Source: https://supreme.justia.com/cases/federal/us/273/456/
Timestamp: 2019-04-21 08:10:23+00:00

Document:
1. The evidence sustains findings that the making of the leases and contracts involved herein was dominated by the Secretary of the Interior, acting collusively with the representative of the two defendant oil companies; that the Secretary of the Navy took no active part in the negotiations, and that the leases and contracts were procured by corruption and fraud. P. 273 U. S. 498.
2. The finding that the Secretary of the Navy signed the documents under misapprehension and without full knowledge of their contents is not sustained. An opposite finding is required by the record. P. 273 U. S. 498.
3. In a suit by the United States to annul contracts made through its officials with private corporations the bona fides of which had been investigated by a committee of the Senate, statements made to the committee by the companies' representative, who voluntarily appeared in defense of their interests, showing that he gave money to one of the officials who dominated the procurement, and participated in the execution of the contracts, were admissible against the defendant corporations in proof of fraud. P. 273 U. S. 498.
So held where he who made the statements was the representative of both companies in procuring the contracts; was at that time president of one company and chairman of the board of directors of the other, having been its president also; controlled both companies through stock ownership, and was chairman of both boards of directors when he testified.
4. A lease of the land of a naval reserve and related contracts, which were procured by private corporations as the result of collusion and corrupt conspiracy between their representative and a high government official who, under an executive order, dominated the administration of the reserve, may be avoided by the United States without regard to whether money paid the official by the representative constituted bribery as defined in the Criminal Code, or whether the official was financially interested in the transaction, or the United States suffered or was liable to suffer any financial loss or disadvantage as a result of the contracts and leases. It is enough if the official's interest and dominating influence were corruptly obtained. It was shown that he so favored the lease and contracts that he could not loyally serve the interests of the United States. P. 273 U. S. 500.
5. The Secretary of the Navy was not empowered by the Appropriation Act of June 4, 1920, to enter into contracts involving the leasing of all the unleased land of a naval petroleum reserve, and providing for the use of the crude oil, to be derived by the United States as royalties under such leases, for the acquisition of extensive storage facilities filled with fuel oil for the Navy. Pp. 273 U. S. 501-502, 273 U. S. 508.
6. Under the proviso of the Naval Appropriation Act of June 4, 1920, the authority of the Secretary of the Navy to provide facilities in which to "store" naval reserve petroleum or its products did not extend beyond those that might be provided by use of the money made available by that act. P. 273 U. S. 509.
7. While the general principles of equity are applicable in a suit by the United States to secure the cancellation of a conveyance or the rescission of a contract, they will not be applied to frustrate the purpose of its laws or to thwart public policy. P. 273 U. S. 505.
8. In this suit brought by the United States to set aside illegal and fraudulent leases and contracts which were made for the purpose of circumventing its laws and defeating its policy for the conservation of its naval petroleum reserves, the United States does not stand on the footing of an individual suing to annul a deed for fraud; its position is not that of a mere seller or lessor of land; the purpose is to vindicate the policy mentioned, the financial element being secondary; the defendants are wrongdoers, and have no equity to reimbursement for their expenditures as a condition to the granting of the relief sought by the government. Pp. 273 U. S. 503, 273 U. S. 508.
9. In a suit by the United States to set aide for illegality and fraud leases made, in contravention of the policy of conserving naval petroleum reserves, and contracts made, as part of the same transaction, for erection of oil storage facilities for the Navy, not authorized by Congress, on land of the United States and for storing them with fuel oil, equity does not exact as a condition to the relief prayed that the defendants be compensated for the cost to them, or the value to the government, of the construction work performed or fuel oil furnished under the contracts, or for the amount they expended in drilling or operating oil wells or in other improvements on the leased premises, but their compensation, if any, must depend on Congress. Pp. 273 U. S. 503, 273 U. S. 508.
Certiorari (27 U.S. 640) to a decree of the circuit court of appeals which affirmed in part and in part reversed a decree of the district court (6 F.2d 43) in a suit by the United States to cancel two leases of land in a naval petroleum reserve and two contracts for erecting storage facilities and supplying fuel oil for the Navy. The bill also prayed an account. The decree of the district court cancelled the leases and contracts for fraud and illegality, but, in the accounting, allowed credits to the two corporations for their expenditures under the leases and contracts, with interest. The circuit court of appeals denied such credits, but in other respects affirmed the decree.
