In The

Supreme Court of the United States




Decided June 15, 1988

Justice O’Connor, Concurring in part and dissenting in part

Topic: Due Process*Court vote: 6–2
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Joining O'Connor opinion: Chief Justice REHNQUIST Chief Justice REHNQUIST
Citation: 486 U.S. 717 Docket: 87–352Audio: Listen to this case's oral arguments at Oyez

* As categorized by the Washington University Law Supreme Court Database

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JUSTICE O'CONNOR, with whom THE CHIEF JUSTICE joins, concurring in part and dissenting in part.

The Court properly concludes that Kansas did not violate the Full Faith and Credit Clause or the Due Process Clause when it chose to apply its own statute of limitations in this case. Different issues might have arisen if Texas, Oklahoma, or Louisiana regarded its own shorter statute of limitations as substantive. Such issues, however, are not presented in this case, and they are appropriately left unresolved. Accordingly, I join Parts I and II of the Court's opinion.

In my view, however, the Supreme Court of Kansas violated the Full Faith and Credit Clause when it concluded that the three States in question would apply the interest rates set forth in the regulations of the Federal Power Commission (FPC). The Court correctly states that misconstruing those States' laws would not, by itself, have violated the Constitution, for the Full Faith and Credit Clause only required the Kansas court to adhere to law that was clearly established in those States and that had been brought to the Kansas court's attention. See ante at 486 U. S. 730 -731. Under the standard the Court articulates, however, the Clause was violated. Each of the three States has a statute setting an interest rate that is different from the FPC rate, and the Supreme Court of Kansas offered no valid reason whatsoever for ignoring those statutory rates. Neither has this Court suggested a colorable argument that could support the Kansas court's decision, and its affirmance of that decision effectively converts an important constitutional guarantee into a precatory admonition.

The Kansas courts have applied equitable principles to justify their choice of the FPC interest rate in this and analogous cases. See ante at 486 U. S. 720 -722; Phillips Petroleum Co. v. Shutts, 472 U. S. 797, 472 U. S. 816 (1985) ( Shutts III ). In Shutts III, we noted that "Oklahoma would most likely apply its constitutional and statutory 6% interest rate, rather than the much higher Kansas rates applied in this litigation"; that "Texas has never awarded any such interest at a rate greater than 6%, which corresponds with the Texas constitutional and statutory rate"; and that "[t]he Kansas interest rate also conflicts with the rate which is applicable in Louisiana." Id. at 472 U. S. 817, and n. 7. We supported each of these propositions with appropriate citations to state law, but remanded the case so that the Supreme Court of Kansas could provide "a more thoroughgoing treatment" of the apparent conflicts between its law and the law of the other three States. Id. at 472 U. S. 818. We then vacated the judgment in the present case and remanded for reconsideration in light of Shutts III. See Sun Oil Co. v. Wortman, 474 U.S. 806 (1985) ( Wortman II ).

On remand, the Supreme Court of Kansas considered the Shutts case first, and then applied the conclusions reached there in the case before us today. See Shutts v. Phillips Petroleum Co., 240 Kan. 764, 732 P.2d 1286 (1987) ( Shutts IV ); 241 Kan. 226, 229, 734 P.2d 1190, 1193 (1987) (opinion below). When one reviews the reasoning of the Kansas court, an undertaking that the majority omits without explanation, that court's failure to give full effect -or any effect -to the laws of its sister States becomes unmistakable.

Adhering to its equitable theory of unjust enrichment, which it now claimed would be adopted by each of the States whose laws it purported to apply, the Kansas court concluded:

Under equitable principles, the states would imply an agreement binding [the oil and gas company] to pay the funds held in suspense to the royalty owners when the FPC approved the respective rate increases sought by [the company], together with interest at the rates and in accordance with the FPC regulations found in 18 CFR § 154.102 (1986) to the time of judgment herein. These funds held by [the company] as stakeholder originated in federal law, and are thoroughly permeated with interest fixed by federal law in the FPC regulations....

Shutts IV, supra, at 800, 732 P.2d at 1313.

This conclusion was not supported with so much as a single colorable argument. The Kansas court, for example, took note of the following Texas statute:

When no specified rate of interest is agreed upon by the parties, interest at the rate of six percent per annum shall be allowed on all accounts and contracts ascertaining the sum payable, commencing on the thirtieth (30th) day from and after the time when the sum is due and payable.

240 Kan. at 777, 732 P.2d at 1298 (quoting Tex.Rev.Civ.Stat.Ann., Art. 5069-1.03 (Vernon 1987)) (emphasis added). This statute was held inapplicable for the following reason.

No Texas court ever mentioned the higher rates set by federal regulations to which [the oil and gas company] had agreed to comply in its corporate undertaking. This issue has not been determined by the Texas Supreme Court.

240 Kan. at 777, 732 P.2d at 1298 (emphasis in original; citations omitted). Thus, the only reason suggested for ignoring the contrary language of the Texas statute was that the Texas Supreme Court had not specifically rejected the Kansas equitable theory. The court cited no case in which the Kansas theory had ever been proposed to the Texas courts; no case suggesting that the Texas courts would "imply an agreement" by the parties to adopt the FPC rates in these circumstances; and no case from any jurisdiction adopting the Kansas theory under which the funds in question were "thoroughly permeated with interest fixed by federal law." In sum, the Kansas court offered not a single affirmative reason for supposing that the Texas courts would adopt the Kansas theory in the face of the contrary language of the Texas statute.

The Supreme Court of Kansas dealt with the following Oklahoma statute in an equally unsatisfactory manner.

