the same time and both appeared on the same

statement of accounts ...” This is incorrect. This Court even

later recognizes on page 5 that Shell Western does not

“appear to have been entirely forthcoming with the

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information about these deductions ...”. The undisputed

letters attached to Plaintiffs’ complaint demonstrate that

Plaintiffs were not aware of the Act 61 deductions and that

those deductions were disguised as a tax” and not an Act 61

fee. (App 65-74). Further, the only “statement” that showed

an Act 6] charge was an “in-house” report by Shell Western

that was not distributed by Shell Western to the royalty

owners. A review of the statement provided to the royalty

owners (App 66) demonstrates that only a “tax” was

withheld, while the in-house report, not sent to the royalty

owners, breaks down the various categories and includes

specific categories for “severance tax” and “privilege tax.”

(App 507). The documents demonstrate that this Court’s

Statement indicating that the Act 61 fee “appeared” on the

royalty owners’ statement of accounts is incorrect, and that

mistake changes the character of the transaction.

D. On page 5 of the Order, the Court writes “the

plaintiffs have admitted that they discovered during the first

case the essential facts relevant to the present case.” The

Plaintiffs certainly did not admit this. This was argument by

Shell Western. The Honorable Judge Quist quickly dispensed

with this argument in his Opinions dated June 13, 1995 and

July 20, 1995. (App 500-501,513-516).

In summary, these are four pivotal points that are not

supported by the record and frankly, are contradictory to the

record. The true facts change the outcome of this case. It is

unfair to the litigants to make these “findings” without, at a

very minimum, a remand.

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II. © THIS COURT INCORRECTLY DECIDED THAT

RES JUDICATA BARRED PLAINTIFFS’

CLAIMS

A. This Court erred when it held that “the

plaintiffs knew or should have known what Shell was doing”

in deciding that Plaintiffs should have litigated the Act 61

issue at the same time as the Act 48 issue. Res judicata is not

available to Shell because Shell agreed early in the case in

Brown v. Shell to limit the scope of the court’s inquiry to the

Act 48 severance tax only. In Brown v. Shell, the parties

stipulated to an Order granting a Motion to Amend, which

Motion provided:

[Jjudicial economy makes advisable the

limiting of issues to be litigated to two, the

propriety of defendant charges imposed upon

plaintiffs for certain operations of the Kalkaska

gas plant and further, defendants imposition

upon plaintiffs of a portion of the Severance

Tax chargeable to individual wells. (Exhibit

A. Emphasis added).

Act 61 was not litigated in Brown v. Shell, and the

parties’ stipulation demonstrates that it could not have been

litigated, by Shell Western’s choice and agreement.

Therefore, as Judge Quist determined, Shell failed in its

burden to meet the requirements of the res judicata defense.

In addition, it would be patently unfair, and inconsistent with

the res judicata doctrine, to allow Shell to agree to limit the

scope of a cause of action and then use that prior, limited

cause of action to defeat subsequent, unrelated claims.

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B. This Court found that “the plaintiffs knew or

should have known what Shell was doing ,” which is contrary

to the record below. Prior to this lawsuit, Shell deducted the

Act 61 fee as part of the “taxes” noted on the statements sent

to Plaintiffs. When asked to explain what “taxes” were being

withheld (App 65), Shell represented that only severance taxes

were being withheld. (App 67). A severance act is the Act

48 tax. Only after further inquiry did Shell disclose the Act

6] deduction. (App 68-69). The results of Plaintiffs’ inquiry

precipitated the filing of this law suit. (App 73). Because

Shell concealed its deduction of the Act 61 fee, at a minimum,

a question of fact exists regarding whether the Act 61 issue

could have been litigated in the prior case. Judge Quist

specifically addressed this issue and found, in his

November 2, 1993, opinion that Shell had not met its burden

of proof on this issue. Shell has subsequently failed to file

any documentation that could alter this decision.

C. This Court also erred in deciding without

discussion that “/t/he representatives of the current class were

previously part of another class which sued Shelli Western,

claiming that the Act 48 deductions breached the parties’

lease,”. No certified class existed with respect to the Act 48

issue and proper class representation was not at issue before

Judge Quist. | Whether individual plaintiffs properly

represented a class in a prior cause of action is a

determination that may not be made from simply examining

the pleadings and briefs. Potter v. Wayne County, 46 Mich

App 174; 207 NW2d 448 (1973). Plaintiffs’ current claims

cannot be barred if their interests were not properly

represented in the prior case.

D. This Court also erred in holding that res

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judicata applied because “/tJ/he plaintiffs already litigated

Shell’s contractual royalty payment obligations once.” Judge

Ryan has previously concluded that when, as here, different

causes of action exist, res judicata cannot apply. In United

Black Firefighters Ass’n v. City of Akron, 976 F2d 999 (6th

Cir., 1992), Judge Ryan concurred with the opinion holding

that a union was not barred by res judicata from raising

certain objections to a 1990 racial discrimination case brought

by the same plaintiffs that had litigated a nearly identical

racial discrimination issue in 1986 and obtained a consent

decree. In finding that res judicata did not apply, this Court,

relying on United States Supreme Court precedent, held that

“the 1986 consent decree was concerned with remedying

alleged racial discrimination prior to 1986" while “[t]he

present consent decree is designed to remedy alleged racial

discrimination in connection with a 1990 promotional

examination and which occurred after the 1986 consent decree

became effective.” Id. at 1005. Even though the racial

discrimination was potentially the same in both cases, the fact

that the new discrimination constituted a new cause of action

precluded the application of res judicata. Similarly, here, a

new cause of action accrues each time Shell wrongfully

withholds a portion of a royalty payment. See Profit Sharing

Trust v. Bell River Joint Venture, 149 Mich App 327, 333;

386 NW2d 185 (1986). Consistent with precedent from the

United States Supreme Court, the Sixth Circuit Court of

Appeals, and Judge Ryan’s concurrence in United Black

Firefighters Ass’n, supra, the fact that a new cause of action

accrues with each wrongful royalty payment precludes the

application of res judicata.

5. Error requiring this Court to reconsider its

_Opinion is also evident from this Court’s reliance on

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Brownridge v. Michigan Mutual In Co, 115 Mich App 745;

321 NW2d 798 (1982). In that case, the plaintiff, who was

fired, lost her claim of sexual discrimination against her

employer, and then was barred from seeking damages for

being fired on the alternate theory that she refused to

participate in the employer’s redlining scheme. The plaintiff's

claim was barred because she was seeking redress for the

same breach,” the fact that she was fired, but alleged two

different legal theories. Here, Plaintiffs are not seeking

recovery for the same breach. The Act 48 tax is different

from the Act 6] fee in that: (1) each provision requires the

payment of a different amount, (2) Act 48 levies a tax for

reasons that are different from those supporting the Act 61

fee, and (3) the purposes behind the two acts differ. Shell

could improperly withhold the Act 48 tax without withholding

the Act 61 fee, and vice versa. This is not a case in which

Plaintiffs are seeking the same recovery on alternate legal

theories. Rather, the 13 original Plaintiffs first sought to stop

Shell from wrongfully withholding the Act 48 tax, and now

the entire class is seeking to bar Shell from wrongfully

withholding the Act 61 fee.

III. THE COURT’S ANALYSIS OF ACT 61 IS NOT

BASED ON MICHIGAN LAW

This Court erred in extending the scope of Act 61 by

finding that the Act 61 fee is levied in the same manner as the

Act 48 fee and, therefore, ordering that a Judgment be entered

in favor of Shell. This conclusion is wrong fcr the following

reasons: (1) Plaintiffs’ constitutional claims were not

addressed by Judge Quist in light of his ruling in favor of

Plaintiffs on non-constitutional grounds; thus those issues

must still be addressed; (2) the history of the two statutes

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demonstrates that Act 61 was not expanded as was Act 48; (3)

the express language of Act 61 incorporated Act 48 for

purposes of collection of the fee only, not for purposes of

levying the fee; (4) a court may not alter the definition of a

term in a statute; (5) Plaintiffs are not “owners” as defined by

Act 61 and thus cannot be subject to the Act 61 fee; and (6)

this Court’s ruling renders Act 61 unconstitutional.

A. This Court erred in applying the Act 48

definition of “producer” to Act 61. In Brown v. Shell, supra,

the Michigan Court of Appeals specifically referred to the Act

61 fee as a “separate privilege tax.” In so doing, the Court

made direct reference to an opinion of the Michigan Attorney

General in OAG 1963-1964, No. 4160, p. 118 (June 17,

1963), in which the Attorney General concluded that the

payment of the Act 48 severance tax and the Act 6] privilege

fee were the responsibility of producers of gas and oil, not of

the owners of royalty interests. The Attorney General’s

opinion is key to understanding why Act 61 does not apply to

Plaintiffs because in response to the Attorney General’s

Opinion, the Legislature, in 1965, amended only Act 48 to

add a definition of “producer” that included royalty owners.

Prior to this amendment, the Act 48 tax was levied on “each

corporation, association, or person engaged in the business of

severing from the soil, oil or gas. . .” Brown v. Shell, supra

at 115. Thus, the new definition and title extended the scope

of Act 48 so that owners of royalty interests were also

responsible for the tax. Brown, 128 Mich App at 116.

Nothing in the history of Act 61 reflects a similar

amendment in response to the Attorney General’s Opinion,

nor does any other basis exist for concluding that the

Legislature ever intended to expand the scope of Act 61 to

include royalty owners. Hence, this Court’s conclusion that

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the scope of Act 6] included royalty owners, by incorporating

Act 48, is not supported by any act of the Legislature. To the

contrary, the express language of Act 6] demonstrates that it

does not incorporated any of the taxing provisions of Act 48

The statute provides that a fee is “levied upon all oil and gas

produced in this state.” MCL 319.22(1) (Emphasis added).

The only purpose for the reference to Act 48 is for collection

of the fee: “The fee shall be collected . . .” by reference to

Act 48. Id. This method of collection is set forth in §3 of

Act 48, and simply provides that the Act 48 tax is withheld

and paid by the common carrier/purchaser instead of being

paid directly by the producer. The reference to Act 48 was

not meant to be used to levy the Act 6] fee on those not

contemplated within the Act 6] regulatory scheme, but was

meant to demonstrate the manner in which the Act 61] fee

would be collected. Under Act 61, royalty owners do not

“produce” oil and gas, rather “producers” of oil and gas

produce oil and gas. See MCL 319.2(g) and (h). Thus, a fee

levied on oil and gas produced can only be levied on those

who produce it: the producers. (See argument III.B., infra).

The Court properly recognized that “only Shell Western is a

“producer” under Act 61". (Op. p8)

B. This Court’s application of the definition of

“producer” in Act 48 to Act 61 also violates established

Michigan rules of statutory construction. While the Court

correctly recognized that “only Shell Western is a “producer”

under Act 61,” the Court ruled without citing legal authority

that the term “producer” as used in Act 48 must be read into

Act 61. As a result, this Court held that Plaintiff royalty

owners are “producers” for the purpose of Section 22 of Act

61 (Opinion Page 11). This holding is directly contrary to

Michigan law. The Michigan rule is that “where the

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legislature has defined a word or a term in an Act, a court is

bound by that definition.” Carr v. General Motors Corp.,

425 Mich 313; 389 NW 2d 686 (1986). In W.S-Butterfield’s

Theaters v. Department of Revenue, 353 Mich 35; 91 NW 2d

269 (1958), the Michigan Supreme Court stated that “we need

not, indeed must not, search a field for meanings where the

Act supplies its own.” Michigan’s rule is consistent with

other states’ laws. See 73 Am Jur 2d, Statutes § 226, Page

413, which provides:

[W]here a statute contains its own

definition of a term used therein, the term may

not be given the meaning in which it is

employed in another statute, although the two

may be in pari materia.

In Carr, supra, at 318 the Court held that:

A cardinal principle of statutory construction

is that where the Legislature has defined a word or

term in an act, a court is bound by that definition. We

reiterated this precept in Earlandson v. Genesee

County Employee's Retirement Commission, 337 Mich

195, 204; 59 NW 2d 389 (1953) quoting 50 Am Jur,

§§ 261, 262, pp 253-254):

It is within the legislative power to

define the sense in which words are employed

in the statute.

A statutory definition supersedes the

commonly accepted, dictionary, or judicial

definition. Where an act passed by the

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legislature embodies a definition it is binding

on the courts. (Emphasis added).

Because the Legislature chose not to levy the Act 61

fee in the same manner as the Act 48 tax, the Act 61

definition of “producer” must prevail.

\. The Court erroneously assumes that it is proper

to take a definition from one statute and impose it upon

another by incorporation or inference. In so doing, the Court

overlooked the fact that the definition of “producer” in Act 48

specifically provides that it is limited to that statute. The

statute provides that the term “producer”

as used in this Act means a person who

owns or is otherwise entitled to delivery of a

share in kind or a share of the monetary

proceeds from the sale of gas or oil as of the

time of its production or severance. MCL

205.312(2); MSA 7.362(2) (emphasis added).

By using the term “as used in this act,” the language

is confined solely to Act 48. A similar clause limiting the

definition of a word to a particular statute was examined by

the Michigan Supreme Court in Wrigley’s Stores Inc. v.

Board of Pharmacy, 336 Mich 583; 59 NW2d 8 (1953).

There the Court, in dismissing an allegation that a definition

of “drug” in one Act controlled the meaning of that term in

another Act held:

PA 1909, No 146, above referred to, in

setting forth its definition of the word drug,

gave that definition with the restriction, ‘the

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term “drug” as used in this Act,’ so that the

legislature must be understood to have limited

the definition as contained in Act 146 to the

things mentioned in that Act and not to have

intended that that definition in that Act should

be construed or used as explaining the meaning

of the word drug as contained in the pharmacy

act. Id. at 590. (emphasis added)

The term “producer,” whose definition is limited to Act 48,

cannot be expanded to Act 61.

D. This Court incorrectly found Plaintiffs to be

“owners” under Act 61. The Court therefore erroneously

concluded that Plaintiffs received a benefit under Act 61. The

Court properly defined the term “owner” under Act 6] as a

person who has the right to drill and produce from any pool.

(Op 8). The plaintiffs are merely royalty owners who have

leased their rights to drill and produce oil or gas from the

property to Shell. In Michigan, Plaintiffs have no right to

drill or produce the oil and gas: “The exclusive right to

explore for and reduce oil and gas to possession becomes

vested in a lessee under an oil and gas lease immediately upon

the execution thereof.” Michigan Consolidated Gas Co. v.

Muzeck, 4 Mich App 502, 507; 145 NW2d 266 (1966).

As discussed by the Michigan Supreme Court in Mobil

Oil Corp. v. Treasury, 422 Mich 473; 373 NW2d 730 (1985),

a decision joined in by Judge Ryan when he was a member of

that court:

Under the terms of the ”lease” the

operator-lessee is entitled to enter onto the

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surface of the property to explore for oil and

gas, to drill wells, to install pumping

equipment, and to extract oil or gas from the

property. To the extent that it does not

interfere with these activities of the lessee, the

landowner lessor is entitled to use the surface

of the property; however, he may not extract

oil or gas himself or transfer the right to do so

to another for the duration of the lease. Id. at

479 (emphasis added).

* * *

The answer is plain. The landowner,

lessor, in oil and gas leases of this type, is not

involved in production at all, but is merely a

passive recipient of income.” /d. at 498.

Plaintiffs-royalty owners are neither “producers” nor

“owners” under Act 61. Thus, the fee levied on “oil and gas

produced” in Michigan cz.inot apply to Plaintiffs. See also

Detroit Hilton Limited Partnership v. Dept’t of Treasury, 422

Mich 422; 373 NW2d 586 (1985), in which Judge Ryan,

writing for a unanimous Court, held that a mere lessor of real

property is not responsible for a tax imposed on the business

of the lessee.

E. The Court of Appeals’ conclusion as to the

meaning and scope of Act 61 renders it unconstitutional.

Further, by directing that judgment be entered without remand

for consideration, this Court effectively cut off issues raised

at the Trial Court which were considered moot merely

because Summary Judgment could be granted on non-

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constitutional grounds. (See Order of Trial Court dated

November 2, 1993). Under this Court’s interpretation, Act

61 is unconstitutional in the following ways:

a.

The failure of Act 61 to clearly and plainly

State that it is a tax imposed upon royalty

owners, and the fact that it does so by

reference to another statute, violates the Const.

1963, Art. 4 § 32, which requires that

“[e]very law which imposes, continues or

revives a tax shall distinctly state the tax.”

The failure of the title of Act 61 to make

reference to any obligation being imposed as a

fee or tax upon royalty owners violates the title

object clause of Const. 1963, Art. 4 §24.

As raised in the Plaintiffs’ complaint. imposing

the Act 61 fee on royalty owners, when that

act is meant to apply to only those in the

business of producing gas and oil, is a

violation of both Plaintiffs’ Michigan and

united States due process rights. Ceust 1963

Art. 1 §2; US Const Am 14. As set forth in

fll.D, supra, Plaintiffs are not in the business

of producing oil simply by being royalty

owners. Thus applying this business fee to

Plaintiffs violates their due process rights.

See, also, Frost v. Railroad Comm’n, 271 US

583; 70 Led 1101 (1926); Ohio Oil Co. v.

Wright-State Treasurer, 386 Ill 206; 53 NE2d

966 (1944).

