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No. 103,009 IN THE COURT OF APPEALS OF THE STATE OF KANSAS WILLIE JEAN FARRAR and KEITH FARRAR, as cotrustees of the KEITH FARRAR REVOCABLE TRUST, dated October 22, 1999; JOHN ELDON GREGG and KEITH THOMAS GREGG, as co-trustees of the MARIE GREGG TRUST U/A, dated APRIL 26, 1979, as amended; and THOMAS L. and PATRICIA A. LAHEY, individually and jointly, Appellees, v. MOBIL OIL CORPORATION, Appellant.

SYLLABUS BY THE COURT 1. Applying K.S.A. 60-223(a), the threshold requirements for a class action in Kansas are: (1) The number of class members is so large that joinder of all members is impracticable; (2) the class claims present common questions of fact or law; (3) the named parties' claims and defenses are representative of the claims and defenses of the other class members; and (4) the class representatives will fairly and adequately protect the interests of the class as a whole.

2. In addition to the threshold requirements of K.S.A. 60-223(a), the certification of a class under K.S.A. 60-223(b)(3) requires that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.

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District courts have substantial discretion in deciding whether to certify a case as a class action. Both state and federal class action rules require that a class should be certified only after a rigorous analysis that the prerequisites of the applicable statute have been satisfied.

4. We review the certification of a class action for an abuse of discretion. A trial court abuses its discretion if it fails either to evaluate carefully the legitimacy of the plaintiffs' allegations and evidence supporting class treatment or to conduct a rigorous analysis to determine whether the statutory prerequisites have been satisfied. An abuse of discretion occurs when the trial court has gone outside the framework of legal standards or statutory limitations or when it fails to properly consider the factors on that issue given by the higher courts to guide the discretionary determination.

5. Our Supreme Court has consistently applied the law of Kansas--not the law of other states--to disputes requiring the construction and enforcement of oil and gas leases on Kansas properties. Kansas has adopted lex rei sitae or the law of the situs of the lease properties as the choice-of-law doctrine that should be applied in cases involving oil and gas leases covering properties in Kansas.

6. Courts in other oil and gas producing states likewise apply their own state law to disputes regarding the payment of royalties on oil and gas produced from leases covering lands located within their boundaries.

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7. Under the facts of this case, the district court did not err in holding that the doctrine of lex rei sitae governs the claims of the plaintiffs' class and in rejecting Mobil's contention that a proper application of lex loci contractus would defeat the prerequisites for maintenance of a class action because of the need to apply varying and disparate laws of numerous states where the instruments were executed.

8. 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 own law is neither arbitrary nor fundamentally unfair.

9. Whether the lessor's rights to royalty are technically classified as personalty or realty, it is difficult to imagine a more intimate contact with Kansas than the construction and enforcement of instruments that license the exploration of Kansas minerals.

10. Under the facts of this case, we conclude that the allegations of the plaintiffs' class implicate significant contacts with Kansas and there is no arbitrariness or unfairness in the application of Kansas law in determining how the subject oil and gas leases should be construed and enforced.

11. Kansas has long recognized the duty of the lessee under an oil and gas lease not only to explore for and develop oil and gas production but to use reasonable diligence in finding a market for the product. The implied obligation is to market the produced minerals at reasonable terms within a reasonable time following production. 3

12. Smith v. Amoco Production Company, 272 Kan. 58, 31 P.3d 255 (2001), is discussed and distinguished.

13. Under the facts of this case, where a purported class action claims improper deductions in calculating royalties under oil and gas leases, there is no need for individualized examination of lease formation or the intent of the parties thereto for purposes of determining predominance of common issues or manageability in certification proceedings where there has been shown a systemic common course of conduct by an oil and gas lessee in calculating royalties payable pursuant to leases to explore and develop Kansas minerals.

14. Because class action certification is discretionary with the trial court, the class may be altered, expanded, subdivided, or abandoned as the case develops. Class actions may be amended, limited, or subclasses of plaintiffs may be established if needed.

Appeal from Stevens District Court; TOM R. SMITH, judge. Opinion filed June 11, 2010. Affirmed.

Shannon H. Ratliff, of Ratliff Law Firm, P.L.L.C., of Austin, Texas, and Richard C. Hite and Arthur S. Chalmers, of Hite, Fanning, & Honeyman, L.L.P., of Wichita, for appellant.

David G. Seely, Thomas D. Kitch, Gregory J. Stucky, Charles E. Millsap, and Daniel E. Lawrence, of Fleeson, Gooing, Coulson & Kitch, L.L.C., of Wichita, and Erick E. Nordling, of Kramer, Nordling & Nordling, LLC, of Hugoton, for appellees.

