Shutts v. Phillips Petroleum Co.

• Decision Date: 25 February 1987
• Docket Number: No. 59588,59588
• Parties: Irl SHUTTS, et al., Appellees, v. PHILLIPS PETROLEUM COMPANY, Appellant.
• Court: Kansas Supreme Court

Page 1286

732 P.2d 1286

240 Kan. 764

Irl SHUTTS, et al., Appellees, v. PHILLIPS PETROLEUM COMPANY, Appellant.

No. 59588.

Supreme Court of Kansas.

Feb. 25, 1987.

Syllabus by the Court

1. In a multi-state plaintiff class action suit, the original decision of the Kansas Supreme Court, after review by the United States Supreme Court, is remanded for the proper due process constitutional standard to be applied. The United States Supreme Court held that for a state's substantive law to be selected in a constitutionally permissible manner, that state must have a significant contact or significant aggregation of contacts creating state interests, such that the choice of its law is neither arbitrary nor fundamentally unfair. On remand, it is held : After reviewing the law of the five states where the majority of the oil and gas leases in question are located, those jurisdictions would apply equitable principles of unjust enrichment to hold the producer or purchaser of gas liable to its royalty owners for interest on suspended royalties held by the gas purchaser or producer pending approval of rate increases by the Federal Power Commission, now the Federal Energy Regulatory Commission.

2. After reviewing the law of the five states where the majority of the oil and gas leases in question are located, it is held : Under equitable principles those states would imply an agreement binding the producer or purchaser of gas to pay the funds held in suspense to the royalty owners when the Federal Power Commission approved the respective rate increases, together with prejudgment interest at the rates and in accordance with the Federal Power Commission regulations found in 18 C.F.R. § 154.102 (1986).

3. The action taken by the United States Supreme Court upon reviewing the conflict of laws issue in this case constitutes a full reversal and, as such, the original judgment and interest awarded by the district court is vacated and post-judgment interest runs from the time the new judgment is entered, as more fully set forth in the opinion.

4. Post-judgment interest for royalty owners having leases in Texas, Oklahoma, Louisiana, New Mexico, and Wyoming are determined by the statutory rate of post-judgment interest for [240 Kan. 765] each of the respective states which is in effect on the date of the new judgment. The Kansas statutory rate of post-judgment interest applies to those royalty owners having leases in Kansas and all other jurisdictions involved, as more fully stated in the opinion.

Joseph W. Kennedy, of Morris, Laing, Evans, Brock & Kennedy, Chartered, Wichita,

argued the cause, and Robert W. Coykendall, of the same firm, Arthur R. Miller, Cambridge, Mass., and T.L. Cubbage, II, Bartlesville, Okl., were with him on the briefs, for appellant

Gordon M. Penny, of Chapin & Penny, Medicine Lodge, argued the cause, and W. Luke Chapin, of the same firm, Harold Greenleaf, of Smith, Greenleaf & Brooks, Liberal, and Ed Moore, of Ginder & Moore, Cherokee, Okl., were on the brief, for appellees.

SCHROEDER, Chief Justice:

This is the third time this class action case has come before the Supreme Court for review. In Shutts, Executor v. Phillips Petroleum Company, 222 Kan. 527, 567 P.2d 1292 (1977) (Shutts I ), a class action against Phillips Petroleum Company (Phillips), plaintiffs sought to recover interest on "suspense royalties" attributable to gas produced from leases in the three-state Hugoton-Anadarko area, the largest physical portion of which was located in Kansas, during a nine-year period from June 1961 to October 1970. The named plaintiff, a Kansas resident, was a representative of a class of 6,400 gas royalty owners, 218 of whom were Kansas residents. This court ruled it could exercise in personam jurisdiction over unnamed nonresident class plaintiffs where procedural due process was satisfied by notice, an opportunity to be heard, and adequate representation. Having found the class action was proper and binding on nonresident plaintiffs, this court also ruled that, under the equitable principle of unjust enrichment, Phillips was liable to the plaintiffs for interest on the suspended royalties in the amount set forth under Phillips' corporate undertaking with the Federal Power Commission (FPC), seven percent per annum, with an additional statutory post-judgment interest of eight percent per annum.