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IV CONCLUSION

This Court should grant Plaintiffs’ request for

Rehearing, or Rehearing In Banc. This Court improperly

made findings of fact contrary to the record below. Res

judicata does not apply because Shell agreed that the prior

cause of action was limited to only the Act 48 issue, Shell

concealed the Act 6] charges, no record exists to support this

Court’s conclusion that Plaintiffs, as a class, were properly

represented in the prior cause of action, and because the Act

61 issue represents a new cause of action, separate and

distinct from the Act 48 issue. This Court’s ruling on the Act

6i issue is contrary to the Act itself and Michigan law. This

Court’s ruling renders Act 61 unconstitutional. This Court’s

ruling does not address Plaintiffs’ various constitutional

challenges raised below. Plaintiffs request that this Court

reverse its Opinion and Order and Affirm the District Court’s

rulings. At a minimum, sufficient questions of fact and law

exist regarding the issues raised by this Court in its Opinion

and Order such that this case must be remanded to the District

Court for further proceedings.

Dated: June 3, 1998 RHOADES, McKEE, BOER

GOODRICH & TITTA

By:/s/

Stephen A. Hilger (P44776)

David E. Bevins (P48955)

Attorneys for Plaintiffs

161 Ottawa Avenue, NW

Suite 600

Grand Rapids, MI 49503-2793

616-235-3500

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ROSI LAW OFFICES, P.C.

Philip R. Rosi (P31915)

Co-Counsel for Plaintiffs

3139 Logan Valley Road

Traverse City, MI 49684

(616) 941-5878

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CERTIFICATE OF SERVICE

I HEREBY CERTIFY that two true and correct copies

of the Brief of Plaintiff-Appellee was furnished this 3" day of

June 1998 to Scott A. Storey, 313 S. Washington Square,

Lansing, Michigan 48933 by depositing said in the United

States mail.

Dated: June 3, 1998 RHOADES, McKEE, BOER

GOODRICH & TITTA

By:/s/

Stephen A. Hilger (P44776)

David E. Bevins (P48955)

Attorneys for Plaintiffs

161 Ottawa Avenue, NW

Suite 600

Grand Rapids, MI 49503-2793

616-235-3500

ROSI LAW OFFICES, P.C.

Philip R. Rosi (P31915)

Co-Counsel for Plaintiffs

3139 Logan Valley Road

Traverse City, MI 49684

(616) 941-5878

TE Se ee

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APPENDIX C

NOT RECOMMENDED FOR PUBLICATION

No. 96-1530

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

FILED

May 22, 1998

LEONARD GREEN, Clerk

KENNETH R. HILLIARD; ) On Appeal from

GREGORY D. STYLES, ) the United States

Trustee under Trust Agreement ) District Court for

dated May 5, 1979, ) the Western

Plaintiffs-Appellees, ) District of Michigan

V.

SHELL WESTERN E & P, INC.,

Defendant-Appellant.

te, Tee? “ee Nee Ne’ Yow

BEFORE: MERRITT, RYAN, and HILL,” Circuit Judges.

RYAN, Circuit Judge. A word of explanation is in

' The Honorable James C. Hill, United States Circuit Judge for

the Eleventh Circuit, sitting by designation.

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order concerning the delay in rendering our opinion in this

case.

Because the issues brought to us on appeal are

exclusively questions of state law, we certified these issues to

the Michigan Supreme Court on October 22, 1997, asking

that it decide the questions. On February 26, 1998, we

received a one-sentence order from the Michigan Court

declining 5 to 2 our request to answer the questions certified.

No reason for the declination was given. We proceed

therefore to resoive these questions of Michigan law in this

unpublished opinion since what we say is not precedential.

This is a class action over which the district court

exercised supplemental jurisdiction after multiple RICO

claims, which were the predicate for federal jurisdiction, were

dismissed from the case. The plaintiffs are landowners who

contractually allowed defendant Shell Western to operate oil

and gas wells on their land. They allege that Shell Western

breached the parties’ contract by deducting a statutory

"privilege fee" from the plaintiffs’ royalties. The district court

granted summary judgment on the plaintiffs’ breach-of-

contract claim and awarded damages to the plaintiff class.

Shell Western appeals from the district court's Final Order,

which also rejected Shell Western’s’s affirmative defense that

res judicata barred the plaintiffs’ claim.

We conclude that because the plaintiffs could have

brought their claim in a prior contract suit between these

parties, res judicata bars the current action. Moreover, we are

satisfied that the district court erred in holding that the

relevant Michigan statutes support the plaintiffs’ claim. Thus,

we shall reverse.

23a

Opinion - No. 96-1530, 5/22/98

I.

FACTUAL BACKGROUND

At the heart of this case are two Michigan

statutes—"Act 48," or Mich. Comp. Laws §205.301 et seq.,

and "Act 61," or Mich. Comp. Laws §319.1 et seq.—which

provide for a "tax" and a "fee," respectively, on the

production of oil and gas in the state. Shell Western has been

deducting a pro rata share of these expenses before paying

royalties to the plaintiffs. The representatives of the current

class were previously part of another class which sued Shell

Western, claiming that the Act 48 deductions breached the

parties’ lease. In this previous action, the Michigan Court of

Appeals upheld summary judgment for Shell, finding that

because the royalty owners were "producers" under the

statute, they were obligated to pay their pro rata share of the

tax. See Brown v., Shell Oil Co., 339 N.W.2d 709 (Mich. Ct.

App. 1983).

In the present action, the plaintiffs claim that Shell

Western has breached the same leases by deducting the Act 61

fee. Plaintiffs allege that, unlike the Act 48 severance tax, this

Act 61 fee must be paid by "operators" of wells, and not the

owners of the land or mineral rights. Shell Western maintains

that the plaintiffs knew or should have known that the Act 61

fee was being deducted from their royalties at the time they

filed the first action, and that, therefore, their failure to raise

that issue in the first suit between the parties precludes

litigating it in the second. Alternatively, Shell Western

contends that Act 61 operates "in the same manner, at the

same time, and subject to the provisions of [Act 48]."

Therefore, it argues, in light of the Brown v. Shell precedent

24a

Opinion - No. 96-1530, 5/22/98

which interpreted Act 48, plaintiffs are obligated to pay their

pro rata share of the Act 61 fee just as they are obligated to

pay part of the Act 48 tax.

The district court rejected both of these arguments,

and found instead that Act 61 required payment solely from

the operators of oil and gas wells. Thus, the court entered

summary judgment for the plaintiffs. This appeal followed.

IT.

A.

a Se a eo ae heen, »

The concerns behind the doctrine of res

judicata are economy of judicial resources and

finality of litigation. The doctrine of res

judicata applies not only to facts previously

litigated, but also to points of law necessarily

adjudicated in determining and deciding the

subject matter of the litigation. Michigan has

" ie rape

Saad onan ae Eee bh} lai “ 7

‘on laintiff could | )

but did not, as well as those questions that

were actually litigated. The doctrine of res

judicata applies equally to facts and law. The

test for determining whether two claims arise

out of the same transaction and are identical |

for res judicata purposes is whether the same :

facts or evidence are essential to the

maintenance of the two actions.

Jones vy. State )‘arm Mut. Auto. Ins. Co., 509 N.W.2d 829,

25a

Opinion - No. 96-1530, 5/22/98

834 (Mich. Ct. App. 1993)(emphasis added) (citations

omitted).

In 1982, the Michigan Court of Appeals ruled that a

woman who lost her suit against her employer for wrongful

discharge by reason of sexual discrimination could not later

bring another claim that she was wrongfully discharged for

her refusal to adopt certain illegal "redlining" practices. See

Brownridge v. Michigan Mut. Ins. Co., 321 N.W.2d 798

(Mich. Ct. App. 1982). In dismissing the plaintiff's second

claim, the court did not explicitly acknowledge that different

facts would be necessary to establish each claim. However, it

is obvious that distinctly different evidence would be offered

under each theory. For instance, the contested evidence in the

second case would address whether the defendant practiced

illegal redlining, whether it demanded such practices from its

employees, and whether the plaintiff's failure to comply led

to her dismissal. None of these facts would have been relevant

in determining whether the plaintiff had been dismissed

because of her gender. Thus, even though these essential facts

would be different in the second case, the court held that both

actions arose out of the same discharge from employment and

therefore the same "transaction" or "matter in issue." Id. at

799.

Similarly, the plaintiffs’ claims here are precluded

under the letter as well as the spirit of the res judicata

doctrine. The letter of the law requires a common

“transaction,” or identity of material "facts" or "evidence."

Although the fact that Shell Western was deducting for Act 48

taxes is different from the fact that it was also deducting for

Act 61 fees, both assessments were deducted from the

plaintiffs’ royalties at the same time and both appeared on the

26a

Opinion - No. 96-1530, 5/22/98

same statement of accounts. And, while it is true that evidence

regarding the plaintiffs’ obligation to pay a pro rata share of

the Act 61 fee would not necessarily have been relevant to

their obligation to pay the Act 48 severance tax, both would

have been equally relevant in proving Shell Western's alleged

breach of contract. Surely, a plaintiff who loses on his claim

that a car manufacturer is liable for injuries caused by

defective brakes cannot then sue under the theory that the

steering was also faulty.

The spirit of the law is to resolve multiple claims

where doing so would conserve judicial resources. Certainly,

this objective would have been better accomplished if the Act

61 claims had been resolved with the Act 48 claims. Although

it does not appear that the plaintiffs strategically chose to

ignore the Act 61 deductions in order to get a second bite at

the appie (nor does Shell Western appear to have been entirely

forthcoming with the information about these deductions),

nevertheless, the plaintiffs knew or should have known what

Sbeil was doing. The plaintiffs already litigated Shell’s

contractual royalty-payment obligations once. They were

required to include ali other royalty-related claims about

which they knew or should Aave known. With reasonable

diligence, the plaintiffs should have known about the Act 61

deductions. In fact, the plaintiffs have admitted that they

discovered during the first case the essential facts relevant to

the present case. Had they brought their Act 61 action earlier,

this issue could have been resolved long ago at much less

expense. Failing to do so then precludes the plaintiffs from

having a second c.:ance now.

Citing no authority, the district court held that res

judicata should not apply to class actions. However,

27a

Opinion - No. 96-1530, 5/22/98

Macomb County, 11

N.W.2d 242, 245-46 (Mich. 1943), demonstrates that

unnamed class members may be precluded from relitigating

claims brought by the class. Similarly, the U.S. Supreme

Court has clearly indicated that res judicata may bar a

member of a losing class from later filing suit on the same

claim. See Phillips Petroleum Co. v. Shutts, 472 U.S. 797,

805 (1985). Courts rely on class representatives and class

counsel to adequately protect the rights of class members. We

must assume that the class representatives and counsel either

made a strategic decision in the first case not to raise the Act

61 issue, or unreasonably failed to discover it. In either case,

the failure is imputed to all class members.

B.

After rejecting Shell Western’s res judicata defense,

the district court went on to hold that Act 61 required the

defendant to pay the fee at issue here. Even if we were not

Satisfied that the claim preclusion aspect of Michigan res

judicata law bars the plaintiffs’ action, we would conclude

that plaintiffs’ case must fail on the merits.

Because the parties’ contract is silent as to who bears

the responsibility for the Act 61 fee, we look to the intent of

the Michigan Legislature, evidenced by the language of Acts

48 and 61, in determining who is required to pay. Section 22,

the fee-imposing portion of Act 61, provided, at the time

relevant to this suit:

For the purpose of monitoring, surveillance,

enforcement and administration of this act, a

fee not in excess of 1%, based on the gross

28a

Opinion - No. 96-1530, 5/22/98

cash market value is levied upon ail oil and gas

produced in this state. The fee shall be

collected by the revenue division of the

department of treasury in the same manner, at

the same time and subject to all the provisions

of the tax levied by [Act 48.]

Mich. Comp. Laws § 319.22(1) (1987). Act 61 provided no

other guidance as to how or from whom the fee was to be

collected.

Act 48, referenced above in Act 61, provided that

"[t]here is hereby levied upon each producer engaged in the

business of severing from the soil, oil or gas, a specific tax to

be known as the severance tax." Mich. Comp. Laws §

205.301 (1965) (emphasis added). Additionally, Act 48

required: "Each producer, when requested by the department,

shall file [a report showing the amount of oil and gas

produced the preceding month and the actual market value

thereof] in the form and manner required by the department."

Mich. Comp. Laws § 205.302(2). The Act 48 severance tax

constituted 2% of the gross cash market value of the total

production of the oil or gas during the preceding monthly

period" and must be paid by "each producer" at the time he

renders each monthly report. Brown, 339 N.W.2d-at 712

(quoting Mich. Comp. Laws § 205.303) (emphasis added).

Under Act 48, a "producer" is "a person who owns,

or is entitled to delivery of a share in kind or a share of the

monetary proceeds from the sale of, gas or oil as of the time

of its production or severance." Mich. Comp. Laws §

205.312(2) (emphasis added). Thus, under Act 48, both

parties are "producers." Under Act 61. however, a

29a

Opinion - No. 96-1530, 5/22/98

"producer" is "the operator, whether owner or not, of a well

or wells capable of producing oil or gas or both in paying

quantities." Mich. Comp. Laws § 319.2(h). Only Shell

Western’s is a "producer" under Act 61. Act 61 defines an

"owner" as "the person who has the right to drill into and

produce from any pool, and to appropriate the production

either for himself or for himself and another or others." Mich.

Comp. Laws § 319.2(g). Obviously, the plaintiffs are owners

under Act 61.

The question is, then, whether Act 48, which is

incorporated by reference into Act 61’s revenue provision,

brings with it its own definition of "producer" or whether Act

48 relies, in turn, on the Act 61 definition. Notably, the Act

61 fee section does not mention 'producers'; rather, its fee is

levied on "oil and gas produced." Moreover, whereas Act 48

is a revenue-generating statute the purposes of which were

served by addressing the obligations of owners of land and

operators of wells simultaneously by defining them as one

category, the non-revenue purposes of Act 61 require separate

categories. For instance, section 319.3 allows "producers" to

select six members of the advisory board to the supervisor of

wells. "Owners" do not select any members. Similarly,

section 319.13 requires the supervisor of wells to "afford the

owner of each property in a pool the opportunity to produce

his just and equitable share of the oil or gas in the pool."

(Emphasis added.) No such consideration is given to

"producers."

When the legislature wanted to ensure that royalty

owners and well operators each paid a pro rata share of the

Act 48 tax, it clearly defined producer to include such owners

and operators and used the defined term "producer" in the

30a

Opinion - No. 96-1530, 5/22/98

taxing provision. When the legislature wanted to distinguish

between “owners” and "producers" for purposes of regulating

oil and gas wells, it clearly defined such terms and used them

appropriately throughout the regulating statute. However,

instead of levying the Act 61 fee which pays for the

regulatory scheme on either the "producer" or the "owner,"

the legislature levied it on “oil and gas produced" and

required it to be collected "in the same manner, at the same

time, and subject to the provisions of [Act 48]."

The district court read Act 61, section 22, as

incorporating all the provisions of the Act 48 taxing statute,

except Act 48's definition of "producer." Instead, the court

held that Act 61's definition of "producer" should in turn be

incorporated into the Act 48 taxing scheme, even though that

word is used only in the regulatory provisions of Act 61, and

is not referred to in section 22, the revenue provision.

However, the fact that Act 61 contains absolutely no

guidance as to the collection of the fee except for the reliance

on Act 48 -- which is explicit in its allocation -- indicates that

the legislature intended to adopt all the taxing provisions of

Act 48. Similarly, section 22 of Act 61 seems to require the

adoption of all portions of the Act 48 tax scheme in order to

give effect to all its clauses. That is, section 22 states that the

fee is to be collected (1) "in the same manner," (2) "at the

same time," and (3) “subject to the provisions of [Act 48]."

Restated another way: (1) the Act 61 fee should be collected

through the same procedures and from the same entities as the

Act 48 tax; (2) the fee should be paid monthly along with the

severance tax; and (3) the definitions of Act 48 should be

applied to the revenue-generating provision of Act 61. It is

difficult to read these three clauses any other way and still

3la

Opinion - No. 96-1530, 5/22/98

give each meaning.

The plaintiffs rely heavily on the argued distinction

between a "tax" and a "fee." They claim that the Act 48 tax

is equivalent to and in place of property taxes and thus is

payable in part by the property owner, while the Act 61 tax is

essentially a fee for the privilege of operating a well and is

thus payable solely by the operator. The Michigan Court of

Appeals, in Bauer v. Department of Treasury, 512 N.W.2d

42, 43 (Mich. Ct. App. 1993), did hold that royalty owners

who paid a pro rata share of the severance tax were exempt

from personal income tax on those same royalties, in light of

Mich. Comp. Laws § 205.315 which states that "[tJhe

severance tax herein provided for shall be in lieu of all other

taxes, state or local, upon . . . the values created.”

The plaintiffs argue that, unlike the Act 48 tax, the Act

61 fee is by nature a license, occupation, or privilege fee.

Thus, it has no natural connection to the property owners, but

rather is directed solely at the party with the license or

privilege to extract oil and gas. The court in Brown v. Shell.

Supra, supported such a distinction in holding that the

Severance tax was not a business, licensing, privilege, or

occupational tax. See Brown, 339 N.W.2d at 713. The

negative inference of this holding could be that Act 61 does

impose a license, occupation, or privilege fee. However, Act

61 was never discussed in Brown. Additionally, the court of

appeals subsequently overruled itself and found that the

severance tax is not a property tax, but an excise tax. See

543 N.W.2d 359, 362

(Mich. Ct. App. 1995).

Moreover, the general thrust of Act 61 is to provide

32a

Opinion - No. 96-1530, 5/22/98

for a supervisor of wells to oversee the extraction of oil and

gas in Michigan. The fee imposed by section 22 provides

funds for this oversight, and any excess monies collected in a

year offset the appropriation for the next year. Mich. Comp.