and leases were obtained and consummated by means of conspiracy, fraud, and bribery, and that they were made without authority of law. Receivers were appointed to take possession of and operate the properties pending the suit. At the trial, the court heard much evidence and later made findings of fact, stated its conclusions of law, announced an opinion (6 F.2d 43), and entered its decree. It adjudged the contracts and leases void and ordered them cancelled; it directed the Petroleum Company to surrender the lands and equipment, and stated an account between the United States and each of the companies. The Transport Company was charged the value of petroleum products received by it and the amount of profits derived upon their sale, and was given credit for the actual cost of construction work performed and of fuel oil delivered under the contracts. The Petroleum Company was charged the value of the petroleum products taken under the leases and given credit for actual expenditures in drilling and operating wells and making other useful improvements. Interest was added to each of the items. The companies appealed to the circuit court of appeals, and the United States took a cross-appeal. That court affirmed the decree so far as it awards affirmative relief to the United States, and reversed that part which gives credit to the companies. 9 F.2d 761.
"constitute Naval Petroleum Reserve No. 1, and shall be held for the exclusive use or benefit of the United States Navy until this order is revoked by the President or by Act of Congress."
This reserve includes all the lands involved in this suit. By a similar order, December 13, 1912, the President created the Naval Petroleum Reserve No. 2.
oil from lands in the naval reserves, for the benefit of the United States: . . . And provided further, that such sums as have been or may be turned into the Treasury of the United States from royalties on lands within the naval petroleum reserves prior to July 1, 1921, not to exceed $500,000, are hereby made available for this purpose until July 1, 1922: Provided further, that this appropriation shall be reimbursed from the proper appropriations on account of the oil and gas products from said properties used by the United States at such rate, not in excess of the market value of the oil, as the Secretary of the Navy may direct."
March 5, 1921, Edwin Denby became Secretary of the Navy and Albert B. Fall Secretary of the Interior. May 31, 1921, the President promulgated an executive order purporting to commit the administration and conservation of all oil and gas bearing lands in the reserves to the Secretary of the Interior, subject to the supervision of the President.
"then the government will, in the discretion of the Secretary of the Interior, grant additional leases on such lands as he may designate in Naval Petroleum Reserve No. 1 as shall be sufficient to maintain total deliveries of royalty oil under this contract at the approximate rate of five hundred thousand barrels (500,000) per annum."
"the contractor shall first be called upon by the Secretary of the Interior to meet such drilling conditions and to pay such royalties as the Secretary may deem just and proper, and in the event of his acceptance . . . , the contractor shall be granted by the government a preferential lease on such tracts as the Secretary of the Interior may decide to lease. In the event of the failure of the contractor to agree . . . , then said lease or leases may be offered for competitive bidding, but the contractor shall have a right to submit a bid on equal terms with others engaged in said bidding."
The lease of June 5, 1922, was signed by the Assistant Secretary of the Interior. It was made in accordance with a letter of April 25, 1922, signed by the Acting Secretary of the Interior and the Secretary of the Navy, and sent to J. J. Cotter, who was vice-president of the Transport Company. It covered the quarter section described in the letter. This lease was assigned to the Petroleum Company.
in the leases, and to satisfy any surplus credits of the government by delivery of fuel oil or other petroleum products, by construction of additional storage facilities, or by payment in cash as the government might elect. The United States agreed to deliver to the company in exchange all royalty oil, gas and casinghead gasoline produced on Reserves Nos. 1 and 2 until its obligations were discharged and, in any event, for 15 years after the expiration of the contract of April 25, 1922 (which was without specified time limit), and to lease to the company all the unleased lands in Reserve No. 1.
The lease of December 11, 1922, is signed for the United States by the Secretary of the Interior and the Secretary of the Navy. It covers all unleased lands in Reserve No. 1, but with a provision that no drilling shall be done on approximately the western half without the lessor's consent. It runs for 20 years and so long thereafter as oil or gas is produced in paying quantities. The royalties range from 12 1/2 to 35 percent.
and to prosecute such other action or proceedings, civil and criminal, as might be warranted.
"There will be no possibility of any further conflict with Navy officials and this department, as I have notified Secretary Denby that I should conduct the matter of naval leases under the direction of the President, without calling any of his force in consultation unless I conferred with himself personally upon a matter of policy. He understands the situation, and that I shall handle matters exactly as I think best and will not consult with any officials of any bureau in his department, but only with himself, and such consultation will be confined strictly and entirely to matters of general policy."
"I suppose you will turn this matter over to First Assistant Secretary Finney, who, with Rear Admiral Robison, may arrange the details of it during your absence, and as I also expect to be absent, I am confidentially furnishing Mr. Cotter with the information so that he can intelligently discuss the matter with Mr. Finney."
