William H. Rehnquist: We'll hear argument next in No. 87-5677, Warren Lee Harris v. Marvin Reed. Mr. Anderson, you may proceed whenever you're ready.
Kimball R. Anderson: Mr. Chief Justice, and may it please the Court. I am here today to urge that the Court apply the plain statement rule of Michigan v. Long to Federal habeas review of state court convictions under 28 USC Sec. 2254. I suggest that if a state court plainly relies on a procedural default, then Federal habeas review should ordinarily be foreclosed, absent cause and prejudice. On the other hand, if, as in this case, the state court is ambiguous or obscure concerning whether it relied on the procedural default, then I suggest that that ambiguity should be resolved in favor of preserving the Federal issue for habeas review.
William H. Rehnquist: Mr. Anderson-- --Do you think that... excuse me. Mr. Anderson, if the state court opinion says there has been a procedural default here and we need not reach this question, nonetheless, you know, for guidance, or whatever, then they go ahead and express an opinion on it... how does that come out under your rule?
Kimball R. Anderson: Well, this Court has said on several occasions that merely noting a procedural default is not the same as actually relying on the procedural default. Oftentimes state courts... and indeed, in Illinois, the state court will note a procedural default but then go on to excuse it, and consider and dispose of the case on the merit.
William H. Rehnquist: And that is your view, as to how this ought to be handled too?
Kimball R. Anderson: Yes. My view is that absent a plain statement clearly invoking the procedural default, as opposed to merely noting it, that absent a plain statement invoking the default and finding the issue waived, then the Federal issue that's been discussed by the appellate court ought to be preserved for review by the--
William H. Rehnquist: So in order to rely on procedural default, the state court opinion must say nothing about the merits of the question?
Kimball R. Anderson: --Oh, no. In order to... the rule would be the same as this Court has articulated in Michigan v. Long, and also in the context of a procedural default that Caldwell v. Mississippi. If the state court plainly relies on a procedural default, then that would foreclose--
William H. Rehnquist: Alone. But... okay. So--
Kimball R. Anderson: --No, not necessarily alone. If they... yes. If they do that, then Federal habeas review is foreclosed absent cause and prejudice, even if they go on to discuss the Federal issue in dicta.
Byron R. White: --Okay. So if the Court says, we have two reasons here for decision: one, a procedural default, two, you haven't got anything on the merits anyway.
Kimball R. Anderson: That's correct, Your Honor. And that is--
Byron R. White: Then what?
Kimball R. Anderson: --Well, that's the circumstances that arises occasionally where you have alternative reliance.
Byron R. White: Well, there's no question if they say they are relying on the procedural default.
Kimball R. Anderson: And in that instance, habeas... the Sykes test would apply, habeas review would be foreclosed absent cause and prejudice.
Byron R. White: That isn't quite Michigan v. Long, is it?
Kimball R. Anderson: Well, Michigan v. Long, of course, is a direct review case, Your Honor. And the rule has--
Byron R. White: I know. But you say you're... you want the Michigan v. Long rule.
Kimball R. Anderson: --That is the rule in Michigan v. Long, Your Honor, as I understand it. It's also applied in Caldwell v. Mississippi, that if the State Court, if the highest Court of the State plainly relies on a procedural default, then that will preclude direct review by the Supreme Court, regardless of whether the State Court also discusses the merits of a Federal issue.
William H. Rehnquist: You mean Caldwell would obtain reversal for you here, because the Illinois Appellate Court did not say anything about procedural default in its opinion?
Kimball R. Anderson: It noted the procedural default, but instead of invoking the default and finding the issue waived, Your Honor, the Court went on to address the merits of Mr. Harris' ineffective assistance of counsel claim.
William H. Rehnquist: Well, how does a court invoke the procedural default in its opinion?
Kimball R. Anderson: Well, any number of ways, but I suggest that the same rules that would govern in Michigan v. Long would govern here, and there the Court has, has said that a simple statement that the Court finds a matter waived or barred because of procedural default would suffice. The Court said that that claims statement rule would serve interests of comity and uniformity and in the systemic interests, and I suggest that all of those policy considerations are equally well-served here in the context of habeas review. The plain statement rule would afford due respect to a decision by a state court to plainly invoke its procedural rules.
Byron R. White: And you say that it ought to be the plain statement by the appellate court, the federal court shouldn't try to imagine whether they relied on it or not? They should say, they should, just an objective test--
Kimball R. Anderson: I'm sorry?
Byron R. White: --[inaudible] the opinion of the appellate court?
Kimball R. Anderson: Precisely Your Honor, and for all of the good reasons that were articulated in Michigan v. Long. This ad hoc method of guessing at, at what the appellate court meant lends itself to error. It disserves the comity interest, and I think the--
Antonin Scalia: It makes a lot of sense where you have a written appellate court decision, but what do you do, I mean, a lot of state appellate courts that, that have mandatory appeals don't write full opinions. In most of them, they just say "appeal denied".
Kimball R. Anderson: --Yes. Sometimes it--
Speaker: Right.
Kimball R. Anderson: --Sometimes this issue does arise in the context of summary--
Antonin Scalia: Suppose you have--
Kimball R. Anderson: --affirmants.
Antonin Scalia: --Right. And suppose you have a lower court opinion that rested its decision on procedural default.
Kimball R. Anderson: Well--
Antonin Scalia: And all that the appellate court says is appeal denied.
Kimball R. Anderson: --Yeah.
Antonin Scalia: What, what obtains there?
Kimball R. Anderson: Well, the plain statement rule should be applied in the context of summary affirmances, because here's the danger that's going to arise if you don't. You have a case where the procedural default is, is, let's say, questionable, both as a matter of state law and as the facts. You also have an arguable Constitutional issue. The prosecutor argues on appeal that the, makes a very weak claim that the procedural default should be invoked. The defendant argues on appeal that his strong Constitutional error ought to be reviewed, and then the appellate court just summarily affirms without a decision. The danger of not applying the plain statement rule in that context is that the state court, you may be in one of those States like Illinois where procedural defaults are excused, and here we've got a busy Court that has not taken the time to articulate its real intent. It... its real intent may be to excuse the, the procedural default, because that's a weaker questionable argument, and rely on the merits. If that happened, and the Federal... and then the plain statement rule is not applied, the federal court runs the risk of guessing incorrectly about the meaning or the intent of the state court.
William H. Rehnquist: How about--
Kimball R. Anderson: And that kind of--
William H. Rehnquist: --How about the second part of Justice Scalia's [inaudible], maybe you're coming to that, the Illinois appellate court rests its decisions solely on procedural fault, appeal to, leave to appeal to the Supreme Court denied without opinion.
Kimball R. Anderson: --Well, if leave to appeal is denied, then there, then there's really... it's like denial of certiorari. There's really been no opinion. So I think then you would look at the appellate court decision--
Speaker: Illinois?
Kimball R. Anderson: --Yes, and you'd look to see whether the appellate court had plainly relied on the procedural default.
Sandra Day O'Connor: Mr. Anderson, in this case, the Illinois Court said that, except for the alibi witnesses, all the matters raised in the Petitioner's ineffectiveness claim could have been raised on direct appeal. And then it went on, and dealt with, on the merits, the alibi witness question. Now, in all fairness, shouldn't that be read as, as procedurally barring everything but the alibi witnesses?
Kimball R. Anderson: Well, in fairness, that is a reasonable interpretation of the decision, but I would point out that reasonable minds have disagreed all the way up through here. We've had four Federal judges below who have disagreed concerning the meaning of the decision. As you know, the District Court concluded that the Appellate Court had intended to excuse the waiver issue, because the Appellate Court discusses not only the alibi witness issue, but also some of the other ineffective assistance of counsel claim issues that Mr. Harris had raised. Two judges in the Seventh Circuit Court of Appeals also said that the order was ambiguous, but they... and then they tried to ascertain the intent of the Court, and they disagreed with the District Court. And then we have Judge Cudahy, who wrote a concurring opinion, and he said: Gee, the order is ambiguous, and I don't think we ought to be trying to divine the unspoken intent. So I think that the, the best evidence, really, that this, that this order is a good candidate for the plain statement rule is the fact that we've now had four lower judges below who have been unable to agree at the meaning of it. And of course the parties--
Sandra Day O'Connor: Well, maybe--
Kimball R. Anderson: --have spent a lot of time briefing it as well.
Sandra Day O'Connor: --Maybe on Federal habeas, our Federalism concerns are somewhat greater than on direct review, so that we could give the benefit of the doubt to the state's position of, of procedural bar.
Kimball R. Anderson: Well, the plain statement rule certainly is not going to preclude the state courts from invoking or applying a procedural rule. So, all the plain statement rule really does is provide the lower Federal courts with guidance concerning whether or not to afford habeas review when the state courts have been obscure.
Sandra Day O'Connor: Yes, but are the considerations on Federal habeas any different at all than on direct review, do you think? I mean, should we be less eager for the Federal courts to reach out and decide these cases?
Kimball R. Anderson: I think that, Your Honor, in the context of habeas review, the Court has noted that its jurisdiction is really broader than on direct review, and I think you also have to keep in mind the historic office of the great writ here, in that it is the ultimate protection against un-Constitutional detention, and this Court has noted that a procedural default does not bar a habeas court from, from exercising jurisdiction and, and affording review. So I think that all of the reasons that Your Honor articulated in Michigan v. Long apply with equal, if not greater, force here in the habeas context, in terms of promoting uniformity, in terms of promoting comity, and protecting the systemic interests that were articulated in Wainwright.
Byron R. White: What... what is, on what basis does a Federal court refuse habeas corpus when there's been a procedural default that the state court relies on?