Laws § 319.22(4). While the plaintiffs and the district court

imply that Act 61 is designed exclusively to regulate the

conduct of well operators such as Shell Western, the oversight

provided by the supervisor of wells includes significant efforts

to protect the "correlative" rights and interests of land

owners. See Mich. Comp. Laws § 319.13(1), 319.18b.

For instance, section 18b provides a penalty for a

"person who abandons a well without properly plugging the

well," but "[nJothing herein contained shall be construed as

imposing any liability upon the owner of land upon which a

well is located, umess he is the owner or part owner of the

well." More important!v, section 13 mandates that "[t]he rules

or orders of the supervisor shall, so far as it is practicable to

do so, afford the owner of each property in a pool the

opportunity to produce his just and equitable share of the oil

or gas in the pool." Thus, although the primary purpose of

Act 61 is almost certainly to regulate the conduct of oil and

gas companies, a significant amount of this regulation appears

to protect the rights of landowners. Additionally, it should be

noted that in 1987 the legislature deleted from section 22 the

word "privilege." If this change was not merely one of

clarification, it must mean that the legislature did not intend

a mere "privilege" fee.

In light of the above, we hold that the taxing portion

of Act 61 incorporates all of the Act 48 taxing mechanism,

including the Act 48 definition of "producer." Thus, the

plaintiffs are "producers" for purposes of section 22 and are

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Opinion - No. 96-1530, 5/22/98

required to pay a pro rata share of the Act 61 fee. Shell

Western has not breached the parties’ contract.

Ill.

Because the plaintiffs are precluded from relitigating

this breach of contract claim, and because it is meritless in

any event, summary judgment for the plaintiffs is

REVERSED, and this case is REMANDED for entry of

judgment for Shell Western. Obviously, this ruling moots

Shell Western’s remaining assignments of error.

34a

APPENDIX D

Michigan Supreme Court

Lansing, Michigan

Conrad L. Mallett, Jr.

Chief Justice

James H. Brickley

Michael F. Cavanagh -

Patricia J. Boyle

Elizabeth A. Weaver

Marilyn Kelly

Clifford W. Taylor

Justices

ORDER

Entered: February 24, 1998

IN RE CERTIFIED QUESTION FROM

THE UNITED STATES COURT OF

APPEALS FOR THE SIXTH CIRCUIT

KENNETH R. HILLIARD and ) SC: 110862

GREGORY D. STYLES, ) CA-6: 96-1530

Plaintiffs-Appellees, )

)

V )

)

SHELL WESTERN E&P, INC., )

Defendant-Appellant. )

/

35a

On order of the Court, the questions certified by the United

States Court of Appeals for the Sixth Circuit are considered,

and the Court respectfully declines the request to answer the

certified questions.

Boyle and Kelly, JJ., would answer the certified questions.

H0219

I, CORBIN R. DAVIS, Clerk of the Michigan Supreme

Court, certify that the foregoing is a true and complete copy

of the order entered at the direction of the Court.

February 24,1998 /s/

Corbin R. Davis

36a

APPENDIX E

NOT RECOMMENDED FOR FULL-TEXT

PUBLICATION

No. 96-1530

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

FILED

October 22, 1997

LEONARD GREEN, Clerk

KENNETH R. HILLIARD,

GREGORY D. STYLES,

Plaintiffs-Appellees,

¥.

SHELL WESTERN E & P, INC.,

)

)

)

)

)

)

)

Defendant-Appellant. )

/

ORDER CERTIFYING QUESTIONS

TO THE SUPREME COURT OF MICHIGAN

BEFORE: MERRITT, RYAN, and HILL,” Circuit Judges.

The Honorable James C. Hill, United States Circuit Judge for

the Eleventh Circuit, sitting by designation.

37a

Order Certifying Questions - No. 96-1530, 10/22/97

This is a state-law class action originally filed in a

Michigan court and in due course removed to the United

States District Court for the Western District of Michigan.

The basis for removal was an issue of federal law involving

claims under the Racketeer Influenced and Corrupt

Organizations Act (RICO), 18 U.S.C. §§ 1961-68, which

have been dismissed from the case. The district court, in the

exercise of its supplemental jurisdiction, entered summary

judgment for the plaintiffs on issues of Michigan law and the

defendant has appealed to this court.

We are asked on appeal to decide questions that are

exclusively issues of state law regarding the proper

application of the Michigan common law of res judicata and

the interpretation of two Michigan statutes: Act No. 48 of the

Public Acts of 1929 as amended, MICH. COMP. LAWS

§ 205.301 et seq., and Act No. 61 of the Public Acts of 1939

as amended, MICH. COMP. LAWS § 319.1 et seq.

I.

Plaintiffs, Kenneth R. Hilliard and Gregory D. Styles,

trustees under a trust agreement, allege on behalf of Michigan

property owners that Shell Western E&P, Inc. has breached

contracts between the parties which allow Shell Western to

extract oil and gas from plaintiffs’ land in exchange for a

percentage of the proceeds. The breach, according to

plaintiffs, arises from Shell Western's deduction of certain

expenses before paying the plaintiffs their royalties. Shell

Western admits that it has been deducting from plaintiffs’

royalties portions of the fee levied under the authority of Act

No. 61 and the tax levied under the authority of Act No. 48,

but maintains that it is authorized by statute to do so. In

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Order Certifying Questions - No. 96-1530, 10/22/97

addition, Shell Western contends that plaintiffs could have,

and should have, raised this issue in a previous lawsuit,

Brown v. Shell Oil Co., 339 N.W.2d 709 (1983), in which

plaintiffs contested the deductions made under Act No. 48.

In Brown, representatives of the current class were

part of another class which sued Shell Western, claiming that

the Act No. 48 deductions breached the parties’ leases, which

were silent on the deductibility issue. The Michigan Court of

Appeals upheld summary judgment for Shell, finding that

because the royalty owners were "producers" under Act No.

48 they were obligated to pay their pro rata share of the tax.

Id. at 713.

In this case, plaintiffs claim that Shell Western has

breached the same leases by deducting the Act No. 61 fee.

Plaintiffs allege that unlike the Act No. 48 severance tax, this

fee must be paid by "operators" of wells, and not the owners

of the land or mineral rights. Shell Western contends that Act

No. 61 operates "in the same manner, at the same time, and

subject to the same provisions of [Act No. 48]." Therefore,

it argues, in light of the Brown precedent, which interpreted

Act No. 48, that plaintiffs are obligated to pay their pro rata

share of the Act No. 81 fee, just as they are obligated to pay

part of the Act No. 48 tax. Additionally, Shell Western notes

the great similarity between the two claims, and contends that

under Michigan claim-preclusion law, plaintiffs are precluded

from raising the issue now when they could have raised it

previously.

Il.

Resolution of the issues.raised in this case may well

39a

Order Certifying Questions - No. 96-1530, 10/22/97

have a significant impact on Michigan jurisprudence and upon

the public fisc. In our judgment, there is insufficient Michigan

decisional law to enable this court to determine how the

Supreme Court of Michigan would rule on either of the issues

presented. A correct interpretation of the Michigan law of res

judicata or claim preclusion has import for Michigan’s

jurisprudence far beyond this case.

In addition, significant sums of money are involved in

the outcome of the Act No. 61 fee issue. The jurisprudential

precedent that must necessarily be set here undoubtedly will

affect the relative burdens upon landowners and oil and gas

companies in Michigan, and necessarily will impact state

revenues.

In an instance such as this, where the state law is

unclear and the resolution of the issues before the court are so

significant, it is preferable, in the interests of comity and a

respect for our federalism, that this intermediate federal

appellate court yield the decisional ground to the Supreme

Court of Michigan for an, authoritative interpretation of the

applicable rules of state law.

Ill.

Therefore, pursuant to the provisions of Michigan

Court Rule 7.305(B), the United States Court of Appeals for

the Sixth Circuit certifies the following questions to the

Supreme Court of Michigan:

1. Whether, under the doctrine of res judicata, a

group of property owner lessors, who previously challenged

their lessee oil and gas driller's practice of deducting a pro

40a

Order Certifying Questions - No. 96-1530, 10/22/97

rata share of Act No. 48 taxes from landowners’ royalties,

and who knew or should have known that the tenant lessee

driller was at the same time deducting a share of the Act No.

61 fee, is precluded from now litigating the Act No. 61

deduction; and

2. Whether the correct interpretation of section 22

of Act No. 61, which imposes a fee on “oil and gas

produced," and which incorporates Act No. 48's provision for

collecting taxes from "producers" of gas and oil, also requires

incorporating Act No. 48's definition of "producer," or

whether Act No. 61's definition of "producer" should be

inserted into Act No. 48's collection scheme, despite the fact

that the term "producers" is not used in section 22 of Act No.

61.

Accordingly, IT IS ORDERED that the foregoing

questions be certified to the Supreme Court of Michigan and

forwarded to the Clerk of the Supreme Court under Michigan

Court Rule 7.305(B).

Nothing in this certification, including the particular

phrasing of the foregoing questions, is intended to limit the

Supreme Court of Michigan in its consideration of the issues

presented. The entire record in this case, together with copies

of the briefs of the parties, will be transmitted by the clerk of

this court to the Supreme Court of Michigan.

/s/

GILBSRT S. MERRITT,

Circuit Judge, Presiding

APPENDIX F

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

FILED

March 20, 1996

Deputy Clerk

U.S. District Court

Western Dist. of Michigan

KENNETH R. HILLIARD and )

GREGORY D. STYLES, ) Case No. 5:93-CV-21

Trustee under Trust Agreement )

dated May 5, 1979, ) HON. GORDON J.

Plaintiffs, . ) QUIST

)

V.

SHELL WESTERN E & P, INC.,

a Delaware corporation,

Defendant.

—, Ne Nee Ne es Ne”

ORDER

The Court has ap; zoved the form of judgment attached

to this Order. The Clerk shall therefore enter the Final

Judgment as attached. Fed. R. Civ. P. 58.

—

42a

Order on Final Judgment - No. 5:93-CV-21, 3/20/96

IT IS SO ORDERED.

Dated: MAR 20 1996

/s/

GORDON J. QUIST

UNITED STATES DISTRICT JUDGE

Order on Final Judgment - No. 5:93-CV-21, 3/20/96

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

FILED

March 20, 1996

Deputy Clerk

U.S. District Court

Western Dist. of Michigan

KENNETH R. HILLIARD and )

GREGORY D. STYLES, ) Case No. 5:93-CV-21

Trustee under Trust Agreement )

dated May 5, 1979, ) HON. GORDON J.

Plaintiffs, ) QUIST

)

V.

SHELL WESTERN E & P, INC.,

a Delaware corporation,

Defendant.

eee ee

FINAL JUDGMENT

This matter having come on to be heard pursuant to

diverse Motions, and the Court having entered an Order on

November 2, 1993:

2 Granting Plaintiffs' Motion for Partial

Summary Judgment on its Breach of Contract Claim:

yi Dismissing Plaintiffs' Constitutional Claims as

44a

Order on Final Judgment - No. 5:93-CV-21, 3/20/96

moot; and,

The Court having entered an Order on May 4, 1995,

dismissing Plaintiffs’ RICO Claims; and,

The Court having entered an Order on May 22, 1995,

allowing Plaintiffs to withdraw their Claims for Relief, Fraud,

and Accounting; and

The Court having entered an Order on December 8,

1993, as amended by Order dated March 28, 1995, certifying

as a Class the following:

All persons, firms, concerns, receivers, trustees,

personal representatives, agents, institutions, associations,

partnerships, corporations, companies, and persons acting

under declarations of trust who have, at any time from and

after the 12th day of January, 1987, been entitled to royalty

payments fromi Shell Western E&P, Inc. ("Shell"), attributed

to production of oil and gas from Michigan oil or gas wells

under leases with Shell and who had, during calendar years

1987 through 1993, $200 or more deducted from such

royalties for payment of the regulatory fee imposed pursuant

to Act 61 of the Michigan Public Acts of 1939, as amended.

and,

The Court having entered an Order on June 16, 1995,

approving Notice to the Class; and,

The Plaintiffs having provided Notice to the Class and

having provided appropriate Proof of Service to the Court of

such Notice; and,

45a

Order on Final Judgment - No. 5:93-CV-21, 3/20/96

The Court having received requests of the following

persons to not be included in the Class:

FREDERICK G. RIEGSEGGER

DONAVAN E. ANDERSON

TILLISSA G. ANDERSON

MARY BELLE COFFMAN

CARROL J. FOX

MARY ANN FOX

NORTH MICHIGAN GAS & OIL

MICHIGAN HOLDINGS INC (C/O SANDRA

SANDERS)

CONOCO INC

OMIMEX ENERGY INC

GWENDOLYN D. WEBB

GARY JEROME MARCLNKOWSKI

DONNA MARCENKOWSKI

KENNETH G. BAXTER

JOYCE E. BAXTER

MILTON C. MOSIER

INEZ H. MOSIER

MUSKEGON DEVELOPMENT COMPANY

WILLIAM C MYLER

MYLER BROTHERS

MARION R. STARK

SHRINERS HOSPITAL FOR’ CRIPPLED

CHILDREN

JONES CO, LTD; DELAFOSSE PROPERTIES,

LTD; JHJ EXPLORATION, LTD; AND TUCKER-

SCULLY INTERESTS, LTD

24. RONALD J. KOSI BOSKI

25. BYRON P. GALLAGHER

26. ETHEL J. GALLAGHER

=>

46a

ONIAWR WN =

i oll =p adil alll anol oll a =)

~V~ COSNAYVAYP& Ss:

Nm WM

N

N

”

Order on Final Judgment - No. 5:93-CV-21, 3/20/96

27. FIRST PRESBYTERIAN CHURCH OF MAPLE

RIDGE (C/O RUTH BRIGGS)

28. RUTH M. LOVE

29. JONES COMPANY, LTD

30. HARROLD M. RUPP

31. NORINE L. RUPP LIFE ESTATE

32. HAROLD W. MOON

33. | FLORENCE MARIE MOON

34. DAVID H. JANSMA

35. MILLER BROTHERS: CEMCO; MILLER

BROTHERS OIL CORP; MILLER OIL CORP;

MILLER ENERGY INC

36. MILDRED GHENT |

37. JUANITA BERRYHILL

38. ISABELLE K. MURPHY

39. WILLIAM L. MURPHY

40. GEORIANNA E. MCFAY

41. LOU ANN OLSEN

42. LEE OLSEN

43. JOSEPH S. PRIZY

44. SHARON L. MURPHY

45. ALICE MAE MURPHY

46. BARBARA J. CREG

47. FERRIS B. MURPHY (DECEASED)

48 FARM CREDIT SERVICES OF MICHIGAN'S

HEARTLAND, PCA

49. CHARLES R. WISE

50. BARBARA J. WISE

51 THERESA G. SCHIFF

52. WILFRED W. COLE

53. MARY JOE COLE

54. ROBERT G. WILDER

55. JOAN SEABROOK

Order on Final Judgment - No. 5:93-CV-21, 3/26/96

56.

57.

38.

59.

60.

61.

62.

63.

64.

65.

66.

67.

68.

69.

70.

71.

Ta.

73.

AILEEN P. STOCKING

PATRICK PETROLEUM COMPANY

LARRY M. BAHR

LOIS M. BAHR

EDWARD REVARD

ADRIAN REYNOLDS

DONNA M. SHAY

CATHERINE E. ISAACSON

ROBERT D. VROMAN

MAXINE L. SCHIMKE

KENNETH W. SCHIMKE

DOROTHY L. MEKARU

GARY A. WILLIAMS

KATHLEEN M. WILLIAMS

HARRY L. MUTCH

A. CLAIRE MUTCH c/o MARY W. MUTCH

ESTATE

GARY MARCENKOWSKI

TRAVERSE OIL COMPANY

The Court having noted that the following list contains

those class members to whom Notice submitted by first class

mail was returned undelivered, and the Court finding that no

aiternative form of service is reasonable; therefore the

following will also be excluded from the class:

1.

AMS ww

JACQUEILINE M. GILLARD TRUSTEE UNDER

TRUST #100 DATED APRIL 4, 1985

SALLY J. LIPPERT, DECEASED

GARY P. STEELE

LOUIS CHRISTIANSEN

JIMBETCO INC.

ROBERT L. NUGENT

48a

Order on Final Judgment - No. 5:93-CV-21, 3/20/96

NOW, THEREFORE, IT IS ORDERED AND

ADJUDGED that:

1. The Plaintiffs, as a Class, shall recover from

Defendant, Shell Western E&P, Inc. ("Shell"), the sum of

Seven Hundred Sixty-Six Thousand Six Hundred Twenty-Two

Dollars and 06/100 ($766,622.06), which represents the

amounts deducted by Shell from royalty payments to members

of the class for the Act 61 regulatory fees for the period of

January 13, 1987, to January 13, 1993. The Plaintiffs, as a

class, shall also recover all Act 61 regulatory fees deducted by

Shell between January 14, 1993, and the date of this Final

Judgment, and through payment in full.

2: The Plaintiffs, as a Class, shall recover pre-

complaint interest from Shell.

3. The Plaintiffs, as a Class, shall recover pre-

judgment interest from Shell, from January 14, 1993, up to

and including the date of entry of this Final Judgment.

4. All pre-complaint and pre-judgment interest

shall be calculated by taking the total amount due as of

December 31 of each year, and applying the floating

Michigan pre-judgment interest rate described in M.C.L.

600.6013 in effect as of December 31 of said year, applied

beginning from January 1 of the following calendar year, and

then in the same manner for such full years or portions of full

years thereafter until the date that this judgment is entered.’

1

By way of.example only, if the total principal owed as of

December 31, 1987, was $100, then the principal and pre-

49a

Order on Final Judgment - No. 5:93-CV-21, 3/20/96

5. This Final Judgment shall earn post-judgment

interest at the rate prescribed in 18 U.S.C. § 1961.