Shutts v. Phillips Petroleum Co., 235 Kan. 195, 679 P.2d 1159 (1984) ( Shutts II ), was factually similar to Shutts I. A class action [240 Kan. 766] suit was brought by Irl Shutts and Robert and Betty Anderson, individually and on behalf of 28,100 royalty owners, including residents of all 50 states, the District of Columbia, the Virgin Islands, and several foreign countries, against Phillips for recovery of interest on suspended gas royalties. These royalty payments were withheld by Phillips at various times while Phillips awaited approval by the FPC for gas price rate increases. When approval was granted, Phillips paid the total amount of the suspended royalties to the royalty owners without interest. It was held first that Kansas had in personam jurisdiction over the nonresident class members as the procedural due process requirements were satisfied when each class member was provided notice by first-class mail describing the action and informing each member he could appear in person or by counsel, and otherwise he would be represented by Shutts and the Andersons, and that class members would be included in the class and bound by the judgment unless they "opted out" of the suit by returning a "request for exclusion." Second, as to the choice of law issue, it was held that, under Kansas law and the principles of equity, Phillips was liable for interest to the royalty owners on the suspended royalties at the rates set forth in Phillips' corporate undertaking with the FPC; seven percent per annum prior to October 10, 1974; nine percent per annum thereafter until September 30, 1979; and thereafter, at the average prime rate compounded quarterly. Statutory post-judgment interest of fifteen percent per annum (K.S.A. 16-204) was also imposed. In determining that Kansas law applied, it was stated:

"In Shutts I it was held the rate of interest set forth in the corporate undertaking established an appropriate measure of damages to compensate the plaintiffs for the unjust enrichment derived by Phillips from the use of the plaintiffs' money. In the instant case Phillips has not satisfactorily established why this court should not apply the rule enunciated

in Shutts I and instead look to the law of each state where leases are located to determine whether damages should be based upon a rate different from that set forth in the FPC undertaking. The general rule is that the law of the forum applies unless it is expressly shown that a different law governs, and in case of doubt, the law of the forum is preferred. 16 Am.Jur.2d, Conflict of Laws § 5. Where a state court determines it has jurisdiction over a nationwide class action and procedural due process guarantees of notice and adequate representation are present, we believe the law [240 Kan. 767] of the forum should be applied unless compelling reasons exist for applying a different law. All of the plaintiff class members in this lawsuit were given actual notice that this action was being brought on their behalf in Kansas. The plaintiffs had the opportunity to opt out of the lawsuit, but chose to have their claims litigated in the Kansas courts. We have hereinbefore held the unnamed plaintiff class members were adequately represented in the lawsuit and that the forum has a significant legitimate interest in adjudicating the claims of the class members. The common fund nature of the lawsuit provides an excellent reason to apply a uniform measure of damages to the class as a whole, as each member of the class has been similarly deprived of the rightful use of his or her money. The plaintiff class members have indicated their desire to have this action determined under the laws of Kansas. Compelling reasons do not exist to require this court to look to other state laws to determine the rights of the parties involved in this lawsuit." 235 Kan. at 221-22, 679 P.2d 1159

Phillips appealed to the United States Supreme Court, Phillips Petroleum Company v. Shutts, 472 U.S. 797, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985). The United States Supreme Court first ruled Kansas properly accepted jurisdiction over the nonresident plaintiffs as the procedural due process requirements were satisfied, as stated above. 472 U.S. at 814, 105 S.Ct. at 2976-77. As to the choice of law question, however, it was ruled the application of Kansas law to all of the investors' claims for interest violated the due process and full faith and credit clauses. In its analysis, the Court first noted that if the law of Kansas was not in conflict with any of the other jurisdictions connected to the suit, then there would be no injury in applying the law of Kansas. 472 U.S. at 816, 105 S.Ct. at 2977. The Court then cited differences in the laws of Kansas, Texas, and Oklahoma which Phillips contended existed. It appears, however, no analysis was made by the Court to determine whether these differences existed in fact. The Court stated:

"Petitioner claims that Kansas law conflicts with that of a number of States connected to this litigation, especially Texas and Oklahoma. These putative conflicts range from the direct to the tangential, and may be addressed by the Supreme Court of Kansas on remand under the correct constitutional standard.

* * *

"The conflicts on the applicable interest rates, alone--which we do not think can be labeled 'false conflicts' without a more thorough-going treatment than was accorded them by the Supreme Court of Kansas--certainly amounted to millions of dollars in liability. We think that the Supreme Court of Kansas erred in deciding on the basis that it did that the application of its...