Phillips Petroleum Co. v. Shutts

472 U.S. 797, 105 S. Ct. 2965, 86 L. Ed. 2d 628, 1985 U.S. LEXIS 104, 2 Fed. R. Serv. 3d 797, 85 Oil & Gas Rep. 486, 53 U.S.L.W. 4879
CourtSupreme Court of the United States
DecidedJune 26, 1985
Docket84-233
StatusPublished
Cited by1,670 cases

This text of 472 U.S. 797 (Phillips Petroleum Co. v. Shutts) is published on Counsel Stack Legal Research, covering Supreme Court of the United States primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 105 S. Ct. 2965, 86 L. Ed. 2d 628, 1985 U.S. LEXIS 104, 2 Fed. R. Serv. 3d 797, 85 Oil & Gas Rep. 486, 53 U.S.L.W. 4879 (1985).

Opinions

[799]*799Justice Rehnquist

delivered the opinion of the Court.

Petitioner is a Delaware corporation which has its principal place of business in Oklahoma. During the 1970’s it produced or purchased natural gas from leased land located in 11 different States, and sold most of the gas in interstate commerce. Respondents are some 28,000 of the royalty owners possessing rights to the leases from which petitioner produced the gas; they reside in all 50 States, the District of Columbia, and several foreign countries. Respondents brought a class action against petitioner in the Kansas state court, seeking to recover interest on royalty payments which had been delayed by petitioner. They recovered judgment in the trial court, and the Supreme Court of Kansas affirmed the judgment over petitioner’s contentions that the Due Process Clause of the Fourteenth Amendment prevented Kansas from adjudicating the claims of all the respondents, and that the Due Process Clause and the Full Faith and Credit Clause of Article IV of the Constitution prohibited the application of Kansas law to all of the transactions between petitioner and respondents. 235 Kan. 195, 679 P. 2d 1159 (1984). We granted certiorari to consider these claims. 469 U. S. 879 (1984). We reject petitioner’s jurisdictional claim, but sustain its claim regarding the choice of law.

Because petitioner sold the gas to its customers in interstate commerce, it was required to secure approval for price increases from what was then the Federal Power Commission, and is now the Federal Energy Regulatory Commission. Under its regulations the Federal Power Commission permitted petitioner to propose and collect tentative higher gas prices, subject to final approval by the Commission. If the Commission eventually denied petitioner’s proposed price increase or reduced the proposed increase, petitioner would [800]*800have to refund to its customers the difference between the approved price and the higher price charged, plus interest at a rate set by statute. See 18 CFR § 154.102 (1984).

Although petitioner received higher gas prices pending review by the Commission, petitioner suspended any increase in royalties paid to the royalty owners because the higher price could be subject to recoupment by petitioner’s customers. Petitioner agreed to pay the higher royalty only if the royalty owners would provide petitioner with a bond or indemnity for the increase, plus interest, in case the price increase was not ultimately approved and a refund was due to the customers. Petitioner set the interest rate on the indemnity agreements at the same interest rate the Commission would have required petitioner to refund to its customers. A small percentage of the royalty owners provided this indemnity and received royalties immediately from the interim price increases; these royalty owners are unimportant to this case.

The remaining royalty owners received no royalty on the unapproved portion of the prices until the Federal Power Commission approval of those prices became final. Royalties on the unapproved portion of the gas price were suspended three times by petitioner, corresponding to. its three proposed price increases in the mid-1970’s. In three written opinions the Commission approved all of petitioner’s tentative price increases, so petitioner paid to its royalty owners the suspended royalties of $3.7 million in 1976, $4.7 million in 1977, and $2.9 million in 1978. Petitioner paid no interest to the royalty owners although it had the use of the suspended royalty money for a number of years.

Respondents Irl Shutts, Robert Anderson, and Betty Anderson filed suit against petitioner in Kansas state court, seeking interest payments on their suspended royalties which petitioner had possessed pending the Commission’s approval of the price increases. Shutts is a resident of Kansas, and the Andersons live in Oklahoma. Shutts and the Ander-[801]*801sons own gas leases in Oklahoma and Texas. Over petitioner’s objection the Kansas trial court granted respondents’ motion to certify the suit as a class action under Kansas law. Kan. Stat. Ann. § 60-223 et seq. (1983). The class as certified was comprised of 33,000 royalty owners who had royalties suspended by petitioner. The average claim of each royalty owner for interest on the suspended royalties was $100.

After the class was certified respondents provided each class member with notice through first-class mail. The notice described the action and informed each class member that he could appear in person or by counsel; otherwise each member would be represented by Shutts and the Ander-sons, the named plaintiffs. The notices also stated that class members would be included in the class and bound by the judgment unless they “opted out” of the lawsuit by executing and returning a “request for exclusion” that was included with the notice. The final class as certified contained 28,100 members; 3,400 had “opted out” of the class by returning the request for exclusion, and notice could not be delivered to another 1,500 members, who were also excluded. Less than 1,000 of the class members resided in Kansas. Only a minuscule amount, approximately one quarter of one percent, of the gas leases involved in the lawsuit were on Kansas land.

After petitioner’s mandamus petition to decertify the class was denied, Phillips Petroleum v. Duckworth, No. 82-54608 (Kan., June 28, 1982), cert. denied, 459 U. S. 1103 (1983), the case was tried to the court. The court found petitioner liable under Kansas law for interest on the suspended royalties to all class members. The trial court relied heavily on an earlier, unrelated class action involving the same nominal plaintiff and the same defendant, Shutts, Executor v. Phillips Petroleum Co., 222 Kan. 527, 567 P. 2d 1292 (1977), cert. denied, 434 U. S. 1068 (1978). The Kansas Supreme Court had held in Shutts, Executor that a gas company owed interest to royalty owners for royalties suspended pending final Commission approval of a price increase. No federal statutes [802]*802touched on the liability for suspended royalties, and the court in Shutts, Executor held as a matter of Kansas equity law that the applicable interest rates for computation of interest on suspended royalties were the interest rates at which the gas company would have had to reimburse its customers had its interim price increase been rejected by the Commission. The court in Shutts, Executor viewed these as the fairest interest rates because they were also the rates that petitioner required the royalty owners to meet in their indemnity agreements in order to avoid suspended royalties.

The trial court in the present case applied the rule from Shutts, Executor, and held petitioner liable for prejudgment and postjudgment interest on the suspended royalties, computed at the Commission rates governing petitioner’s three price increases. See 18 CPR §154.102 (1984). The applicable interest rates were: 7% for royalties retained until October 1974; 9% for royalties retained between October 1974 and September 1979; and thereafter at the average prime rate. The trial court did not determine whether any difference existed between the laws of Kansas and other States, or whether another State’s laws should be applied to non-Kansas plaintiffs or to royalties from leases in States other than Kansas.

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Bluebook (online)
472 U.S. 797, 105 S. Ct. 2965, 86 L. Ed. 2d 628, 1985 U.S. LEXIS 104, 2 Fed. R. Serv. 3d 797, 85 Oil & Gas Rep. 486, 53 U.S.L.W. 4879, Counsel Stack Legal Research, https://law.counselstack.com/opinion/phillips-petroleum-co-v-shutts-scotus-1985.