6. All interest due under this Final Judgment shall

be paid by Shell to the Common Fund based on the gross

recovery to the class. The precise amount of all post-filing

damages, pre-complaint interest, pre-judgment interest, and

post-judgment interest paid by Shell to the Common Fund and

subsequently distributed to the class members shall be

determined by this Court when it makes its Order of

Distribution to Class members after all appeals are final.

7. This Court grants Plaintiffs’ request for

declaratory relief. Shell's deduction of the Act 61 fee is a

breach of contract; the class members are not liable for any

portion of the Act 61 regulatory fee; and Shell is not entitled

to deduct any portion of the Act 61 regulatory fee from

royalty payments to class members.

complaint interest would be calculated by taking $100 multiplied by

the interest rate of 8.50%, which is the M.C.L. 600.6013 effective

interest rate as of December 31, 1987. Interest wouid begin running

on the $100 as of January 1, 1988. The new principal plus interest

would then be calculated at the end of each succeeding calendar

year beginning December 31, 1988, and the new interest rate

would be applied at the beginning of calendar year beginning

January 1, 1989, and so forth. The interest calculation would be

continued up 10 the date Final Judgment is entered. The following

interest rates shai! be used in the calculation cf pre-complaint and

pre-judgment interest, as of the beginning of these years: 1988 -

8.50%, 1989 - 9.21%, 1990 - 10.105%, 1991 9.535%, 1992 -

8.715%, 1993 - 7.68%, 1994 - 6.313%, 1995 - 7.128%, 1996 -

7.813%, and 1996 - 7.953%.

50a

Order on Final Judgment - No. 5:93-CV-21, 3/20/96

8. All amounts found to be owed under this Final

Judgment shall be paid by Shell into a Common Fund for the

benefit of class members. This Court retains jurisdiction to

make all necessary Orders relative to the distribution of that

Common Fund. The Common Fund shall be maintained by

Shell in the form of a segregated account at a financial

institution of its choice, and Shell shall provide quarterly

balance statements to Plaintiffs' counsel. Shell shall have the

option to post sufficient bond to be approved by this Court in

lieu of paying the amounts into a Common Fund.

9. This Court retains jurisdiction over this matter

to grant such further and proper relief that becomes

necessary, including but not limited to the award of attorneys

fees and expenses from the Common Fund and the

enforcement of the declaratory judgment under 28 U.S.C.

§ 2202.

Dated: 3/20/96 /s/

CLERK, U.S. DISTRICT COURT

Sla

APPENDIX G

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

FILED

July 20, 1995

U.S. District Court

Western District of Mich.

KENNETH R. HILLIARD and )

GREGORY D. STYLES, ) Case No.

Trustee under Trust ) 5:93-CV-21

Agreement dated May 5, 1979, )

Plaintiffs, ) HON.

) GORDON J.

vs. ) QUIST

)

SHELL WESTERN E & P, INC..

a Delaware corporation,

Defendant.

OPINION AND ORDER DENYING SHELL'S

MOTION FOR RECONSIDERATION

Defendant, Shell Western E & P Inc. (Shell), has filed

a Motion for Reconsideration and for Relief From Order of

this Court, which Order is dated June 13, 1995. In the

Opinion and Order of June 13, 1995, this Court denied Shell's

ee ee

52a

ee ee Re ee

Opinion and Order - No. 5:93-CV-21, 7/20/95

motion to apply the doctrine of res judicata to bar the named

plaintiffs (who are the representatives of the class that this

Court has certified) from pursuing this action. Shell claims

the named plaintiffs were apprised that the "privilege fee" was

being deducted from their royalty checks even if the other

class members were not so apprised. Shell says that granting

the motion for partial res judicata for the named plaintiffs,

| only, would not destroy the class nature of this case and that

this Court did not pay enough attention to three of the

documents that Shell brought to this Court's attention.

As this Court said in its Opinion of june 13, 1995, the

first time that Shell raised the point of a limited application of

the res judicata argument was after the Court ruled on the

general application of res judicata and all substantive matters.

Shell was never prevented from raising the issue of limited

application of the doctrine in the alterative to the general

application, although there are probably good tactical reasons

for Shell's not having done so. The point is that by May 12,

1995, this case, one of the oldest on this Court's docket, had

been concluded except for some important details regarding

class notification. It was at this point that Shell sought, for the

first time, to have the class representatives dismissed, thereby

depriving the class of their class representatives. New class

representatives could possibly be appointed, but this would

cause delay.

More importantly, a review of the law and the record

does not lead this Court to change its earlier decision that

Michigan's "broad rule" does not apply in this case.

Michigan's "broad rule" has been defined as follows:

The plea of res judicata applies, except in

53a

q

Opinion and Order - No. 5:93-CV-21, 7/20/95

special cases, not only to points upon which

the court was actually required by the parties

to form an opinion and pronounce a judgment,

bet :

the litigation, and which the parties exercising

reasonable diligence, might have brought

forward at the time. i ,

Rogers v. Colonial Fed']

Savings & Loan Ass'n, 405 Mich. 607, 616 -

17 (1979) (emphasis in original).

Plaintiffs privilege fee claims before this Court are not

simply alternative theories of relief for the same set of

operative facts. Unlike Gose v. Monroe Auto Equipment Co..

409 Mich. 147 (1980) and Cj icati

of Detroit, 888 F.2d 1081, 1088-91 (6th Cir. 1989), for

example, the instant case does not involve a single right to

recover for a worker's injury (Gose) or a single transaction

which gave rise to contract claims and constitutional Claims

(City Communications). Rather, the instant case involves

entirely different, individual, and Ongoing breaches of

contract requiring construction of separate state statutes,

which breaches occurred both before and after the alleged

breaches asserted in state courts were litigated to conclusion

or settled. Only the deductibility of the severance tax was

litigated to conclusion before the state courts. The litigation

now before this Court does not deal with the severance tax.

Nor is this Court aware of any document which asserted that

the privilege fee issue was settled or was even discussed

during the settlement negotiations in the state court matter.

The documents to which Shell refers in its motion now

under consideration refer to the severance tax and the

“privilege tax." However, Exhibits D and J are documents

54a

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Opinion and Order - No. 5:93-CV-21, 7/20/95

which, in this Court's judgment, do not fairly apprise the

plaintiffs of the deductions to the extent that the privilege fee

was ever before the parties and considered as a claim to be

forgiven for all time. The response of Hubert W. Johnson to

the question of Mr. Dale A. Rhoades, attorney for plaintiffs

in Black v. Shell, likewise is not fair apprisal. This one

answer may show that Mr. Rhoades was asleep at the switch

in not following through on the answer and thereby expanding

on the details of the deduction of the privilege fee. But, it is

not unusual in a deposition to listen to answers with one ear

because the questioner is often concentrating on establishing

a particular point the questioner wishes to make.

It seems to this Court that if Shell had wanted or

thought that the issue of the privilege fee should be concluded

in the state court litigation, the settlement documents would

have clearly so indicated. The settlement covered many

specific items, but it did not cover the privilege fee. It does

not make sense that Shell, with its bank of outstanding

lawyers, would have tried to rely upon the doctrine of res

judicata if it thought that the privilege fee issue had been

settled. Shell either was absolutely sure that there would be no

question of the propriety of the deduction of the privilege fee,

purposefully kept a very low profile during the state court

litigation so that the plaintiffs would not pursue the deduction,

or, like the plaintiffs, simply missed the issue.

In conclusion, the plaintiffs' attorneys' potential

knowledge of bits and pieces of information regarding the

privilege fee did not give rise to an unreasonable lack of

diligence as to forever \bar the named plaintiffs from collecting

the full royalties under their leases.

55a

Opinion and Order - No. 5:93-CV-21, 7/20/95

For the foregoing reasons, Defendant's Motion For

Reconsideration (docket no. 111) is hereby DENIED.

IT IS SO ORDERED

Dated: JUL 20, 1995

/s/

GORDON J. QUIST

UNITED STATES DISTRICT JUDGE

56a

APPENDIX H

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

FILED

June 13, 1995

U.S. District Court

Western District of Mich.

KENNETH R. HILLIARD and )

GREGORY D. STYLES, ) Case No.

Trustee under Trust ) 5:93-CV-21

Agreement dated May 5, 1979, )

Plaintiffs, ) HON.

) GORDON J.

vs. ) QUIST

)

SHELL WESTERN E & P, INC., )

a Delaware corporation, )

Defendant. )

/

OPINION AND ORDER DENYING SHELL’S

MOTION FOR LIMITED APPLICATION

OF RES JUDICATA

The defendant, Shell Western E&P, Inc., has moved

for Limited Application of Res Judicata, dismissing the claim

of the named plaintiffs (class representatives) in the state court

57a

Opinion and Order - No. 5:93-CV-21, 6/13/95

action of i This motion will be

denied for the following reasons:

1. Granting the motion would destroy the class

action nature of this case in that:

(a) This matter was certified as a class action

on December 8, 1993;

(b) There would no longer be questions of law

or fact common to the class;

(c) The claims of the class representatives

wow'd not be typical of the claims or defenses, of the

Ciass;

(d) The class representatives would no longer

have any incentive to fairly and adequately protect the

interests of the class because they would be barred

from any recovery in this case.

(¢) The issue of application of the doctrine of

res judicata solely to the class representatives in

i was not raised by Shell

until all substantive issues, including the res judicata

issue, were decided by this Court.

& This Court's review of the record in Brown v.

Shell_Oil Company, reveals that plaintiffs in that case,

including piaintiffs' class representatives, were not fairly

apprised of the fact that Shell was deducting the Act 61

"privilege fee" from the royalties due the lessors. This lack of

fair notice deprived the lessors of the Opportunity to bring the

58a

Opinion and Order - No. 5:93-CV-21, 6/13/95

claim for wrongful deduction of the Act 61 privilege fee to the

attention of the class members and the state court. Basically,

Shell's position is that “because you did not discover the

deduction in Brown y. Shell Oil company, we can stick you

with your naivete in the instant litigation." This Court is not

aware of any case that would support so broad an application

of res judicata.

THEREFORE, IT IS ORDERED that Shell's Motion

For Limited Application Of Res Judicata (docket no. 105) is

DENIED.

Dated: June 13, 1995

/s/

GORDON J. QUIST

UNITED STATES DISTRICT JUDGE

59a

APPENDIX I

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

FILED

May 4, 1995

U.S. District Court

Western District of Mich.

KENNETH R. HILLIARD and )

GREGORY D. STYLES. ) Case No.

Trustee under Trust ) 5:93-CV-21

Agreement dated May 5, 1979, )

Plaintiffs, ) HON.

) GORDON J.

vs. ) QUIST

SHELL WESTERN E & P. INC.,

a Delaware corporation,

>

ee ee

for violation of subsection 1962(b) of the federal Racketeer

Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.

§ 1962(b), over which this Court would have jurisdiction

Opinion and Order - No. 5:93-CV-21, 5/4/95

pursuant to 18 U.S.C. § 1964(c). The plaintiffs have been

certified as a class of holders of royalty interests as lessors of

mineral rights leased to defendant Shell Western E&P, Inc.

(Shell). Plaintiffs claim that Shell has wrongfully deducted

from their royalty payments a 1% pro rata share of the

regulatory fee imposed by Act 61 of the Michigan Public Acts

of 1939, as amended. M.C.L.A. 319.1 et seq., M.S.A.

13.139 (Act 61).

Previously, this Court held that the deduction of the

Act 61 privilege fee from the royalty payments was a breach

of contract. This Court also held, on the basis of the record

before it at that time, that the res judicata defense of Shell was

not ripe, and was, therefore, denied. This Court also held

that, unlike subsection 1962(c) of RICO, subsection 1962(b)

does not require a "person" that is separate and distinct from

the "enterprise". However, this Court said in its earlier

Opinion, _ This is not to say that the plaintiff bes stated or can

prove a RICO violation."

Shell has now filed new motions for summary

judgment based upon the doctrine of res judicata and for

failure of Count V to state a claim under RICO subsection

1962 (b). Plaintiffs previously moved to strike Shell's

collateral estoppel/res judicata defenses. Plaintiffs' motion

was denied without prejudice but will be addressed in this

Opinion.

The facts upon which this decision rests are more fully

set forth in this Court's Opinion of November 2, 1993.

STANDARDS FOR DECISION

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Opinion and Order - No. 5:93-CV-21, 5/4/95

The summary judgment standards on the res judicata

issue are also set forth in the Opinion of November 2, 1993.

The RICO action may be dismissed if Count V fails to

state a claim upon which relief can be granted. Fed. R. Civ.

P 12(b)(6). The moving party has the burden of proving that

no Claim exists. All factual allegations in the complaint must

be presumed to be true and reasonable inferences must be

made in favor of the non-moving party. 2A James W. Moore,

Moore's Federal Practice { 12.07[2.5] (2d ed. 1991).

Dismissal is proper "only if it is clear that no relief could be

granted under any set of facts that could be proved consistent

with the allegations." Hi ing, 467 U.S.

69, 73, 104 S. Ct. 2229, 2232 (1984). Dismissal is also

proper if the complaint fails to allege an clement necessary for

relief or "if an affirmative defense or other bar to relief is

apparent from the face of the complaint, such as the official

immunity of the defendant... .” 2A James W. Moore,

Moore's Federal Practice, ¢ 12.07[2.5] (2d ed. 1991).

RES JUDICATA

Shell claims that the decision and settlement of the

prior actions of Brown v.. Shell, No. 81-885 8-CK in the

Grand Traverse County Circuit Court, and Black v. Shell,

No. G82-833CA(7)’, in the Western District of Michigan bar,

by the doctrine of res judicata (more recently called, claim

preclusion), plaintiff’ s current claims for wrongful deduction

of the Act 61 privilege fee. Shell, in the first instance,

contends that the plaintiffs’ suit in Brown "constituted an all

* The Black case was voluntarily dismissed.

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Opinion and Order - No. 5:93-CV-21, 5/4/95

encompassing challenge to Shell's calculation of royalty

payments and included the claim that inappropriate deductions

were made from royalty checks." Shell Res Judicata Brief at

4. This statement is not correct as to the deductions of the Act

61 privilege fee which is the subject of the instant case. The

record in Brown does contain a reference to the Act 61

privilege fee in plaintiffs’ brief in opposition to Shell's motion

to dismiss the severance tax aspect of Brown, but that

reference is in the context of explaining the act 48 severance

tax. The Michigan Court of Appeals certainly did not rule on

the deductibility of the Act 61 privilege fee from the royalties.

Brown v. Shell Oil Co., 128 Mich. App. 111 (1983), appeal

denied, 424 Mich. 867 (1986), cert. denied, 479 U.S. 824,

107 S. Ct. 97 (1986). The record, taken in the light most

favorable to Shell, simply does not support any reasonable

conclusion that the parties in Brown, that is Shell and the

class members in Brown, or the plaintiffs’ attorneys, were

considering the Act 61 privilege fee when Brown was being

litigated.

To the contrary, the record in Brown supports the

position that the deduction of Act 61 privilege fee was not

being litigated in Brown. Brown had two aspects - a litigation

to conclusion aspect and a settlement aspect. The deductibility

by Shell of the Act 48 severance taxes was litigated to

conclusion. As stated, there is no court decision on the

deductibility of the Act 61 privilege fee. The plaintiffs’ other

claims against Shell in Brown and Black were settled. The

notice to the Brown class members of the terms of the

settlement set forth the plaintiffs' claims as follows:

A. Plaintiffs claim royalty owners are entitled to

be paid royalties based upon the value of products

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Opinion and Order - No. 5:93-CV-21, 5/4/95

which are manufactured at the Kalkaska Gas Plant and

are attributable to their lease. Alternatively, plaintiffs

claim that the difference between the total value of

those plant products and the value actually credited to

the lease is excessive.

B. Plaintiffs claim Shell is not authorized to

deduct from royalties costs for dehydration,

compression, and sour-gas treatment.

c. Piaintiffs claim Shell is not authorized to

withhold from royalty payments amounts necessary to

pay pro-rata share of the Michigan Oil and Gas

Severance Tax. Plaintiffs' severance tax Claims are not

affected by the settlement agreement explained below.

D. Plaintiffs claim Shell breached the oil and gas

leases and they should be canceled.

On the issue of whether the court decision in Brown resolved

the deductibility of the Act 61 privilege fee, it is important

that in paragraph C of this notice the parties, which prepared

the notice, and the court, which approved of the notice

specifically mention the severance tax, which was part of the

litigated aspect of the case, and only the severance tax, as not

being part of the settlement. Thereby, the parties agreed that

the Act 61 privilege fee was not part of the Brown litigation

over the deductibility of the Act 48 severance taxes.

Nor is the deductibility of the Act 61 privilege fee part

of the settlement. The Act 61 privilege fee is not mentioned

in the pleadings, settlement documents or notice to the class

members. The specific mention of the items that were settled

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Opinion and Order - No. 5:93-CV-21, 5/4/95

without mentioning the Act 61 privilege fee shows that the

Act 61 privilege fee was not settled. In fact, plaintiffs’

attorneys still contend that they did not even know that the

Act 61 privilege fees were being deducted when Brown was

settled.

If Shell is to succeed in its res judicata argument, it

must do so by application of Michigan's "broad rule" to the

facts of this case. As this Court pointed out in its prior

opinion, under Michigan law the doctrine of res judicata is

used “to bar both claims actually litigated by parties in prior

actions and claims that could have been, but were not

litigated.” City Communications, Inc, v, City of Detroit, 888

F.2d 1081, 1089 (6th Cir. 1989). There is no Michigan

decision of which either party or the Court is aware which

holds that Michigan's broad res judicata rule applies or does

not apply in a class action situation.

