Appeal from Stevens District Court; TOM R. SMITH, judge.
SYLLABUS BY THE COURT 1. An abuse of discretion standard of review does not mean that a mistake of law cannot be corrected on appeal. Rather, a district court necessarily abuses its discretion when it makes an error of law. 2. In reviewing a district court's certification of a class, an abuse of discretion can be found where the trial court has gone outside the framework of legal standards or statutory limitations, or when it fails to properly consider the factors on class certification established by the higher courts to guide the discretionary determination. 3. K.S.A. 60-223(a) establishes four factors that must be met before a class is certified: numerosity, commonality, typicality, and adequacy of representation. 4. Prior to 2010, K.S.A. 60-223 contained no specific guidance on how a district court should assess the adequacy of class counsel. Nevertheless, a relevant consideration should include looking at the work counsel has done in identifying or investigating potential claims in the class action. 5. Class counsel in a class action is not necessarily inadequate for failing to independently determine the precise value of a hypothetical claim that counsel believes to be without merit and unrecoverable at trial. 6. An abuse of discretion standard applies to an appellate review of the district court's approval of a class action settlement, and the appellant bears the burden of establishing such an abuse of discretion. An abuse of discretion occurs when the court goes outside the framework of or fails to consider the proper legal standards. 7. A district court's finding, after hearing, that a class action settlement is fair, reasonable, and adequate comports with both current and prior law in Kansas. 8. In determining whether a class action settlement is fair, reasonable, and adequate, a district court should consider all of the relevant circumstances affecting the particular
settlement of the particular class action for the benefit of the particular class members. The relevant circumstances could include whether the settlement was fairly and honestly negotiated; whether serious questions of law and fact exist that place in doubt the ultimate litigation outcome; whether the value of immediate recovery outweighs the mere possibility of future relief after protracted and expensive litigation; and whether the parties believe the settlement to be fair and reasonable. 9. A class representative is permitted to release an unlitigated claim that is based upon the same underlying facts and theory of liability as the asserted claims in a settled class action. 10. Parties to an oil and gas lease are free to modify or change the terms of their agreement, and their express contractual provisions shall control over general statutory provisions, public policy concerns, or implied covenants. 11. The district court's role with respect to a consensual class action settlement agreement is merely to ensure that the agreement is not the product of fraud or collusion and that, taken as a whole, the settlement is fair, adequate, and reasonable to all concerned. 12. An arbitration provision in a class action settlement agreement that is limited to requiring binding arbitration for disputes arising out of a stipulated settlement does not deprive the class members of their inviolate right to jury trial under Section 5 of the Kansas Constitution Bill of Rights.
The opinion of the court was delivered by: Johnson, J
The opinion of the court was delivered by JOHNSON, J.: Royalty owners entitled to receive a share of the production of natural gas in the Hugoton gas field in southwest Kansas brought a class action against Anadarko Petroleum Corporation (APC) claiming that the company and its affiliates had effected an underpayment of the royalties required by the plaintiffs' respective oil and gas leases. The original petition, filed in 1998, sought an accounting, damages, and declaratory and injunctive relief. The case was tried to the bench in 2002, reargued to the same trial judge in 2006, and settled in June 2009. Stan Boles, one of the more than 6,000 members of the settlement class, objected to the amended class certification and the class action settlement agreement negotiated by Timothy Coulter, as representative of the plaintiff class. Despite Boles' objection, the district court approved the settlement, finding it to be bona fide, fair, just, reasonable, and adequate. Boles appeals the district court's approval of the settlement, while the plaintiff class and the defendant urge us to affirm the district court's approval of the settlement. Finding that the district court did not abuse its discretion in assessing the adequacy of class representation or the character of the settlement agreement, we affirm its rulings.
FACTUAL AND PROCEDURAL OVERVIEW
APC's brief relates a brief history of the development of what it refers to as the Kansas Hugoton Gas Field (Hugoton Field), along with a description of the evolution of the defendant company and its affiliates. APC recites that the Hugoton Field was discovered in the 1920s and first developed in the 1930s by several companies, including Panhandle Eastern Pipe Line Company (PEPL). PEPL drilled wells, laid a gathering system west of Hugoton, Kansas, built a transmission line eastward connecting the system to the Liberal compressor station, and built an interstate transmission line further connecting the Hugoton Field to distant eastern markets. PEPL subsequently formed Anadarko Production Company, which in turn eventually formed APC as a wholly-owned subsidiary for the exploration, production, and development of operations in the Hugoton Field, and elsewhere. APC formed Anadarko Gathering Company (AGC), which now operates the Hugoton Gathering System, consisting of approximately 1,650 miles of pipeline utilized to gather and transport natural gas from thousands of wells. APC sells most of its production from southwest Kansas to another affiliated company, Anadarko Energy Services Company (AESC).