Before RULON, C.J., GREENE, J., and LARSON, S.J. 4

GREENE, J.: ExxonMobil Oil Corporation, formally Mobil Oil Corporation (Mobil), appeals the district court's certification of a class action against it by Mobil's oil and gas lessors of Kansas minerals within the Hugoton Field, or by the successors in interest to such lessors, alleging breach of express and implied covenants by Mobil in the purported improper deduction of expenses from the payment of royalties to lessors. Mobil contends the district court abused its discretion in certifying a class because it failed to rigorously analyze the requirements of K.S.A. 60-223, that choice-of-law issues and variations in the circumstances surrounding execution of individual leases defeat the predominance of any common issues of law or fact, and that these individual issues would make management of a class action difficult if not impossible. Concluding there was no abuse of discretion by the district court, we affirm the class certification and remand for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND Plaintiffs initially sought to certify a class action on behalf of interest owners of minerals burdened by 1,200 leases on acreage within the areal extent of the Kansas Hugoton Field, whose gas flowed through the Bushton gathering system owned by ONEOK. The action alleged that Mobil had breached express and implied contractual obligations by deducting from royalty payments a pro-rata portion of the amount paid by Mobil to ONEOK for services necessary to gather the gas and transport it to the processing plant. These claims were expanded 3 years later to include claims of the additional mineral interest owners whose gas flowed through the Jayhawk Plant on the Hickok gathering system owned by Mobil. Counsel indicated at oral argument that the scope of the litigation now involves approximately 2000 leases and more than 5000 potential class members.

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After Mobil's attempts to remove the action to federal court failed, discovery was conducted, the certification issue was joined, and the district court conducted an evidentiary hearing. Following posttrial submissions from the parties, the court entered its 21-page journal entry certifying a class action under K.S.A. 60-223(b)(3) and defining the class as:

"'All persons or concerns owning mineral interests in lands located in the areal confines of the Kansas Hugoton Gas Field, burdened by oil and gas leases owned in whole or in part by defendant insofar as such leases are productive of gas from above the base of the Panoma Council Grove Field, the gas from which has been subject to the Gathering Agreement, including the instrumentalities of the United States of America and federally chartered corporations, such as, but not limited to, the Farm Credit Bank of Wichita and the Federal Land Bank, but excluding the United States of America insofar as its mineral interests are managed by the Mineral Management Service.'"

On September 1, 2009, Mobil filed its application with this court to take an interlocutory appeal pursuant to K.S.A. 60-223(f). This court granted the application and stayed the district court proceedings pending resolution of this interlocutory appeal. Mobil then timely filed its notice of appeal.

STANDARDS FOR CLASS CERTIFICATION AND APPELLATE REVIEW THEREOF

There are four statutory threshold prerequisites to bringing a class action in Kansas. A class action is only proper if (1) the number of class members is so large that joinder of all members is impracticable; (2) the class claims present common questions of fact or law; (3) the named parties' claims and defenses are representative of the claims and defenses of the other class members; and (4) the class representatives will fairly and adequately protect the interests of the class as a whole. K.S.A. 60-223(a). In shorthand, the threshold elements are identified as "(1) numerosity, (2) commonality, (3) typicality,

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and (4) adequacy of representation." Dragon v. Vanguard Industries, Inc., 277 Kan. 776, 778, 89 P.3d 908 (2004) (Dragon I).

In addition to meeting all the threshold elements, a putative class plaintiff must establish that a class action is maintainable under one of the three provisions of K.S.A. 60-223(b). Here, plaintiffs rely on the criteria of K.S.A. 60-223(b)(3), which state:

"[T]he court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. The matters pertinent to the findings include: (A) The interest of the members of the class in individually controlling the prosecution of defense of separate actions; (B) the extent and nature of any litigation concerning the controversy already commenced by or against members of the class; (C) the desirability or undesirability of concentrating litigation of the claims in the particular forum; (D) the difficulties likely to be encountered in the management of a class action." (Emphasis added.)

Mobil's primary contentions focus on whether the common issues predominate over the individual issues framed by variations in applicable state law and by the individualized examination of lease formation. The predominance inquiry of Rule 23(b)(3) of the Federal Rules of Civil Procedure, which parallels K.S.A. 60-223(b)(3), tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation, a standard "far more demanding" than the commonality requirement of Fed R. Civ. Proc. 23(a). Amchem Products, Inc. v. Windsor, 521 U.S. 591, 623-24, 138 L. Ed. 2d 689, 117 S. Ct. 2231 (1997). Thus, predominance "require[s] more than a common claim." Newton v. Merrill Lynch, Pierce, Fenner & Smith, 259 F.3d 154, 187 (3d Cir. 2001).

Mobil also challenges the manageability of the action as a class action. The other prong under subsection (b)(3), "[c]ommonly referred to as 'manageability,' . . . 7

encompasses the whole range of practical problems that may render the class action format inappropriate for a particular suit." Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 164, 40 L. Ed. 2d 732, 94 S. Ct. 2140 (1974). The superiority requirement insures that no other available method of handling the claims has greater practical advantages. See In re Univ. Serv. Fund Tel. Billing Practices Lit., 219 F.R.D. 661, 679 (D. Kan. 2004) (obvious alternative of individual suits by each plaintiff would be grossly inefficient, costly, and time consuming because the parties, witnesses, and courts would be forced to endure unnecessarily duplicative litigation).