This Court concludes that Michigan's broad rule

should not be applied in the context of a class action such as

the action now before this Court. This Court agrees that

Michigan's broad rule is generally a good rule for the orderly

resolution of disputes between parties. However, where class

actions are involved, this Court believes that protection of the

class members should override the finality that Michigan's

broad rule would afford. Both the state and federal rules for

class actions provide a range of protections for the class

members. For example, the class representatives must fairly

and adequately protect the interests of the class. The class

members in Brown were given notice of the nature of the

claim being asserted on their behalf. They were also given

notice of the terms of the settlement. No notice to the class

members informed them that their claims for wrongful

65a

Opinion and Order - No. 5:93-CV-21, 5/4/95

deduction of the Act 61 privilege fee were at issue in the

litigation or were being settled. An individual class member

could well have objected to the proposed settlement if. the

member knew that a claim for wrongful deduction of the Act

61 privilege fee was being settled. If there had been such an

objection, perhaps the state circuit judge, in performing his

duty to the class, would not have approved the settlement.

Certainly, (in hindsight) the class representatives could not

have been adequate representatives of the class if they

unknowingly disposed of Act 61 privilege fee claims. In

short, this Court believes that a class action settlement should

not bar all claims that could have been litigated between the

parties but only those claims that were actually litigated.

Otherwise, the notices, representatives and courts upon which

individual class members rightfully rely would be

meaningless.

For these reasons, Shell's motion for s

judgment on the grounds of res judicata will be denied. For

these same reasons, plaintiffs' motion to strike Shell's

collateral estoppel/res judicata affirmative defenses will be

granted.

RICO

In order to state a claim under the Racketeer

Influenced and Corrupt Organizations Act ("RICO") 18

U.S.C. § 1964(c), a plaintiff must allege (1) an injury to

plaintiff's business or property as a result of (2) defendant's

violation of one or more provisions of 18 U.S.C. § 1962.

i 473 U.S. 479, 495, 105

S. Ct. 3275, 3284 (1985). Section 1962 has four subsections -

§ 1962 (a)- (d). 18 U, S.C. § 1962 (a), prohibits any person

66a

Opinion and Order - No. 5:93-CV-21, 5/4/95

from using investment income derived from a pattern of

racketeering activity in any interstate enterprise. 18 U.S.C.

§ 1962(b), the subsection upon which plaintiffs are relying in

the instant case, states as follows:

(b) It shall be unlawful for any person

through a pattern of racketeering activity or through

collection of an unlawful debt to acquire or maintain,

directly or indirectly, any interest in or control of any

enterprise which is engaged in, or the activities of

which affect interstate of foreign commerce.

18 U.S.C. § 1962 (c), makes it unlawful, for "any person

employed by or associated with" an interstate "enterprise" to

conduct the affairs of the enterprise through a pattern of

racketeering activity. 18 U.S.C. § 1962(d), makes it unlawful

to conspire to violate the previous subsections of 1962. As

"chapter headings," § 1962(a) may be called the "investment"

section; § 1962 (b) may be called the “acquisition or control"

section; § 1962(c) may be called the "conducting" section;

and § 1962(d) may be called the “conspiracy” section.

Because the plaintiffs rely upon § 1962(b) in an

attempt to state a RICO claim in this case, this Court will

analyze the pleading elements of that particular subsection.

This Court believes that one of the clearest descriptions of the

requirements of S 1962(b) is found in Lightning Lube. Inc. v.

Witco Corp., 4 F.3d 1153, 1190 (3d Cir. 1993):

In order to recover under this section, a plaintiff must

show injury from the defendant's acquisition or

control of an interest in a RICO enterprise, in addition

to injury from the predicate acts. "Such an injury may

67a

Opinion and Order - No. 5:93-CV-21, 5/4/95

be shown, for example, where the owner of an

enterprise infiltrated by the defendant as a result of

racketeering activities is injured by the defendant's

acquisition or control of his enterprise." In addition,

the plaintiff must establish that the interest or control

of the RICO enterprise by the person is as a result of

racketeering. It is not enough for the plaintiff merely

to show that a person engaged in racketeering has an

otherwise legitimate interest in an enterprise. Rather,

it must be established firmly that there is a nexus

between the interest and the alleged racketeering

activities.

4 F.3d at 1190 (Citations omitted) (emphasis added). In

Lighting Lube, the United States Court of Appeals for the

Third Circuit affirmed the district court's dismissal of the

§ 1962(b) claim because the plaintiff failed to allege how the

“acquisition of interest” and “control” of the " enterprise by

defendant injured plaintiff:

As stated above, a well-pled complaint under

section 1962(b), just as with section 1962(a), requires

the assertion of an injury independent from that caused

by the pattern of racketeering. Here, Lightning Lube

alleges in terms of a section 1962(b) injury that the

employees of Witco are engaged in a pattern of

racketeering. RICO Case Statement at 73. Such an

allegation clearly is insufficient because it merely

parrots the same injury that section 1962 (c) is meant

to remedy and fails to explain what additional injury

resulted from the person's interest or control of the

enterprise.

Opinion and Order - No. 5:93-CV-21, 5/4/95

Id. at 1191. The classic example of a § 1962(b) injury is

where the owner of a legitimate business is injured by

infiltration of the business by racketeering activity such as

loan sharking or extortion. F/V Robins Nest, Inc. v. Atlantic

Marine Diesel. Inc., Nos. 92-3900, 1994 WL 594592,

(D.N.J. Oct. 14, 1994). Several other cases describe the

independent injury requirement of § 1962(b). E.g., Danielsen

y. Burnside-Ott Aviation Training Center Inc., 941 F.2d

1220, 1231 (D.C. Cir. 1991).; Banks v. Wolk, 918 F.2d 418

(3rd Cir. 1990); Greenburg v. Tomlin, 816 F. Supp. 1039

(E.D. Pa. 1993).

In this particular case, the plaintiffs allege that Shell

engaged in a series of predicate acts of mail fraud by mailing

royalty checks and other documents to plaintiffs without ever

disclosing to plaintiffs that defendants were deducting the Act

61 privilege fee. Thus, plaintiffs do not allege that Shell's

mail fraud caused Shell to gain or maintain control of an

enterprise to plaintiffs’ injury. If plaintiffs had made such

allegations, they would not make sense. For example, as

stated in Brown v. Siegel, No. 94-1829, 1995 WL 66860, at

*4 (E.D. Pa. Feb. 13, 1995):

[I]t is also counter intuitive to assert that an

enterprise . . . could gain or maintain control

of itself through a pattern of racketeering

activity.

Plaintiffs simply claim that the allegedly fraudulent

scheme itself caused them injury. In fact, at oral argument,

plaintiffs conceded that they have not alleged an injury arising

from acquiring or maintaining control which is separate and

distinct from the alleged predicate acts. They point out,

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Opinion and Order - No. 5:93-CV-21, 5/4/95

however, that RICO must be liberally construed. Pub. L. 91-

452, § 904(a), 84 Stat. 922, 947 (1970); Sedima, 473 U.S. at

498, 105 S. Ct. at 3286. Plaintiffs then argue that because the

predicate acts are mail fraud and Congress did not create a

private remedy for mail fraud, this Court should imply that

RICO created a private remedy for mail fraud.

As defendant points out, there are adequate remedies for fraud

in state common law. Furthermore, there is a significant

difference between construing a statute liberally and

legislating from the bench. As the Supreme Court said in

— U.S. _, 113 S. Ct. 1163, 1172

(1993), the liberal construction provision of RICO

is not an invitation to apply RICO to new

purposes that Congress never intended. Nor

does the clause help us to determine what

purposes Congress had in mind. Those must

be gleaned from the statute through the normal

means of interpretation.

If Congress had wished to create a private remedy for

mail fraud, it could have done so. The RICO statute,

however, is not intended to create federal, private remedies

for everything that Congress has made a federal crime.

Rather, § 1964(c) of RICO only provides a private right of

action against those who commit any of the activities

prohibited in § 1962.

Plaintiffs have not stated a claim under 18 U.S.C. §

1964(c). Therefore, defendant's motion to dismiss Count V of

the Complaint will be granted, and plaintiffs' RICO claim will

be dismissed.

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Opinion and Order - No. 5:93-CV-21, 5/4/95

A separate Order consistent with this Opinion will

be entered.

Dated: May 4, 1995

/s/

GORDON J. QUIST

UNITED STATES DISTRICT JUDGE

Tila

Opinion and Order - No. 5:93-CV-21, 5/4/95

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

FILED

May 4, 1995

U.S. District Court

Western Dist. of Mich.

KENNETH R. HILLIARD and

GREGORY D. STYLES,

Trustee under Trust

Agreement dated May 5, 1979,

Plaintiffs,

vs.

SHELL WESTERN E & P, INC.,

a Delaware corporation,

Defendant.

)

) Case No.

) 5:93-CV-21

)

) HON.

) GORDON J.

) QUIST

)

)

)

)

/

ORDER

In accordance with Opinion issued on this date,

IT IS HEREBY ORDERED that plaintiffs’ Motion to

strike affirmative defenses of collateral estoppel/res judicata

(docket no. 59) is GRANTED.

IT IS FURTHER ORDERED that defendant's Motion for

summary judgment on the grounds of res judicata (docket no.

74) is DENIED.

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Opinion and Order - No. 5:93-CV-21, 5/4/95

IT IS FURTHER ORDERED that defendant's Motion

for partial summary judgment to dismiss count V of the

complaint (docket no. 75) is GRANTED as to the RICO claim

and plaintiffs’ RICO claim is DISMISSED.

IT IS FURTHER ORDERED that defendant's motion

to dismiss de minimis claims (docket no. 76) is now moot

pursuant to the Order docketed as number 91.

Dated: May 4, 1995

/s/_

GORDON J. QUIST

UNITED STATES DISTRICT JUDGE

73a

APPENDIX J

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

FILED

November 2, 1993

U.S. DISTRICT COURT

WESTERN DIST OF MICH

BY/s/

KENNETH R. HILLIARD and )

GREGORY D. STYLES, ) Case No. 5:93-CV-21

Trustee under Trust Agreement )

dated May 5, 1979, ) HON. GORDON J.

Plaintiffs, ) QUIST

Vv.

SHELL WESTERN E & P, INC.,

a Delaware corporation,

Defendant.

ORDER

In accordance with the Opinion issued on this date,

IT IS HEREBY ORDERED that plaintiffs’ motion for partial

summary judgment on its breach of contract claim (docket

#13) is GRANTED.

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Order and Opinon - No. 5:93-CV-21, 11/2/93

IT IS FURTHER ORDERED that defendant's motion for

dismissal or summary judgment (docket #12) is GRANTED

IN PART AND DENIED IN PART. On the claims of breach

of contract, fraud, and RICO, defendant's motion is

DENIED. On plaintiffs' accounting claim, defendant's

unopposed summary judgment motion is GRANTED.

IT IS FURTHER ORDERED that plaintiffs’

constitutional claim is DISMISSED AS MOOT.

IT IS FURTHER ORDERED that plaintiffs submit a

Supplemental brief on class certification no later, than

November 22, 1993.

Dated: November 2 1993

/s/

GORDON J. QUIST

UNITED STATES DISTRICT JUDGE

75a

Order and Opinion - No. 5:93-CV-21, 11/2/93

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

FILED

November 2, 1993

U.S. DISTRICT COURT

WESTERN DIST OF MICH

BY/s/

KENNETH R. HILLIARD and )

GREGORY D. STYLES, ) Case No. 5:93-CV-21

Trustee under Trust Agreement )

dated May 5, 1979, ) HON. GORDON J.

Plaintiffs, ) QUIST

) ~_

¥.

SHELL WESTERN E & P, INC.,

a Delaware corporation,

Defendant.

a, Nee Ne Se Se Se”

OPINION

Plaintiffs are holders of royalty interests as lessors of

mineral rights in oil wells leased to defendant Shell Western

E&P, Inc. (Shell). They claim that Shell has wrongfully

deducted from their royalty payments a 1% pro rata share of

the regulatory fee imposed under the Michigan Supervisor of

Wells Act, Act 61 of the Michigan Public Acts of 1939, as

amended, M.C.L.A. 319.1 et seg., M.S.A. 13.139 (Act 61).

Shell acknowledges that it has deducted the fee, but denies

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Order and Opinion - No. 5:93-CV-21, 11/2/93

that it has acted wrongfully.

Defendant' s Positi

Shell moved for summary judgment on all counts of

plaintiffs' Complaint. With respect to Count I, which alleges

that Shell has breached its contracts by deducting the fee,

Shell argues that it acted within its rights on the authority of

Brown v. Shell Oil Co., 128 Mich. App. 111, 339 N.W.2d

709 (1983), appeal denied, 424 Mich. 867 (1986), cert.

denied, 479 U.S. 824, 107 S. Ct. 97 (1986). Brown v. Shell

held that royalty payments were subject to severance taxes on

oil and gas assessed pursuant to another Michigan statute, Act

48 of the Michigan Public Acts of 1929 as amended, M.C.L.A.

205.301-205.315, M.S.A. 7.351-7.365 (Act 48). Shell also

alleges that Count I is barred by res judicata because plaintiffs’

claim includes the same parties and a claim arising out of the

same circumstances as the first case, which claim cou! _ have

been raised in the earlier case.

On Count II, which requests that the Court declare Act

61 unconstitutional if it is read to require payment by lessors,

Shell maintains that the issue is not ripe for constitutional

adjudicaticn because it is pled as alternative relief. Shell also

seeks to disraiss Count II on the grounds that plaintiffs have

sued the wrong party and must bring the constitutional claim

against the taxing body and not against Shell.

In Count III, plaintiff; claim that Shell's repeated

deduction of the Act 61 fee under the guise of a "severance tax"

constituted fraud. Shell argues that judgment should be entered

against plaintiffs on the fraud claim because there has been no

material misrepresentation and no intent to deceive. It also

maintains that this claim should be dismissed because plaintiffs

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Order and Opinion - No. 5:93-CV-21, 11/2/93

failed to plead sufficien: facts to show a specific intent to

deceive and failed to plead reliance or damages as a result of

reliance.

Count IV requests an accounting. Shell argues that

plaintiff has not pled sufficient facts to justify the equitable

remedy of an accounting and that the availability of discovery

makes an accounting unnecessary.

With respect to Count V, a RICO claim, Shell argues

that plaintiffs have failed to state a claim for mail fraud for the

same reasons they failed to state a general claim for fraud. Shell

also maintains that plaintiffs have failed to allege damages to

business or property as a result of the alleged fraud. In a

supplemental motion, Shell seeks dismissal on the grounds that

plaintiffs failed to allege the existence of a "person" separate

and distinct from an "enterprise" as required by 18 U.S.C. S

1962(b) and failed to allege the elements of mail fraud with

sufficient particularity.

Plaintiffs’ Positi

Plaintiffs moved for summary judgment only on Count

I, on the issue of the legality of deducting the Act 61 fee from

their royalty payments. They argue that the payment is a

regulatory fee which Shell is not authorized to deduct in the

absence of lease language permitting such a deduction.

In response to Shell's motion, plaintiffs assert that their

claim is not blocked by res judicata because Brown v. Shell,

supra, addressed a different type of fee or tax and thus dealt

with a different issue. Plaintiffs maintain that the constitutional

challenge in Count II is valid because a reading in favor of

Shell-would: violate the Michigan Constitution. On Counts III

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Order and Opinion - No. 5:93-CV-21, 11/2/93

and V, the fraud and RICO counts, plaintiffs argue that there

are questions of fact that bar summary judgment. They do not

disagree with defendant that the equitable relief of an

accounting requested in Count IV is unnecessary in this

instance.

DISCUSSION

Standard for Summary Judgment

Summary judgment is appropriate if there is no genuine

issue as to any material fact and the moving party is entitled to

a judgment as a matter of law. Fed. R. Civ. P. 56. The rule

requires that the disputed facts be material. Material facts are

facts which are defined by substantive law and are necessary to

apply the law. A dispute over trivial facts which are not

necessary in order to apply the substantive law does not prevent

the granting of a motion for summary judgment. Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 2510

(1986). The rule also requires the dispute to be genuine. A

dispute is genuine if a reasonable jury could return judgment

for the nonmoving party. Id. This standard requires the non-

moving party to present more than a scintilla of evidence to

defeat the motion. The summary judgment standard mirrors the

standard for a directed verdict. The only difference between the

two is procedural. Summary judgment is made based on

documentary evidence before trial, and directed verdict is made

based on evidence submitted at trial. 477 U.S. at 250-51, 106

S. Ct. at 2511.

A moving party who does not have the burden of proof

at trial may properly support a motion for summary judgment

by showing the court that there is no evidence to support the

non-moving party's case. Celotex Corp. v. Catrett, 477 U.S.

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Order and Opinion - No. 5:93-CV-21, 11/2/93

317, 324-25, 106 S. Ct. 2548, 2553-54 (1986). If the motion is

so supported, the party opposing the motion must then

demonstrate with "concrete evidence" that there is a genuine

issue of material fact for trial. Id.; Frank vy. D'Ambrosi, Nos.

91-3529, 91-3385, 91-3529, _ F.3d _ "(6th Cir. September 22,

1993) 1993 WL 366352, *4. The court must draw all inferences

in a light most favorable to the non-moving party, but the court

may grant summary judgment when "the record taken as a

whole could not lead a rational trier of fact to find for the non-

moving party." Agristor Financial Corp. v. Van Sickle, 967

F.2d 233, 236 (6th Cir. 1992) (quoting Matsushita Electric

» 475 U.S. 574, 587, 106 S.

Ct. 1348, 1356 (1986)).