The point at which the raw natural gas comes to the surface and leaves the well is referred to as the wellhead. Oil and gas leases ordinarily provide for the payment of royalties at the wellhead. But the gas is subjected to processing at certain points between the wellhead at the front end and the interstate transmission pipeline at the tail end, where the principal market for gas from the Hugoton Field exists. Highly summarized and simplified, the gas is initially subjected to some processing at the well site, e.g. separation, dehydration, and compression, before it enters the gathering system. In the gathering system, the gas stream is further treated and must be compressed at various locations to push the gas towards a processing plant. In the process, the gas cools and forms condensate, some of which is lost or removed. Further, some of the gas stream is used as fuel for the compressors in the gathering system operations. Then, the gas enters processing plants where natural gas liquids (NGLs), helium, and other non-hydrocarbons such as nitrogen are removed from the gas stream before the residue is compressed again for entry into the interstate pipeline. Federally regulated tariffs govern the condition of the gas that is allowed into interstate pipelines. Some of the by-products removed at the processing plants, such as helium, are sold separately.
At the time of this lawsuit, AESC paid APC for the gas based on a formula tied to a published index price applicable to gas being sold at the inlet to the PEPL interstate transmission pipeline. The formula related the downstream price back to the wellhead by subtracting AESC's gathering and fuel costs pursuant to its contracts with AGC and others. But the net price was applied to the full wellhead MMBtu (one million British thermal units) content of the gas stream so as to capture the heating value of NGLs and condensate which had been part of the wellhead gas stream but which were removed before the gas entered the interstate pipeline. As noted, some of those removed components were sold separately in downstream markets.
The oil and gas leases required APC to pay royalties on the gas produced at the well site. Accordingly, APC paid royalties on the same basis as it was paid by its affiliates, meaning that the royalties were calculated using the market-based index price at the interstate pipeline inlet, less the gathering and fuel costs necessary to move the gas from the well sites to the interstate pipeline index point. Given that the royalties were paid based upon the heating value of the entire gas stream at the wellhead (which would include the commingled NGLs, etc.), no separate royalties were paid on the sales of NGLs or other components of the gas stream after their removal or extraction, except for helium. Correspondingly, APC also did not charge royalty owners with any of the costs associated with removing or extracting the NGLs from the gas stream at the processing plants. But APC did pay royalties on the net sales of helium, meaning that royalty owners shared in the costs associated with extracting the helium from the gas stream.
In 1998, plaintiffs, all of whom were or had been owners of mineral interests in lands leased by APC, filed a petition challenging the manner in which APC was paying royalties on natural gas production under the respective oil and gas leases. The plaintiffs principally complained that APC had wrongfully allocated production and marketing costs against the royalty payments in contravention of its contractual obligation to produce gas at its own expense. The original petition included the following allegations:
"J. With respect to production of the effluent stream from lands subject to the aforementioned leases, defendant has failed to properly and fully account for royalty payments due to members of plaintiff class in accordance with the express and implied covenants of their leases, by wrongfully allocating production costs and the cost of placing gas in a marketable condition ('marketing costs') so as to reduce such royalty payments to which members of plaintiff class are entitled or by unilaterally selecting an improper lower price on which royalty payments are calculated.
"L. By its conduct, defendant has unjustly enriched itself and breached its duties and obligations (both express and implied) arising under the aforementioned leases, including but not limited to the following:
(a) By means of its allocation of costs (such as gathering, compression, and fuel) associated with the production of the effluent stream, and/or by means of non-arms-length sales to an affiliated entity, defendant has wrongfully reduced royalty payments to members of the plaintiff class, and has thereby breached its duty to produce gas at its own expense;
(b) By means of its allocation of costs associated with placing the effluent stream in a marketable condition, and/or by means of non-arms-length sales to an affiliated entity, defendant has wrongfully reduced royalty payments to members of the plaintiff class, and has thereby breached its duty to place gas in a marketable condition at its own expense;
(c) By so reducing royalty payments to members of the plaintiff class, and by failing to disclose such reductions in remittance statements, defendant has breached its duty of good faith and fair dealing when accounting to members of the plaintiff class."
