L. Ruth Fawcett Trust v. Oil Producers, Inc. of Kan.

475 P.3d 1268

L. RUTH FAWCETT TRUST, Cindy K. Page-Colmer, Trustee, on Behalf of Itself and All Others Similarly Situated, Appellants/Cross-appellees,

v.OIL PRODUCERS, INC. OF KANSAS, Appellee/Cross-appellant.

No. 120,611

Court of Appeals of Kansas.

Opinion filed October 2, 2020

Rex A. Sharp, Barbara C. Frankland, and Ryan C. Hudson, of Rex A. Sharp, P.A., of Prairie Village, for appellants/cross-appellees.

Robert W. Coykendall and Will B. Wohlford, of Morris, Laing, Evans, Brock & Kennedy, Chartered, of Wichita, for appellee/cross-appellant.

Before Buser, P.J., Hill and Warner, JJ.

Hill, J.:

At times a district court's discretion evaporates. When a higher court remands a case to a lower court for further proceedings, the higher court's mandate limits what a lower court can do with that remanded case. The lower court cannot do as it wishes once the case returns. It must follow the ruling of the higher court. This is known as the mandate rule. Because the district court here on remand had to obey the mandate of the Supreme Court, its discretion had disappeared.

After this class action lawsuit returned to the district court on remand from our Supreme Court, the Class sought to amend its petition. The lower court held that it was constrained by the Supreme Court's ruling and refused to grant the motion to amend the Class' claim. The Class appeals.

The district court was correct. Because of what our Supreme Court ruled and how it came to that holding, we hold that granting the motion to amend would have undermined the Supreme Court's judgment and was thus barred by the mandate rule. Simply put, the district court had no discretion to grant the motion.

Additionally, we must resolve an issue over what is the proper prejudgment interest rate on unpaid royalties, and a cross-appeal about whether the Defendants can raise a statute of limitations defense.

The case history provides a context for our decision.

This class action seeks recovery of underpaid gas royalties. It is brought by about 2,300 royalty owners against the operator, Oil Producers, Inc. of Kansas, known as OPIK in this litigation. OPIK sells the raw natural gas at the wellhead to third parties, who, in turn, make the gas fit to enter our nation's interstate pipeline system. OPIK calculates the royalty payments on the amount it receives for the gas at the wellhead, rather than the price of the gas as it enters the interstate market.

The interstate market standards for the quality of natural gas must be met before gas can enter the pipelines. This often means that the raw gas must be improved by gathering, compressing, dehydrating, treating, and processing the gas once it has been extracted. Naturally, these steps require money. This added cost of processing is why the price for natural gas, as it enters the interstate market, is higher than the price at the wellhead. And that price differential is the main source of the disagreement between the Class and OPIK.

The Class' original petition alleged that OPIK breached its implied duty to market the gas. That duty has been imposed by our courts on the operators of oil and gas leases and not on the royalty owners. In fact, the courts have held that an operator must prepare the gas for market and if it is unmerchantable in its natural form, preparing the gas must be done with no cost to the royalty owner. The Class claimed damages from OPIK for the breach of this duty.

When it first considered this implied duty, the district court granted summary judgment to the Class and denied summary judgment to OPIK. The Class had maintained that by computing its royalty payments on the wellhead price of the gas, instead of the price of the gas as it enters the interstate market, OPIK had, at least partially if not totally, shifted the costs of preparing the gas to the royalty owners. This shifting of the costs of improving the gas breached the implied covenant to produce. Both sides appealed and the case eventually arrived in our Supreme Court.

The Kansas Supreme Court held that the gas production was merchantable once the operator has put it into a condition acceptable to a purchaser in a good-faith transaction. In reversing the district court, the Supreme Court ruled that the Class was not entitled to judgment as a matter of law. The court rejected the Class' theory that postproduction, postsale expenses necessary to transform raw natural gas into the quality required for interstate pipeline transmission were attributable solely to the operator as part of the operator's responsibility to make the gas marketable. Fawcett v. Oil Producers, Inc. of Kansas , 302 Kan. 350, Syl., 365-66, 352 P.3d 1032 (2015).

On a separate issue, the Supreme Court ruled the Class was entitled to summary judgment for OPIK's wrongful deduction of conservation fees from the royalties paid to the Class. The court then remanded the case to the district court. Fawcett , 302 Kan. at 352, 366, 352 P.3d 1032.