"Mr. Cotter will wait upon you with data, etc., with relation to oil tanks and royalty oils in connection with Pearl Harbor demands. I have asked him also to hand you, for your inspection, the original of a letter from Colonel Doheny addressed to myself, containing a resume of the data. Should you think best to accept this proposition then, of course, it would be necessary, in my judgment, to turn over to Col. Doheny, if we can do so, leases upon further wells or area in the naval reserve in which he is now drilling. If this is done, it must be understood that the royalty must be made less than are the present royalties being paid by the Midway and Pan-American."
"If you approve the proposition, will you kindly indicate to me such approval by simple endorsement upon Col. Doheny's letter to myself, signed by yourself. Your simple O.K. will be sufficient."
Doheny had agreed to advance $100,000 to Fall as and when he should need it. November 30, at Fall's request, Doheny sent him $100,000 in currency. The money was obtained in New York on the check of Doheny's son who carried it to Washington and gave it to Fall, and Fall sent to Doheny by the son a demand note for $100,000. No entry of the advance was made in the accounts of Doheny or the petitioners. Nothing has been paid on account of principal or interest. At that time, it was understood between Doheny and Fall that the latter need not repay it in kind. Doheny intended, if Fall did not dispose of a certain ranch in New Mexico, to cause the Transport Company to employ him at a salary sufficient to enable him, out of one-half of it, to pay off the amount in five of six years, and he knew that Fall expected to leave the service of the government and accept employment with one of his companies. A few weeks after it was given, Doheny tore Fall's signature off the note so that it would not be enforceable in the hands of others. December 1, Fall gave instructions to subordinates that the petition of the petroleum Company for reduction of royalties should not be granted, but that, as relief, the company be given another lease at regulation royalties.
"It is evident from our conversation of April 18 that your interpretation of preferential right was to the effect that the . . . Transport Company desired the right to lease certain specified land in naval petroleum reserve No. 1, as well as preferential right to lease other land in naval petroleum reserve No. 1 to the extent described in article XI of contract. It is also my understanding from your conversation that, unless the . . . Transport Company could get a lease to certain lands, your company would not desire to enter into a contract under the terms outlined in proposal (B), and preferred the government would accept proposal (A)."
the Department of the Interior will agree to grant to the . . . Transport Company within one year from the date of the delivery of a contract relative to the Pearl Harbor project leases to drill the following tracts of land."
The letter specified the quarter section covered by the lease of June 5, 1922, and an additional strip, and stated that the royalties to be required would not be greater than specified rates ranging from 12 1/2 to 35 percent. The preferential right was inserted to prevent competition. The assurance that additional leases would be given was not necessary or required under proposal B.
After the making of the contract of April 25, the posted field price of crude oil declined rapidly. In the autumn of 1922, the Transport Company and Doheny were in correspondence or consultation with Fall for the purpose of at once securing additional leases in Reserve No. 1. Doheny submitted a proposition to Fall which the latter delivered to his subordinates with his favorable recommendation. Later Doheny enlarged the proposition, and there followed negotiations concerning the proposed lease. Doheny and Fall agreed upon a schedule of royalties. The lease of December 11 was arranged without competition of any kind. Plans for the proposed construction work had not been prepared. Before the contract and lease were made, Fall and others in his department stated to persons making inquiries that it was not the intention to make leases or to drill in that reserve. The danger of drainage had been eliminated by agreement between the United States and oil companies operating in the vicinity that no drilling should be done by either except on six months' notice to the other.
"We find no ground for disturbing the findings of fact which we deem essential to the decision of he case, and, while the evidence may be insufficient to support certain contested findings, the disputed facts, in view of our conclusions upon the law applicable to the case, become of little importance."
The petitioners here argue that the Secretary of the Navy did in fact exert the authority conferred by the Act of June 4, 1920, and that Fall did not dominate the making of the contracts and leases; that it was not proved by any evidence competent or admissible against the companies that Doheny gave Fall $100,000; that the giving of the money did not affect the transaction; that it was a loan, and not a bribe, and that the record does not sustain the conclusion of the district court.
We have considered the evidence, and we are satisfied that the findings as to the matters of fact here controverted are fully sustained, except the statement that Denby signed the contracts and leases under misapprehension and without full knowledge of the contents of the documents. As to that, the record requires an opposite finding. Under the Act of June 4, 1920, it was his official duty to administer the oil reserves; he was not called as a witness, and it is not to be assumed that he was without knowledge of the disposition to be made of them or of the means employed to get storage facilities and fuel oil for the Navy. He is presumed to have had knowledge of what he signed; there are direct evidence and proven circumstances to show that he had. But the evidence sustains the finding that he took no active part in the negotiations, and that Fall, acting collusively with Doheny, dominated the making of the contracts and leases.