District courts have substantial discretion in deciding whether to certify a case as a class action. Dragon I, 277 Kan. at 779. Both state and federal class action rules require that a class should be certified only "'after a rigorous analysis, that the prerequisites of [the statute] have been satisfied.'" Dragon I, 277 Kan. at 780 (quoting General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 160-61, 72 L. Ed. 2d 740, 102 S. Ct. 2364 [1982]). In conducting this "rigorous analysis," the district court may be required to look behind the plaintiffs' pleadings before resolving the certification question. The factual inquiry, however, does not require an actual determination of the merits of the plaintiffs' claims. Dragon I, 277 Kan. at 781; see In re Univ. Serv., 219 F.R.D. at 679.

We review the certification of a class action for an abuse of the discretion as outlined above. A trial court abuses its discretion if it fails either to evaluate carefully the legitimacy of the plaintiffs' allegations and evidence supporting class treatment or to conduct a rigorous analysis to determine whether the statutory prerequisites have been satisfied. See Dragon I, 277 Kan. at 779-81. An abuse of discretion occurs when the trial court goes outside the framework of legal standards or statutory limitations or fails to properly consider the factors given by the higher courts to guide the discretionary determination. Dragon v. Vanguard Industries, 282 Kan. 349, 354, 144 P.3d 1279 (2006) (Dragon II). 8

SUMMARY OF CHALLENGES TO THE DISTRICT COURT'S CLASS CERTIFICATION

Mobil's challenge to the district court's class certification order is multifaceted. Mobil initially argues the district court "ignores the Kansas Supreme Court's directives in Dragon I and Dragon II by failing to hold Plaintiffs to their burden," by shifting that burden to Mobil, and by failing to perform a rigorous analysis of the predominance and manageability elements.

More specifically, Mobil claims that the district court's apparent application of lex fori--the law of the forum--as the choice of law is contrary to Kansas caselaw because the subject royalty interests are governed by leases executed in many states, and the application of the law of the forum is unconstitutional as "to a nationwide class's claims." Moreover, Mobil argues that when the proper choice-of-law doctrine of lex loci contractus is considered, a host of legal questions framed by the action will be subject to various state laws, thus demonstrating that common questions of law do not predominate.

Additionally, Mobil claims that a proper reading of Smith v. Amoco Production Company, 272 Kan. 58, 75-76, 31 P.3d 255 (2001), means that implied covenants in oil and gas leases are implied in fact and not in law, thus requiring "an examination of the lease and its amending documents and the facts and circumstances surrounding these documents' execution" in order to determine whether the parties reached "the unspoken agreement specifically alleged." Thus, Mobil suggests that its duty to each purported class member is dependent upon an individualized factual inquiry "governed by thousands of leases and amending documents with materially different royalty clauses that were executed at various times under varying circumstances."

In summary and for purposes of our analysis, we address two major concerns in this appeal: (1) Did the district court abuse its discretion in failing to consider the proper 9

choice-of-law doctrine and would application of the proper doctrine create such diversity of legal issues that statutory prerequisites for a class action would be defeated? and (2) Did the district court abuse its discretion in misconstruing controlling caselaw governing implied covenants of the oil and gas leases and would a proper construction and application of such caselaw result in a myriad of individualized factual inquiries that would inevitably defeat the statutory prerequisites for a class action?

DID THE DISTRICT COURT ABUSE ITS DISCRETION IN FAILING TO CONSIDER THE PROPER CHOICE-OF-LAW DOCTRINE FOR THIS LITIGATION? Mobil contends the district court erred in addressing the choice-of-law issues raised in this case. Mobil argues that the district court improperly applied a lex fori approach to resolving the conflicts issue, which it claims is inconsistent with Kansas law. Further, Mobil contends such an application of lex fori to every class member's claim would be unconstitutional and that Kansas law requires the application of the lex loci contractus principle adopted by Kansas in some class actions framing contract disputes, requiring the application of the law where each lease was finalized. In a conflict-of-law situation, the determination of which state's law applies is a question of law over which this court has unlimited review. Foundation Property Investments v. CTP, 37 Kan. App. 2d 890, 894, 159 P.3d 1042 (2007), aff'd 286 Kan. 597, 186 P.3d 766 (2008).

The district court's findings and conclusions as to the proper choice of law included the following:

"The Kansas Supreme Court has applied Kansas Law to oil and gas leases located in Kansas, regardless of where they were executed. Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 815, 105 S.Ct. 2965, 2976, 86 L.Ed.2d 628 (1985) ('Shutts II'); Shutts v. Phillips Petroleum Co., 240 Kan. 764, Syl.

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