Back in district court, the Class sought to amend its claim. This time, the Class alleged that OPIK had violated its duty of good faith and fair dealing by manufacturing a sale before the raw gas was in a condition acceptable for the commercial market to shift midstream expenses to royalty owners. The district court denied the motion to amend after finding it was foreclosed from reconsidering the issue of good faith by the Supreme Court's decision and mandate.

The district court also ruled that OPIK could not assert a statute of limitations defense on its illegal deduction of conservation fees. But the district court declined to award prejudgment interest to the Class for OPIK's wrongful deduction of conservation fees. Both parties appeal.

The Class contends two errors compel reversal of the district court:

(1) The district court misconstrued the Supreme Court's decision and mandate;

(2) the district court erred by failing to award prejudgment interest.

In a cross-appeal, OPIK claims the district court erred by ruling it was barred by equitable estoppel from asserting a statute of limitations defense for unpaid royalties because of its wrongful withholding of the conservation fee.

The parties pull us in opposite directions on applying the mandate rule. The Class argues that the district court misconstrued the Supreme Court's mandate. Citing the court's statement that "What it means to be ‘marketable’ remains an open question," it argues the district court should have considered whether the gas was marketable at the well as an open question of fact. Fawcett , 302 Kan. at 363, 352 P.3d 1032.

Bolstering its argument on that point, the Class claims it has expert reports showing the gas was not marketable at the well. The Class suggests the duty to market requires an arm's length sale in an open market with many willing buyers and many willing sellers. It wants a trial where the parties can argue whether a good-faith sale occurred in this case.

The Class also contends the Supreme Court did not say what constitutes a good-faith sale or where a sale must occur for it to be in good faith. The Class maintains that there can be no good-faith sale until after the midstream services to prepare the gas for the downstream market were completed. In its view, an amended petition was appropriate because the Kansas Supreme Court decision changed the law on what it means for gas to be marketable.

Opposing all of these contentions, OPIK argues the proposed amendment to the petition would violate the Supreme Court's mandate. It relies on the court's statement that "OPIK satisfied its duty to market the gas when the gas was sold at the wellhead." Fawcett , 302 Kan. at 365, 352 P.3d 1032. In OPIK's view, the Class is simply relabeling the argument the Kansas Supreme Court rejected. For support on this point, OPIK cites Edwards v. State , 31 Kan. App. 2d 778, Syl. ¶ 3, 73 P.3d 772 (2003), where this court stated, "Where the appellate court has decided a particular issue, by explicit language or by necessary implication, the district court is foreclosed from reconsidering such an issue."

In its view, a finding of good faith was necessarily made by the Kansas Supreme Court and considering the Class' argument would undermine the court's explicit holding. OPIK acknowledges that the Kansas Supreme Court said, "What it means to be ‘marketable’ remains an open question." Fawcett , 302 Kan. at 363, 352 P.3d 1032. But it notes that the court then said: "But the answer is not simply, as Fawcett would have us hold, interstate pipeline quality standards or downstream index prices," 302 Kan. at 363-64, 352 P.3d 1032, which is what the Class is again arguing in its motion to amend. Simply put, the Class is trying to raise an argument in the lower court that the Supreme Court has already rejected.

How we will proceed.

We will first review one form of the law-of-the-case doctrine known as the mandate rule. We explore what lower courts can and cannot do when they, on remand, receive a ruling from a higher court. After that, we will examine the Supreme Court's opinion in this case. To make our ruling, we need to know not only what the court said, but try to determine why it said it. With that in mind, we intend to apply the mandate rule to the Class' motion to amend its claim. At this point, we will determine whether the district court erred in denying the Class' motion to amend.

From the amendment motion, we turn to prejudgment interest. First, we will determine which interest rate, if any, applies. And finally, we review the district court's holding that some prejudgment interest is not allowable here because the amount of the unpaid royalty was unliquidated.

At the end, we focus on the cross-appeal. We must decide whether the doctrine of equitable estoppel prevents OPIK from raising a statute of limitations defense.

The mandate rule

This rule demonstrates how our courts work when a higher court sends a case back to a lower court. First, we will examine some general authorities on the rule and then look at some...