The finding that Doheny caused the $100,000 to be given to Fall is adequately sustained by the evidence.
177 F. 863, 865; Chicago, Burlington & Quincy R. Co. v. Coleman, 18 Ill. 297, 298.
The facts and circumstances disclosed by the record show clearly that the interest and influence of Fall, as well as his official action, were corruptly secured by Doheny for the making of the contracts and leases; that, after the executive order of May 31, 1921, Fall dominated the administration of the naval reserves, and that the consummation of the transaction was brought about by means of collusion and corrupt conspiracy between him and Doheny. Their purpose was to get for petitioners oil and gas leases covering all the unleased lands in the reserve. The making of the contracts was a means to that end. The whole transaction was tainted with corruption. It was not necessary to show that the money transaction between Doheny and Fall constituted bribery as defined in the Criminal Code, or that Fall was financially interested in the transaction, or that the United States suffered or was liable to suffer any financial loss or disadvantage as a result of the contracts and leases. It is enough that these companies sought and corruptly obtained Fall's dominating influence in furtherance of the venture. It is clear that, at the instance of Doheny, Fall so favored the making of these contracts and leases that it was impossible for him loyally or faithfully to serve the interests of the United States. The lower courts for that reason rightly held the United States entitled to have them adjudged illegal and void. Crocker v. United States, 240 U. S. 74, 240 U. S. 80-81; Garman v. United States, 34 Ct.Cls. 237, 242; Herman v. City of Oconto, 100 Wis. 391, 399; Harrington v. Victoria Graving Dock Co., L.R. 3 Q.B.D. 549; Tool Co. v. Norris, 2 Wall. 45, 69 U. S. 54-56; Trist v. Child, 21 Wall. 441, 88 U. S. 448, 88 U. S. 452; Meguire v. Corwine, 101 U. S. 108, 101 U. S. 111; Oscanyan v. Arms Co., 103 U. S. 261, 103 U. S. 275; Washington Irr. Co. v. Krutz, 119 F. 279, 286.
long been its policy to prohibit the making of contracts of purchase or for construction work in the absence of express authority and adequate appropriations therefor. R.S. §§ 3732, 3733; Act of June 12, 1906, 34 Stat. 255; Act of June 30, 1906, 34 Stat. 764. The Secretary was not authorized to use money received from the sale of gas products. All such sums are required to be paid into the Treasury. R.S. §§ 3617 and 3618, as amended, 19 Stat. 249.
The words granting authority to the Secretary are "use, store, exchange, or sell" the oil and gas products. As the Secretary, among other things, was authorized until July 1, 1922, to use money out of the appropriation to "store" oil and gas products from these lands, it will not be held, in the absence of language clearly requiring it, that he was also empowered without limit to use crude oil to pay for additional storage facilities. Unless given him by "exchange," the Secretary had no power by such contracts to locate or construct fuel depots. It is not contended that the clause confers unlimited authority, and the petitioners say that the word "exchange" must have some reasonable limitation. But they insist that it is broad enough to authorize the contracts. If it is, there is no reason why crude oil may not be used to pay for any kind of construction work or to purchase any property that may be desired by the department for the use of the Navy.
the meaning contended for by petitioners, it must be taken to indicate that Congress intended by the clause in question not only to restore to the Secretary authority in respect of fuel depots that had been taken from him by the Act of March 4, 1913, but also to enable him, by means of contracts and leases such as these, to reverse, if he saw fit, the established policy of the government as to the petroleum reserves. The circumstances of the enactment, as well as the terms of the provision, indicate a purpose to authorize exchange of crude petroleum from these reserves for fuel oil and other petroleum products suitable for use by the Navy. The Secretary was not authorized to refine the crude product. A draft of the Act included that authority, but the word "refine" was stricken out. This made necessary the exchange of the crude product for fuel oil and other products suitable for use. Whatever the meaning rightly to be attributed to the words employed, it is clear that they stop short of authorizing the Secretary to pay for improvements such as were covered by the contracts.
The petitioners insist that, in any event, they are entitled to credit for the cost of construction work performed and of the fuel oil furnished at Pearl Harbor, and also for the amount they expended to drill and operate oil wells and to make other improvements on the leased lands.
Transport Company delivered into the storage constructed a specified quantity of fuel oil of value to the United States equal to what it cost the company; that, under the supervision of government officials, the Petroleum Company economically expended money for development of the leased lands to produce oil, gas, and gasoline and to make thereon permanent improvements that resulted in benefit to the United States equal to the amount expended.