Standard for Dismissal

An action may be dismissed if the complaint fails to

state a claim upon which relief can be granted. Fed. R. Civ. P.

12(b)(6). The moving party has the burden of proving that no

claim exists. All factual allegations in the complaint must be

presumed to be true and reasonable inferences must be made in

favor of the non-moving party. 2A James W. Moore, Moore's

Federal Practice, § 12.0712.5] (2d ed. 1991). Dismissal is

proper “only if it is clear that no relief could be granted under

any set of facts that could be proved consistent with the

allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 104

S. Ct. 2229, 2232 (1984). Dismissal is also proper if the

complaint fails to allege an element necessary for relief or "if

an affirmative defense or other bar to relief is apparent from the

face of the complaint, such as the official immunity of the

defendant... "2A James W. Moore, Moore's Federal practice,

| 12.0712.5] (2d ed. 1991).

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Order and Opinion - No. 5:93-CV-21, 11/2/93

Statutory Interpretation

The fee statute at issue in this litigation, Act 61 of the

Michigan Public Acts of 1939, as amended, provides as

follows:

319.22. Fee for monitoring, surveillance,

enforcement, and administration of

act

Sec. 22. (1) For the purposes of monitoring,

surveillance, and administration of this act, a fee not

in excess of 1%, based upon the gross cash market

value is levied upon oil and gas produced in this state.

The fee shall be collected by the revenue division of

the department of treasury in the same manner, at the

same time, and subject to the provisions of the tax

levied by Act No. 48 of the Public Acts of 1929,

being sections 205.301 to 205.317 of the Michigan

Compiled Laws.

M.C.L.A. 319.22, M.S.A. 13.139(22).

Act 45, to which Act 61 refers, provides:

205.301. Severance tax on oil or gas

Sec. 1. There is hereby levied upon each

producer engaged in the business of severing from the

soil, oil or gas, a specific tax to be known as the

severance tax.

M.C.L.A. 205.301, M.S.A. 7.351.

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Order and Opinion - No. 5:93-CV-21, 11/2/93

In both instances, payment is collected from

producers, but there is a marked difference in how "producer"

is defined. Act 48 defines "producer" as "a person who owns,

or is entitled, to delivery of a share in kind or a share of the

monetary proceeds from the sale of, gas or oil as of the time

of its production or severance." M.C.L.A. 205.312, M.S.A.

7.362. In contrast, Act 61 defines "producer" as "the

operator, whether owner or not, of a well or wells capable of

producing oil or gas or both in paying quantities." M.C.L.A.

319.2(h), M.S.A. 13.139(2)(h).

The Michigan Attorney General analyzed both Acts in

1963. At that time, the Act 61 heading still referred to a

"privilege tax" rather than a "fee" and the definition of

"producer" in Act 48 had not yet been amended to include

those holding a royalty interest. Addressing the question of

whether the State of Michigan was liable for payment of a pro

rata share of the Act 61 fee and the Act 48 tax, the Michigan

Attorney General ruled that the state was not liable because,

as a lessor, it was not a "producer" and because imposition of

a tax on the state requires positive legislative action. O.A.G.

1963-1964 No. 4160 (June 17, 1963).

~ After the Attorney General issued his opinion, the

Michigan legislature amended the definition of "producer" to

include lessor in Act 48 and exempted the state from the tax.

The Michigan Court of Appeals subsequently analyzed Act

48, as amended, in Brown v. Shell Oil Co., 128 Mich. App.

111, 339 N.W.2d 709 (1983), appeal denied, 424 Mich. 867

(1986), cert. denied, 479 U.S. 824, 107 S. Ct. 97 (1986), a

case brought by holders of royalty interests as lessors of

mineral rights in oil wells leased to Shell Oil Company. The

Michigan Court of Appeals held that it was legitimate for

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Order and Opinion - No. 5:93-CV-21, 11/2/93

Shell to assess a pro rata share of the Act 48 severance tax

against the lessors because the amended statute included them

within the definition of producers. The court distinguished

between a gross production tax, such as Act 48, which is

levied in place of property tax, and a license, privilege, or

occupation tax, and explained that "because the severance tax

is in lieu of other related property taxes, it is assessable

against royalty holders as well as lessees who are actually

engaged in the business of severing the oil or gas from the

soil." 128 Mich. App. at 119, 339 N.W.2d at 713.

Plaintiffs urge this Court to follow the Attorney

General's Opinion and hold that it is unlawful to pass along

the Act 61 fee absent a contractual provision. An Attorney

General Opinion is not a binding interpretation of law that this

Court must follow. Traverse City School District v. Attorney

General, 384 Mich. 390, 185 N.W.2d 9, 17 (1971).

Moreover, the Attorney General's Opinion rested on the

general exemption of state property from taxation absent

positive legislation. Thus, his analysis that a pro rata share

should not be assessed because the state, as lessor, was not a

producer can be characterized as dicta.

Shell argues that judgment should be entered in its

favor on the basis of the Brown v. Shell, decision, which held

that Act 48 taxes could be assessed against the lessors. Shell

notes that the Act 61 fee is te “be collected by the revenue

division of the department of treasury in the same manner, at

the same time, and subject to the provisions of the tax levied

by Act No. 48 of the Public Acts of 1929." In its first brief,

it argues that the tax is levied on “producers” and that

plaintiffs must be considered producers pursuant to Act 48

and Brown v. Shell. The Act 61 definition of producers

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Order and Opinion - No. 5:93-CV-21, 11/2/93

differs from the Act 48 definition, however, and does not

include lessors. It defines producers as well operators.

M.C.L.A. 319.2 (h), M.S.A. 13.139(2) (h). Plaintiffs, as

lessors, are not operators in connection with the production of

oil and gas. Mobil Oil Corp. v. Dep't of Treasury, 121 Mich.

App. 293, 328 N.W.2d 367 (1982), aff'd, 422 Mich. 473,

373 N.W.2d 730 (1985). The Act 61 reference to Act 48

cannot be read to somehow amend Act 61's definition of

producers. Thus, Shell's argument that the Act 61 assessments

it has made against the lessors are required by statute fails.

Shell also argues that the Act 61 fee should be assessed

against lessors because it is levied on "oil and gas produced"

and a share of the oil and gas belongs to plaintiffs under the

leases, which provide for payment in kind or at market value. '

Shell also argues that market value or "proceeds" that

The royalty payment provision of the leases attached to the

Complaint as Exhibits 1 and 2 state:

4. The lessee shall pay lessor, as royalty, one-eighth of the

proceeds from the sale of the gas, as such, produced from gas wells

on leased premises, and where not sold shall pay Fifty Dollars

($50.00) per annum as royalty from each such well, and such well

shall be held to be a producing well under paragraph numbered two

hereof. The lessor to have gas free of charge from any gas well on

the leased premises for stoves and inside lights in the principal

dwelling house on said land by making his own connections with,

the well, the use of said gas to *> at the lessor's sole risk and

expense. The lessee shall pay to lessor for gas produced from any

oil well and used by the lessee for the manufacture of gasoline or

any other product, as royalty, one-eighth of the market value of

such gas at the mouth of the well. If said gas is sold by the lessee,

then as royalty one-eighth of the proceeds of the sale thereof.

84a

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Order and Opinion - No. 5:93-CV-21, 11/2/93

plaintiffs are paid under the lease are after-tax proceeds.

While this conclusory statement is valid for the Act 48

severance tax pursuant to Brown v. Shell, the distinction the

Brown court made between taxes imposed in lieu of property

taxes and license or privilege fees blocks its application to Act

61 fees.

Act 61 imposes a regulatory fee rather than a tax. The

purpose of the Act is to regulate wells for the prevention of

waste. M.C.L.A. 319.1, M.S.A. 13.139(1). Section 22,

which imposes the fee, states that it is "[flor the purpose of

monitoring, surveillance, enforcement and administration of

this act." M.C.L.A. 319.22, M.S.A. 13.139(22).

Expenditure of the monies collected is limited to that

purpose.” In contrast, Act 48 provides: "The severance tax

herein provided for shall be in lieu of all other taxes, state or

local, upon the oil or gas, the property rights attached thereto

> Act 61, section 22, provides:

(3) The proceeds of the fee provided for in this section shall be

credited to tho general fund and appropriated by the legislature

toward the cost of monitoring, surveillance, enforcement, and

administration of this act.

(4) An unexpended fee collected during the current or any

previous fiscal year, or unexpended appropriation, shall be carried

over and deducted from the following year's appropriation in

determining an amount to be certified by the director of the

department of management and budget to the department of

treasury for computing the annual fee provided for in this act.

M.C.L.A. 319.22, M.S.A. 13.139(22).

85a

i aaiiaieilaatieea iene

Order and Opinion - No. 5:93-CV-21, 11/2/93

or inherent therein, or the values created thereby; upon all

leases or the rights to develop and operate any lands in this

state for oil or gas, the values created thereby and the

property rights attached to or inherent therein." M.C.L.A.

205.315, M.S.A. 7.365.

As the Brown vy. Shell court suggested by drawing a

distinction between severance and privilege taxes and holding

that the severance tax was assessable against royalty holders

"because the tax is in lieu of other related property taxes," it

is inappropriate to assess a regulatory fee like that assessed

under Act 61 against the lessor, absent an agreement in the

lease that the lessor will pay a share of the fee.

Defendant admits that the leases attached to the

Complaint as Exhibits 1 and 2 are copies of leases held by

plaintiffs Styles and Hilliard. The provision of those leases

regarding payments, which is quoted in footnote 1, provides

that lessors will be paid a percentage of the gross proceeds of

the gas and oil sold. There is no provision allowing a

deduction for a payment that is not the responsibility of the

lessors. Thus, with respect to the leases cited in the

Complaint, Shell's deduction of the Act 61 fee is a breach of

contract.

For the reasons stated above, plaintiffs’ motion for

partial summary judgment is granted and Shell's motion as to

Count I is denied. In light of the Court's decision on Count I,

plaintiffs’ constitutional claim, Count II, is moot. Defendant's

res judicata argument must, however, be addressed because

it has the potential of requiring dismissal of the contract claim

prior to reaching judgment on the merits.

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Order and Opinion - No. 5:93-CV-21, 11/2/93

Res Judicata

The res judicata issue is whether Brown v. Shell bars

portions of this action. Under Michigan law, the doctrine of

res judicata is used "to bar both claims actually litigated by

parties in prior actions and claims that could have been, but

were not, litigated." City Communications. Inc. v. City of

Detroit, 888 F.2d 1081, 1089 (6th Cir. 1989) (citing Gose v.

Monroe Auto Equip, Co., 409 Mich. 147, 162-63, 294

N.W.2d 165, 167 (1980)). In City Communications,

plaintiff's First Amendment claim was barred on the grounds

that plaintiff had been afforded the opportunity to amend its

complaint to add constitutional claims in a previous action and

had failed to do so. 888 F.2d at 1088-91. .

In response to Shell's allegation that plaintiffs’ contract

claim is barred by res judicata, plaintiffs argue only that their

claims are not barred because the instant claims differ from

the claims raised in Brown y. Shell. Plaintiffs do not dispute

that the parties are the same. In addition, plaintiffs make no

assertion that the claims could not have been brought as a part

of Brown vy. Shell. On the other hand, Shell has provided no

evidence that plaintiffs were afforded a full opportunity to

bring their claims regarding Act 61. In the instant complaint,

plaintiffs allege that they did not know of the additional

deduction until 1989. Thus, it appears that plaintiffs were not

aware, at the time they brought the Brown v. Shell action,

that the tax deduction Shell was taking from their royalties

included the Act 61 fee in addition to the Act 48 severance

tax. Even if plaintiffs had or could have became aware of the

dual nature of the deduction during the pendency of Brown v.

Shell, that case was determined on summary judgment and

there is no evidence that plaintiffs would have been afforded

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Order and Opinion - No. 5:93-CV-21, 11/2/93

a chance to amend their complaint to include the Act 61

claims.

On the basis of the current record, the res judicata

claim is denied. It does not appear that the Act 61 claims were

ripe for adjudication or that plaintiffs had the opportunity to

bring, them before the court in the Brown v. Shell litigation.

RICO AND FRAUD

Fraud Claim

Shell argues that Count V, the RICO claim, should be

dismissed because plaintiffs have not pled the elements of mail

fraud with sufficient particularity. It also argues that the fraud

claim, Count III, should be dismissed or that summary

judgment should be granted because plaintiffs have offered no

evidentiary support for their fraud claim. The elements of

actionable fraud under Michigan law are as follows:

The general rule is that to constitute actionable

fraud it must appear: (1) That defendant made

a material representation; (2) that it was false;

(3) that when he made it he knew that it was

false, or made it recklessly, without any

knowledge of its truth, and as a positive

assertion; (4) that he made it with the intention

that it should be acted upon by plaintiff; (5)

that plaintiff acted in reliance upon it; and (6)

that he thereby suffered injury.

Hi-Way Motor Co. v. International Harvester Co., 398

Mich. 330, 336, 247 N.W.2d 813, 816 (1976) (quoted in

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Order and Opinion - No. 5:93-CV-21, 11/2/93

Schwartz v. Electronic Data Systems. Inc., 913 F.2d 279, 285

(6th Cir. 1990)).

In the Complaint, plaintiffs allege that since at least

1983, Shell made it a practice to withhold Act 61 regulatory

fees from plaintiffs' royalty payments and to conceal the

withholding by identifying it as a "tax." Plaintiffs also allege

that Shell knew the regulatory fee was not an obligation of

plaintiffs and was not an authorized withholding. In addition.

plaintiffs allege that Shell used the mails to transmit the check

stub advices and other data that disguised the Act 61

regulatory fee deduction as a tax and attach examples of the

documents to their Complaint. These allegations are sufficient

to state a cause of action in fraud, including mail fraud.

"{Al mailing that is incident to an essential part of the

scheme" satisfies the mailing element of the mail fraud

offense. Schmuck v. United States, 489 U.S. 705, 712, 109

S. Ct. 1443, 1448 (1989) (citation omitted).

Shell also argues that the facts do not support

plaintiffs’ fraud claim. It maintains that it did not engage in

misrepresentation or intentional deception by deducting the

Act 61 fee as a tax, but, instead, used the language used in the

Attorney General's Opinion and the term originally used in

the statute, which described the Act 61 fee as a "privilege

tax." Shell attached to its summary judgment motion

examples of instances when the State of Michigan referred to

the Act 61 fee as a tax, but does not attach an affidavit linking

these documents with any action Shell took or failed to take.

Plaintiffs likewise refer in their summary judgment

briefs to documents attached to pleading but do not include

affidavits. Their response to Shell's motion for summary

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Order and Opinion - No. 5:93-CV-21, 11/2/93

judgment refers to the letters attached to plaintiffs' Complaint,

which document the inquiry counsel made in 1989. (See

Complaint, Exhibits 3, 4, 5, 6). Defendant, in its answer to

the Complaint, did not deny the genuineness or authenticity of

the letters but instead responded that the documents speak for

themselves. These letters show that the Act 61 fee was

withheld as a "tax" and that plaintiffs were informed of that

fact in 1989. On the basis of plaintiffs’ response to

defendant's summary judgment motion and the documents

they cite, it appears that there are questions of fact regarding

whether there were intentional misrepresentations and

reliance. Shell thus is not entitled to judgment on the fraud

claim or on the RICO claim on the grounds that there is no

fraud.

Shell also seeks to defeat the RICO claim by arguing

that plaintiffs have failed to allege damages to business or

property as a result of the alleged fraud. It claims that

plaintiffs "must allege a separate and traceable injury

‘stemming directly from the Defendants’ alleged use or

investment of their [allegedly] illegally obtained income in the

[RICO] enterprise.'" Defendant's Motion for Judgment on the

Pleadings at 7 (quoting Arioli jal- iti

Inc., 811 F. Supp. 303 (E.D. Mich. 1993)). The rule stated

in Arioli pertains, however, only to RICO claims based on 18

U.S.C. § 1962(a). In this instance, plaintiffs’ claims are based

on 18 U.S.C. § 1962(b). Plaintiffs allege as damages that, as

a result of the fraudulent deduction, they were "wrongfully

deprived of substantial funds." Complaint, ¢ 83. This

pleading is sufficient to state damages to business or property,

since an injury under RICO need not be "separate from the

harm from the predicate acts."

Co., Inc., 473 U.S. 479, 495, 105 S. Ct. 3275, 3284 (1985).

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Order and Opinion - No. 5:93-CV-21, 11/2/93

During oral argument on the contract construction

issue, I raised the issue of whether Count V properly alleged

a RICO violation because it did not allege the "person" -

"enterprise" distinction that is required by 18 U.S.C. S 1962.

The parties have now briefed the point.

As the Court of Appeals for the Fifth Circuit has explained:

[I]n plain English, the subsections [of Section 1962 of the

RICO statute] state:

(a) a person who has received income from a pattern

of racketeering cannot invest that income in an

enterprise.

(b) a person cannot acquire or maintain an interest in

an enterprise through a pattern of racketeering.

(c) a person who is employed by or associated with an

enterprise cannot conduct the enterprise's affairs

through a pattern of racketeering.

(d) a person cannot conspire to violate subsections (a),

(b), or (c).

Thus, RICO claims under all four subsections

necessitate: 1) a person who engages in 2) a Pattern of

racketeering activity, 3) connected to the acquisition,

establishment, conduct, or control of an enterprise.

In re Burzvynski, 989 F.2d 733, 741 (Sth Cir. 1993) (citation

omitted) (emphasis in original).

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Order and Opinion - No. 5:93-CV-21, 11/2/93

A RICO "person" includes any individual or entity

capable of holding an interest in property. 18 U.S.C. §

1961(3). A RICO "enterprise" includes a legal entity and any

union or group of individuals associated in fact although not

a legal entity. 18 U.S.C. § 1961(4).