Kimball R. Anderson: Well, as Justice Rehnquist wrote in Wainwright v. Sykes, comity interest would ordinarily preclude a court from affording habeas review if there has been an adequate and independent state grounds for the state court's decision. And that rule was explained in terms of affording proper due respect for the decision of the state courts to enforce their procedural rules.
Byron R. White: But this is a, this is a court made consideration, I take it?
Kimball R. Anderson: It is a court made consideration. I'm sure Your Honor is familiar with the history of it. In Fay v. Noia, the Court said that absent a deliberate bypass, Federal habeas review would be allowed. And then we have the Daniels v. United States and Fay v. Henderson, which began developing this cause and prejudice test, and then the Court finally adopted the cause and prejudice test in Wainwright v. Sykes, emphasizing the, the systemic interest of finality and efficiency and the comity interests of--
Byron R. White: So Federal habeas is really, as has been suggested, is a different kettle of fish than a directed review, I suppose? Why shouldn't there be a presumption in favor of the, in an ambiguous situation, a presumption in favor of the state grounds?
Kimball R. Anderson: --Well, for all of the reasons that we discussed. In part because if you have, if you have a presumption in favor of default, for example, you are not going to give the appropriate, the respect that is due when, for example, a state court without being clear decides not to apply its procedural rules. When a state court decides not to invoke its procedural rules, and instead to reach the merits of a Federal issue, it has necessarily made a determination that the policies underpinning its procedural rules aren't worthy of indication in that particular case. And a Federal court, I think, ought to give proper respect for that determination as well as the determination to invoke the rules where appropriate.
Byron R. White: Well, in the ambiguous case, the State Court hasn't said that. The State Court is, how do you know whether they relied on it or not?
Kimball R. Anderson: That's the problem. You don't know, and the danger--
Byron R. White: Well, the--
Kimball R. Anderson: --The danger with the--
Byron R. White: --Well, at least, at least the State Court notes the procedural default.
Kimball R. Anderson: --Notes it and goes on to address merit. So you don't know--
Byron R. White: Well, they--
Kimball R. Anderson: --in our instance what they intended.
Byron R. White: --They just want lawyers to know what the Federal rule is.
Kimball R. Anderson: Maybe, but maybe they thought that their procedures... the policies underpinning their procedural rules didn't merit the vindication given the important issues in this case, and the importance of this particular issue to this particular defendant. You don't know, and the danger of presuming in favor of default is that you're going to guess wrong, and the danger--
Byron R. White: This argument, your argument now sounds like even if the state court relies solely on procedural default in a particular case, the habeas, the habeas corpus court should sit and entertain the claim if it finds that there has been an uneven application of procedural default.
Kimball R. Anderson: --No, I haven't said that at all, Your Honor.
Byron R. White: Well, you did.
Kimball R. Anderson: Not here today or on the briefs. I said that if the state court plainly relies on the procedural default as the basis for its decision--
Byron R. White: Regardless of whether it does it every day or not?
Kimball R. Anderson: --Correct.
Antonin Scalia: Isn't part of the problem with adopting an ambiguity rule? It's not a clear line rule. I'm helping you... don't... I mean, if you could tell me how that could be a clear line rule, I'll be happy to rule against you. But you don't know whether it's ambiguous until you inquire into state law.
Kimball R. Anderson: That's right.
Antonin Scalia: You have to inquire into what the State law procedure is.
Kimball R. Anderson: That's right--
Antonin Scalia: You really don't know that there's an ambiguity until you've made the Federal habeas court conduct an inquiry into state procedural law.
Kimball R. Anderson: --Which, as this Court said in Michigan v. Long, was not a good procedure.
Byron R. White: But we usually rely on the court of appeals judges to tell us what state law is.
Kimball R. Anderson: Yes, but there are going to be instances where the state court hasn't told you, they've been obscure as to the whether or not there is a procedural default, either legally or factually in the context, and the danger of presuming in favor of default in those instances, as I said, is that important individual rights may be lost simply because the state court judge was obscure about his intent. And I think when you're dealing with individual liberty, that kind of ambiguity or obscurity just should not be tolerated, should not block Federal review of the habeas issue. And I think that this Court... if you look at the Court's decisions in this area over the years, you've seen the rule developed in the direct review cases, of about the plain statement rule, but you've also seen the rule develop in the habeas cases that if the state court has disposed of the Federal issue, then the Federal courts have an unflagging duty to resolve or to review the correctness of the state court's decision on the Federal issue. Going back, way back to Brown v. Allen... Brown v. Allen said that if there's an adequate and independent State grounds, then habeas review is going to be foreclosed. But they went on to give some exceptions to that, and one of those exceptions is right on point here. In Brown v. Allen, they said, well, if the state court indicates that state collateral review is permissible despite a procedural default, then the Federal court can afford habeas review of the Federal issue that has been disposed of by the state court in the state collateral proceeding. That's really what we have here. We have, we have a situation where the state court indicated that state collateral review may be permissible. The Circuit Court disposed of Mr. Harris' ineffective assistance claim on the merits, and then we get up in the appellate court and we're really not sure what they did with it, but they at least talked about it, discussed it, and concluded in their... at the end of their order, that his petition is denied, based on their review of the entire record.
John Paul Stevens: Mr. Anderson, may I ask you a question about your reliance on Michigan v. Long? Generally speaking, not exclusively, the Michigan v. Long line of cases deal with situations in which the state is contending that the state courts have given more protection to a Federal Constitutional claim than the Constitution actually warrants. In the habeas situation, it's the exact reverse. Typically the defendant is claiming that he was deprived of protection the Constitution would provide him. Do you think that distinction has any significance and which way does it cut?
Kimball R. Anderson: I don't think it has a significance, because I would call Your Honors' attention to the fact that that Michigan... although that was the context of Michigan v. Long, that plain statement rule has been applied subsequently in a procedural default case, in Caldwell v. Mississippi, where the defendant failed to, failed to raise his Constitutional issue on appeal, and his conviction was affirmed. And then it went to the Mississippi Supreme Court, which raised the issue sua sponte, split four to four over it, and then it went to this Court on certiorari, and I, I think Justice Marshall was writing for the majority. He made it very clear there that the mere existence of a procedural bar is not going to foreclose this Court's direct review jurisdiction. On the contrary, the state court actually had to have relied upon the procedural bar before this Court will decline jurisdiction. So I think, Your Honor is right. That was the context of Michigan v. Long. But I think it is, it's gone the other way in subsequent cases. So I don't think the distinction is important. I do think that all of the reasons for the application of the plain statement rule in the context of direct review apply equally well in the habeas context, in the context of habeas review.
Anthony M. Kennedy: Well, in the Caldwell case, we found that the State Court's ruling was not ambiguous, and that they had not invoked the procedural bar.
Kimball R. Anderson: That's true. The defendant had--
Anthony M. Kennedy: So the--
Kimball R. Anderson: --defaulted--
Anthony M. Kennedy: --So the inference, that, or the language in the opinion that procedural bars are treated the same way as state substantive grounds was really unnecessary to that decision?
Kimball R. Anderson: --I'm not following you there, Your Honor.
Anthony M. Kennedy: In Caldwell, we found that the State Supreme Court's order was clear, and that it had not relied on the state procedural ground.
Kimball R. Anderson: As I recall, the Court in Caldwell said that the reference to the waiver issue in the prevailing opinion is somewhat cryptic, but then went on to note that the Michigan Supreme Court had requested briefs on the Constitutional issue, had requested oral argument, and had in fact attempted to decide it, four to four. So I can't agree with Your Honor that the decision was crystal clear, because Justice Marshall did note that the Mississippi Supreme Court had referred to the waiver issue, and that the Court's reference, as he put it, was "somewhat cryptic".
Anthony M. Kennedy: Well, assuming that we made a clear holding, that procedural grounds are subject to the Michigan Long, v. Long rule in direct review cases, if we apply it in the context of a habeas proceeding, I assume that in most of the cases such as Justice Scalia puts, where there is simply a one-line order affirmed, we won't need cause and prejudice anymore because we simply rely on a presumption that procedural bar was not invoked?
Kimball R. Anderson: Well, I have urged in my briefs, and here today, that you don't adopt that presumption because that presumption is contrary to the rationale set forth in Michigan v. Long, and it also runs the risk that the Federal District Court is simply going to guess wrong at the meaning of the State Court, and fundamental rights will be lost simply because the State Court's opinion was obscured.
Anthony M. Kennedy: Well, you mention the Illinois practice, really as an empirical matter. I should think that most state courts respect their procedural bar rules. They're designed to tell the state courts that these are not litigatible issues--
Kimball R. Anderson: I have no--
Anthony M. Kennedy: --and you're asking us to presume the opposite.
Kimball R. Anderson: --Oh, no. Oh, no. I have no quarrel with that as a general proposition, Your Honor. Illinois State, Illinois State Courts as a general rule do invoke their procedural default rules. But there are instances where they also excuse them, and you see the most frequent, that arises most frequently in the context that we're here today in, namely, cases under our Illinois Post-Conviction Hearing Act. If, if you look at our reply brief, we list a number of cases where cases arising under the Illinois Post-Conviction Act have excused a procedural default, particularly when, when ineffective assistance of counsel is at issue. And all I'm saying is, if the, if the state court want's to foreclose Federal review, all they have to do is plainly rely on and invoke the procedural default. On the other hand, if they're going to be ambiguous about it, then in order to preserve the vitality of the great writ, and to protect the comity and systemic interests, you've got to preserve the Federal issue for review by the Federal court.
Anthony M. Kennedy: And that is not... or is it based on an inference that the state court probably did ignore the procedural bar?
Kimball R. Anderson: It's--
Anthony M. Kennedy: Or is that just irrelevant, as far as you're concerned?