'The legal rate of interest shall be six percent (6%) in the absence of any contract as to the rate of interest, and by contract the parties may agree to any rate as may be authorized by law, now in effect or hereinafter enacted.'

Id. at 784, 732 P.2d at 1302 (quoting Okla.Stat., Tit. 15, § 266 (1981)) (emphasis added). The Kansas court's entire discussion of this statute was as follows:

In the above cases where interest was awarded, the applicable rate was six percent. However, in First Nat. Bank v. Cit. & So. Bank, 651 F.2d 696 (10th Cir.1981), applying Oklahoma law, a federal circuit court awarded interest at the rate of ten percent as provided in the promissory note, and rejected the argument that interest must be limited to Oklahoma's legal rate of six percent. Therefore, in equity, the corporate undertaking entered into by [the oil and gas company] and the FPC would probably be viewed by implication as contractual by the Oklahoma courts, and the rates required in 18 CFR § 154.102 (1986) would be imposed, rather than the statutory six percent.

240 Kan. at 784, 732 P.2d at 1302. The court did not explain why it thought that Oklahoma law could properly be inferred from a decision by a federal court. Nor did the court explain why an express agreement in a promissory note should be considered equivalent to the fictional or "implied" agreement that the court chose to find in the case before it. (In First Nat. Bank of Hominy, Okla. v. Citizens and Southern Bank of Cobb Cty., Marietta, Ga., 651 F.2d 696 (CA10 1981), the defendant was the guarantor of the obligation evidenced by the promissory note.) Once again, the Kansas court read its theory of unjust enrichment into another State's law without a shred of affirmative support for doing so.

The applicable Louisiana statute provided that " [a]ll debts shall bear interest at the rate of seven percent per annum from the time they become due, unless otherwise stipulated. '" 240 Kan. at 791, 732 P.2d at 1307 (quoting La.Civ.Code Ann., Art.1938 (West 1977)) (emphasis added). After discussing three irrelevant federal decisions, the Kansas court concluded:

We find Louisiana would apply the FPC rates of interest under equitable principles. Whitehall Oil Co. v. Boagni, [255] La. 67.

240 Kan. at 793, 732 P.2d at 1308. Boagni, a 1969 decision of the Supreme Court of Louisiana, does not support the proposition for which it was cited. In that case, an oil and gas company was permitted to recover royalties from its lessors after the FPC revised downwards the gas prices to which the royalties were tied. The Louisiana court reached this conclusion by applying equitable principles

to determine conflicting claims under a contract where there is neither express law nor contractual provisions governing a determination of them.

255 La. 67, 74, 229 So.2d 702, 704 (1969) (emphasis added). This holding does not in any way support the proposition that the Louisiana courts would apply equitable principles to reach a result contrary to that dictated by the language of a Louisiana statute. Thus, the Supreme Court of Kansas again concluded that one of its sister States would decline to apply its own statute, and the Kansas court again failed to offer any colorable support for its conclusion.

At bottom, the Kansas court's insistence on its equitable theory seems based on nothing more than its conviction that it would have been "fair" for the parties to agree that the oil and gas company should pay the same interest rates for suspended royalty payments arising from approved price increases that the company would have had to pay its customers for refunds arising from disapproved price increases. That is a wholly inadequate basis for concluding that three other States would conclude that the parties did make such an agreement. Even assuming that the result imposed on the parties by the Kansas court was "fair," which is not at all obvious, neither that court nor this Court has given any reason for concluding that the parties to the case before us agreed either to adopt the FPC interest rates or to be bound by the Kansas judiciary's notions of equity.

The majority does not discuss the Kansas court's analysis of its sister States' statutes, which clearly indicate that rates of 6% or 7% were applicable. Indeed, the Court appears to think that no analysis was necessary, because the Kansas court was not bound by the language of the statutes with which it was confronted. See ante at 486 U. S. 732, n. 4 ("Relief cannot be granted in this Court unless decisions plainly contradicting the Kansas court's interpretations were brought to the Kansas court's attention" (emphasis added; citations omitted)). This suggestion is inconsistent with the language of the Full Faith and Credit Clause, and is not dictated by the holding in any of our previous cases. Nor is the Court on firmer ground when it imagines that the Kansas court merely read "standard contract law" into the statutes of its sister States. Ibid. The "industry practice" of complying with FPC regulations where they are applicable hardly implies an "industry usage" or "common understanding" under which the terms of those regulations are to be applied in other situations where they are not applicable. Neither the Kansas court nor this Court has pointed to a single instance -let alone an "industry practice" -in which an oil company and its lessor agreed that the FPC interest rates would apply in circumstances like those presented here. Unless "industry usage" means "practices that the Supreme Court of Kansas thinks are fair," neither standard contract law nor standard logic will support the majority's attempted defense of the Kansas court's result.

Today's decision discards important parts of our decision in Shutts III, 472 U. S. 797 (1985), and of the Full Faith and Credit Clause. Faced with the constitutional obligation to apply the substantive law of another State, a court that does not like that law apparently need take only two steps in order to avoid applying it. First, invent a legal theory so novel or strange that the other State has never had an opportunity to reject it; then, on the basis of nothing but unsupported speculation, "predict" that the other State would adopt that theory if it had the chance. To call this giving full faith and credit to the law of another State ignores the language of the Constitution and leaves it without the capacity to fulfill its purpose. Rather than take such a step, I would remand this case to the Supreme Court of Kansas with instructions to give effect to the interest rates established by law in Texas, Oklahoma, and Louisiana. I therefore respectfully dissent.

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