Pan-American Petroleum Co. v. United States, 9 F.2d 761 (9th Cir. 1926)

*762 *763 *764 *765 *766 *767 *768 Frederic R. Kellogg, of New York City, Joseph J. Cotter, of Washington, D. C., Dean Emery, of New York City, Harold Walker, of Washington, D. C., Charles Wellborn, Olin Wellborn, Jr., Henry W. O'Melveny, and Walter K. Tuller, all of Los Angeles, Cal., and Frank J. Hogan, of Washington, D. C., for appellants and cross-appellees.

Atlee Pomerene, of Cleveland, Ohio, and Owen J. Roberts, Sp. Counsel, of Philadelphia, Pa., and Samuel W. McNabb, U. S. Atty., of Los Angeles, Cal., for the United States.

Before GILBERT, HUNT, and RUDKIN, Circuit Judges.

GILBERT, Circuit Judge (after stating the facts as above).

The defendants assign error to certain of the findings of fact of the trial court, certain of the rulings of that court upon the admission of evidence, and certain of the court's conclusions of law. We find no ground for disturbing the findings of fact which we deem essential to the decision of the case, and, while the evidence may be insufficient to support certain contested findings, the disputed facts, in view of our conclusions upon the law applicable to the case, become of little importance.

Particular objection is made to the admission *769 in evidence of statements made by Doheny before the Senate Committee. Those statements were offered in evidence after Doheny had been called as a witness for the plaintiff to testify as to the $100,000 payment to Fall by him, and had availed himself of his constitutional privilege by declining to answer on the ground that his testimony might tend to incriminate him. The offer in evidence of the statements so made before the Senate Committee was accompanied with a proffer of proof that Doheny had voluntarily appeared and made the statements before the committee. Objection was interposed, on the ground that the said statements were not shown to have been made as part of any transaction of the defendant corporations, or as part of the res gestæ of any corporate transaction, or under circumstances showing that Doheny had any express or implied authority to appear before the Senate Committee and speak for said corporations. The court held that, at the time of making the declarations, Doheny was acting within the scope of his authority as an agent of his corporations and admitted the testimony. There having been a preliminary showing before the court that the leases were negotiated by Doheny on behalf of the defendants, and as their agent and that those matters were the very matters brought for investigation before the Senate Committee, we are not convinced that the court's ruling was erroneous.

There can be no question but that the declarations of an officer or agent of a corporation, even though they consist of a narrative of past facts, may, under appropriate circumstances, be admitted in evidence against the corporation, nor does the admissibility of such declarations necessarily depend upon the length of time that has elapsed between the occurrences and the declarations, 10 R. C. L. 978. Clearly if any officer of the defendant corporations was authorized to bind them by declarations after the event, it was Doheny. As president of both companies, he had negotiated the agreements and had executed the same. The scheme to pay for tankage facilities construction and fuel oil by government royalty oil originated with him and Fall. He was the dominating figure and the administrative officer by whom the business of the corporations was conducted, and acts done by him within the scope of the corporate powers were presumably duly authorized. At the time when the declarations were made, there were pending transactions between the plaintiff and the defendants to which the declarations were pertinent, for the contracts and leases were in active operation, and their validity was being investigated by the Senate Committee. The defendants were interested in vindicating the contracts, and it was to their interest to show that the $100,000 transaction was a purely personal one, and in no way related to the procurement of the contracts. The declarations were also against the interest of the declarant, and no other means of obtaining the evidence were available to the plaintiff. Among the cases tending to support the ruling of the trial court are Chicago v. Greer, 9 Wall. 726, 19 L. Ed. 769; Xenia Bank v. Stewart, 114 U.S. 224, 5 S. Ct. 845, 29 L. Ed. 101; Fidelity & Deposit Co. v. Courtney, 186 U.S. 342, 22 S. Ct. 833, 46 L. Ed. 1193; Joslyn v. Cadillac Automobile Co., 177 F. 863, 101 C. C. A. 77; C., B. & Q. R. R. Co. v. Coleman, 18 Ill. 298, 68 Am. Dec. 544. In Rosenberger v. H. E. Wilcox M. Co., 145 Minn. 408, 177 N.W. 625, the court said:

"The fact that this transaction occurred some time after the contract of sale of the stock, and that the statement was an admission as to facts existing when the contract was made, is not decisive. An agent of a corporation, if acting within the scope of his authority, may make an admission in behalf of the corporation as to a past transaction, just as a natural person or his authorized agent may do so."

