Source: https://caselaw.findlaw.com/us-supreme-court/200/321.html
Timestamp: 2019-04-25 10:58:18+00:00

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US v. DETROIT TIMBER & LUMBER CO.
[200 U.S. 321, 322] These are cross appeals from a decree of the circuit court of appeals for the eighth circuit, affirming in part and erversing in part a decree of the circuit court for the western district of Arkansas.
The bill was filed on April 5, 1902, by the United States against the Detroit Tamber & Lumber Company, the Martin- [200 U.S. 321, 323] Alexander Lumber Company, and a number of individual defendants. The object of the bill was to set aside patents to 44 tracts of land, issued to the individual defendants, and all conveyances, contracts, and leases from them purporting to convey title to or a right to cut and remove timber from the lands, and also for an accounting of the timber cut and removed from the lands by the two companies, and judgment therefor.
The charge was that the lands were entered under the timber act of June 3, 1878 (20 Stat. at L. 89, chap. 151), and in fraud of its provisions, in that the purchase money was advanced by the Martin- Alexander Company under contracts with the entrymen that after the entries they should convey to it all the standing timber thereon. The Martin- Alexander Company denied that there were any such contracts, and the Detroit Company in addition pleaded that it was a bona fide purchaser from the former company. It appeared from the testimony that for some time prior to January 14, 1901, the Martin-Alexander Company owned and operated a sawmill plant in the vicinity of these lands; that most, if not all, of the entrymen were its employees; that it furnished all the money for the purchase prices of these lands, as well as for the expenses connected with the entries, and that after the entries the entrymen, with three exceptions, executed conveyances to it of all the standing timber. Fifty- eight and one half per cent of the stock of the Martin-Alexander Company belonged to E. B. Martin, while A. V. Alexander controlled the remainder, which was owned by himself, his wife, and J. O. Means.
On January 14, 1901, the Detroit Company purchased the entire property of the Martin-Alexander Company for $60,000 cash and an assumption of its obligations, amounting to $17,456.79. Prior to May 9, 1901, patents were issued for all the lands, thirteen having been issued before January 14, 1901. After the purchase from the Martin-Alexander Company the Detroit Company obtained deeds of the lands from the patentees of twenty-seven of the tracts. [200 U.S. 321, 324] The circuit court found that the transactions between the entrymen and the Martin-Alexander Company were not in conflict with the statute, that there were no agreements between them and it prior to the entries in respect to conveyances of the standing timber, and that there was only the mere expectation on the part of the company that it would be able to purchase the timber. Thereupon it dismissed the bill. 124 Fed. 393. The court of appeals, reviewing the testimony, held that there were contracts between the parties making the entries and the Martin-Alexander Company prior to the entries, and that therefore those entries were in fraud of the act, but it also found that the purchase by the Detroit Company was in good faith, and that therefore that company was entitled to protection in its purchase. It ordered the bill dismissed as to the 27 tracts for which patents had been issued and conveyances made to the Detroit Company. As to the seventeen which had not been conveyed, it ordered a decree canceling the patents, but dismissing the bill so far as respects any relief claimed against the Detroit Company. 67 C. C. A. 1, 131 Fed. 668.
Messrs. Marsden C. Burch, Fred A. Maynard, and Solicitor General Hoyt for the United States. [200 U.S. 321, 325] Messrs. W. E. Hemingway, James F. Read, Thomas C. McRae, U. M. Rose, and George B. Rose for the lumber companies.
The able and elaborate opinions of both the circuit court and the court of appeals relieve us from much labor. There are two questions of fact: First, whether the parties making the entries had, prior to acquiring title from the government, made any agreement with the Martin- Alexander Company for a conveyance of an interest in the properties, or were seeking to acquire title solely for their own benefit. Second, whether [200 U.S. 321, 329] the Detroit Company was a purchaser in good faith from the Martin- Alexander Company. With reference to the first question, the circuit court was of the opinion that there were no agreements between the parties. The court of appeals was of a different opinion, and held that the entries were made in pursuance of such agreements. This is a case in equity, and while in such a case questions of fact are always open to consideration by an appellate court, great respect is paid to the conclusions of the trial court in respect to them. Certainly, if the circuit court and the court of appeals had agreed, we should be very loath to disturb their conclusion. Differing as they do in the present case, we have examined this question, and agree with the court of appeals. The entire management of these entries was in the hands of an agent of the Martin-Alexander Company. It furnished the moneys, both for the purchase prices and all expenses; and it is not easy to believe that it did all this on a mere expectation that, after the entries had been made, it could purchase the timber. It is a much more reasonable conclusion that it had an understanding with the parties making the entries respecting purchases and prices. It is quite likely that the entrymen were not conscious of wronging the government, and thought that if it received the full price demanded, that was enough. The testimony of one witness suggests at least that they may have been advised that there was no contract unless it was in writing, and that hence they could conscientiously take the oath required in connection with an entry. So, without casting any imputation of intentional perjury on those parties, we agree with the court of appeals that the testimony points strongly to the fact that the entries were in pursuance of an understanding or agreement with the Martin-Alexander Company that, as it was advancing all the money, the entrymen should convey to it the standing timber at a fixed price.
