Farrar v. Mobil Oil Corporation, No. 103,009 (Kan. App. 6/11/2010), 103,009.

Decision Date11 June 2010
Docket NumberNo. 103,009.,103,009.
PartiesWILLIE JEAN FARRAR and KEITH FARRAR, as cotrustees of the KEITH FARRAR REVOCABLE TRUST, dated October 22, 1999; JOHN ELDON GREGG and KEITH THOMAS GREGG, as co-trustees of the MARIE GREGG TRUST U/A, dated APRIL 26, 1979, as amended; and THOMAS L. and PATRICIA A. LAHEY, individually and jointly, <I>Appellees,</I> v. MOBIL OIL CORPORATION, <I>Appellant.</I>
CourtCourt of Appeals of Kansas

SYLLABUS BY THE COURT

1. Applying K.S.A. 60-223(a), the threshold requirements for a class action in Kansas are: (1) The number of class members is so large that joinder of all members is impracticable; (2) the class claims present common questions of fact or law; (3) the named parties' claims and defenses are representative of the claims and defenses of the other class members; and (4) the class representatives will fairly and adequately protect the interests of the class as a whole.

2. In addition to the threshold requirements of K.S.A. 60-223(a), the certification of a class under K.S.A. 60-223(b)(3) requires that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.

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3. District courts have substantial discretion in deciding whether to certify a case as a class action. Both state and federal class action rules require that a class should be certified only after a rigorous analysis that the prerequisites of the applicable statute have been satisfied.

4. We review the certification of a class action for an abuse of discretion. A trial court abuses its discretion if it fails either to evaluate carefully the legitimacy of the plaintiffs' allegations and evidence supporting class treatment or to conduct a rigorous analysis to determine whether the statutory prerequisites have been satisfied. An abuse of discretion occurs when the trial court has gone outside the framework of legal standards or statutory limitations or when it fails to properly consider the factors on that issue given by the higher courts to guide the discretionary determination.

5. Our Supreme Court has consistently applied the law of Kansas—not the law of other states—to disputes requiring the construction and enforcement of oil and gas leases on Kansas properties. Kansas has adopted lex rei sitae or the law of the situs of the lease properties as the choice-of-law doctrine that should be applied in cases involving oil and gas leases covering properties in Kansas.

6. Courts in other oil and gas producing states likewise apply their own state law to disputes regarding the payment of royalties on oil and gas produced from leases covering lands located within their boundaries.

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7. Under the facts of this case, the district court did not err in holding that the doctrine of lex rei sitae governs the claims of the plaintiffs' class and in rejecting Mobil's contention that a proper application of lex loci contractus would defeat the prerequisites for maintenance of a class action because of the need to apply varying and disparate laws of numerous states where the instruments were executed.

8. For a state's substantive law to be selected in a constitutionally permissible manner, that state must have a significant contact or significant aggregation of contacts, creating state interests, such that the choice of its own law is neither arbitrary nor fundamentally unfair.

9. Whether the lessor's rights to royalty are technically classified as personalty or realty, it is difficult to imagine a more intimate contact with Kansas than the construction and enforcement of instruments that license the exploration of Kansas minerals.

10. Under the facts of this case, we conclude that the allegations of the plaintiffs' class implicate significant contacts with Kansas and there is no arbitrariness or unfairness in the application of Kansas law in determining how the subject oil and gas leases should be construed and enforced.

11. Kansas has long recognized the duty of the lessee under an oil and gas lease not only to explore for and develop oil and gas production but to use reasonable diligence in finding a market for the product. The implied obligation is to market the produced minerals at reasonable terms within a reasonable time following production.

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12. Smith v. Amoco Production Company, 272 Kan. 58, 31 P.3d 255 (2001), is discussed and distinguished.

13. Under the facts of this case, where a purported class action claims improper deductions in calculating royalties under oil and gas leases, there is no need for individualized examination of lease formation or the intent of the parties thereto for purposes of determining predominance of common issues or manageability in certification proceedings where there has been shown a systemic common course of conduct by an oil and gas lessee in calculating royalties payable pursuant to leases to explore and develop Kansas minerals.

