Cooper Clark Found. v. Oxy U.S. Inc.

58 Kan.App.2d 335

469 P.3d 1266

COOPER CLARK FOUNDATION, On Behalf of Itself and All Others Similarly Situated, Appellees,

v.OXY USA INC., Appellant.

No. 120,371

Court of Appeals of Kansas.

Opinion filed June 26, 2020

Review Denied November 24, 2020

Mark C. Rodriguez and Deborah C. Milner, of Vinson & Elkins LLP, of Houston, Texas, and James M. Armstrong and Mikel L. Stout, of Foulston Siefkin LLP, of Wichita, for appellant.

Rex A. Sharp, Barbara C. Frankland, Ryan C. Hudson, and Scott B. Goodger, of Sharp Law LLP, of Prairie Village, for appellees.

Before Leben, P.J., Gardner, J., and McAnany, S.J.

Leben, J.:

Oxy USA Inc. appeals the district court's decision to certify Cooper Clark Foundation's class-action lawsuit. Cooper sued on behalf of Kansas landowners with leases allowing Oxy to extract natural gas from their property in exchange for a monthly payment. Cooper alleges that Oxy underpaid landowners for several years by subtracting processing expenses from payments in violation of Oxy's duties under the leases. On appeal, Oxy raises four issues with the district court's certification decision. We begin with a preview of those issues and how we'll resolve them.

First, Oxy argues that the district court misapplied a legal doctrine underpinning many of Cooper's claims: the marketable-condition rule. Oxy says the court misread a case applying that rule, Fawcett v. Oil Producers, Inc. of Kansas , 302 Kan. 350, 352 P.3d 1032 (2015). Oxy contends that, under Fawcett , the class cannot be certified because the district court can't decide whether gas was marketable without evaluating gas quality from individual wells. But Oxy misreads Fawcett and ignores the way in which Cooper has defined the proposed class. Under Cooper's class definition, the only gas included is gas bound for the interstate market. So even if some small amount of gas could be used at the wellhead to run equipment or at a nearby farmhouse to provide heat, that wouldn't affect the marketability of the gas headed to the interstate market. And only that gas is included in Cooper's class.

Second, Oxy challenges the district court's commonality finding. A district court can't certify a class without finding commonality, meaning that all class members' claims depend on a common contention that's capable of resolution classwide. Oxy says several aspects of Cooper's claims present individual questions that should have precluded a commonality finding. But Cooper supplied ample evidence for the district court to find that the class petition raised several common questions, so the district court was right to reject Cooper's contrary claims.

Third, Oxy attacks the district court's predominance finding. Cooper certified the class under K.S.A. 60-223(b)(3), so the district court had to find that questions common to all class members predominated over those affecting only individual members. Oxy says that its statute-of-limitations defense presents individual questions that predominate because the district court will have to consider whether each class member has an excuse for failing to timely file their claims. But Oxy's defense can be litigated classwide; and even if it could not, the individual questions that defense might pose would not predominate. So the district court didn't abuse its discretion in finding predominance.

Last, Oxy claims that the district court failed to rigorously analyze the statutory requirements for class certification. Oxy points out that, before certifying the class, the district court didn't expressly rule on Oxy's motion to strike Cooper's expert testimony. Oxy says the failure to do so violated a requirement that the district court rigorously analyze the statutory requirements for class certification. Yet nothing in the substance of Oxy's motion would have precluded certification. And even if the district court should have ruled on Oxy's motion before certifying the class, the court implicitly did so with detailed findings rejecting the substance of Oxy's motion. On Oxy's last argument, like the other three, we find no error in the district court's decision to certify Cooper's class action.

FACTUAL AND PROCEDURAL BACKGROUND

We consider the issues of this appeal in the context of how gas is produced from the Hugoton Field. That field was once described as the largest reservoir of natural gas in the world. It's no surprise, then, that most Hugoton Field gas doesn't stay in Kansas—it's sent to pipelines for sale in the interstate market. See Coulter v. Anadarko Petroleum Corp. , 296 Kan. 336, 339, 292 P.3d 289 (2013) ; Southwest Kan. Royalty Owners Ass'n v. Kansas Corporation Comm'n , 244 Kan. 157, 160, 769 P.2d 1 (1989).

To understand the background of the case so that we can then discuss the legal issues of this appeal, we will first review the gas-production process and the gas leases at issue. When we get to the leases, each lease has a lessor, the landowner who grants rights to extract gas beneath the surface, and a lessee, the gas company that takes the gas to market it. For the ease of the lay reader, we'll simply refer to the lessee as the gas company throughout this opinion. Cooper seeks to represent the lessors in this class action; Oxy is the gas company or lessee.