Kimball R. Anderson: --Well, you just can't tell, and when you can't tell, all of the policy reasons we've discussed, I think, in the context of habeas, even more so than direct-review compel preservation of the Federal issue for Federal review. I'm not saying you have to make an inference one way or the other. In some cases, you'll be able to make an inference. Some cases you won't. In this case, there are several reasonable inferences that you can make from the order, but it still boils down to the fact that you're guessing at what the appellate court really intended to do. And I'm saying when you're guessing in the context of individual liberty, it's... it's a dangerous game to play, and it's the wrong game to play.
John Paul Stevens: Well, Mr. Anderson, speaking of the Illinois practice, it wouldn't be a matter of presuming that they've ignored the bar, but rather because of the broad exception in the Illinois Post Conviction Act for a case of fundamental unfairness, that they think there's enough substance to the claim alleged in the petition that they are concerned that it might meet that test, and in the case of doubt, they go ahead and decide it on the merit. But I don't think it's... you're really arguing they were simply unaware of the procedural bar?
Kimball R. Anderson: Oh, no--
John Paul Stevens: They just don't think it might apply, given the allegations of Federal Constitutional violations.
Kimball R. Anderson: --Absolutely. They were clearly aware of the procedural default. They noted it. I agree with Your Honor entirely. I... with Your Honor's permission, I think I'll reserve my remaining time for rebuttal.
William H. Rehnquist: Thank you, Mr. Anderson. We'll hear now from you, Mr. Shuff.
Robert V. Shuff, Jr.: Mr. Chief Justice, and may it please the Court. The Respondents here respectfully submit that when a state court opinion is unclear whether it rests on adequate and independent state grounds or the merits of a Federal Constitutional claim, that that ambiguity should be resolved in favor of the state grounds, so that habeas review is unavailable, absent the showing of cause and prejudice. In effect, we're asking that this Court form a presumption that the state courts have followed their own procedural rules, and therefore an adequate and independent state grounds exists in such cases. There are strong cases, strong interests of both the states and public which make this presumption desirable. These interests are grounded in Constitutional considerations, under our Federal system, the interests of comity, which allows us the fair opportunity to review, allows us a degree of finality, reduces our states' ability to... I'm sorry, increases our states' ability to decide our own future, and to bring order to our criminal justice--
Byron R. White: It also would save the Federal courts from some work, I suppose?
Robert V. Shuff, Jr.: --Yes. That is an attendant side benefit.
Byron R. White: From going through a useless procedure, which because it may be it goes back to the State Court and they decide it on the State grounds.
Robert V. Shuff, Jr.: Your Honor, they could decide it on the State grounds. That is an attendant... an attendant--
John Paul Stevens: I don't understand that. They can... after the Federal habeas Court decides that there's merit to the case, and orders a retrial, how would it go back to the State system to reargue the State procedural bar?
Robert V. Shuff, Jr.: --Well, it would not.
John Paul Stevens: It would not? Okay.
Robert V. Shuff, Jr.: But if the--
Byron R. White: But if there's ambiguity, you say you should assume that it's a State ground.
Robert V. Shuff, Jr.: --That's correct. You should assume that it was a State ground, and therefore the relief on a habeas proceeding--
Byron R. White: So you never... you never decide the Federal claim?
Robert V. Shuff, Jr.: --That's correct. The Federal claim should be decided that it is barred. The Respondent's proposal is a presumption in favor of the State Courts' following their rules. Finality is one of the main reasons that we propose this. Habeas is after all a collateral attack, not like the direct appeal. When it's a collateral attack, it is already further removed from the direct appeal, from the trial, from what should be, as this Court has stated, the main event. It allows the state to have order, and that order allows us to punish criminals, and that that ability to punish criminals allows us to have the rule of law and order, and the rule of law and order allows us to guarantee the individual liberties by the use of the great writ of habeas corpus. The role of the trial cannot be overemphasized. If we lose or obscure evidence by a review after review after review, the state's ability to protect the integrity of that trial is in fact, in many cases, lost.
Antonin Scalia: Mr. Shuff, I'm... I happen to think that the silliest thing to spend a lot of time litigating about, and for judges to have to spend a lot of time inquiring into, is, is whether they have jurisdiction, that the jurisdictional issues ought to be clear. Now, Mr. Anderson has given us a clear line. You can tell right away... you look at the opinion of the State Court. If it says, either as an alternative holding or as, as a sole holding, "we rely on the procedural default. " that's the end of the matter. If it doesn't say that, there's Federal jurisdiction; if it does say it there isn't. What clear line do you give us? You say where it's ambiguous. How do I know when it's ambiguous?
Robert V. Shuff, Jr.: Well, I would submit that it would be ambiguous if it didn't say "we rely solely on the State ground. "
Antonin Scalia: I don't have anything except a court of appeals, a state court of appeals order that says: affirmed. That's all I have.
Robert V. Shuff, Jr.: In that instance, Your Honor, we would suggest that the Court assume that the State followed its rules and if the state followed its rules and procedural default was argued, that it would be a matter of procedural default, and habeas would not lie.
Antonin Scalia: Well, I'd have to look to see whether procedural default was argued? Right?
Robert V. Shuff, Jr.: Under that circumstances, you might have to make that second inquiry.
Antonin Scalia: And I'd also have to make a ruling on whether the argument was a right one, I suppose. I'd have to figure out what the state law is about procedural default, wouldn't I, as a Federal court?
Robert V. Shuff, Jr.: In some instances, yes.
Antonin Scalia: I don't--
Robert V. Shuff, Jr.: In that instance, when it's just "appeal denied",--
Antonin Scalia: --That's going to be a very common instance. That's going to be a very common instance.
Robert V. Shuff, Jr.: --Well--
Antonin Scalia: I just don't consider that a very clear line. I don't like to... to, you know, I'd much rather have Federal judges figuring out what Federal law is, than figuring out what the State procedural law is. That seems to me an utterly useless exercise for Federal judges to engage in.
Robert V. Shuff, Jr.: --Well, it is not a, a useless exercise when you look to some of the ideas such as comity and what the burden is in the habeas on the States. If you look at the, the habeas practice in Illinois, for example, 300 cases a year, you then think about how you, how you would apply this rule to 300 cases. That is not a great number of cases, but is a significant number of cases, and the burden to the States... you should look at it possibly back that way, rather than the burden on the Federal court looking at that question.
William H. Rehnquist: What, as a practical matter, is the burden to the states of the rule that the Petitioner proposes?
Robert V. Shuff, Jr.: Well, the burden to the State is one that is systemic. The cases, for example, that are cited by the Petitioner... in each one of those cases, the Illinois Court said, "We have found"... this is, I'm sorry, this is in their reply brief... they have... "We have found that there is in fact a default, but we are choosing to waive that default and go to the merits. " That was a very small number of cases. They have cited a Law Review article in that reply brief that states it conservatively. It's Paul Wangren, and it's an article in the De Paul Law Review that says conservatively for every 10 cases that the courts don't find a waiver and don't waive, they find one where they find a waiver and, and I'm sorry, the procedural default, and do waive. And so what you're doing is, you're putting the burden back on the states to, in over 90 percent of their cases, to say, well, we're not waiving,--
Antonin Scalia: Big deal. All they have to do is say by the way, we're relying on procedural default when they are. That's all they have to say. We are relying on procedural default. You could even summarize it. You could say procedural default. You say, is that such a terrible burden on the States? Whenever they say that, the Federal Court is out of it. If they don't say it, the Federal Court isn't.
Robert V. Shuff, Jr.: --Well, I believe that is the--
Antonin Scalia: It's quick and easy, no trouble for everybody.
Robert V. Shuff, Jr.: --I believe that is a simple rule, but I don't believe that it serves the interest of comity or Federalism or the finality rules or the main event of trial or any other interests that you have been trying to address.
Antonin Scalia: Instead of that, you want to have the Federal judges enter into this, this inquiry, for no useful Federal purpose at all, into what the State law of procedural default is.
Robert V. Shuff, Jr.: Well, to begin with, to start with the presumption that we followed our rules, and to give our Courts the respect of a co-existing jurisdiction to say that we believe that you followed your rules. That's a rebuttable presumption--
Antonin Scalia: Why can't they give us some respect, and just, some respect, and just say procedural default when that, when that's what they're relying on?
Robert V. Shuff, Jr.: --That would be ideal if they would all do that, Your Honor.
Antonin Scalia: You see? Makes sense to me. Well, what are the circumstances when they don't do it, in these 300 cases? We're not just talking about the whole world, 300 cases going through the Illinois Court of Appeals. Are a lot of them affirmances of trial courts without opinion?
Robert V. Shuff, Jr.: No, not in Illinois. Primarily they'll be what we call a Rule 23 opinion, which is an unpublished opinion, very short, no issues that are merit publishing but that here's what we decided.
William H. Rehnquist: Is there anything that concerns you from the point of your representing the State by your opponent's rule, other than the fact that the Court would have to say, "We find a procedural default here. " when perhaps they would prefer not to? Are there any class of cases that haven't been explored in the argument or on the briefs?
Robert V. Shuff, Jr.: Yes, there is a classic case that I think would mitigate against that, and that's the classic case--
William H. Rehnquist: Nullicate against it.
Robert V. Shuff, Jr.: --I'm sorry.
William H. Rehnquist: Yes.
Robert V. Shuff, Jr.: That's a class where you have a procedural default and you're talking of possibly of something like incompetency of counsel or misconduct of the judiciary, because when you take those through the Illinois system, you're going to go up two different lines: either on direct appeal, where you talk about a plain error, or a, a post conviction proceeding where you're talking about a fundamental fairness. And when you then come to the habeas review, if the Court were to throw those cases back, it would change the standard by which those questions would be decided.
William H. Rehnquist: If what court were to throw the--
Robert V. Shuff, Jr.: The Federal court. The habeas Court, Mr. Chief Justice.