With reference to the second question of fact, the circuit court made no finding, having disposed of the case by its conclusion in respect to the first. The court of appeals found [200 U.S. 321, 330] that the Detroit Company was a purchaser in good faith from the Martin- Alexander Company. Here, too, we have examined the testimony, and are satisfied that the conclusion of the court of appeals was correct. A brief statement of the salient facts may be not unimportant. The headquarters of the Detroit Company were in St. Louis, of the Martin-Alexander Company in southwest Arkansas. They dealt at arm's length. On December 20, 1900, Alexander, of the Martin-Alexander Company, applied to U. L. Clark, presidernt of the Detroit Company, at St. Louis, to purchase Martin's interest in the Martin-Alexander Company. Clark declined, stating that the Detroit Company would make no purchase of a fractional interest in the property. Thereupon it was arranged that he should make an examination with a view to the purchase of the entire property. The Detroit Company's inspector was sent to Arkansas to examine the lands. Clark himself went down in the January following, and, after receiving the report of the inspector, terms of sale were, on January 14, agreed upon; $60,000 cash and the assumption of the Martin-Alexander Company's debts. The $60,000, by agreement between the stock-holders of the Martin-Alexander Company, were divided, $34,850 to Martin, $24,850 to Mrs. Alexander, $150 to A. V. Alexander, and $150 to J. O. Means. Martin and Means were paid at once; the debts were also promptly paid. Alexander desired to take stock in the Detroit Lumber Company in lieu of the money coming to his wife and himself. Clark was not then authorized to make such arrangement, but subsequently the stock of the Detroit Lumber Company was increased and the Alexanders were paid in full in that stock. The entire property of the Martin- Alexander Company, included in which were the sawmill, tram and logging roads, these timber contracts and other like contracts, and also all stock on hand, was, at the time of the purchase,-January 14,-turned over to the Detroit Lumber Company, which thereafter continued the business. The Martin-Alexander Company had no deeds of the lands in controversy, but simply contracts for the timber [200 U.S. 321, 331] thereon, and, in order to be relieved from the necessity of keeping accounts with respect to the different tracts, the Detroit Company proceeded to obtain deeds from twenty-seven of the patentees, paying on an average $25 apiece therefor, which was a fair price for the lands after the timber had been cut off. It had no knowledge or intimation that there was anything wrong in the titles until the last of September or the first of October, 1901,-more than four months after the government had issued its patents for all the lands,-when it received a notice to that effect from a government inspector.
We do not understand the law to be as stated, or that one who enters into an ordinary and reasonable contract for the [200 U.S. 321, 332] purchase of property from another is bound to presume that the vendor is a wrongdoer, and that, therefore, he must make a searching inquiry as to the validity of his claim to the property. The rule of law in respect to purchases of land or timber is the same as that which obtains in other commercial transactions, and such a rule as is claimed by counsel would shake the foundations of commercial business. No one is bound to assume that the party with whom he deals is a wrongdoer, and if he presents property, the title to which is apparently valid, and there are no circumstances disclosed which cast suspicion upon the title, he may rightfully deal with him, and, paying full value for the same, acquire the rights of a purchaser in good faith. Jones v. Simpson, 116 U.S. 609 -615, 29 L. ed. 742-744, 6 Sup. Ct. Rep. 538. He is not bound to make a searching examination of all the account books of the vendor nor to hunt for something to cast a suspicion upon the integrity of the title.
