In Coulter v. Anadarko Petroleum Corp., 2013 WL 135664 (Kan, Jan. 11, 2013), the Kansas Supreme Court closed the book on nearly fifteen years of oil and gas lease class litigation and provided some helpful guidance on how Kansas courts will evaluate the adequacy of class counsel and the fairness and adequacy of class action settlements. This class action was brought in 1998 by owners of mineral interests in lands leased by APC principally, and alleged that APC had wrongfully allocated production and marketing costs against royalty payments in violation its contractual obligation to produce gas at its own expense. After a bench trial and submission of proposed findings of fact and conclusions of law by both sides in 2002, the case sat with no ruling for years. In 2008, after moving to recuse the judge and receiving no ruling on that motion, the parties took matter into their own hands and resumed settlement negotiations. Those negotiations led to an agreement, culminating in a 2009 fairness hearing that resulted in the approval of the class settlement.
Appellant Stan Boles was the sole class member to file an objection and appear at the fairness hearing to challenge the settlement. Boles assailed both the adequacy of class counsel and the fairness of the settlement based on class counsel’s alleged failure to investigate “non-gathering” claims – i.e., those claims alleging reduction in royalties attributable to downstream events other than the gathering and fuel costs incurred in the gathering system – before releasing them on behalf of the class as part of the class settlement. The district court had permitted Boles to call an expert witness who testified that the non-gathering claims were worth in excess of $40,000,000.00, and that the full value of the gathering and non-gathering claims were worth in excess of $140,000,000.00 rather than the $33,000,000.00 agreed upon in the settlement. Following the district court’s denial of his objection and motions for intervention and further discovery, Boles appealed, and the case was transferred to the Kansas Supreme Court pursuant to K.S.A. 20-3018(c).
Writing for the Court, Justice Johnson first addressed Boles’ contention that class counsel was inadequate by failing to adequately identify and investigate the value of potential non-gathering claims. In 2010, K.S.A. was amended to more fully delineate the criteria by which the adequacy of class counsel is assessed:
“(1) Appointing Class Counsel. Unless a statute provides otherwise, a court that certifies a class must appoint class counsel. In appointing class counsel, the court:
(A) must consider:
(i) the work counsel has done in identifying or investigating potential claims in the action;
(ii) counsel’s experience in handling class actions, other complex litigation, and the types of claims asserted in the action;
(iii) counsel’s knowledge of the applicable law; and
(iv) the resources that counsel will commit to representing the class;
(B) may consider any other matter pertinent to counsel’s ability to fairly and adequately represent the interests of the class;
(C) may order potential class counsel to provide information on any subject pertinent to the appointment and to propose terms for attorney’s fees and nontaxable costs….”
The Court acknowledged that these post-amendment standards were not controlling in this fifteen-year-old case, but concluded nonetheless that the additional language provided a useful framework for its analysis. Applying these standards, the Court affirmed the district court’s finding that class counsel adequately represented the class. In particular, the Court agreed that class counsel had indeed identified and investigated the value of the non-gathering claims, and had properly concluded that there was none. The Court flatly declined to impose upon class counsel a duty to determine the precise value of “hypothetical claims which counsel believes to have no merit.”
The Court then addressed the fairness of the class settlement and concluded that the district court did not abuse its discretion approving the class settlement as fair and adequate. Although K.S.A. 60-223 was recently amended to track the Rule 23 standard requiring that the class settlement be “fair, reasonable and adequate,” the prior version of the statute – and the version controlling the approval of this settlement – required only judicial approval with no further explanation of the governing standard. After discussing the various factors applied by various courts in evaluating class settlement, the Court decided – without determining what standards would become a “mandatory inquiry in all class actions in Kansas district courts” – to consider “all of the relevant circumstances, including those deemed important by federal courts,” to assess whether the settlement is fair, reasonable and adequate. Functionally, the Court applied the factors relied upon by the Tenth Circuit:
(1) whether the proposed settlement was fairly and honestly negotiated;
(2) whether serious questions of law and fact exist, placing the ultimate outcome of the litigation in doubt;
(3) whether the value of an immediate recovery outweighs the mere possibility of future relief after protracted and expensive litigation; and
(4) the judgment of the parties that the settlement is fair and reasonable.
Under these standards, the Court readily determined that the district court had not abused its discretion in approving the class settlement. The Court particularly rejected the argument that the settlement was unfair because it released non-gathering claims, relying on class counsel’s testimony that the inclusion of the non-gathering claims in the release had enabled the class to negotiate a better overall settlement, although class counsel believed these claims themselves had no value.
The Court was similarly unimpressed with Boles’ assertion that, because the non-gathering claims were never litigated, there was no “adverseness” and therefore no Article III standing to release these “unlitigated” claims. Without deciding whether federal standing analysis applies to state court class action settlements, the Court rejected this argument, concluding instead that the non-gathering claims were not separate claims, but “simply additional damages for the class’ allegations of breach of contract” under the “identical predicate rule,” which permits “the release of a claim based on the identical factual predicate as that underlying the claims in the settled class action even though the claim was not presented and might not have been presentable in the class action.” Wallace B. Roderick Revocable Living v. XTO Energy, 679 F. Supp.2d 1287, 1308 (D. Kan. 2010). The Court also found that the non-gathering claims had indeed been sufficiently litigated in the course of establishing the factual predicate for the gathering claims, thereby eliminating any lingering due process concerns raised by Boles.
While the Court’s analysis was nominally executed under a pre-amendment standard, the Kansas Supreme Court functionally applied a post-amendment framework to flesh out both the standard for determining adequacy of class counsel and the benchmarks for assessing the fairness of class action settlements. As such, this opinion should provide useful guidance on these issues prospectively.