William H. Rehnquist: --I don't... perhaps I don't understand enough about Illinois law. I don't... I really don't understand exactly what you're saying. There are two different post-conviction routes in Illinois?
Robert V. Shuff, Jr.: Yes.
William H. Rehnquist: And--
Robert V. Shuff, Jr.: Well, there's a post conviction direct appeal route, okay, and there we have a rule of plain error, okay, which is simply almost a one, a one-step rule. And then we have a fundamental fairness on a post conviction proceeding, which is the normal place where matters off the record in the direct appeal would be brought if they raise a Constitutional claim. And those rules are different than the rule that you would obtain in a habeas case, if in fact you granted the habeas under the proposed rule.
Antonin Scalia: --But what difference does that... I think the Chief Justice's question is, is not going to the, to that point, the effect of a habeas decision. It's going to the question of whether there's some category of case where it would be difficult or impossible for the state court to say "procedural default". Is there any?
Robert V. Shuff, Jr.: There is no impossibility that I could think of, if that was the question. I'm sorry I misunderstood the question.
William H. Rehnquist: I thought that was the question. You've answered either one question or two. [Laughter]
Robert V. Shuff, Jr.: Well, the cause and prejudice standard that this Court has set forth provides an adequate safety net for the habeas seeker, so to speak, the Petitioner, in those cases where there would have been a procedural default, and yet a serious Constitutional question could exist. You also have the further review of a, an extreme miscarriage of, a fundamental miscarriage of justice. So you have, actually, two safety nets or safety valves for which people who are kept from the habeas system via presumption of the state, following these rules, for them to escape into the habeas system, or enter the habeas system, more correctly. So, we feel that the individual liberties should be carefully balanced against the state's liberties with the very fundamental thought in mind that in this country, the states have the majority of the burden of protecting society from the criminal. We are the sentry, and we feel that the interests of comity and Federalism should be protected, and therefore that the presumption should go to the states. For those reasons, we ask you that you please affirm the Seventh Circuit.
John Paul Stevens: Mr. Shuff, before you sit down, could I ask you a question?
Robert V. Shuff, Jr.: Sure.
John Paul Stevens: You said there are about 300 habeas cases in Illinois every year, is that the--
Robert V. Shuff, Jr.: That's approximately numbered.
John Paul Stevens: --How many of those go to hearing, are there evidentiary hearings in them, would you say? Do you... maybe, I mean, if you do know?
Robert V. Shuff, Jr.: I do not know how many go to evidentiary hearing. But it's a significant amount... there are quite a few that do go to evidentiary hearing.
Speaker: Yes. Thank you, Mr. Shuff. Mr. Anderson, you have four minutes remaining.
Kimball R. Anderson: Thank you, Mr. Chief Justice. My opponent argues that there should be a presumption that the State Courts have followed their procedural rules. I certainly don't have any quarrel with that, but the presumption should recognize that the State Courts, in following their procedural rules, sometimes invoke procedural default and sometimes excuse it. I think the plain statement rule would recognize that fact. My opponents also argue that there should be a presumption in procedural default whenever there's ambiguity. And I would remind my opponent that that very presumption in favor of dismissal has been rejected by this Court in the context of direct review in the Michigan v. Long case. There, the Court said that it would not dismiss the case outright if the State Court had been ambiguous or obscure concerning whether it relied on an adequate and independent state ground. On the contrary, the Court there said that it would presume in those instances that the court had disposed of the issue on the Federal issue. And now my opponents are arguing basically for the reverse presumption in the context of habeas review, but have identified no good reasons that I've heard here today--
Byron R. White: Well, I take it, I take it then that your position, the state would never be able to, should never be allowed to raise procedural default in the first instance in the Federal habeas court?
Kimball R. Anderson: --I'm not, I'm not sure I'm following the gist of your question, Your Honor. If--
Byron R. White: Well, there, no claim of procedural default was ever made in the state courts--
Kimball R. Anderson: --If--
Byron R. White: --and the state court simply decided the Federal issue, and the state comes into the Federal habeas Court saying procedural default.
Kimball R. Anderson: --Well, I think that... I think that's settled, Your Honor, and that was... that was, that was settled in the County Court of Ulster case, and also--
Byron R. White: So the answer is the state may not raise it in the first instance?
Kimball R. Anderson: --That's right. It's not... it cannot be raised in the first instance in the Federal court, because the state court didn't give any indication that, that its review of the Federal issue was barred because of the procedural default, and I think Justice Stevens said in County Court of Ulster that if a state court doesn't indicate that, that review of the Federal issue is precluded by the state's procedural bar, then the Federal Court certainly implies no disrespect for the state courts by entertaining the issue. My opponents also say that the cause and prejudice rule provides some kind of safety net here, but the cause and prejudice test was never intended as a safety net for obscure state court opinions. There is certainly no authority for that proposition. In Wainwright v. Sykes, the Court didn't charge ahead to determine whether or not there was cause and prejudice. Instead, they first, the Court first addressed in detail whether or not there was in fact an adequate and independent State grounds for the state court decision. You don't just jump over that and rely on the, rely on the, rely on the cause of prejudice test as some kind of safety net here. Finally, I think that maybe I should conclude with an analogy to a baseball rule, since I know noted the Court's reliance on baseball precedent this morning, and since we are approaching the seventh game of the National League series tonight. It's settled in baseball that a tie between the runner and the ball goes to the runner. I think it's equally settled in the context of direct review that a tie between the procedural default and the Federal issue goes to the Federal issue. And now, I think, what we have here is the state is trying to change the rules of the ball game just because we're here on habeas review instead of direct review. And as I've said today and in our briefs, there really isn't any different... there isn't any good reason to treat ambiguity in the context of direct review any differently than in habeas review. And I thank Your Honors very much.
William H. Rehnquist: Thank you, Mr. Anderson. The case is submitted.


Earl Warren: Number 362, Raymond Jerean Koller and Martin Silverbrook, Petitioners, versus United States of America. Mr. Malis, you may proceed.
Robert H. Malis: May it please the Court. We are here on a writ of certiorari in the United States Court of Appeals from the Third Circuit. The sole question with the consideration of this Court, whether the recoveries provided under Section 26 (b) (1) of the Surplus Property Act of 1944, constitute a civil fine, penalty or forfeiture within the meaning of Section 2462 of Title 28, the civil statute of limitation. This action was commenced on May 12, 1955 and sought recovery by the Government of the sum of $2000 plus double whatever actual damage was provable against two veterans who were alleged to have given false statements to the Government in connection with the application and the obtaining of used -- surplus trucks. These events occurred in 1945 and the last one in 1946, almost nine years prior to the institution of this civil act -- civil action of it, pardon me. Meanwhile, in 1950, these defendants were indicted and pleaded guilty and were fined. The question raised at the time of institution of the civil action is whether 2462 which requires the institution of suit within five years from the date of the commission of the offenses is bar to the civil action instituted almost nine years after it occurred and an additional five years after indictment. The defendants resisted throughout but the District Court speaking to Judge (Inaudible) felt, as he stated in his opinion reluctantly constrained to find, that Rex Trailer, the opinion having just come down from this Court a short while before, sufficiently indicated that the provisions of 26 (b) (1) of the Surplus Property Act, did not constitute any civil fine, penalty or forfeiture within the meaning of that Act. On appeal, of course, the same defense was raised and the Court of Appeals for the Third Circuit decided this case, I believe squarely, on the authority of Rex Trailer. It is our position and we would like to urge upon the Court that Rex Trailer does not constitute authority for the position which many of the judges in reading it have extended it to -- as in this case. May I point out first the language of the statute which is so critical and which we must interpret here in order to make a decision, 26(b) (1) --
Earl Warren: Where do we find that?
Robert H. Malis: I beg you -- it's on page 2 of the petitioner's brief, if it please the Court and directing the Court's attention if I may to the paragraph near the bottom of the page beginning with one, parenthesis one shall pay to the United States the sum of $2000 for each such act, and double the amount of any damage which the United States may have sustained by reason thereof together with the cost of suit or --
William O. Douglas: The one -- the precise one that was involved in Rex Trailer.
Robert H. Malis: No, sir.
William O. Douglas: The same provision?
Robert H. Malis: It is the same provision. Yes, sir.
William O. Douglas: That's what I want mean --
Robert H. Malis: But -- I beg your pardon.
William O. Douglas: The same statute.
Robert H. Malis: Exactly the same provision of the statute sir, however, the defense was entirely different.
William O. Douglas: Double jeopardy.
Robert H. Malis: Double jeopardy in Rex Trailer as opposed to limitations here.
Hugo L. Black: What page of your brief are you reading from?