They maintain that, as a condition of granting the United States the relief it claims, equity requires it to give credit to them for their expenditures; that, if this be denied, they will be required to pay double the value of the royalty oil they have received, and that the United States thereby will be unjustly enriched; that, except the balance shown by the account, they have paid in full for such oil; that the United States has fully paid for the benefits it received from petitioner's expenditures, and that, in effect, it now seeks to recover the payments it made voluntarily. And they insist that the United States must be made to bear these amounts even if the contracts were made without authority of law or were tainted with fraud, violation of public policy, conspiracy, or other wrongful act.
In suits brought by individuals for rescission of contracts, the maxim that he who seeks equity must do equity is generally applied, so that the party against whom relief is sought shall be remitted to the position he occupied before the transaction complained of.
"The court proceeds on the principle that, as the transaction ought never to have taken place, the parties are to be placed as far as possible in the situation in which they would have stood if there had never been any such transaction."
is rescinded by one who has the right to do so, "the courts will endeavor to do substantial justice so far as is consistent with adherence to law." Stoffela v. Nugent, 217 U. S. 499, 217 U. S. 501. The general principles of equity are applicable in a suit by the United States to secure the cancellation of a conveyance or the rescission of a contract. United States v. Detroit Lumber Co., 200 U. S. 321, 200 U. S. 339; United States v. Stinson, 197 U. S. 200, 197 U. S. 204; Iowa v. Carr, 191 F. 257, 266; cf. Mason v. United States, 260 U. S. 545, 260 U. S. 557 et seq. But they will not be applied to frustrate the purpose of its laws or to thwart public policy.
ordinary rule that a vendor suing to annual a sale fraudulently induced must offer and be ready to return the consideration received. That rule, if applied, would tend to frustrate the policy of the public land laws, and so it is held that the wrongdoer must restore the title unlawfully obtained and abide the judgment of Congress as to whether the consideration paid shall be refunded."
"Where, however, conveyance has been made in violation of the restrictions, it is plain that the return of the consideration cannot be regarded as an essential prerequisite to a decree of cancellation. Otherwise, if the Indian grantor had squandered the money, he would lose the land which Congress intended he should hold, and the very incompetence and thriftlessness which were the occasion of the measures for his protection would render then of no avail. The effectiveness of the acts of Congress is not thus to be destroyed. The restrictions were set forth in public laws, and were matters of general knowledge. Those who dealt with the Indians contrary to these provisions are not entitled to insist that they should keep the land if the purchase price is not repaid, and thus frustrate the policy of the statute."
"If the defendant is entitled, upon a cancellation of the patents fraudulently and illegally obtained from the United States, in the name of others, for its benefit, to a return of the moneys furnished to its agents in order to procure such patents, we must assume that Congress will make an appropriation for that purpose when it becomes necessary to do so. The proposition that the defendant, having violated a public statute in obtaining public lands that were dedicated to other purposes, cannot be required to surrender them until it has been reimbursed the amount expended by it in procuring the legal title is not within the reason of the ordinary rule that one who seeks equity must do equity, and, if sustained, would interfere with the prompt and efficient administration of the public domain. Let the wrongdoer first restore what it confesses to have obtained from the government by means of a fraudulent scheme formed by its officers, stockholders and employees in violation of law."
capacity of, or in any places other than the facilities provided for that purpose pursuant to authorization by Congress. Whatever their usefulness or value, it is not for the courts to decide whether any of these things are needed or should be retained or used by the United States. Such questions are for the determination of Congress. It would be unjust to require the United States to account for them until Congress acts, and petitioners must abide its judgment in respect of the compensation, if any, to be made. And this applies to the claim on account of the fuel oil, as well as to the other items. Clearly petitioners are in no better position than they would be if they had paid money to the United States, instead of putting the fuel oil in storage. Equity does not condition the relief here sought by the United States upon a return of the consideration. United States v. Trinidad Coal Co., supra; Heckman v. United States, supra; Causey v. United States, supra.
March 4, 1913, c. 148, 37 Stat. 891, 898; June 30, 1914, c. 130, 38 Stat. 392, 401; March 3, 1915, c. 83, 38 Stat. 928, 937; August 29, 1916, c. 417, 39 Stat. 556, 570; March 4, 1917, c. 180, 39 Stat. 1168, 1179; June 15, 1917, c. 29, 40 Stat. 182, 207; July 1, 1918, c. 114, 40 Stat. 704, 726; November 4, 1918, c. 201, 40 Stat. 1020, 1034; July 11, 1919, c. 9, 41 Stat. 131, 145; June 5, 1920, c. 253, 41 Stat. 1015, 1030; July 12, 1921, c. 44, 42 Stat. 122, 130.
on monthly balances to May 31, 1925.

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