Most of the litigation under Section 1962 arises out of

subsection (c). In order to state a claim under subsection (c)

the plaintiff must describe a "person" that is separate and

distinct from the "enterprise" being used by the "person."

See, ¢.g,, Palmer v, Nationwide Mut. Ins. Co., 945 F.2d

1371, 1373 (6th Cir. 1991); Guzowski v. Hartman, 969 F.2d

211, 215-16 (6th Cir. 1992), cert denied, 113 S. Ct. 978

(1993)The terms "employed by" and “associated with"

contemplate a person distinct from the enterprise. See, ¢.g.,

Puckett v. Tennessee Eastman Co., 889 F.2d 1481, 1489 (6th

Cir. 1989). The "enterprise" is not vicariously liable under

subsection (c) because such vicarious liability would violate

the distinctness requirement. Davis v. Mutual Life Ins.Co. of

New York, F.3d No. 90/3560/3561/3587/3878/3879/3881,

(6th Cir. September 21, 1993) 1993 WL 370537.

The narrow issue presented by defendant's current

motion is whether the "person" and "enterprise" must be

distinct under subsection (b), since Count V of the Complaint

alleges that Shell's activities violate 18 U.S.C. § 1962(b). In

order to state a claim under subsection 1962(b), the plaintiff

must allege two basic things: (1) the defendant acquired or

maintained an interest in an alleged enterprise through a

pattern of racketeering activity; and (2) the plaintiff suffered

injury to business or property as a result of that acquisition or

maintenance.

Order and Opinion - No. 5:93-CV-21, 11/2/93

The weight of authority supports the plaintiff's

contention that, in contrast to subsection 1962(c), the

"person" and "enterprise" need not be distinct for purposes of

subsection 1962(b). See, In re Burzvnski, 989 F.2d 733, 743

(Sth Cir. 1993); Busby v. Crown Supply, Inc., 896 F.2d 833,

841-42 (4th Cir. 1990); Landry v. Air Line Pilots Ass'n Intel,

AFL-CIO, 901 F.2d 404, 425 (5th Cir. 1990), cert. denied,

498 U.S. 895, 111 S. Ct. 244 (1990); Shearin v. Hutton

Group, Inc,, 885 F.2d 1162, 1165 (3d Cir. 1989); Wilcox v.

First Interstate Bank of Oregon, N.A., 815 F.2d 522, 529

(9th Cir. 1987); Petro-Tech, Inc. v. Western Co., 824 F.2d

1349, 1361 (3d Cir. 1987); Liquid Air Corp. v. Rogers, 834

F.2d 1297, 1307 (7th Cir. 1987), cert. denied, 492 U.S. 917,

109 Si Ct. 3241 (1989); Schreiber Distrib, Co, v. Serv-Well

Furniture Co., Inc., 806 F.2d 1393, 1398 (9th Cir. 1986). As

stated in Landry:

In contrast to the language of subsection (c) which

"requires a relationship between the ‘person’ and the

‘enterprise,’ subsection [ ... ] (b) require[s] only the

use of an ‘enterprise’ by a ‘person.’" Thus the RICO

person and the enterprise need not be distinct for a

person to be held liable under subsection (b). A

finding of vicarious liability on the part of an

enterprise which derived benefit from its

representative's wrongful acts is also consistent with

this view.

901 F.2d at 425 (citation omitted) (emphasis in original).

A corporation may be liable under Section 1962(b) if

it actually benefits from racketeering income as distinguished

from being a mere target or passive instrument of a

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Order and Opinion - No. 5:93-CV-21, 11/2/93

racketeering scheme. As stated in Schreiber:

Under either section 1962(a) or (b), however,

the corporation necessarily must be the direct

or indirect beneficiary of the pattern of

racketeering activity to be both the "person"

and the "enterprise."

806 F.2d at 1398.

There are district court cases to the contrary, including

a case from this district. In re Tucker Freight Lines. Inc., 789

F. Supp. 884 (W.D. Mich. 1991) (Miles, J.). It does not

appear that any Court of Appeals has held that the "person"

and "enterprise" must be distinct under subsection 1962(b).

Nor does there appear to be any Sixth Circuit case on the

point.

I have decided to follow the weight of authority and to

deny without prejudice defendant's motion to dismiss the

Complaint for failure to allege a "person" distinct from the

"enterprise. "’ This is not to say that the plaintiff has stated or

can prove a RICO violation. I am simply holding that the

Complaint Should not be dismissed on the grounds discussed

in this Opinion.

Class Certificati

> The motion is denied "without prejudice" because the Sixth

Circuit may hold that under subsection 1962(b) the "person" and

“enterprise” must be distinct.

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Order and Opinion - No. 5:93-CV-21, 11/2/93

Plaintiffs originally brought this case in the Circuit

Court for the County of Grand Traverse as a class actioa.

After Shell removed the case to federal court, both parties

filed motions regarding class certification. Plaintiffs request

that the Court defer action on class certification until after it

has decided the motions for summary judgment. Shell

requests early determination of class certification. In its brief,

Shell contends that plaintiffs have not properly defined a class

nor justified prosecution of this case as a class action. Shell

has not, however, supported its objections or even specified

them with any particularity.

Federal Rule of Civil Procedure 23(a) provides:

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

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

class is so numerous that joinder of all members is

impracticable, (2) there are questions of law or fact

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

representative parties are typical of the claims or

defenses of the class, and (4) the representative parties

will fairly and adequately protect the interests of the

class.

Plaintiffs define the class as:

all persons, firms, concerns, receivers, trustees,

personal representatives, agents, institutions,

associations, partnerships, corporations, companies,

and persons acting under declarations of trust who

have, at any time, been entitled to royalty payments

from Shell, attributed to production of oil and gas

from Michigan wells under leases with Shell which

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Order and Opinion - No. 5:93-CV-21, 11/2/93

contain no _ provision expressly or implicitly

authorizing Shell to make any deductions from

royalties for taxes or fees imposed upon Shell by the

State of Michigan.

Complaint, { 24.

The class, as plaintiffs define it, may meet all of these

criteria. Plaintiffs' definition of the class requires, however,

some refinement to address the problems discussed below.

The first problem is the lack of a time limit on the

class. The time should be limited by the applicable statutes of

limitations. The second problem is that the definition is

somewhat amorphous as to the lease language that would

trigger inclusion in the suit. It may be that there is little

variation in leases and that the language can be specifically

identified. If not, perhaps typical language can be cited.

Thirdly, the number of persons in the class must be assessed

after the definition is made more specific.

CONCLUSION

For the reasons stated above, plaintiffs' motion for

summary judgment on its breach of contract claim is

GRANTED. Shell's motion to dismiss or for summary

judgment on the claims of breach of contract, fraud, and

RICO are DENIED. Shell's unopposed summary judgment

motion on plaintiffs' accounting claim is GRANTED.

Plaintiffs’ constitutional claim is DISMISSED AS MOOT. As

to class certification, plaintiffs should submit a supplemental

brief addressing the issues raised in this Opinion no later than

November 22, 1993. Defendant may submit a response within

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Order and Opinion - No. 5:93-CV-21, 11/2/93

fourteen (14) days after service of the brief. An Order

consistent with this Opinion will be entered.

Dated: November 2, 1993

/s/

GORDON J. QUIST

UNITED STATES DISTRICT JUDGE

APPENDIX K

STATE OF MICHIGAN

CIRCUIT COURT FOR THE COUNTY

OF GRAND TRAVERSE

CASE NO. 93-10714-CK

A TRUE COPY

VIRGINIA A. WATSON

Grand Traverse County Clerk

January 13, 1993

By Deputy County Clerk

KENNETH R. HILLIARD and )

GREGORY D. STYLES, Trustee )

under Trust Agreement dated May 5, 1979,)

Plaintiffs,

Vv.

SHELL WESTERN E & P, INC.,

Defendant.

i i

Philip R. Rosi (P31915)

John W. Tilley (P43302)

Co-Counsel for Plaintiffs

P O Box 1826

Traverse City, MI 49685-1826

Phone: (616) 946-0044

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Complaint - No. 93-10714-CK, 1/13/93

Dale W. Rhoades (P19386)

Kurt D. Hassberger (P29125)

Rhoades, McKee, Boer, Goodrich & Titta

Co-Counsel for Plaintiffs

611 Waters Building

Grand Rapids, MI 49503

Phone: (616) 235-3500

There is no other pending or resolved civii action arising

out of the transaction or occurrence alleged in the

complaint.

COMPLAINT WITH JURY DEMAND

Plaintiffs, on behalf of themselves and all others

similarly situated, complain of the Defendant, and state as

follows:

COMMON ALLEGATIONS

3 This action seeks (1) monetary damages

grounded on breach of contract, misrepresentation, and fraud

based on the concealed deduction by Defendant Shell Western

E & P, Inc.'s (hereinafter "Shell") from royalty interest

payments it has made to Plaintiffs, illegally passing along a

charge hereinafter, “regulatory fee") imposed upon

Defendant under the Michigan Supervisor of Wells Act, PA

1939, No. 61 ["Act 61"], MCL 319.1, ef seg., and (2) treble

damages under 18 USC 1961(1)(B) [RICO] based on Shell’s

use of the United States mail in perpetrating this conduct.

JURISDICTION

a eR nT nn ee a eT ee eae

Complaint - No. 93-10714-CK, 1/13/93

2. At all times mentioned or material to the claims

asserted herein, Plaintiff Kenneth R. Hilliard has been a

resident of the County of Manistee, State of Michigan.

3. At all times mentioned or material to the claims

asserted herein, Plaintiff Gregory D. Styles has been a

resident of the County of Otsego, State of Michigan.

4. Defendant Shell is a Delaware corporation with

its principal place of business in Houston, Texas, its mailing

address being P.O. Box 576, Houston, Texas 77001: that it is

and was at the time of the events alleged in this Complaint

doing business in the State of Michigan, more particularly,

but not exclusively, in the counties of Mason, Manistee,

Benzie, Wexford, Grand Traverse, Kalkaska, Antrim,

Crawford, Otsego, Cheboygan, Montmorency and Presque

Isle; and that it maintains as a business address within the

State of Michigan, Grandview Plaza Building, Traverse City,

in the County of Grand Traverse, Michigan 49685.

5. Jurisdiction over Plaintiffs’ RICO claims is

conferred upon the Supremacy Clause of the United States

Constitution. (US Const art VI)

6. The amount in controversy, as to each named

plaintiff, exceeds the sum of Ten Thousand Dollars

($10,000.00).

FACTUAL BACKGROUND

yA Shell approved for use a specific lease form

designated LB-88-68 Michigan.

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Complaint - No. 93-10714-CK, 1/13/93

8. Plaintiff Kenneth R. Hilliard (Hilliard) is

owner of interests in minerals underlying various premises in

the County of Manistee in the State of Michigan.

9. On April 10, 1968, Shell, through its agent,

J.L. Orr, leased the interests of Hilliard using form LB-88-68

Michigan. Copies of that lease and assignment are annexed

hereto as Exhibit "1."

10. Plaintiff Gregory D. Styles, as Trustee under

a Trust Agreement, dated May 11, 1979, and doing business

as Stangor Land Company, owns mineral interests in the

County of Otsego in the State of Michigan.

11. On April 10, 1968, Shell, through its agent,

W.B. Phillips, leased certain interests of Earl E. Styles and

Effie T. Styles using lease form LB-88-68 Michigan. Those

interests were subsequently conveyed to Plaintiff Gregory D.

Styles, Trustee, doing business as Stangor Land Company.

Copies of that lease and the assignment to Shell, together with

related conveyances and trust agreements are annexed hereto

as Exhibit "2".

12. Both said leases provide for the payment to

Plaintiffs Hilliard and Styles as Trustee, doing business as

Stangor Land Co., of royalty payments based on the one-

eighth (1/8) of the market price of oil produced from the

premises and one-eighth (1/8) of the proceeds from the sale of

gas produced from gas wells on the premises.

13. The LB-88-68 Michigan lease contains no

provision expressly or implicitly authorizing Shell to make

any deduction from royalties for taxes or fees imposed upon

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Complaint - No. 93-10714-CK, 1/13/93

Shell by the State of Michigan.

14. _ At all times mentioned or material to the claims

asserted herein, Shell has owned and/or operated one or more

wells producing oil and gas from Plaintiff's premises covered

by the lease identified above.

CLASS ACTION ALLEGATIONS

15. Plaintiffs adopt by reference paragraphs |

through 14 above.

16. Plaintiffs and members of Plaintiff Class are

owners of mineral interests underlying various premises in the

State of Michigan.

17. Shell is the owner of leasehold interests in

minerals underlying diverse properties in which Plaintiffs and

members of Plaintiff Class own mineral interests.

18. Shell executed a lease with Plaintiffs and

members of Plaintiff Class for the exploration and production

of oil and gas from the premises in which they and members

of Plaintiff Class own mineral interests.

19. — On information and belief, all such leases are

in the form "LB-88-68 Michigan,” as in Exhibit "1," or on

other lease forms, which contain no provision expressly or

implicitly authorizing Shell to make any deduction from

royalties for taxes or fees imposed on Shell by the State of

Michigan.

20. The interests owned by Plaintiffs and members

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Complaint - No. 93-10714-CK, 1/13/93

of Plaintiff Class under the leases is that of a passive non-

operating lessor: a royalty interest.

21. The interest of Shell under the leases is that of

an active lessee’s working interest.

22. The leases confer upon Shell the sole and

exclusive right to explore for and produce oil and gas from

the leased premises, free from the possession, control and

interference of Plaintiffs and members of Plaintiff Class.

23. Shell, either alone or with other so-called

working interest owners, has drilled, owns and operates wells

producing oil and/or gas from property in which Plaintiffs and

members of Plaintiff Class hold lessor-royalty interests.

24. Theclass, to wit: all persons, firms, concerns,

receivers, trustees, personal representatives, agents,

institutions, associations, partnerships, corporations,

companies, and persons acting under declarations of trust who

have, at any time, been entitled to royalty payments from

Shell, attributed to production of oil and gas from Michigan

wells under leases with Shell which contain no provision

expressly or implicitly authorizing Shell to make any

deductions from royalties for taxes or fees imposed upon Shell

by the State of Michigan is so numerous that joinder of all

members of the class is impractical.

25. There are questions of law or fact addressed

hereinafter common to the class.

26. The claims of the representative parties set

forth hereinafter are typical of the claims of the class.

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Complaint - No. 93-10714-CK, 1/13/93

27. The representative parties fairly and adequately

protect the interests of the class.

28. The prosecution of separate actions by

individual members of the class would create the risk of

inconsistent or varying adjudications with respect to

individual members of the class which would establish

incompatible standards of conduct for the party opposing the

Class.

29. The prosecution of separate actions by

individual members of the class would create the risk of

adjudications with respect to individual members of the Class

which would as a practical matter be dispositive of the

interests of other members not parties to the adjuciation or

substantially impair or impede their ability to protect their

interests.

30. | The Defendant has acted and/or refused to act

on grounds generally applicable to the entire class.

31. The questions of law or fact common to the

members of the class predominate over any questions

affecting only individual members, and a class action is

superior to other available methods for the fair and efficient

adjuciation of the controversy.

COUNT I

BREACH OF CONTRACT

32. Plaintiffs adopt by reference paragraphs |

through 31 above.

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Complaint - No. 93-10714-CK, 1/13/93

33. Shell is an owner and/or producer of wells

producing oil and gas from the properties in which Plaintiffs

and members of Plaintiff Class own mineral interests.

34. |The Michigan Supervisor of Wells Act, PA

1939, No. 61, MCL 319.1, et seq., hereafter referred to as

Act 61 established rules and regulations to prevent producers

from operating in a manner which would result in the waste

of oil and gas.

35. | As owner/producer of wells producing oil or

gas, Shell is required to pay the State of Michigan a

regulatory fee assessed by Section 22 of Act 61, MCL

319.22.

36. Section 22 of Act 61 expressly states that the

regulatory fee is imposed "For the purpose of monitoring,

surveillance, enforcement and administration of this act. . ."

MCL 319.22.

37.- The Michigan Attorney General in OAG No.

4160, June 17, 1963, concluded that as a matter of Michigan

law, the Act 61 regulatory fee is not the obligation of holders

of royalty interest in oil and gas production.

38. Shell is charged with notice of OAG No. 4160

since its publication.

39. Since at least April 3, 1983, the date of

issuance of the decision of the Michigan Court of Appeals in

Brown v Shell,.128 Mich App 111, Shell had actual

knowledge of OAG No. 4160 referred to therein.

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Complaint - No. 93-10714-CK, 1/13/93

40. Act 61 contains no provision authorizing an

owner/producer to withhold the regulatory fee from royalty ~

payments to Plaintiffs and members of Plaintiff Class.

41. ‘Plaintiff's lease, on form "LB-88-68

Michigan," contains no provision authorizing the deduction of

the Act 61 regulatory fee from royalty payments.

42. Lease form "LB-88-68 Michigan" is clear and

unambiguous.

43. On information and belief, other lease forms

that Shell executed with other members of Plaintiff Class are

equally clear and unambiguous and contain no provision

authorizing the deduction of the regulatory fee from royalty

payments.

44. Since at least 1983 and, on information and’

belief, for some time prior thereto, Shell has made it a

practice of withhoiding a portion of the Act 61 regulatory fee

from royalty payments to its Michigan lessors.

45. Monthly, Shell deducts a portion of the Act 61

regulatory fee from royalty payments to Plaintiffs and

members of Plaintiff Class.