Robert H. Malis: I'm reading from page 2, if it please, at the bottom. Now, the second section, number two, shall -- if the United States shall so allege, pay to the United States as liquidated damages a sum equal to the price of consideration, agreed to be given by the United States or any federal agency to such person or by such person to the United States of any federal agency as the case maybe or, and then the third section which appear on the top of page 3, but which in essence is identical to two, containing as well the language as liquidated damages. Now, these three provisions for recovery of money by the Government are the provisions which we discussed in Rex Trailer, and are likewise identical to except for one or two words, all the provisions which appear in the Contract Settlement Act and in the False Claims Act. The distinction which we urge upon the Court, differentiates between 26 (b) (1) and between 26 (b) (2) and (3) which have a more similar importance. That distinction, as we feel, urged by several statements of the Congress and also by the very language employed in Act itself. When we examined the statute and I note that in my brief, the title of the Section involved does not appear, but in the statute at large and also in the United States Code, this Section bears a title, civil remedies and penalties. Unfortunately, it does not appear in as much as the statute had been exerted for the purposes of this argument. The title is indicative, we feel, of congressional understanding that somewhere in this Section, if there is a reference to the penalty, there is a provision for penalty included otherwise the title should not have said, and would not have said, civil remedies and penalties as the title of 26 (b). Secondly, there is need for differentiating between (b) (1) and (b) (2) and (3), because in (2) and (3) the Congress has taken the trouble to expressly state that the recoveries of those two sections shall be considered liquidated damages, whereas in 26 (b) (1) that language is missing. Now, ordinarily -- I think it's a matter of statutory construction with long standing, ordinarily, if the Congress omits critical language in one paragraph which it includes and rather shall I say definite fashion parenthetically and separating that phrase in the middle of this provision for recovery if they go to the trouble to include it in two, but omit it in one, ordinary rules of construction would argue that we who sit to construe the statute may not thereafter ignore what the Congress has omitted or put in as the case maybe to arrive at a unification of the interpretation of this three different provisions. We feel and we urge strongly that this Section 26 (b) (1) is different from 26 (b) (2) and (3) aside from the legalistic effect which we can discuss shortly but as -- but in the language itself, it is clearly indicative of congressional understanding that there is a difference, that 26 (2) and (3) have been turned to be liquidated damages. The 26 (b) (1) is not so termed and in addition, violates what I would consider a basic fundamental of liquidated damages that is that if a specific sum, the $2000 he reserved were to be considered liquidated damages, then the provision for double the amount in addition of any actual damage which of course has to be proved. Its provable damage requires evidence. You have destroyed the concept of a liquidated damage provision, such a concept substitutes for the proof of actual damage or future -- looking to the future for damage, the agreed figure in which case here, the Congress might have legislated $2000 and he said no more.
Earl Warren: Must the liquidated damages for the Government to prevail or can it be on any other theory?
Robert H. Malis: If it please the Court. It cannot be on any other theory --
Earl Warren: On any other --
Robert H. Malis: -- that I know that --
Earl Warren: Yes.
Robert H. Malis: -- the Government can prevail in this case --
Earl Warren: Yes.
Robert H. Malis: -- unless this $2000 may be deem to be liquidated damages.
Earl Warren: Yes.
Robert H. Malis: It certainly bears no direct relationship to any other aspects of the case, it is not required or susceptible of proof and must therefore be either liquidated damages or penalty. I think this is -- the problem that the Government must overcome in order to destroy the effect of 2462 on these provisions, they must be able to satisfy the Court that this is liquidated damages. Now, let's look into an interesting thing that is not in the brief and I'd like to emphasize it for that reason. The suspension section that is alluded to in the Government's brief and in mine rather briefly, was enacted in 1942. In 1944 -- by the way, the language at that time was that this suspension section, suspended the operation of limitations of actions and so on to all offenses indictable, all offenses indictable under the various laws of the United States, and this was enacted to save the -- the tolling of the statute on criminal cases until three years after the end of hostility. In 1944 within a month or so of the adoption and the enactment of the Surplus Property Act, the Contract Settlement Act, was passed by the Congress and in that Contact Settlement Act case, they amended the suspension section. The suspension of limitation section was thereby amended, deleting from its provision the applicability to offenses indictable under. That language was removed and it then referred to acts, offenses and transactions. Now, the Contract Settlement Act was specifically made subject to this suspension of the statute of limitations by the Act in 1944. Within two months, along comes the Congress and they enact the Surplus Property Act. And in that Act, Section 28, follows the section under a consideration here, they lie in just a position to each other on the page of the statue at large, 26 (b) (1) and 28. And in 28, they again, amend the suspension of limitation section to include specifically the provisions of the Surplus Property Act, and they relate to that, and they -- the critical thing about is that this suspension section being applicable since 1944 to the Contract Settlement Act and to offenses transactions as opposed to indictments. Now, it's clearly applicable to a suit under the Surplus Property Act, but what do we find? There is no criminal provision at all in the Surplus Property Act. As a matter of fact, these veterans were indicated under an entirely different statute with the filing of a false certificate.
William J. Brennan, Jr.: Is the section 28 -- do we have it before us here on either brief for the offense?
Robert H. Malis: Section 28 as amended -- as amended is before you in the Government's brief and in a footnote in my briefs are near at the end, but the reason I emphasize this in such detail is that the prior section -- section which appeared in 1942 has not been reproduced in either brief or the record in either place. This was, I think, an omission which could have been explained, because it shows clearly, congressional understanding and intent to apply suspension of limitations to the Surplus Property Act in which it was enacted and not merely as the Government has sought to induce this Court to believe, not merely to criminal cases. And the proof of it lies in the fact that there is no criminal provision whatever in the Surplus Property Act. These indictments fell solely under the False Statement Act which is Title 18, Section 80 and now 1001. Now, I would like -- my time -- I don't know when I begun unfortunately. I think I have a few minutes left. I would like to point out an important argument which I think will clarify the problem which has arisen as a result of the decision in Rex Trailer. In the hundred odd years that the False Claims Act has been in the courts, down to the present time, there have been many, many decisions relating to the various provisions which are identical to of course, with the exception of the word for forfeit being removed or missing from the Surplus Property Act, but in -- for all intention purposes, this Court in Rex Trailer decided that those provisions were the same. Down through the years, the judges, the justices and all the Supreme Courts of the land as well as the United States Supreme Court have consistently referred to this provision as a forfeiture time and time and time again. As a matter of fact, as recently as 1959, Mr. Justice Black in -- mentioned in (Inaudible), used the language as we use a pencil and a pen with the familiarity of everyday expression, from every decision in 1863 going down until even mentioned (Inaudible), that $2000 which is $2000 all by itself, plus all other legal damage has been referred to us the forfeiture. As a matter of fact, when the Section 2461 was enacted by the Congress in 1948, they were referring at that time 2461 is the immediate antecedent in the code and it provides for the institution and collection of civil fines, penalties and forfeitures by a civil action. And they referred to in that legislative history, they referred to the decision in Marcus versus Hess, in which under consideration was the same provision in the False Claims Act. In other words, we lawyers, the judges, the justices throughout our land have for a hundred years refer to this $2000 stipend as a forfeiture. I think in my brief, I mentioned a case in Third Circuit, U.S. versus Roller, where in 19 times, in one opinion Judge McLaughlin classified that $2000 as a forfeiture. Now, I urge this Court respectfully that if we, the judges, the justices and the lawyers call this thing $2000 dollars a stipend a forfeiture and the Congress legislates, reading the opinions of this Court and referring even in the case of Rex Trailer, Marcus and Hess -- they refer to this opinions and they say, they should for a civil fine, penalty or forfeiture may be brought within five years. It is not within our promise to go back to Huntington and Attrill or Helvering and Mitchell to see whether legalistically we may find a differentiation and I submit to you sirs that there are many between the $2000 figure which has no relationship or there's no fraction or multiple of any actual damage. But we need not to do that where if the Congress uses the language that the courts used then it should be interpretive in that way. Now, Rex Trailer had before it a question of double jeopardy. There is no part in their saying -- in fact the courts have to the contrary that civil sanctions exists.
Earl Warren: We will recess now, Mr. --
Robert H. Malis: Thank you.


Earl Warren: Number 287, United States versus Huntington Beach Company. Mr. Zarky.
Hilbert P. Zarky: If the Court please, this is the companion case to the Southwest Exploration Company argument. The taxpayer in this case is one of the upland owners, Huntington Beach Company. And the Court of Claims held that it was entitled to depletion on the income payments which Southwest Company had made to it. Just to clarify what the situation is with respect to the division of the allowance the year here involved was 1948 and in that year the gross income, which Southwest had obtained from the leases, was approximately $20,000,000. After deducting it, its expenses, it had a net income of some $7,300,000 of which it had paid to Huntington Beach, $1,300,000, maybe it share of the net profits. Now, if the Ninth Circuit were correct in the Southwest case, Southwest would be entitled to a deduction based on the entire $20,000,000 of income it obtained from the property. So that its actual depletion deduction would be about $5,500,000. Now, if the Court of Claims is correct, then out of the Southwest $20,000,000, it must exclude the $1,300,000 it paid to the upland owner here. So that its depletion base would be $18,700,000 instead of $20,000,000 and the depletion base of Huntington Beach would be $1,300,000, the net profit payments which it received. The Court of Claims in holding that Huntington Beach had a depletable interest followed what is our first alternative argument, namely, that under the peculiar circumstances of this case, the upland owners had contributed valuable rights which enabled production to take place and that they have received a depletable interest in the form of net profit payments which became within the rationality of Burton-Sutton and Kirby. That I -- the Court of Claims gave a practical example, which I think is very persuasive, it posed this hypothetical situation that imagine that the owner of land had given an easement for a golf course permitting it to use the surface of the land, so that the golf club had complete rights with respect to that surface. And that thereafter, minerals were discovered to underlie the surface and the owner of the property had given a mineral deed to a third party. But that third party cannot exploit the minerals without digging through the surface of the land and so he must turn to the golf club to obtain the necessary property rights to permit that to take place. So, the Court of Claims says, suppose that the owner of the mineral rights now deals with the owner of the surface or the person who has an easement with the surface and obtains the right to break through the surface and will pay for the life of mineral lease a portion of the net profits from production. Court of Claims assumed that that would be an easy case that the owner of the surface ought to have the deduction for depletion. “And,” said the Court of Claims and we agree with the Court of Claims, “This case should be no different that the upland owners do not have their property immediately and physically above the mineral deposits and that the physical mineral deposit lies at an angle.” The important thing is that their property is being used and their property is enabling the production to take place.
Harold Burton: Mr. Zarky, Mr. Wilson just got through reading to us and commenting on the two sentences of the regulations. Would you mind commenting on those and related to this --
Hilbert P. Zarky: Yes, sir.
Harold Burton: -- situation?