It is contended that the Act of June 4, 1920 (41 Stat. 812), conferred upon the Secretary of the Navy ample authority to enter into the exchange contracts of April and December, 1922. We cannot think that by the use of the word "exchange" in the act, which was a rider to the appropriation bill of June 4, 1920, it was the intention of Congress to bestow upon the Secretary of the Navy power to dispose of the oil products of the naval reserves in the manner in which it was done in the contracts and leases here in question. The act, after giving the secretary possession of the naval reserve lands, etc., authorized him "to conserve, develop, use, and operate the same in his discretion, directly or by contract, lease, or otherwise, and to use, store, exchange, or sell the oil and gas products thereof, and those from all royalty oil from lands within the naval reserves, for the benefit of the United States. * * * Provided further, that such sums as have been or may be turned into the Treasury of the United States from royalties on lands within the naval petroleum reserves prior to July 1, 1921, not to exceed *770 $500,000, are hereby made available for this purpose until July 1, 1922." Section 1 (Comp. St. Ann. Supp. 1923, § 2804i).

The power to lease, following as it does the authority to conserve, was evidently to be used as a protective measure to prevent drainage of the naval reserve lands from adjacent oil drilling. The power to sell, so conferred, necessarily carried with it the legal obligation to turn into the Treasury of the United States the proceeds of sales. If anywhere in the act there is authority to justify the execution of the contracts and leases in question here, it must be found in the word "exchange." The opinion of the Judge Advocate General of the Navy was that the authority thus granted to exchange was "unrestricted," which could only mean that the Secretary of the Navy could exchange all oil in the naval reserve and all royalty oils for any purpose for which he saw fit. The defendants do not go so far as that. They assume that the authority to exchange is limited to exchanges for fuel reserve purposes. We find nothing in the act which imposes such a limitation, and we think it clear that the word "exchange" embraces either the broad authority which was found by the Judge Advocate General, or that the intention was to limit the exchange by the words of the accompanying proviso "not exceeding $500,000," and that the exchange intended was an exchange of crude oil for fuel oil for the current use of the navy; the then existing depots of fuel oil for current use having been authorized by express acts of Congress. The Act of June 4, 1920, bestows no express authority to create fuel depots. If the power to exchange be extended beyond exchange for current fuel oil or facilities for the storage of royalty oils not to exceed $500,000, there is no limit to it. There can be no middle ground. Either the intention was that the power was thus to be limited, or it was absolutely without limit, and under it the Secretary of the Navy might have exchanged crude oil for battleships or airplanes, or anything else which he deemed to be of benefit to the navy, and all this in addition to the millions contracted to be expended for the storage facilities at Pearl Harbor and the filling of the same, the total estimate for which, according to the testimony of Admiral Robison, was $103,000,000.

As early as August 31, 1842, Congress, under its constitutional authority to provide and maintain a navy, enacted that "the Secretary of the Navy may establish, in such places as he may deem necessary, suitable depots of coal, and other fuel, for the supply of steamships of war." Rev. Stat. § 1552. On March 4, 1913, 37 Stats. 898, on account of the establishment of fuel depots by the Secretary of the Navy, which had subsequently been abandoned, Congress, on the recommendation of the House Committee on Naval Affairs, "in the interest of economy," repealed section 1552, R. S., and at the same time made an appropriation for the completion of a coaling plant and oil tanks at Pearl Harbor. Thereafter annual appropriations were made for fuel oil storage at various points; the largest appropriation for that purpose being $200,000. For the year 1921 an appropriation of $1,000,000 for storing oil at Pearl Harbor was requested by the Chief of the Bureau of Yards and Docks of the Navy, but the request was denied, and no appropriation for that purpose was made for that year; nor was any made for any subsequent year, obviously for the reason that none was applied for.

