Case Title: Seeco, Inc. v. Hales

Citation: 

Docket Number: 96-1392

State: arkansas

Court: Arkansas Supreme Court

Date: 1997-10-30T00:00:00Z

Document:
SEECO, INC., et al. v. Allen HALES, et al.

96-1392                                            ___ S.W.2d ___

                    Supreme Court of Arkansas
               Opinion delivered October 30, 1997


1.   Parties -- class certification -- trial court's discretion. -- Trial
     courts are given broad discretion in matters of class
     certification.

2.   Parties -- class certification -- predominance -- trial court considers
     common issues first. -- Regarding class certification, the supreme
     court has established a procedure of handling the common
     issues first, recognizing that the trial court, in its
     discretion, can later resolve the individual questions.

3.   Fraud -- clear and convincing testimony required to prove elements. -- To
     prove actual fraud, evidence of justifiable reliance must be
     offered; under Arkansas law, fraud is never presumed, and
     clear and convincing testimony must exist to prove its
     elements.

4.   Parties -- class certification -- challenge based on reliance will not bar
     predominance satisfaction. -- Certification challenges based on the
     statute of limitations, fraudulent concealment, releases,
     causation, or reliance have usually been rejected and will not
     bar predominance satisfaction because those issues go to the
     right of a class member to recover, in contrast to underlying
     common issues of the defendant's liability.
5.   Parties -- class certification -- challenges based on lack of reliance and
     diligence did not override common question regarding fraudulent scheme --
     no abuse of discretion in predominance finding. -- The supreme court
     held that although the fact that lack of reliance and
     diligence might be arguments raised by appellants, these
     challenges would not override the common question relating to
     the allegation of a fraudulent scheme perpetrated by
     appellants and directed at appellee royalty owners; the
     overarching issue that must be the starting point in the
     resolution of the matter related to the existence of the
     alleged scheme; the supreme court determined that there was no
     abuse of discretion by the trial court in its predominance
     finding.

6.   Appeal & error -- issue calling for advisory opinion not addressed. -- The
     supreme court declined to address an issue where any opinion
     on the subject would have been advisory in nature.

7.   Civil procedure -- class action -- superiority requirement -- efficiency. -
     - Rule 23(b) of the Arkansas Rules of Civil Procedure requires
     that a class action be superior to other available methods for
     the fair and efficient adjudication of the controversy; real
     efficiency can be had if common, predominating questions of
     law or fact are first decided, with cases then splintering for
     the trial of individual issues, if necessary.
8.   Civil procedure -- class action -- superior method for adjudicating this
     controversy -- no abuse of discretion in certifying class. -- Where the
     supreme court concluded that a class action would fair to both
     sides in the case, it held that a class action was the
     superior method for adjudicating the controversy; there was no
     abuse of discretion by the trial court in certifying the
     class.


     Appeal from Sebastian Circuit Court; Don Langston, Judge;
affirmed.
     Everett & Mars, by: Thomas A. Mars; Kenneth S. Gould; and John
J. Watkins, for appellants.
     Harper, Young, Smith & Maurras, PLC, by: Don A. Smith and S.
Walton Maurras; Marilyn J. Eickenhorst; and Gable Gotwals Mock
Schwabe, by: James M. Sturdivant, M. Benjamin Singletary, and
Timothy A. Carney, for appellees.