Hilbert P. Zarky: I was just going to that, Mr. Justice Burton. As a background, I must talk about three cases, which have preceded Kirby and Burton-Sutton, and which the Court of Claims and we distinguished on the particular facts of this case. That was a trilogy of cases all reported in the 303 U.S. One case is Helvering v. O'Donnell. The taxpayer in that case own one-third of the stock in a corporation that had oil and gas leases. He sold his stock to another corporation which undertook to acquire the oil properties from the first corporation and as consideration for the stock which it acquired was going to pay Mr. O'Donnell one-third of the net profits from its production after it acquired the oil properties. This Court held that the net profit payments received by the selling stockholder were not depletable. The next case is Elbe Oil Land. There, the owner of oil-bearing property had transferred it for a large dated consideration, partly payable immediately and partly payable in installments in the future if the transferee elected not to abandon the transaction. In addition, the transferee undertook to pay to the transferor a percentage of its net profits after it had recouped its entire investment including this purchase price which it had paid for the property. And the issue in that case was whether the installment payments were themselves subject to depletion or whether they were sales profits. There having been no net profits paid in that case. And the third case is Helvering v. Bankline Oil Company where the taxpayer had a contract with a lessee of the wells to buy the gas as it float in the wells and to process it making natural gas and gasoline. And in Bankline, the taxpayer claimed that it was buying under its contract, the gas at a favorable price less than market price and then it should be entitled to depletion on the difference between the price that paid under the contract and the price which it would have paid and had it been buying at market price. Now, we distinguish those three cases on the ground that, and none of them as here, was the party receiving the net profit payments, doing anything essential to the production of oil and gas. When the stockholders sold his stock in O'Donnell, he wasn't like the upland owners here enabling the lessee to get to the property, except in a more -- most indirect sense. Elbe itself is peculiar because you were trying to test whether there was a sale measured by the fact that the net profit payments had been retained and this Court said that interest was not one which qualify the sale in anyway. And indeed in Burton-Sutton, the Court indicated that Elbe should not be extended beyond its facts. And Bankline represented nearly a favorable contract to purchase. Now, to get more to the answer to your question, Mr. Justice Burton, for those trilogy of cases, the Treasury amended its regulations immediately thereafter to provide that a favorable contract and interest in net profits is not a depletable interest. And the Government so thought that's what the three cases stood for. And that's why when Kirby and Burton-Sutton was here, the Government relying on those regulations contented very rigorously that nothing short of an interest in gross production could be depletable and that an interest in net production or net profits could not be depletable. This Court, of course, held to the contrary in both cases. So that this Court in effect did not feel that the regulations was a correct interpretation of the statute. In other words, to the extent that the regulations say that an interest in net profits is not a depletable or economic interest in the property. The regulations are in contradiction to what Kirby and Burton-Sutton held. And my understanding is that under the new Code, the proposed Treasury Regulations contemplate omitting that particular sentence in order to have the regulations conform to the Kirby and Burton-Sutton cases. So that actually to the extent that the argument rests here on the regulations is the very same argument which the Government twice advanced unsuccessfully in this very tribunal. So that we do not feel that the regulations at all point to the fact that the upland owners cannot have a depletable interest. I think it might be helpful if I ran down some of the arguments, which the Ninth Circuit accepted, to indicate why we think they are wrong. To a large extent, the --
Stanley Reed: But before -- before you leave the regulation, isn't -- isn't there a difference between the interest in the -- in the Burton-Sutton and the -- the -- what's the other case, Kirby?
Hilbert P. Zarky: Kirby.
Stanley Reed: -- different interests of what we have here?
Hilbert P. Zarky: I think not in Burton-Sutton, Your Honor. I say this for this reason, prior to the transfer in Kirby and Burton-Sutton, there was a difference because the transferor stood in a position where they could exploit the minerals. But after the transfer in Burton-Sutton, Gulf, the assignor, had no further interest, any further legal interest, in the minerals in place. So far as Gulf was concerned, it was as much a stranger to what was taking place after the less -- after the assignment than the upland owners here. But Gulf did have an interest and that's what this Court held was important. It maintained an interest by having reserved the share of the net profits of the operator and it was that economic interest which this Court said having them retained by Gulf. It meant that Gulf must look to the depletion allowance to recover whatever capital investment it had in the minerals in place. So we feel that this case stands just like Burton-Sutton. There have been arguments made which indicate that authorities, that Burton-Sutton is different because, for example, there was a covenant there to reconvey to the assignor if the assignee didn't develop the property. There have been arguments in here that this is not a rent or royalty. This is a personal covenant of Southwest. But the Fifth Circuit, you will recall, decided Burton-Sutton in the Government's favor. It had held that -- and that profit payments were not depletable and the Fifth Circuit did so on the very philosophy that that was a personal covenant that the assignor had no interest in the minerals and this had followed the previous decisions of the Fifth Circuit. So that so far as the legal interest is concerned, it seems to us that the upland owners here stand in the same -- almost the same situation if the assignor did in Burton-Sutton after the assignment.
Stanley Reed: Well, do you -- do you interpret the regulation where it says thus an economic that it does not possess an economic interest merely because the factual relation with the owner that that's an economic offense?
Hilbert P. Zarky: Well, I think that those regulations --
Stanley Reed: That's solely as a contract entirely apart from many power that the landowner has to -- to give access to or not to give access to the owner, is it -- is that what distinguishes --
Hilbert P. Zarky: That --
Stanley Reed: -- cases from the others?
Hilbert P. Zarky: That's how I would distinguish the present peculiar situation from Helvering and O'Donnell, Elbe Oil Land and Bankline.
Stanley Reed: But I'm --
Hilbert P. Zarky: But I -- I'm sorry.
Stanley Reed: And to recognize by -- and this regulation itself.
Hilbert P. Zarky: Well, I think that the regulations and I'm puzzled by just what they can mean today after Burton-Sutton and Kirby. Treasury thought that the trilogy O'Donnell, Elbe and the Bankline stood flattened for the proposition that no interests in their profits could ever be depletable whether reserved by the lessor, reserved by an assignor or acquired by stranger. Now, we know that that isn't so that at least in the lessor and the -- and the assignor --
Stanley Reed: Which profits, comes from a -- from a power over the land itself and over the way to get to the oil, will that distinguish it?
Hilbert P. Zarky: Well, the upland owners here.
Stanley Reed: I'm speaking now with the regulations.
Hilbert P. Zarky: Yes. Well, the regulations were not written with that in mind. They were written in -- in mind that there was a flat rule of law, net profits, no depletion, no matter how you acquire it. And they were written, of course, before the --
Stanley Reed: (Inaudible)
Hilbert P. Zarky: -- Kirby and Burton-Sutton so that they must be regarded as -- to a large extent distinguished by what Kirby and Burton-Sutton held. So that to the extent, the arguments here are based on the fact that there was no legal title for the minerals, that there were no reversionary interest, no right to drill in the upland owners, that there was a personal covenant that the regulations governed it. All those are arguments which the Government had advanced and which this Court rejected in Kirby and Burton-Sutton. And we think that the same arguments are really being resurrected here today to achieve the result which this Court said is not the law in those two cases.
Hugo L. Black: If those regulations were denied by the court opinion, why have they'd been left standing?
Hilbert P. Zarky: I'm a little puzzled by that too, Justice Black. But there are many instances where the administrator just have too many things to do and don't get around to it fast enough. But the position, which we take here today, is taken advisably with the Commissioner's acquiescence so that this -- does reflect the present position of the Internal Revenue Service.
Hugo L. Black: How long does it take him to take into regulation back here?
Hilbert P. Zarky: Well, I suppose that one had nothing else to do, it would be very fast.
Hugo L. Black: Well, what I meant was, they've evidently taking it up to you.
Hilbert P. Zarky: Well, they didn't take it up with me. That was --
Hugo L. Black: Why didn't you take up with them? Have you taken up with them?
Hilbert P. Zarky: Well, when we're through litigating for the -- for the client, then we're through with it. We have no authority to -- to change the regulations --
Hugo L. Black: Yes, you have nothing to do with it, but I wondered why when you call -- when their attention was called to it that some steps were not taken and you changed it --
Hilbert P. Zarky: The thought may well have been that Kirby and Burton-Sutton spoke for themselves and that exactly where the line should be drawn was not too clear, but --
Hugo L. Black: Well, which part of this regulation do you consider is out by reason of Kirby and Sutton?
Hilbert P. Zarky: Well, to the extent that the regulations make the flat blunt statement.
Hugo L. Black: The part that Justice Reed read?
Hilbert P. Zarky: This part here, “Thus, an agreement between the owner of an economic interest --
Hugo L. Black: In the brief, where is that on?
Hilbert P. Zarky: That's on page 48 of the Government's brief in Southwest. I'm not sure we reproduced it in Huntington Beach. “Thus, an agreement between the owner of an economic interest and another entitling the latter to purchase the product upon production.” That part we think is good law.
Hugo L. Black: Thus, where is that now, page 48?
Hilbert P. Zarky: “Thus, an agreement between the owner of an economic interest, and another at the last final paragraph, entitling the latter to purchase the product upon production.” We think that that is good law under Bankline. “Or to share in the net income derived from the interests of such owner does not convey a depletable economic interest.” That we think is bad law under Kirby and Burton-Sutton.
Hugo L. Black: The last quote?
Hilbert P. Zarky: That's right.
Harold Burton: Do you say, Mr. Zarky, that there were some pending legislation that it reflect the change?