'A chancellor will not be astute to charge a constructive trust upon one who has acted honestly and paid a full and fair consideration without notice or knowledge. On this point we need only refer to Sugden on Vendors, p. 622, where he says: 'In Ware v. Egmont, 4 De G. M. & G. 460, the Lord Chancellor Cranworth expressed his entire concurrence in what, on many occasions of late years, had fallen from judges of great eminence on the subject of constructive notice, namely, that it was highly inexpedient for courts of equity to extend the doctrine. When a person has not actual notice, he ought not to be treated as if he had notice, unless the circumstances are such as enable the court to say, not only that he might have acquired, but also that he ought to have acquired it, but for his gross negligence in the conduct of the business in question. The question, then, when it is sought to affect a purchaser with constructive notice, is not whether he had the neans of obtaining, and might, by prudent caution, have obtained the knowledge in question, but whether not obtaining was an act of gross or culpable negligence."
In the light of these authorities we see nothing which casts any imputation on the conduct of the Detroit Company, or [200 U.S. 321, 334] that tends to show that it was not a purchaser in absolute good faith.
See also United States v. Freyberg, 32 Fed. 195, a case in the circuit court for the eastern district of Wisconsin, in which it was held by Judge Dyer that an action brought by the government to recover for timber cut from land which had been entered as a homestead, but the full equitable title of which had not then passed to the entryman, either by the required occupation of the premises or by a commuting of the homestead to a pre-emption entry-an action maintainable at the time it was commenced- was defeated by the issue of the final receiver's receipt and the consequent perfection of a full equitable title.
Counsel for the government deny the application of this principle in the present case on the ground, first, that it gives vitality and validity to a wrongful acquisition of title from the government. They say that equity is never founded on a wrong, and that because the original entries were wrongful the doctrine of relation will not be applied. But this is a clear misunderstatnding of the purpose and scope of the doctrine of relation. If the original entries were rightful, there is no need of its application, for the patents would pass perfect titles. The equity is founded on the rightful conduct of the purchaser, and not on the wrongful conduct of the entrymen. It upholds the purchaser in his honest purchase notwithstanding the wrongful character of the entries. This is akin to the ordinary rule in respect to a bona find purchaser. Equity sustains the title in spite of the fact that his grantor may have wrongfully obtained it, and upholds it because of his rightful conduct.
There are two or three answers to this contention. In the first place, the headnote is not the work of the court, nor does it state its decision,- though a different rule, it is true, is prescribed by statute in some states. It is simply the work of the reporter, gives his understanding of the decision, and is prepared for the convenience of the profession in the examination of the reports. In the second place, if the patent referred to in that headnote is a patent issued upon a wrongful entry, no such fact appeared in the case, because no patent was issued upon the entry charged to have been wrongful, but after that entry had been canceled, a patent was issued to Diller on a new entry. If it refers to some other patent than one issued upon a wrongful entry, it has no pertinency, for the doctrine of relation never carries a patent back to the date of any other entry than that upon which it is issued. And finally, the headnote is a misinterpretation of the scope of the decision.
With reference to the other tracts and the denial of any relief, by accounting or otherwise, against the Detroit Company, it is contended that as prior to the issue of a patent, the Land Department could have set aside the entries on account of the fraudulent contracts, the courts will now grant the same relief; and further, that inasmuch as the patents are by this decree canceled and the title restored to the government, the Detroit Company must be regarded as a wrongdoer in respect to the timber which it took from the lands prior to the decree, and an accounting should have been ordered. But this ignores the fact that the Detroit Company acted in good faith, and purchased the timber from those having an apparently perfect equitable title thereto. It becomes necessary to inquire what is the significance of a final receiver's receipt and the effect of a cancelation by the Land Department of such a receipt. The receipt is an acknowledgment by the government that it has received full pay for the land, that it holds the legal title in trust for the entryman, and will in due course issue to [200 U.S. 321, 338] him a patent. He is the equitable owner of the land. It becomes subject to state taxation, and under the control of state laws in respect to conveyances, inheritances, etc. Carroll v. Safford, 3 How. 441, 11 L. ed. 671; Witherspoon v. Duncan, 4 Wall. 210, 18 L. ed. 339; Simmons v. Wagner, supra; Winona & St. P. Land Co. v. Minnesota, 159 U.S. 526 , 40 L. ed. 247, 16 Sup. Ct. Rep. 83; Cornelius v. Kessel, 128 U.S. 456 , 32 L. ed. 482, 9 Sup. Ct. Rep. 122; Hastings & D. R. Co. v. Whitney, 132 U.S. 357 , 33 L. ed. 363, 10 Sup. Ct. Rep. 112; Benson Min. & Smelting Co. v. Alta Min. & Smelting Co. 145 U.S. 428 , 36 L. ed. 762, 12 Sup. Ct. Rep. 877.