The production process

This case involves a class-action lawsuit about natural-gas leases. Cooper represents 190 Kansas gas wells owned and operated by Oxy until 2014 (Class Wells). Oxy produced gas from Class Wells under 245 leases (Class Leases). The leases covered wells in the Hugoton Field, which stretches from southwest Kansas down through the panhandles of Oklahoma and Texas.

Most but not all Hugoton gas is bound for the interstate market—a small amount is used near the well in its raw form. You can use raw gas to heat a home (House Gas) or power irrigation equipment (Irrigation Gas). Or you can use it in the field to power gas-production equipment (Field Gas). But most Hugoton gas isn't used near the well—nearly all of it (about 99%) is sent for processing and sale in the interstate market.

That's what happened in our case. Oxy sent a small amount of gas from Class Wells for use in its raw form near the well: gas from 13 Class Wells was used as House Gas and gas from 24 Class Wells (about 2% to 3% of all gas from Class Wells) was used as Irrigation Gas. But most Class Wells (160 of 190) sent no gas for use as House or Irrigation Gas. Oxy used some gas from an unknown number of Class Wells as Field Gas to power its pumps and compressors.

Oxy sent the rest of the gas drilled from Class Wells for processing at the Jayhawk Plant under a contract with Amoco Production Company, the Plant's owner. Cooper's class definition includes only the gas from Class Wells sent for processing at the Plant (Class Gas); it excludes any raw gas from Class Wells used as House, Irrigation, or Field Gas.

At the Plant, Amoco extracted three individual components from raw Class Gas: Natural Gas Liquids (NGLs), Crude Helium, and Residue Gas. Amoco charged an in-kind processing fee for its services: it retained 25% of NGLs and 50% of Crude Helium extracted from Class Gas. It also charged a processing fee for Residue Gas. Then Amoco delivered the three extracted components, minus the amount retained as a processing fee, back to Oxy at the Plant. So Oxy received 100% of Residue Gas, 75% of NGLs, and 50% Crude Helium.

After processing, Oxy sold the components in the interstate market. Those sales had to occur after processing—until then, raw gas doesn't meet the minimum-quality standards set by the Federal Energy Regulatory Commission (FERC) for transporting gas on interstate pipelines. Oxy sold Residue Gas to its affiliate entity Occidental Energy Marketing, Inc. Occidental Energy paid Oxy the Southern Star Index Price—an established interstate-pipeline price based on a survey of transactions over a given period. Then Occidental Energy resold Residue Gas to third-parties. Occidental Energy also marketed NGLs for Oxy, selling the product to third-parties and passing on proceeds to Oxy. Oxy had a similar arrangement with Amoco for Crude Helium—Amoco marketed the product and passed on proceeds it received from buyers to Oxy.

The royalty clauses

We've focused so far on the production process, tracing Class Gas from the well where Oxy extracted it to the interstate market where Oxy sold it. But to understand Cooper's claims, it would help to understand how Oxy paid landowners under Class Leases.

Like all natural-gas leases, Class Leases require Oxy to pay royalties. Royalties are paid monthly from the gas company to a landowner (the lessor) when land burdened by a lease produces gas. Cooper and Oxy dispute the proper method of calculating royalty under Class Leases. Oxy points to three types of royalty clauses recognized in Kansas: proceeds, market value, and Waechter . Under proceeds leases, the gas company pays royalty based on a percent of the actual money it receives from selling the gas. But with market-value leases, Oxy says the gas company pays based on the price a willing buyer would pay a willing seller in a free market. Waecther leases—named after the lease type in Waechter v. Amoco Production Co. , 217 Kan. 489, 537 P.2d 228 (1975) —combine aspects of proceeds and market-value leases, with payment depending on where the gas was sold.

In the district court, both parties submitted a chart categorizing Class Leases by their royalty clauses. Both charts categorize Class Leases into 14 forms. Oxy's chart also sorts the leases into the three types we just mentioned. By Oxy's count, Cooper's class includes 114 Waechter leases, 104 market-value leases, and 27 proceeds leases. Oxy's chart also classifies each lease form by the volume of gas on which Oxy says it had to pay royalty. Cooper disputes these classifications.

The class action

On February 16, 2017, Cooper filed a class-action petition alleging that Oxy had underpaid royalties on Class Gas from July 1, 2007, to April 30, 2014 (Class...