Hilbert P. Zarky: Well, the Bureau -- the Internal Revenue Service is now preparing regulations under the new 1954 Code which didn't change the basic statute from the 39 Code. And it's a long time consuming process to get out all the details. They are far from being ready for approval. But my understanding is that Internal Revenue Service intends to delete that last part of the sentence. I would like, if I may, to pass to our alternative argument, which is that without regard to whether or how the upland owners acquired this interest in net profits. We ask the Court to hold that it had an economic interest. Now, we recognized, we're asking the Court to go beyond what was decided in Kirby and Burton-Sutton. Now, we think we're asking for a sensible logical extension of those cases to make a workable rule. An interest in gross production is obtained by the life of the lease like a gross royalty. That's depletable no matter who has it or how he obtained it. And its common in the industry for the lessor to fragment his reserved royalty and sell it to others and its common for the lessee to fragment his interest by granting overriding royalty. And as a matter of fact, by -- in many situation, you will find hundreds of people having minute fraction of the right to -- every barrel of oil produced or the proceeds from their sale. And no one doubts that those interests are depletable so long as they're (Inaudible) with the lease no matter how they go, whether by sale, assignment, by inheritance just so long as the party who has the interest has an interest in gross production that is depletable. Now, the question we pose is, if as Kirby and Burton-Sutton hold an interest in net profits is so like an interest in gross production as to be depletable in the circumstances of those cases, should not the same rule apply to an interest in net profits no matter how its conveyed or to whom its conveyed or how its obtained. That is if the lessor or assignor and Kirby and Burton-Sutton having retained an interest in net profits is entitled to depletion. Shouldn't a transferee for cash consideration, donation by gift, by inheritance, shouldn't the transferee stand in the same position that the transferor did? And if that interest can be carved out by the lessor, why shouldn't the lessee be able to carve it out, just as the lessee can grant an interest in gross production by an overwriting royalty, why shouldn't the lessee be able to sell an in interest in net profits and convey depletable interest even if it's for a cash consideration. This would be a simple rule. It would be a workable rule. Everyone would know precisely where everyone stands. If you didn't have to concern yourself with whether the peculiar circumstances of this case or another case fitted in to the rationality of Kirby and Burton-Sutton. If the Court agrees with us, then it makes no difference that the upland owners obtained this interest by conveying an interest in their property. It could be consider just as though the upland owners had bought for cash from Southwest the right to receive 24.5% of its net profits for the term of the lease. And that ought to be as depletable in the hands of the upland owners as if for cash, they had bought the right to receive one-eighth of gross production from the leases. In other words, if this Court will put them both on the same basis so that an interest in net profits which stand precisely as an interest in gross production, we think that we have a logical extension in the two case and would have a rule which would make for more uniform results and would be administratively a lot more workable and taxpayers would be able to predict where they stand rather than having to worry about whether particular circumstances do or do not fall within the share or reliance of Kirby and Burton-Sutton.
Earl Warren: Mr. Horrow.
Harry R. Horrow: May it please the Court. The respondent, Huntington Beach Company, is one of the upland owners on whose land, the oil wells -- oil wells were located which were drilled under the ocean and into the tidelands. The respondent received 17.75% of the net profits from the production of that oil and gas. The respondent claimed depletion on those net profits payments and depletion was allowed by the court below. The respondent contends that in accordance with the opinion of the court below that the depletion deduction should be a portioned to those who share in the income from production in accordance with their shares. That is to say, in the case of the respondent, depletion should be allowed on its net profits payments. In the case of Southwest, depletion should be allowed only on the portion of the income which it is entitled to keep and depletion should be allowed on the portion of the income from production which it is required to pay over, the royalties to the State and the net profits payments to the upland owners. Of course, these net profit payments are taxable to the upland owners and, of course, the royalties and the net profits payments that are paid by Southwest would not be taxable to Southwest. The facts in -- in this case differ in no material respect from those in the companion case, 286. They have been stated by the government counsel, but I would like to emphasize the steps involved in bringing about the production of oil and gas on the state lands. The first step was a call for bids on the state lease. Under that call, the only persons eligible to bid for the state lease were the upland owners or those to whom the upland owners were willing to sell their property or grant the use of their property. They were not compelled under the state law to grant the use of their property to anybody, certainly not to Southwest. Southwest at that time had been an inactive corporation. It own no property, controlled no property in the area and had no -- no right to insist that Huntington Beach or the other upland owners convey to it the right to use the property in order to make it eligible for the bid. The upland owners chose not to bid for the state lease. They chose not to sell their property. They chose instead to grant the use of their property to Southwest and make Southwest eligible to bid on the state lease. Southwest, thereby, become the only eligible bidder. And, of course, the state lease was granted to Southwest, but that lease was not unconditional. Southwest had no right under that lease to enter upon the tidelands and produce upon the tidelands. The lease required that Southwest use the property of the upland owners and drill its wells through the upland owners' property. So that the grant by the State of the right to extract the oil from the -- the submerged lands was not effective. It was not complete without the grant that was made by the upland owners. Both grants were necessary in order to permit Southwest to enter upon the production of oil and gas in the tidelands. In consideration of the grant of the use of their property, Southwest agreed to pay the upland owners 24.5% of the net profits, in the case of the respondent, 17.75% of the net profits from all of the operation on the state lands. The upland owners were not limited to a share in the net profits from the wells that were located on their lands. It is true that the lease required that the wells be located on their lands. But if the lease should be modified so as to permit vertical drilling into the tidelands, the upland owners will share in the net profits from those wells as well as the producing wells that are now located on their property. The grant of the use of a property, the agreement covering the share in net profits were inseparably apart of the state lease.The state lease was not operated without the grant that was made by the upland owners. No production could have taken place without that grant and the grant of the use of a property, the right to share in the profits were coextensive with the lease. The lease was for a term of 20 years or so long thereafter as oil and gas might be produced and the same was true of the grant to the upland owners for the use of their property as well as their share in the profits. Now, the respondent contends that under those arrangements, it had an economic interest in the production of the oil and gas in the tidelands. I say economic interest because that is the term that the Supreme Court, this Court, has used in all of its decisions relating to a depletable interest. But this Court has used the term economic interest in describing a depletable interest because it has repeatedly said that it is the economic relation of the taxpayer to the oil and gas production, not the legal relation that control his right to depletion. It doesn't make any difference what the concepts of property law are under the -- the applicable state jurisdiction, the niceties of conveyancing are ignored, the sole question in determining whether the taxpayer has a depletable interest is whether he has a capital investment in the oil and gas in place and must look solely to the production, the income from the production for a return of his capital. The respondent --
Harold Burton: Was the resource of your client's property is being depleted?
Harry R. Horrow: Your Honor, the resource which is depleted is our property right which is our right to share in the income from production, our net profits. As the income rises or falls, our property interest will produce more or less income and when the oil is exhausted, when the mineral content has been entirely removed, our property is exhausted. The depletion allowance --
Harold Burton: Your property remained just the same, doesn't it?
Harry R. Horrow: Our property, if Your Honor please, is the right to share in the profits. The property that we owned, the surface and the right to use the subsurface in drilling the wells that was property which we had -- in which we had a capital investment.We invested that in the production that was taking place under the state lease, entitle -- entitled to the oil or to the oil deposit is not necessary for depletion. I might add that Southwest had no title to the mineral deposit because --
Harold Burton: Suppose the State had allowed them to drill out in the water, right over the -- the tidelands.
Harry R. Horrow: Under the --
Harold Burton: You wouldn't had anything depleted in, would you?
Harry R. Horrow: If the wells had -- had been permitted to be drilled in the tidelands and no agreement had been made between the upland owners and Southwest, the upland owners will have no share in the income from production.
Harold Burton: It would have anything to plead it either, wouldn't it?
Harry R. Horrow: That is correct. But the state law required that the wells be drilled through our property.
Sherman Minton: But the State can change that.
Harry R. Horrow: The State can change that but the State cannot change our agreement, Your Honor. Our agreement provides that we are entitled to the net profits from all the operations on the state lands whether or not those operations take place through slant drilled wells or whether they take place through vertical wells. We have a continuing right to share in the income from production of the oil and gas under that lease as long as that lease is in effect or any renewal or extension of that lease.
Harold Burton: Mr. Horrow, do you join the Government in -- in the second alternative?
Harry R. Horrow: Yes, Your Honor. And if I may take that up, I'd like to -- now, I'd like to discuss the -- the theory of the Government in which we confer. The Government's theory is predicated on its interpretation of the Burton-Sutton case. That case involved a right to share in the net profits under a lease which the Gulf Refining Company had obtained and then in turn assigned to an operator. The operator agreed to pay Gulf 50% of the net profits and this Court held that that net profits interest standing alone was depletable. We found no difference between a net profits payment and the situation in Kirby where there was a royalty interest together with a share in the net profits. The Government had contended in Burton-Sutton that a net profits interest standing alone was not depletable. If the taxpayer had to own something else to give him his economic interest, a royalty or other interest, then this Court held that that was not true, that the net profits interest standing alone was depletable because the mark of an economic interest was a share in the income from production and sole dependency on production for that income. The Burton-Sutton case left open this question, if the Gulf Refining Company which held a share in the net profits sold that net profits interest for cash or if the operator turned around and sold another portion of the net profits to a third party when the purchaser of that net profits interest be entitled to depletion. And the Government contends that it would be because the taxpayer would have a capital investment in the production of the oil and gas, it could look solely to the production for a return of its capital or the possibility of profit. We conquer in that view. But the respondent does not rest its case on that point. There are additional factors here which attached to -- to our net profits interest which we believe require the recognition of an economic interest on the part of respondent without regard to the acceptance to the government's theory. Now, there are four factors that we think are present here. One, the upland owners had control over the right to produce. Two, there was required and continuing use of their property and production. Three, the operator, Southwest, in order to acquire its economic interest had as a condition precedent to pay the upland owners a share in the net profits. And -- and the fourth factor is the continuing control which the upland owners exercised over the production.I'd like to take up each one of those points briefly.
