Source: https://caselaw.findlaw.com/us-supreme-court/273/456.html
Timestamp: 2019-04-22 09:11:00+00:00

Document:
[273 U.S. 456, 458] Messrs. Frank J. Hogan, of Washington, D. C., and Frederic R. Kellogg, of New York City, for petitioners.
[273 U.S. 456, 473] Messrs. Owen J. Roberts, of Philadelphia, Pa., and Atlee Pomerene, of Cleveland, Ohio, for the United States.
This suit was brought by the United States in the northern division of the southern district of California against the petitioners, Pan- American Petroleum and Transport Company and Pan-American Petroleum Company. The former will be called the Transport Company and the latter the Petroleum Company. The relief sought is the cancelation of two contracts with the Transport Company, dated April 25, and December 11, 1922, and two leases of lands in Naval Petroleum Reserve No. 1, to the Petroleum Company, dated June 5 and December 11, 1922, an injunction, the appointment of receivers, and an accounting. The complaint alleges that the con- [273 U.S. 456, 486] tracts 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 canceled; 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.
Under R. S. 2319, 2329 (Comp. St. 4614, 4628), and the Act of February 11, 1897, c. 216, 29 Stat. 526 (Comp. St. 4635), public lands containing oil were open to settlement, exploration and purchase. Exploration and location were permitted without charge, and title could be obtained for a nominal amount. United States v. Midwest Oil Co., 236 U.S. 459, 466 , 35 S. Ct. 309. Prior to the autumn of 1909 large areas of public land in California were explored; petroleum was found, patents were obtained, and large quantities of oil were taken. In September of that year, the Director of the Geological Survey [273 U.S. 456, 487] reported that, at the rate oil lands in California were being patented, all would be taken within a few months, and that, in view of the increased use of fuel oil by the Navy, there appeared to be immediate need for conservation. Then the President, without specific authorization of Congress, by proclamation withdrew from disposition in any manner specified areas of public lands in California and Wyoming amounting to 3, 041,000 acres. By the Act of June 25, 1910, c. 421, 36 Stat. 847 (Comp. St . 4523-4525), Congress expressly authorized the President to withdraw public lands containing oil, gas and other minerals. An executive order of July 2, 1910, confirmed the withdrawals then in force. By a later order, September 2, 1912, the President directed that some of these lands '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.
'Provided, that the Secretary of the Navy is directed to take possession of all properties within the naval petroleum reserves ... to conserve, develop, use, and operate the same in his discretion, directly or by contract, lease, or otherwise, and to use, store, exchange, or sell the oil and gas products thereof, and those from all roy- [273 U.S. 456, 488] alty 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.' Comp. St. 2804i.
The contract dated December 11, 1922, is signed for the United States by the Secretary of the Interior and the Secretary of the Navy. It declares that it is desired to fill storage tanks at Pearl Harbor promptly as they are completed and also to procure additional fuel oil and other petroleum products in storage there and elsewhere; that the Secretary of the Navy requested the Secretary of the [273 U.S. 456, 490] Interior as administrator of the naval petroleum reserves to arrange for such products in storage and to exchange therefor additional royalty crude oil, 'the probably cost of the additional products and storage immediately planned for being estimated at $15,000,000 more or less'; that this cannot be done on the basis of exchange for the crude oil coming to the government under the present leases; that, under the contract of April 25, 1922, the company is granted preferential right to leases to certain lands in Naval Reserve No. 1; and that the company was planning to provide refinery facilities at Los Angeles, together with pipe lines from the field to the refinery and docks, and to erect storage having capacity of 2, 000,000 barrels or more. The company agreed to furnish, as directed by the Secretary of the Interior, the fuel oil in storage at Pearl Harbor covered by the earlier contract; to construct for actual cost additional storage facilities there, as required, up to 2,700,000 barrels; to furnish without charge, other petroleum products in the proposed storage as and when completed on the basis of market prices plus transportation cost at going rates; to furnish without charge, until expiration of the contract, storage for 1,000,000 barrels of fuel oil at Los Angeles; to fill it with fuel oil for the Navy at such time as government royalty oil should be available for exchange, and to bunker government ships from such oil at cost; to maintain for 15 years subject to the demands of the Navy 3,000, 000 barrels of fuel oil in the company's depots at Atlantic Coast points; to furnish crude oil products and storage facilities at other points, designated by the government, when sufficient crude oil has been delivered to satisfy the Pearl Harbor contract; to sell the Navy at 10 per cent. less than market price additional available fuel oil produced from the reserves and manufactured products from its California refineries; to credit the Navy for crude oil at published prices and for gas and casinghead gasoline at prices fixed [273 U.S. 456, 491] 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 casing head 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.