14. Because class action certification is discretionary with the trial court, the class may be altered, expanded, subdivided, or abandoned as the case develops. Class actions may be amended, limited, or subclasses of plaintiffs may be established if needed.

Appeal from Stevens District Court; TOM R. SMITH, judge. Opinion filed June 11, 2010. Affirmed.

Shannon H. Ratliff, of Ratliff Law Firm, P.L.L.C., of Austin, Texas, and Richard C. Hite and Arthur S. Chalmers, of Hite, Fanning, & Honeyman, L.L.P., of Wichita, for appellant.

David G. Seely, Thomas D. Kitch, Gregory J. Stucky, Charles E. Millsap, and Daniel E. Lawrence, of Fleeson, Gooing, Coulson & Kitch, L.L.C., of Wichita, and Erick E. Nordling, of Kramer, Nordling & Nordling, LLC, of Hugoton, for appellees.

Before RULON, C.J., GREENE, J., and LARSON, S.J.

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GREENE, J.:

ExxonMobil Oil Corporation, formally Mobil Oil Corporation (Mobil), appeals the district court's certification of a class action against it by Mobil's oil and gas lessors of Kansas minerals within the Hugoton Field, or by the successors in interest to such lessors, alleging breach of express and implied covenants by Mobil in the purported improper deduction of expenses from the payment of royalties to lessors. Mobil contends the district court abused its discretion in certifying a class because it failed to rigorously analyze the requirements of K.S.A. 60-223, that choice-of-law issues and variations in the circumstances surrounding execution of individual leases defeat the predominance of any common issues of law or fact, and that these individual issues would make management of a class action difficult if not impossible. Concluding there was no abuse of discretion by the district court, we affirm the class certification and remand for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

Plaintiffs initially sought to certify a class action on behalf of interest owners of minerals burdened by 1,200 leases on acreage within the areal extent of the Kansas Hugoton Field, whose gas flowed through the Bushton gathering system owned by ONEOK. The action alleged that Mobil had breached express and implied contractual obligations by deducting from royalty payments a pro-rata portion of the amount paid by Mobil to ONEOK for services necessary to gather the gas and transport it to the processing plant. These claims were expanded 3 years later to include claims of the additional mineral interest owners whose gas flowed through the Jayhawk Plant on the Hickok gathering system owned by Mobil. Counsel indicated at oral argument that the scope of the litigation now involves approximately 2000 leases and more than 5000 potential class members.

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After Mobil's attempts to remove the action to federal court failed, discovery was conducted, the certification issue was joined, and the district court conducted an evidentiary hearing. Following posttrial submissions from the parties, the court entered its 21-page journal entry certifying a class action under K.S.A. 60-223(b)(3) and defining the class as:

"`All persons or concerns owning mineral interests in lands located in the areal confines of the Kansas Hugoton Gas Field, burdened by oil and gas leases owned in whole or in part by defendant insofar as such leases are productive of gas from above the base of the Panoma Council Grove Field, the gas from which has been subject to the Gathering Agreement, including the instrumentalities of the United States of America and federally chartered corporations, such as, but not limited to, the Farm Credit Bank of Wichita and the Federal Land Bank, but excluding the United States of America insofar as its mineral interests are managed by the Mineral Management Service.'"

On September 1, 2009, Mobil filed its application with this court to take an interlocutory appeal pursuant to K.S.A. 60-223(f). This court granted the application and stayed the district court proceedings pending resolution of this interlocutory appeal. Mobil then timely filed its notice of appeal.

STANDARDS FOR CLASS CERTIFICATION AND APPELLATE REVIEW THEREOF

There are four statutory threshold prerequisites to bringing a class action in Kansas. A class action is only proper if (1) the number of class members is so large that joinder of all members is impracticable; (2) the class claims present common questions of fact or law; (3) the named parties' claims and defenses are representative of the claims and defenses of the other class members; and (4) the class representatives will fairly and adequately protect the interests of the class as a whole. K.S.A. 60-223(a). In shorthand, the threshold elements are identified as "(1) numerosity, (2) commonality, (3) typicality,

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and (4) adequacy of representation." Dragon v. Vanguard Industries, Inc., 277 Kan. 776, 778, 89 P.3d 908 (2004) (Dragon I).

In addition to meeting all the threshold elements, a putative class plain...

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