46. Shell enriches itself by retaining the portion of

the Act 61 regulatory fee it withholds from royalty payments

to Plaintiffs and members of Plaintiff Class.

47. In making monthly royalty payments to

Plaintiffs and members of Plaintiff Class, Shell includes an

accounting of the amount it deducts from royalty payments for

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Complaint - No. 93-10714-CK, 1/13/93

Michigan taxes.

48. | The monthly accountings identify all deductions

as "tax."

49. In making annual accounting to Plaintiffs and

members of Plaintiff Class, for tax purposes by IRS Substitute

1099 form, Shell has reported the total of the monthly tax

deductions as "severance tax."

50. Michigan’s severance tax is levied pursuant to

The Severance Tax Act, MCL 205.301 et seqg., MSA 7.351,

et seq.

51. | The amount Shell reports to royalty owners as

deductions for the severance tax exceeds the sums allowed by

tax rates in the Severance Tax Act.

52. By an exchange of correspondence dated June

15, 1989, through July 27, 1989, (Exhibits "3", "4," "5", and

"6") Shell disclosed to counsel for Plaintiffs that it was

deducting the regulatory fee, including it as an element of the

"severance tax."

53. In an exchange of correspondence, including a

demand that Shell cease deducting the regulatory fee from

royalties by including it as an element of the severance tax,

Shell claimed it was legally entitled to continue its practice in

part because it is "in accord with the custom and practice in

the industry these many years" (Exhibits "7", "8", and "9").

54. Prior to obtaining the above-referenced leases

Shell, its agents or employees, failed to advise Plaintiffs, their

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Complaint - No. 93-10714-CK, 1/13/93

predecessors in title, or members of Plaintiff Class that any

portion of the Act 61 regulatory fee would be deducted from

royalty payments.

55. Shell, its agents or employees, failed to inform

Plaintiffs, their predecessors in title or members of the

Plaintiff Class, at the time the leases were executed that any

portion of the Act 61 regulatory fee would be deducted from

royalty payments.

56. Shell knew, or should have known that the

severance tax and regulatory fee are inherently distinct.

57. Shell knew, or should have known that the

severance tax is imposed under the legislature’s taxing power,

whereas the Act 61 regulatory fee is imposed under its police

power.

58. At all relevant times, Shell knew that whereas

the severance tax is imposed under PA 1929, No. 48, MCL

205.301, et seqg., the regulatory fee is imposed under PA

1939, No. 61, MCL 319.1, et seq., two separate and distinct

Statutes.

59. Shell has continued its practice of deducting the

regulatory fee in its computation of royalties, without

disclosing that deduction to Plaintiffs or to members of

Plaintiff Class.

60. Shell’s deduction of the regulatory fee from

royalty payments to Plaintiffs and members of the Plaintiff

Class constitutes continuous breaches of contract.

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61. As aresult of the breaches of contract by Shell,

Plaintiffs and members of the Plaintiff Class have been

substantially damaged in sums in excess of $10,000.00,

having received less from Shell in royalty payments than that

to which each is entitled.

62. Shell’s conduct as set forth in Count I was so

willful and wanton as to demonstrate a reckless disregard of

the rights of Plaintiffs and members of the Plaintiff Class.

COUNT I

DECLARATION OF UNCONSTITUTIONALITY

63. Plaintiffs adopt by reference paragraphs 1

through 62 above.

64. To any extent that Shell’s passing on of the

regulatory fee may be found to be authorized by any statute,

administrative rule, governmental opinion or policy, such

authorization would violate the federal and Michigan

constitutions as follows:

(1) It would violate the "Title-Object” clause of the

Michigan Constitution, Mich Const 1963, art 4, § 24,

since the title of Act 61 gives no indication that

royalty holders would be so liable for the regulatory

fee.

(2) It would violate Plaintiffs’ due process rights |

under both the Michigan and Federal Constitutions by

including within a regulated class persons who are not

in fact within that class; specifically, including by

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Complaint - No. 93-10714-CK, 1/13/93

legislative fiat, royalty holders within the class of oil

and gas producers, solely for the purposes of assessing

liability for the regulatory fee upon them. Mich Const

1963, art 1, §§ 2 and 17; art 9, § 3; US Const,

Amend. 14.

65. To any extent that Shell’s passing on of the

regulatory fee may be found authorized by statute, rule, or

governmental opinion or policy, through an interpretation that

likens the regulatory fee to any tax, such as the severance tax

imposed under the Severance Tax Act, MCL 205.301, er seq.,

such authorization would violate provisions of the Michigan

constitution, in addition to those in { 62 (1) and (2) above, as

follows:

(1) It would violate the distinct statement of tax

requirement in the Michigan Constitution. Mich

Const 1963, art 4, § 32.

(2) It is without a valid state purpose, its sole

effect and purpose being to shift a portion of the

burden of the regulatory fee to royalty holders,

alleviating part of the burden upon oil and gas

producers, with no new revenue for the State.

(3) To the extent that the regulatory fee is found to

be a property tax, it would violate the uniformity of

property taxation clause of the Michigan Constitution

in failing to "provide for the determination of true

cash value of such property; the proportion of true

cash value at which such property shall be uniformly

assessed, which shall not . . . exceed 50 percent; and

for a system of equalization of assessments." Const

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Complaint - No. 93-10714-CK, 1/13/93

1963, art 9, § 3.

(4) To the extent that the regulatory fee is found to

be a tax of any nature it would violate the title-object

clause of the Michigan Constitution art 4, § 24, as the

title of Act 61 makes no mention of a "tax" and gives

no suggestion of the imposition of same on any

property in the state.

COUNT Ii

ACTION FOR FRAUD

66. Plaintiffs adopt by reference paragraphs 1

through 65 above.

67. Shell’s conduct in repeatedly deducting the

privilege fee from royalties, when its leases with Plaintiffs do

not authorize such deductions and while actual and

constructive notice that the State Attorney General had

concluded that holders of royalty interests have not obligation

to pay the fee, disguising such deductions as "severance tax,"

constitutes willful material and substantial misrepresentations

made with the conscious intent to deceptively deprive

Plaintiffs and enrich Shell, i.e., fraud.

68. As a result of Shell’s fraudulent conduct,

Plaintiffs and members of Plaintiff Class have been

substantially damaged, having received less from Shell in

royalty payments than that to which each is entitled.

COUNT IV

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Complaint - No. 93-10714-CK, 1/13/93

ACTION FOR ACCOUNTING

69. Plaintiffs adopt by reference paragraphs 1

through 68 above.

70. — Shell has served notice through correspondence

with Plaintiff's counsel (see Exhibits "7", "8" and "9") that it

will continue to make wrongful deductions of the regulatory

fee from Plaintiffs’ royalties until an order of this Court as

requested herein.

71. Plaintiffs are entitled to be advised of all

deductions made from their royalties based on the act 61

regulatory fee.

72. Plaintiffs have no adequate remedy at law.

COUNT V

VIOLATION OF RICO

73. Plaintiffs adopt by reference paragraphs 1

through 72 above.

74. Shell used the United States mail in violation

of 18 USC 1341.

75. Shell used the United States mail in disguising

the Act 61 regulatory fee deduction as an element of its

deduction for Michigan’s severance tax.

76. Specifically, Shell used the United States mail

in submitting monthly check stub advices and supporting data

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Complaint - No. 93-10714-CK, 1/13/93

to Plaintiffs and members of the Plaintiff Class which made

and continue to make no disclosure that Defendant reduces the

royalty payments by an amount withhold for the Act 61

regulatory fee. Examples of such check stub advices to

Plaintiffs are included as Exhibit "10" and are outlined as

follows:

Gregory D. Styles d/b/a Stangor Land Company:

check stub 1-21-83; check stub 10-26-92

Kenneth R. Hilliard: check stub 11-19-82; 1991

Check Stub Detail Summary

77. Specifically, Shell used the United States Mail

in submitting annual Internal Revenue Service Substitute 1099

forms to Plaintiffs and members of the Plaintiff Class to

falsely and deceptively conceal the Act 61 regulatory fee

deduction, including it as an element of the deduction for the

severance tax. See attached 1099 forms for Plaintiffs Gregory

D. Styles doing business as Stangor Land Company and

Kenneth R. Hilliard, Exhibit "11".

78. Specifically, Shell concealed the Act 61

regulatory fee deduction knowing that such deduction was

unauthorized by contract or by statute.

79. Specifically, Shell made such deductions,

concealing their nature, to wrongfully enrich itself and

deprive and defraud Plaintiffs and members of Plaintiff Class

of funds rightfully due them.

80. Shell perpetuated this fraud by providing the

misinformation to the Internal Revenue Service and to

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Complaint - No. 93-10714-CK, 1/13/93

Plaintiffs and Plaintiff Class by using Substitute Form 1099,

using the United States Mail.

81. Specifically, Shell made repeated willful use of

the United States mail with the specific intent to mislead and

misinform Plaintiffs and members of the Plaintiff Class about

the true nature of the deduction, and to profit thereby, a clear

violation of 18 USC 1341.

82. Shell’s practice of defrauding Plaintiffs and

members of the Plaintiff Class making monthly use of the

United States mail in repeated violation of 18 USC 1341

constitutes a pattern of racketeering activity as defined in Title

18 USC 1961(1)(B) all in violation of Title 18 USC 1962(B).

83. By reason of Shell’s practice of defrauding

Plaintiffs and members of Plaintiff Class with a pattern of

racketeering in violation of Title 18 USC 1961, ef seq,

Plaintiffs and members of Plaintiff Class were purposefully

and wrongfully deprived of substantial funds properly and

legally due to them as royalties for oil and gas preduced from

their lands and interests.

RELIEF

WHEREFORE, Plaintiffs pray that this Honorable

Court:

A. As soon as is practicable after the

commencement of this action brought as a

Class action, determine by order whether it is

to be so maintained.

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Complaint - No. 93-10714-CK, 1/13/93

B.

Enter an order declaring that:

(1) Plaintiffs and members of the Plaintiff

Class are not liable for any portion of the Act

61 regulatory fee.

(2) Shell is not entitled to deduct any portion

of the Michigan regulatory fee paid by Shell

from royalty payments to be paid to the

Plaintiffs or members of the Plaintiff Class

pursuant to its oil and gas leases.

Enter a judgment declaring that in the event

Shell’s actions of passing on the regulatory fee

is authorized by statute, administrative rule,

governmental opinion or policy, any such

authorization violates the federal and/or

Michigan constitutions.

Pursuant .9 Title 18 USC 1964(a), issue a

preliminary iajunction during the pendency of

these proceedings and a permanent injunction

at the conclusion enjoining and restraining

Shell, its agents, employees, and

representatives from deducting from royalty

payments due to Plaintiffs or Plaintiff Class

any sum or sums attributable to the Act 61

regulatory fee.

Order Shell to render true and proper

accounting to Plaintiffs of all moneys

attributable to the regulatory fee which it had

deducted from Plaintiffs’ royalties, which

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Complaint - No. 93-10714-CK, 1/13/93

accounting should include the amount of

regulatory fees deducted from any and all

royalty payments paid to each and every

plaintiff and each and every member of the

Plaintiff Class and the date that each regulatory

fee deduction was made from royalty

payments.

Enter a judgment in favor of Plaintiffs and

members of the Plaintiff Class and against the

Defendant adjudging Defendant to have

breached its contracts with Plaintiffs and

Plaintiff Class, awarding damages for such

breach in the cumulative sum of all regulatory

fees deducted by Shell from royalty payments

paid to Plaintiffs and members of the Plaintiff

Class, together with interest at legal rates from

and after the date of the payment of each

royalty payment from which regulatory fees

were deducted.

Enter a judgment in favor of Plaixitffs and

members of the Plaintiff Class and against the

Defendant adjuding Defendant to have

fraudulently deprived Plaintiffs and members

of Plaintiff Class, awarding as compensatory

damages the cumulative sum of all regulatory

fees deducted by Shell from royalty payments

paid to Plaintiffs and members of the Plaintiff

Class, together with exemplary damages as the

Court deems fit and proper, and interest at

legal rates from and after the date of the

payment of each such royalty payment from

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Complaint - No. 93-10714-CK, 1/13/93

which regulatory fees were deducted.

Enter a judgment in favor of the Plaintiffs and

members of the Plaintiff Class and against

Defendant Shell adjudging Defendant to have

violated Title 18 USC 1341 and Title 18 USC

1961 et seq awarding Plaintiffs three-fold the

cumulative sum of all Act 61 regulatory fees

deducted by Shell from royalty payments paid

to Plaintiffs and members of the Plaintiff

Class, and accrued interest, together with costs

of suit and reasonable attorney fees as

mandated by Title 18 USC 1964(c).

Grant Plaintiffs and members of the Plaintiff

Class such other and further relief as shall be

agreeable to equity and good conscience

together with costs, interest, and attorney fees.

JURY DEMAND

Plaintiffs hereby demand a jury trial.

Dated: January 12, 1993 _— By:/s/

Respectfully submitted,

Philip R. Rosi (P31915)

Co-counsel for Plaintiffs

161 E. Front Street,

P.O. Box 1826

Traverse City, MI 49685-1826

Telephone 616/946-0044

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Complaint - No. 93-10714-CK, 1/13/93

Dated: January 12, 1993 _— By:/s/

Dale W. Rhoades (P19386)

Rhoades, McKee, Boer,

Goodrich & Titta

Co-counsel for Plaintiffs

611 Waters Building

Grand Rapids, MI 49503

Telephone 616/235-3500

** Publisher’s note: Exhibits to this Complaint are reproduced

in Appendix P.

118a

APPENDIX L

STATE OF MICHIGAN

IN THE CIRCUIT COURT FOR THE COUNTY

OF GRAND TRAVERSE

File No. 81-8858-CK

ALBERT K. BROWN, CATHERINE D. BROWN,)

KENT ROSENBERG, ARLENE ROSENBERG, _)

VICTOR SCHULER, ELIZABETH SCHULER, )

DONALD E. WOOD, ELLEN L. WOOD, )

EARL HILLIARD, MARGARET HILLIARD,

JEROME A. RAY, KAREN M. RAY,

and KENNETH R. HILLIARD

Plaintiffs,

Vs

SHELL OIL COMPANY, a Delaware corporation,

)

)

)

)

- )

)

)

Defendant. )

/

Thompson, Zirnhelt, Bowron,

Senger & Rosi, P.C.

Philip R. Rosi, P 31915

Attorney for Plaintiffs

Foster, Swift, Collins

& Coey, P.C.

Webb A. Smith, P 20718

Scott A. Storey, P 30232

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Orders from Brown v. Shell - No. 81-8858-CK

Attorneys for Defendant

Terence V. Lynam, Esq.

105 East Washtenaw St.

Lansing, Michigan 48933

Attorney for Defendant

FIRST AMENDED COMPLAINT

AND DEMAND FOR JURY TRIAL

Plaintiffs for themselves and for and on behalf of all

persons similarly situated, complain of Defendant and allege:

Ri That plaintiffs are now and at all times mentioned or

material to the claims asserted herein have been residents and

citizens of the State of Michigan and the owners of mineral

interests in land in the State of Michigan.

2. That defendant Shell Oil Company is a Delaware

corporation with its principal place of business in Houston,

Texas, its mailing address being P.O. Box 576, Houston,

Texas 77001; that it is and was at the time of the events

alleged in this Complaint doing business in the State of

Michigan, more particularly, but not exclusively, in the

Counties of Mason, Manistee, Benzie, Wexford, Grand

Traverse, Kalkaska, Antrim, Crawford, Otsego, Cheboygan,

Montmoreney and Presque Isle; thai it maintains as a business

address within the State of Michigan, Grandview Plaza

Building, Traverse City, in the County of Grand Traverse,

Michigan 49684.

Orders from Brown v. Shell - No. 81-8858-CK

3. That plaintiffs Albert K. Brown, Catherine D. Brown,

Kent Rosenberg, Arlene Rosenberg, Victor Schuler, Elizabeth

Schuler, Donald E. Wood and Ellen L. Wood are owners of

interests in minerals underlying various premises in Kalkaska

County, Michigan.

4. That plaintiffs Earl Hilliard, Margaret Hilliard,

Jerome A. Ray, Karen M. Ray and Kenneth R. Hilliard, are

owners of interests in minerals underlying various premises

in Manistee County, Michigan.

3. That defendant is the owner of leasehold interests in

minerals underlying the property of plaintiffs Albert K.

Brown, Catherine D. Brown, Kent Rosenberg, Arlene

Rosenberg, Victor Schuler, Elizabeth Schuler, Donald E.

Wood, Ellen L. Wood, Jerome A. Ray, Karen M. Ray and

Kenneth R. Hilliard by virtue of certain recorded oil and gas

leases on lease forms identified as LB-88-68 Michigan.

6. That defendant, its employees or agents, selected the

LB-88-68 Michigan form to use when leasing the premises of

plaintiffs Albert K. Brown, Catherine D. Brown, Kent

Rosenberg, Arlene Rosenberg, Victor Schuler, Elizabeth

Schuler, Donald E. Wood, Ellen L. Wood, Jerome A. Ray,

Karen M. Ray, and Kenneth R. Hilliard.

T. That defendant is the owner of leasehold interests in

the minerals underlying the property of plaintiffs Earl Hilliard

and Margaret Hilliard by virtue of a certain recorded oil, gas

and mineral lease on a lease form identified as Producers 88 -

Michi 4-71) Paid Up.

8. That defendant, its employees or agents, selected the

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Orders from Brown v. Shell - No. 81-8858-CK

Producers 88 - Michigan (4-71) Paid Up form for use when

leasing the premises of plaintiffs Earl Hilliard and Margaret

Hilliard.

9. That existing upon the premises of plaintiffs are one or

more producing gas and/or oil wells, hereinafter referred

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