     Robert L. Brown, Justice.
     Appellants SEECO, Inc. (SEECO), and Arkansas Western Gas
Company (AWG) are wholly owned subsidiaries of appellant
Southwestern Electric Company (Southwestern).  Appellees Allen
Hales, et al. (the royalty owners), are lessors under various oil
and gas leases possessed by SEECO who brought a class action suit
to claim royalties that were allegedly due but not paid.  The trial
court certified the royalty owners as a class after considering the
criteria set out in Rule 23(a) and (b) of the Arkansas Rules of
Civil Procedure.  The class is estimated to consist of more than
3,000 members.  SEECO, AWG, and Southwestern have appealed the
class certification and specifically contest the trial court's
findings that common questions of law and fact predominate over
questions affecting individual class members.  The appellants
further reject the claim that the royalty owners' class action is
the superior method for the fair and efficient adjudication of this
controversy.  As a corollary issue, the appellants contend that the
constitutional right to trial by jury will be skewed by having 
bifurcated trials with one jury deciding common questions for the
royalty owners and a second jury determining individual questions. 
We affirm.
     In their complaint, the royalty owners claim that SEECO failed
to enforce the provisions of a gas-sales contract, known as
Contract 59, against AWG and further failed to pay the royalty
owners the proper proceeds from the gas produced under the numerous
SEECO leases affected by the contract.  The complaint states that
Contract 59 was entered into between SEECO and AWG on July 24,
1978.  It alleges that under Contract 59 SEECO dedicated acreage in
Franklin, Johnson, Washington, Crawford, and Logan Counties for oil
and gas production, and that AWG obligated itself for 20 years to
purchase volumes of gas under a "take-or-pay" arrangement at a
guaranteed price.  That arrangement provided that the purchaser
(AWG, in this instance) would either buy a volume of gas at the
contract price or pay a specified price without taking the gas. 
The royalty owners allege that throughout the term of Contract 59,
SEECO did not require AWG to pay the guaranteed prices or take the
required volumes of gas per the terms of the agreement.  
     The royalty owners further allege: (1) that SEECO allowed AWG
to freeze gas prices below the contract price for the period
between December 1984 and July 1, 1994; (2) that SEECO imprudently
and arbitrarily released wells, acreage, and production from
Contract 59 throughout the term of the contract, which resulted in
the sale of gas for less than the contract price; (3) that SEECO
failed to drill additional wells and fully develop a plan for
increased production on the royalty owners' acreage; and (4) that
SEECO continuously provided gas storage to AWG without
compensation.  Other misdeeds by SEECO were set out in the
complaint which, according to the royalty owners, resulted in lower
prices for gas and, thus, less proceeds for them.
     The royalty owners also allege that SEECO fraudulently
concealed its failures under Contract 59 by intentionally refusing
to document the pricing and other deficiencies under Contract 59. 
They state that SEECO engaged in conduct favorable to AWG due to
their relationship as affiliate companies wholly owned by
Southwestern and that SEECO's course of conduct resulted in
significant losses to the royalty owners.
     The complaint specifically alleges that in 1987 SEECO
solicited the purchase of mineral interests from the royalty owners
and misrepresented the market price for natural gas.  In that
solicitation letter, SEECO noted that gas prices had been declining
in recent years, but, according to the allegation, SEECO failed to
disclose that under Contract 59 AWG was obligated to make minimal
volume purchases of gas and to pay for that gas at a certain price. 
The complaint also asserts that in a 1983 letter SEECO advised the
royalty owners that it had entered into a gas-sales contract with
Natural Gas Pipeline (NGP) which would result in reduced royalties. 
The royalty owners claim that SEECO failed to disclose that the
same gas dedicated under the NGP contract was already dedicated
under Contract 59, with its take-or-pay provision, at a
significantly higher purchase price.
     The royalty owners seek compensatory damages in excess of
$58,450,000 and punitive damages against appellants, jointly and
severally, on the legal theories of: (1) fraud and constructive
fraud; (2) breach of the oil and gas leases; (3) breach of the duty
to market the gas reasonably; (4) breach of the duty of good faith
and fair dealing; (5) violation of Ark. Code Ann.  15-74-601 & -
602 (Repl. 1994), which govern penalties for fraudulently
withholding oil and lease payments; (6) unjust enrichment; (7)
tortious interference with contractual relations; (8) civil
conspiracy; and (9) violation of Ark. Code Ann.  15-72-305 (Repl.
1994), which requires calculation of royalties on a weighted-
average price.  The royalty owners also asked for certification of
a class pursuant to Rule 23 of the Arkansas Rules of Civil
Procedure.
     At the class-certification hearing, Dr. David Taylor testified
that he was a named plaintiff seeking to become a class
representative because of his royalty interests in eleven oil and