Earl Warren: Suppose Mr. Horrow, in order to make this oil merchantable it was necessary to have a pipeline from the well and, let's say, three or four miles in place it was convenient for -- for handling the oil and Southwest acquired an easement over -- over the land for that pipeline and paid for it by a percentage of the -- of the net profits. Would the owners of that land have a depletion allowance?
Harry R. Horrow: Under the --
Earl Warren: (Voice Overlap) have to it?
Harry R. Horrow: Your Honor, under the broad theory of Burton-Sutton, it would. But under the particular facts of our case, that situation would be different from ours because the property, the use of which is granted for the net profits interest is not used in production. It's not used in the extraction of the oil and gas. The owner of the property does not have any control over the right to produce. The acquisition of the economic interest of the operator is not -- does not take place as a result of being required to pay a portion of the net profits and there is not the continuing control over production that is present here in our situation.
Earl Warren: I don't see how -- how these things apply because it -- its just by position of your land that -- with relation to the state pool that you claim to be entitled to this depletion allowance.Now -- and we could also say that it's because of the relationship of this -- of this land that you get an easement over is in the similar relation to your land that is necessary for you to -- necessary for them to have that in order to produce. Now, why wouldn't that produce the same effect so far as depletion is concerned?
Harry R. Horrow: Your Honor, I'd like to suggest this important difference. In order to get the right to produce, Southwest had to pay the upland owners, the share of the profits, just as it had to pay the State of California royalty. In our opinion, there is no difference in substance or effect between the royalty that Southwest had to pay to the State to acquire the right to produce and the share in the net profits that it had to pay to the upland owners in order to acquire the right to produce. In both cases, those payments diminished the economic interest of Southwest because to the extent that Southwest is required to pay these amounts out of income from production. It does not have that much income from production on which it could claim or should -- should get depletion. Well, if I may, I'd like to take up these four points that I think represent factors applicable here requiring the recognition of our interest, economic interest whether or not the broad rule of Burton-Sutton or the broad interpretation of Burton-Sutton is accepted. The first one, is matter of control over the right to produce just as in Burton-Sutton, the upland owners have the choice of operating the property themselves taking and bidding on the state lease and they are the only ones eligible if they chose to. They chose not to grant the use of their property to Southwest or permitting someone else to operate the property. In Burton-Sutton, Gulf shows not to operate the property. It assigned the lease to an operator for sharing the net profits. And we contend that our position is identical in effect with the situation that Gulf had in Burton-Sutton. On the second point, the use of our property in production. The key to depletion is an economic interest. If more is needed unless -- then -- then a share in the net income is not our economic interest confirmed by the fact that our property must be used both under the law and -- and the easement, the state lease, to produce that oil and gas. I've discussed the third point, the matter of -- of the -- the payment by Southwest of the net profits as a condition precedent to acquiring its -- its right to produce. The fourth element is the continuing control that the upland owners hand over the production. At the time, the use of the uplands was granted to Southwest, an agreement was entered into which prescribed in detail how Southwest was to conduct its operations. It had to conform the good drilling practice. It had to give complete information on the pumps, mechanical condition. It had to conform to any conservation program that a majority of the producers should agree to. And in extracting the oil, it had to agree to follow good engineering practice and those requirements were essentially the same as the requirements that were laid down in the state lease. And they both reflect the concern that one who has an interest in production exercises or expresses in seeing to it that there is maximum economic recovery from the oil and gas to assure maximum income on its share of the -- the income from production.
Stanley Reed: Mr. Horrow, are you going to discuss the regulations (Inaudible)
Harry R. Horrow: Yes, sir. I think Mr. Zarky has stated that insofar as the regulations express the view that a net profits interest is not depletable. That position has been squarely rejected by this Court in Kirby and Burton Sutton.
Stanley Reed: Well, do you -- are you familiar when those regulations were issued?
Harry R. Horrow: The regulations were issued, Your Honor, following Elbe and O'Donnell and Bankline Oil.
Stanley Reed: Well, the reason I was asking that was because the Government brief says, Treasury Regulations (Inaudible) were promulgated under Internal Revenue Code of 1939.
Harry R. Horrow: Those regulations conformed to the regulations that were in effect following Elbe and O'Donnell, which I believe were decided in 1939.
Stanley Reed: But in -- in Burton-Sutton, the Treasury Regulation referred to, regular -- Treasury Regulations of 1994.
Harry R. Horrow: There -- there has been no -- no substantial change in this portion of the regulations since Elbe, O'Donnell and Bankline Oil. In these --
Stanley Reed: But were they -- what in the preceding regulations was -- was this the same regulation in the preceding regulation?
Harry R. Horrow: Well, these regulations, Your Honor, were before this Court in the Kirby and Burton-Sutton cases.Regulations in this form were before this Court in those two decisions.
Stanley Reed: They're -- they may have been but they -- if -- if the Government is correct in saying the petitioner promulgated under the Internal Revenue Code of 1939, if I take it what they are, then they didn't cover the years 1936, 1937 and 1938 which Burton-Sutton covers. So that -- if -- if I'm -- if that is correct, I don't know whether it is not, I merely notice that these regulations weren't referred to in Burton-Sutton so far as I can see it (Inaudible)
Harry R. Horrow: Well, that's correct, Your Honor.
Stanley Reed: And -- and when -- and when these were promulgated in 1939, Burton-Sutton covered 1936, 1937 and 1938 and we would have the issuance of these regulations after Burton-Sutton.
Harry R. Horrow: The Burton-Sutton case, Your -- Your Honor knows, it was decided in 1946.
Stanley Reed: Yes.
Harry R. Horrow: The years --
Stanley Reed: And also, it covers fiscal year's ending in 1936, 1937 and 1938. Perhaps, Mr. Zarky knows about the plaintiff -- the economics of the later years.
Harry R. Horrow: At any rate, insofar as they express the view that a net profits payment is not depletable, they are squarely contrary and inconsistent with the Burton-Sutton decision in --
Stanley Reed: Yes, I -- I was assuming you answered the question.
Harry R. Horrow: -- in the Kirby case. And, Your Honor, I believe we referred to the portion of the regulations dealing with the contractual relation clause in the preceding sentence on page 48. That statement does not reach this situation because that regulation pertains to a taxpayer who has no capital investment in the mineral deposit. It is our contention that we had a capital investment in the mineral deposit represented by the dedication of our property to the production of the oil and gas.
Stanley Reed: As supported by the California legislation.
Harry R. Horrow: Made possible by the California legislation, but once those agreements --
Stanley Reed: Made -- made necessary with California.
Harry R. Horrow: Made necessary, yes, Your Honor. But once those agreements had been entered into whereby we -- we stipulate it for a share in the profits, the legislation could not deprive us the benefit of that agreement.
Stanley Reed: Perhaps you'll --
Harry R. Horrow: I'd like to close it with this -- with this point. The Court has repeatedly said that economic realities control depletion. The economic realities of this situation are these. There are three interests that share in the income from production. One, mistake through its royalties. Secondly, Southwest as the operator of the property. And the third is the -- the upland owners who share in the net profits. If depletion is allowed to the upland owners, recognition will be given of the economic realities of this situation and the deduction will be apportioned on the basis of the economic interest as they appear, namely, on the basis in which the parties share in the income from production.
Hilbert P. Zarky: All right. May I just comment on the regulations? The existing regulations were amended by a treasury decision as I recall in the early part of 1940 to reflect the O'Donnell, Elbe and Bankline cases. Now, Your Honor is correct that those regulations were not applicable in Burton-Sutton but they were the regulations applicable in Kirby, and you will find it in Footnote 4 of the Kirby opinion, a quotation from the regulations which include that disputed sentence. Now, of course, in both Burton-Sutton and in Kirby, we were contending that the regulations were a correct interpretation of the statute which had all along remained unchanged so that our position had been calling that the applicable regulation were governing in Kirby and that what they stated was the correct rule of law not only because they governed those particular years, but because there were a correct interpretation of the statute which has remained unchanged all the way through. And as, Your Honor, may recall in Burton-Sutton, the Court, in speaking of the regulations, broadly said that they're not very helpful. They tell us what to do once you decided what is a rent or royalty but they don't tell us what is a rent or royalty.And in -- the net profit payment regulation was intended to be specific. After Kirby and Burton-Sutton, we think they are equally unhelpful in deciding the issue posed by this case because, had the regulations been applied literally. I think the Government should have prevailed in both Kirby and Burton-Sutton because to the extent that they say that an interest in net profits is not an economic interest.That was precisely what the Court held was not true in both Kirby and Burton-Sutton.
Harold Burton: Do you report what happened here before the Court of Claims, aren't you?
Hilbert P. Zarky: Sorry, sir?
Harold Burton: The Government's for what happened in the Court of Claims.
Hilbert P. Zarky: No, no, we took the opposite side in the Court of Claims. We argued very -- as rigorously as we could by the same contention which Southwest makes in this case. In other words, we took one position in Ninth Circuit. We took the opposite position in the Court of Claims and lost both of them.
Harold Burton: (Voice Overlap) --
Hilbert P. Zarky: We -- we were persuasive no matter which -- which side we argue that. [Laughs]
Harold Burton: You -- you agree with the Court of Claims now, don't you?
Hilbert P. Zarky: Yes, that's before we took a tactical inconsistent position because we had to. But now --
Harold Burton: Would you -- you'd like to, the present case, to be affirmed.
Hilbert P. Zarky: The Court of Claims, we believe, should be affirmed to the Ninth Circuit reversed.
Harold Burton: Otherwise, you would -- anybody wouldn't get depletion.
Hilbert P. Zarky: That's right and we agreed that one of the two parties must get it and we also contend that both of them can have it.
Sherman Minton: Moved it's depletion --