The relief sought in the original petition included the following:
"WHEREFORE, plaintiffs, . . . pray:
"1. For the judgment of this court declaring that defendant is prohibited from allocating production and marketing costs so as to reduce such royalty payments to which members of plaintiff class are entitled or from unilaterally selecting an improperly lower price on which royalty payments are calculated; and for an order (i) permanently prohibiting defendant from calculating royalty payments in such a manner or in any other manner contrary to its duties under Kansas law, and (ii) requiring defendant to henceforth calculate and make royalty payments in accordance with such duties.
"2. For a full and complete accounting by defendant of: (a) all the consideration defendant and any related entity has received in connection with the sale or other disposition of the effluent stream (or any portion thereof) extracted from the lands subject to the leases described above; and (b) complete disclosure of all reductions in royalty payments due to charges and expenses, if any, allegedly incurred by it or by any related entity before the disposition of such effluent stream, and the purpose of each such reduction; and (c) the manner in which all royalty payments in connection with any such disposition have been calculated; and
"3. For judgment of damages and prejudgment interest, for underpayment of royalty resulting from improper reductions and/or the use of other than arms-length pricing . . . ."
Subsequently, APC filed notice of removal to the United States District Court for the District of Kansas, but plaintiffs' motion to remand the action to state court was granted, based upon a lack of federal court subject matter jurisdiction. Upon remand and further discovery, the Stevens County District Court certified the class on August 23, 2000. The certified class, which at the time consisted of approximately 4,500 members, was described as:
"All persons or concerns owning mineral interests in lands located in the areal confines of the Kansas Hugoton Field, burdened by oil and gas leases owned in whole or in part by [APC] insofar as such leases are productive of gas from above the base of the Panoma Council Grove Field, production from which has been collected in one or more gathering systems operated by [AGC] . . . ."
On November 20, 2001, the district court denied both parties' motions for summary judgment, and the matter proceeded to a bench trial in February 2002. The pretrial order identified the following relevant issues of fact and law to be decided in the trial:
"a. Whether Plaintiffs' royalties are being reduced by expenses incurred to compress the gas in issue.
"b. If Plaintiffs' royalties are being reduced by expenses incurred to compress the gas, what is the purpose for compressing the gas in issue?
"c. Whether Plaintiffs' royalties are being reduced by expenses incurred to dehydrate the gas in issue.
"d. If Plaintiffs' royalties are being reduced by expenses incurred to dehydrate the gas, what is the purpose for dehydrating the gas in issue?
"e. Whether Plaintiffs' royalties are being reduced by expenses incurred to 'gather' or 'transport' the gas in issue.
"f. If Plaintiffs' royalties are being reduced by expenses incurred to 'gather' or 'transport' the gas in issue, whether those expenses are properly categorized as 'gathering' or 'transportation', as those terms are defined by Kansas law.
"g. Whether any or all of the expenses referred to in paragraphs a through f are 'production' expenses, as Kansas law defines that term.
"h. Whether the facilities between the wells in issue and the interstate transmission pipeline are being used either to 'produce' the gas in issue in this case or to place that gas in marketable condition.
"i. Whether liquid hydrocarbons are being extracted from the gas in issue and, if so, if that extraction is done for purposes of making the gas in issue marketable?
"j. Whether any or all of the expenses referred to in paragraphs a through f and i, above, are 'marketable' expenses, as Kansas law defines that term.
"k. Whether the gas in issue is 'marketable' at the well. . . . .
"a. Whether the compression costs at issue in the instant case may, under Kansas law, be deducted prior to calculating and paying royalty under the express and implied terms of the subject oil and gas leases and the facts of this case.
"b. Whether the dehydration costs at issue in the instant case may, under Kansas law, be deducted prior to calculating and paying royalty under the express and implied terms of the subject oil and gas leases and the facts of this case.
"c. Whether the gathering costs at issue in the instant case may, under Kansas law, be deducted prior to calculating and paying royalty under the express and implied terms of the subject oil and gas leases and the facts of this case.
"d. Whether the transportation costs at issue in the instant case may, under Kansas law, be deducted prior to calculating the paying royalty under the express and implied terms of the subject oil and gas leases and the facts of this case.
"e. How Kansas law defines 'production' expenses and whether such definition includes the expenses necessary to place the gas in marketable condition.
"f. How Kansas law defines 'gathering' and 'transportation' in the context of the facts of this case.