Indeed, in some of the opinions of this court, emphasizing the value of a receiver's receipt, there are expressions which seem to underestimate the significance of a patent. Wisconsin C. R. Co. v. Price County, 133 U.S. 496, 510 , 33 S. L. ed. 687, 694, 10 Sup. Ct. Rep. 341; Deseret Salt Co. v. Tarpey, 142 U.S. 241, 251 , 35 S. L. ed. 999, 1002, 12 Sup. Ct. Rep. 158. For it must be remembered that the latter is the instrument which passes the legal title, and that until it is issued the legal title remains with the government, and is subject to investigation and determination by the Land Department. Barden v. Northern P. R. Co. 154 U.S. 288, 326 , 38 S. L. ed. 992, 1001, 14 Sup. Ct. Rep. 1030; Michigan Land & Lumber Co. v. Rust, 168 U.S. 589, 592 , 42 S. L. ed. 591, 592, 18 Sup. Ct. Rep. 208; Guaranty Sav. Bank v. Bladow, 176 U.S. 448 , 44 L. ed. 540, 20 Sup. Ct. Rep. 425. But while, until the issue of the patent the land is under the control of the Land Department, which, upon proper investigation and for sufficient reasons, may set aside the certificate of entry, yet this power of the Land Department cannot arbitrarily be exercised without notice to the entryman, and if improperly exercised the rights of the entryman may be enforced in the courts after the patent has issued to other parties. Guaranty Sav. Bank v. Bladow, supra. It is true, as against the government, and while the title remains in the government, he may not be able to enforce his equity, because no action can be maintained against the government except upon contract, express or implied. United States v. Jones, 131 U.S. 1 , 33 L. ed. 90, 9 Sup. Ct. Rep. 669. But while he may not sue on his equity, he may protect that equity when sued by the government. It is sometimes said that a legal title with an equity is paramount to an equity alone; but this is not strictly true unless the equities are equal, for sometimes a superior equity [200 U.S. 321, 339] may be adjudged paramount to a legal title and an inferior equity. Garland v. Wynn, 20 How. 8, 15 L. ed. 801; Lytle v. Arkansas, 22 How. 193, 16 L. ed. 306; Lindsey v. Hawes, 2 Black, 554, 17 L. ed. 265; Wirth v. Branson, 98 U.S. 118 , 25 L. ed. 86; 2 Pom. Eq. Jur. 678, and following. But we need not stop to inquire what rights the Detroit Company will have after a patent has issued. It is enough now to hold that it can defend its equities against the suit of the government.
It is a mistake to suppose that for the determination of equities and equitable rights we must look only to the statutes of Congress. The principles of equity exist independently of, and anterior to, all congressional legislation, and the statutes are either annunciations of those principles or limitations upon their application in particular cases. In passing upon transactions between the government and its vendees we must bear in mind the general principles of equity, and determine rights upon those principles, except as they are limited by special statutory provisions. And clearly, upon those principles, a party purchasing an equitable right is entitled to be protected in his purchase so far as it can be done without trespassing upon the rights of other parties. The statute provides that if an entry is wrongfully made, it may, prior to patent, be set aside by the Land Department, the entryman forfeiting the money which he has paid. In other words, by the action of the Department the equitable title is canceled and restored to the government. It then has both the full title to the land and the money which had been paid for it. And this is the penalty which is imposed for the wrongful entry. Certainly, when the government retains the full price which it has placed upon the land and also recovers the land itself, it is abundantly compensated for any wrong which has been attempted by the entryman. And a party who deals with such entryman-relying upon the evidences of his entry, which are in all respects in form good and sufficient, and are an acknowledgment by the government officials of a rightful entry-is justly entitled to the consideration of a court of equity. In this case, finding [200 U.S. 321, 340] the entryman holding apparently valid equitable titles to the lands, it entered into contracts with them for the purchase of the timber. It cut and removed the timber-all in good faith. It is equitable that, having thus acted in good faith, it should not be held to account for the timber which it has already paid for and cut and removed in reliance upon these contracts. The government has every dollar which it would have received in case of a perfectly valid entry, and has also recovered the land. Surely it is not just for it to ask further payment, and from a party who dealt in good faith with the entrymen, relying upon the titles which it had created. If the Detroit Company has taken some timber from the land, it has once paid for it and ought not to be compelled to pay a second time, and to the government, which has already received full pay for the land, timber and all. It is inequitable to give to the government not merely the land and the price which it charged for the land, but also the value of the timber obtained by the Detroit Company. It is doubling the penalty which the statute imposes, or, if not doubling, at least, largely increasing it.
We think the decision of the Court of Appeals was right, and it is affirmed.

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