gas leases dedicated under Contract 59.  He testified that his
claims concerned the lack of enforcement of Contract 59 regarding
the price of gas sold by SEECO to AWG as well as the volume of gas
to be purchased.  On cross-examination, Dr. Taylor stated that
SEECO had voluntarily converted the leases from fixed-price leases
to proceeds leases based on its performance over the last number of
years.  He also contended that the terms of the leases should not
control because SEECO and AWG were affiliates which were not
dealing at arms' length; therefore, the royalty-price determination
should be dictated by the terms of Contract 59, as opposed to his
leases.  Dr. Taylor further contended that there was fraud in
connection with the 1983 letter and the 1987 solicitation letter
sent out by SEECO because neither letter made reference to Contract
59 and AWG's take-or-pay obligation under that contract.
     In rebuttal, SEECO attacked Dr. Taylor's assertion of
fraudulent concealment and showed that Contract 59 had been on file
with the Arkansas Public Service Commission (PSC) since 1978 or
1979.  SEECO also offered several newspaper articles with
information that, it argued, should have put royalty owners on
notice about pricing.  One was a January 21, 1991 article entitled
"Purchasing Practices Defended by Company," from the Ozark
Spectator, which documented challenges from the PSC and the
Attorney General's Office regarding high prices paid by AWG, which
were passed on to ratepayers under Contract 59.  A second article
was a January 15, 1993 story entitled "Gas Company Left Prices
High, PSC Told" from the Arkansas Democrat-Gazette, which also
indicated that AWG was paying too much under Contract 59.  Finally,
a November 1, 1994 article entitled "Settlement Reached After 3
Years" in the Northwest Arkansas Times documented a settlement
between the Attorney General's Office, PSC staff, SEECO, and AWG,
causing a reduction for AWG ratepayers because Contract 59 violated
Arkansas's least-cost purchasing law.  Dr. Taylor testified that he
was unaware of these articles.
     Allen Franklin Hales, another named plaintiff and potential
class representative, testified that he was asking for
certification as a royalty owner under two leases with SEECO which
were dedicated to Contract 59.  In his deposition, Hales echoed Dr.
Taylor's concerns about the fact that the 1983 and 1987 letters
were silent about Contract 59.  Dr. Robert Gordon Jeffers also
testified by deposition that SEECO should have enforced Contract
59.
     Brooks Clower, an attorney employed by Southwestern, testified
that he perused the oil and gas leases of Dr. Taylor, Dr. Jeffers,
and Mr. Hales, and concluded that some leases contained a fixed-
price royalty and a disclaimer of implied covenants, while other
leases provided for royalties to be paid on a proceeds basis and
did not contain a disclaimer clause.  He also testified that the
various leases differed with respect to government-regulation
clauses, which would make some leases subject to certain defenses
that would be unavailable in connection with other leases.  The
leases also differed in form, with Dr. Taylor, for example, having
three different types of leases.  Clower testified that the leases
may or may not be subject to pooling agreements made for the
purpose of forming a drilling unit, which would also vary the terms
of the lease agreements.
     The trial court entered an order certifying the class of
royalty owners affected by the alleged acts and omissions of SEECO,
AWG, and Southwestern.  Two subclasses were created based on
whether the subclass leases were leased to SEECO and dedicated
under Contract 59, or leased to third parties and affected by
Contract 59.  The trial court's order found that the following
common and predominating issues existed:
     The evidence produced by the plaintiffs indicates: an
     alleged overall scheme and course of conduct by the
     defendants designed to defraud the members of the
     proposed class as a group irrespective of the type of oil
     and gas lease or the volume of production from the
     leases; that SEECO in deference to Arkansas Western Gas
     Company's interest allegedly failed to enforce the take,
     price and other provisions of Contract 59 almost since
     the contract's inception and actively concealed such
     conduct from the proposed class; that the defendants
     failed to state material facts in correspondence which
     appears to have been sent to members of the potential
     class including citizens and residents of this judicial
     district; the defendants intentionally failed to keep
     documentary records of the deficiencies under Contract 59
     for fear of discovery of such deficiencies by the members
     of the proposed class; and the defendants allegedly
     engaged in actions before the Arkansas Public Service
     Commission designed to conceal their actions from the
     members of the proposed class.

                         I. Predominance
     The appellants urge that the trial court erred in its
predominance finding.  We observe initially that trial courts are
given broad discretion in matters of class certification.  Direct
Gen. Ins. Co. v. Lane, 328 Ark. 476, 944 S.W.2d 528 (1997); Union
Nat'l Bank v. Barnhart, 308 Ark. 190,