"g. How Kansas law defines the implied duty to market gas in the context of the facts of this case.
"h. How Kansas law defines 'marketable' in the context of the facts of this case."
The plaintiff class points out that, prior to the bench trial, the district court ruled against the plaintiff class on two issues which the class identifies as being "key legal issues." First, the district court refused to find that, as a matter of Kansas law, a lessee is always prohibited from deducting compression expenses, including fuel, from a royalty owner's share. Those expenses comprised the bulk of plaintiffs' gathering deduction claims (gathering claims). Instead, the trial court ruled that the deductibility of these expenses turned on the factual determination of the purpose for which the costs were incurred, i.e., whether the costs were necessary to put the gas in marketable condition. In the second ruling, the district court found that the plaintiff class had not met the threshold test for asserting a claim for punitive damages based upon the class' allegation that APC used affiliates to hide that it was underpaying royalties.
At the bench trial, the parties presented conflicting expert testimony and documentary evidence on the critical question of the point at which APC had produced gas in marketable condition. The plaintiff class presented evidence to support its contention that the gas was not in marketable condition until it met the federal specifications to be transported in the interstate pipeline, which was after the processing plants had extracted the NGLs and non-hydrocarbons and the remaining gas stream had been highly compressed. APC presented evidence to support its assertion that the raw natural gas was in marketable condition at the well site, before it even entered the gathering system.
After the bench trial, the parties submitted proposed findings of fact and conclusions of law, and the court heard argument on those proposals on May 10, 2002. After the matter had been pending for a number of years, the plaintiffs moved for re-argument. The district court granted the motion and held a rehearing on August 9, 2006. When a ruling had not been rendered by September 2007, the parties sought recusal of the trial judge, albeit no ruling on that motion appears in the record.
Shortly thereafter, the parties engaged in an unsuccessful mediation. Later in 2008, the parties resumed settlement negotiations. APC took the position that any settlement agreement had to cover all aspects of its royalty responsibilities in Kansas, including both hydrocarbons and non-hydrocarbons. In return, APC was willing to make a series of "representations" upon which plaintiffs' counsel could rely in evaluating whether a settlement offer would be fair and adequate for the class members. Included in those representations were: (1) an averment that APC has always paid royalties on the total heating value of the gas stream as it leaves the wellhead, i.e., the full MMBtu wellhead volume; (2) an assurance that APC's royalty calculation makes no deduction or adjustment for processing when determining the price to be applied to the wellhead MMBtu; (3) an estimation of the additional net value of the NGLs when they are extracted and sold at the processing plant over and above their MMBtu value as part of the gas stream at the wellhead, i.e., an estimate of the net uplift as a percentage of the market index price; (4) an explanation of the contract terms between APC's affiliate and the National Helium Plant regarding the pricing or the taking in kind of the extracted liquids; (5) an explanation of how APC pays royalties on helium; (6) an agreement that APC accepts the estimate that net revenues realized from the sale of gas at Kansas pooling points reflect an increase of 1% of the index price; and (7) a submission of a spreadsheet setting forth APC's best estimate of the gathering and fuel costs that plaintiff class was seeking to recoup in the lawsuit.
Those continuing negotiations eventually culminated in the subject agreement. A motion was filed with the district court, requesting the certification of an expanded class and the conditional approval of the settlement. The proposal expanded the size of the class to over 6,000 members by enlarging the geographical and geological boundaries of the included wells. The new class was defined as:
"[A]ll Persons owning mineral interests that are or were burdened by oil and gas leases owned or operated in whole or in part by APC covering property located in Kansas, and that were royalty owners of APC on production for any production month prior to January 1, 2009, to the extent that such production was sold by APC to any Affiliate of APC . . . ."
The key terms of the settlement included the following: (1) APC's payment of $33 million in damages for the alleged past underpayment of royalties; (2) the plaintiffs' release of all claims arising out of or relating to the payment or calculation of royalties on APC's working interest share of gas, including both hydrocarbon and non-hydrocarbon components, such as helium; (3) going forward provisions dictating how APC would calculate and pay future royalties on both hydrocarbon and non-hydrocarbon components of the gas stream; (4) a provision that APC's royalty check stubs or supplemental documentation would include information on the components of the agreed-upon royalty calculation methodology on gas as well as information on the volumes and net proceeds received on helium and other non-hydrocarbon components of the gas stream; and (5) a provision that any future discrepancy or dispute about the calculation or payment of royalties under the settlement ...