A joint resolution adopted by the Senate and House of Representatives and approved by the President February 8, 1924 (43 Stat. 5), stated that it appeared from evidence taken by the committee on public lands and survey of the Senate that the contract of April 25, 1922, and the lease of December 11, 1922, were executed under circumstances indicating fraud and corruption, without authority on the part of the officers purporting to act for the United States and in defiance of the settled policy of the government to maintain in the ground a great reserve supply of oil adequate to the needs of the Navy. It declared the contracts and leases to be against public interest and that the lands should be recovered and held for the purposes to which they were dedicated. And it authorized and directed the President to cause suit to be prosecuted for the annulment and cancellation of the lease and all contracts incidental and supplementary thereto, [273 U.S. 456, 492] and to prosecute such other action or proceedings, civil and criminal, as might be warranted.
The finding that Doheny caused the $100,000 to be given to Fall is adequately sustained by the evidence. [273 U.S. 456, 499] Early in 1924, during the investigation of these contracts and leases by the Senate committee, Doheny voluntarily appeared as witness and there gave testimony for the purpose of explaining the money transaction between him and Fall at the time the initial contract was being negotiated. At the trial of this case, over objections of the companies, his statements before the committee were received in evidence. Petitioners insist that they were not admissible. But Doheny acted for both companies when the contracts and leases were negotiated. He controlled the voting power of one that owned all the shares of the other. He was President of the Petroleum Company up to July 24, 1922, and then became chairman of its board. He was President of the Transport Company until December 7, 1923, when he became chairman of its board. He was chairman of both when he testified. There is no evidence that his control over or authority to act for these companies was less in 1924, when he appeared for them before the committee, than it was in 1921 and 1922, when he negotiated and executed the contracts and leases. The companies were much concerned as to the investigation lest it might result in an effort to set aside the transaction. , the hearing before the committee was an occasion where it was proper for them to be represented. Doheny had acted for them from the inception of the venture. The facts and circumstances disclosed by the record justified the lower courts in holding that, when he testified before the committee, he was acting for the companies within the scope of his authority. His statements on that occasion are properly to be taken as theirs, and are admissible in evidence against them. Chicago v. Greer, 9 Wall. 726, 732; Xenia Bank v. Stewart, 114 U.S. 224, 229 , 5 S. Ct. 845; Fidelity & Deposit Co. v. Courtney, 186 U.S. 342, 349 , 351 S., 22 S. Ct. 833; AEtna Indemnity Co. v. Auto- Traction Co. (C. C. A.) 147 F. 95, 98; Joslyn v. Cadillac Co. (C. C. A.) [273 U.S. 456, 500] 177 F. 863, 865; Chicago, Burlington & Quincy R. R. Co. v. Coleman, 18 Ill. 297, 298, 68 Am. Dec. 544.
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 contracs 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, 80 , 81 S., 36 S. Ct. 245; Garman v. United States, 34 Ct. Cl. 237, 242; Herman v. City of Oconto, 100 Wis. 391, 399, 76 N. W. 364; Harrington v. Victoria Graving Dock Co., L. R. 3 Q. B. D. 549; Tool Co. v. Norris, 2 Wall. 45, 54, 56; Trist v. Child, 21 Wall. 441, 448, 452; Meguire v. Corwine, 101 U.S. 108 , 111; Oscanyan v. Arms Co., 103 U.S. 261 , 275; Washington Irr. Co. v. Krutz (C. C. A.) 119 F. 279, 286.
[273 U.S. 456, 501] The transaction evidenced by the contracts and leases was not authorized by the Act of June 4, 1920. The grant of authority to the Secretary of the Navy did not indicate a change of policy as to conservation of the reserves. The Act of June 25, 1910, the Act of February 25, 1920, the executive orders, and the Joint Resolution of February 8, 1924, show that it has been and is the policy of the United States to maintain a great naval petroleum reserve in the ground. While the possibility of loss by drainage might be a reason for legislation enabling the Secretary to take any appropriate action that at any time might become necessary to save the petroleum, it is certain that the contracts and leases have no such purpose. The work to be paid for in crude products contemplated the construction of fuel depots. The one covered by the first contract was a complete unit sufficient for 1,500,000 barrels including pumping stations, fire protection and its own wharf and channel. It is not necessary to consider the possible extent of the construction that might be required under the later contract. Indeed it could not then be known how much work and products in storage it would take to exhaust the reserve. The record shows that the Navy Department estimated the cost of proposed storage plants and contents at approximately $103,000,000. Congress has not authorized any such program. The department tried and failed to secure additional appropriations for the Pearl Harbor storage facilities. The Act of August 31, 1842, 5 Stat. 577 (R. S. 1552), gave the Secretary authority to construct fuel depots. But it was taken away be the Act of March 4, 1913, 37 Stat. 898. Since that time Congress has made separate appropriations for fuel stations at places specifically named. 1 And it has [273 U.S. 456, 502] 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 (Comp. St. 6884, 6886); Act of June 12, 1906, 34 Stat. 255; Act of June 30, 1906, 34 Stat. 764 ( Comp. St. 6763). 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 (Comp. St . 6606, 6609).
The purpose and scope of the provision are limited to the administration of the reserves. The clause is found in a proviso to an appropriation for an investigation of fuel adapted to naval requirements and the availability of the supply in the naval reserves. If 'exchange' has [273 U.S. 456, 503] 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 substance of the account, as stated in the decree of the District Court, is printed in the margin. 2 The [273 U.S. 456, 504] findings show that the storage facilities at Pearl Harbor covered by the contracts were economically completed on the lands of the United States under the direction of the companies and the supervision of officers of the Navy; that they are of benefit to the United States and are now available for use and should be retained by it; that the [273 U.S. 456, 505] 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.
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.' Neblett v. Macfarland, 92 U.S. 101 , 103 (23 L. Ed. 471). And, while the perpetrator of the fraud has no standing to rescind, he is not regarded as an outlaw; and, if the trans- [273 U.S. 456, 506] action 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, 501 , 30 S. Ct. 600, 601 (54 L. Ed. 856). 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, 339 , 26 S. Ct. 282; United States v. Stinson, 197 U.S. 200, 204 , 25 S. Ct. 426; State of Iowa v. Carr (C. C. A.) 191 F. 257, 266; cf. Mason v. United States, 260 U.S. 545 , 557, et seq., 43 S. Ct. 200. But they will not be applied to frustrate the purpose of its laws or to thwart public policy.
It was the purpose of those making the contracts and leases to circumvent the laws and defeat the policy of the United States established for the conservation of the naval petroleum reserves. The purpose of the representatives of the department was to get for the Navy fuel [273 U.S. 456, 509] depots or storage facilities that had not been authorized by Congress. The leases were made to obtain the crude products for use as a substitute for money to make good the amounts advanced by petitioners to pay for such improvements. The Secretary's authority 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 the Act of June 4, 1920. And, in order to get control of the oil lands covered by the leases, the companies agreed to pay for these unauthorized works of construction and to furnish fuel oil and other products of petroleum suitable for naval use to fill the storage facilities so added. The contracts and leases and all that was done under them are so interwoven that they constitute a single transaction not authorized by law and consummated by conspiracy, corruption and fraud. The United States does not stand on the same footing as an individual in a suit to annul a deed or lease obtained from him by fraud. Its position is not that of a mere seller or lessor of land. The financial element in the transaction is not the sole or principal thing involved. This suit was brought to vindicate the policy of the government, to preserve the integrity of the petroleum reserves and to devote them to the purposes for which they were created. The petitioners stand as wrongdoers, and no equity arises in their favor to prevent granting the relief sought by the Inited States. They may not insist on payment of the cost to them or the value to the government of the improvements made or fuel oil furnished as all were done without authority and as means to circumvent the law and wrongfully to obtain the leases in question. As Congress had not authorized them, it must be assumed that the United States did not want the improvements made or was not ready to bear the cost of making them. No storage of fuel oil at Pearl Harbor was authorized to be made in excess of the [273 U.S. 456, 510] 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.
[ Footnote 1 ] 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.
NOTE.-Interest is at the rate of 7 per cent. and is calculated on monthly balances to May 31, 1925.

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