It is not conceivable that by the rider to the appropriation bill Congress intended in that casual way to surrender its legislative functions as to the control and disposition of the naval oil reserves and the establishment of fuel oil depots for the navy, to revolutionize the established method of transacting the public business of the United States, and to repeal, so far as they relate to the oil reserves, sections 3732 and 3733, Rev. Stat., and sections 6884, 6885, 6886 and 6873, Comp. St., which forbid the making of contracts to bind the government beyond the amount appropriated therefor, unless otherwise specifically provided, and section 3709, Rev. Stat., being Comp. St. § 6832, which makes competitive bidding and advertising indispensable to the making of all such contracts, and sections 3617 and 3618 of Rev. Stat., being Comp. St. §§ 6606, 6609, which make it obligatory to turn into the Treasury of the United States all proceeds of sales of royalty oils as was done prior to June 4, 1920, and as was expressly provided by the Act of February 25, 1920 (Comp. St. Ann. Supp. 1923, §§ 4640¼-4640¼ss). If such had been the intention, it is but reasonable to assume that it would have been expressed in terms so clear as to exclude all doubt.

The construction placed upon the act by the officers of the government, to whom were delegated the powers conferred thereby, is of no value as indicating the meaning of the act. The evidence is that the Secretary of the Interior and the representatives of the *771 Department of the Navy, who were most interested and active in furthering the Pearl Harbor scheme, were doubtful of their authority to engage in it, and intentionally refrained from giving out information concerning the same, and withheld from members of Congress knowledge of their action, through fear that they would encounter trouble from Congress. Clearly any such contract is illegal, unless made in pursuance of authority previously given by Congress. It is no answer to these considerations to say that the contracts were beneficial, and that the United States received full value for every dollar expended thereunder. Said the court in Filor v. United States, 9 Wall. (76 U. S.) 45, 19 L. Ed. 549:

"The officers at Key West did not represent the United States, except in their military capacity, though assuming to do so. In signing the agreement, and in taking possession of the premises claimed by the petitioners, they acted on their own responsibility. Their unauthorized acts cannot estop the government from insisting upon their invalidity, however beneficial they may have proved to the United States. If the petitioners are entitled to compensation for the use of the property they must seek it from Congress."

The defendants, referring to the fact that the record contains no finding that the contracts or leases were harmful, or that the government was damaged thereby, contend that the suit may not be maintained without proof of pecuniary damage to the United States. To that we cannot agree. As indicating pecuniary damage, the trial court directed attention to the fact that the government had for a period of fifteen years parted with possession of the oil and petroleum products of its naval oil reserves, and had been deprived of its right to make more valuable contracts and leases than those which were made with the defendants, and to obtain the benefits of competition for leases, and, passing by those considerations as not necessarily pertinent to the case, the court based its decree upon the right of the United States to be restored to the use and possession of its naval oil reserves, which, through fraud, undue favoritism, and misconduct of its officers, had been relinquished to private enterprises. We think the ground so taken by the trial court was justified. Applicable to this question are the authorities cited later in this opinion on the question of the obligation of the United States to accord the defendants equity. In Heckman v. United States, 224 U.S. 413, 439, 32 S. Ct. 424, 432 (56 L. Ed. 820), upon the right of the United States to invoke the equity jurisdiction of its courts, the court said: "It was not essential that it should have a pecuniary interest in the controversy." In United States v. Carter, 217 U.S. 286, 30 S. Ct. 515, 54 L. Ed. 769, 19 Ann. Cas. 594, it was held that the fact that the United States had suffered no pecuniary damage from a fraud committed against it did not prevent recovery. In Hammerschmidt v. United States, 265 U.S. 182, 188, 44 S. Ct. 511, 512 (68 L. Ed. 968) the Chief Justice said:

"To conspire to defraud the United States means primarily to cheat the government out of property or money, but it also means to interfere with or obstruct one of its lawful governmental functions by deceit, craft, or trickery, or at least by means that are dishonest. It is not necessary that the government shall be subjected to property or pecuniary loss by the fraud, but only that its legitimate official action and purpose shall be defeated by misrepresentation, chicane, or the overreaching of those charged with carrying out the governmental intention."

We are unable to affirm the court below in holding that the United States, in order to obtain the relief which it sought, is required to credit the defendants with the sums which they expended under the leases and contracts, and in holding applicable to the case the maxim that he who seeks equity must do equity. That maxim is as old as equity itself, and is of almost universal application. It means that he who seeks the aid of an equitable court subjects himself to the imposition of such terms as the settled principles of equity require. But the maxim is only a guiding principle and not an exact rule governing all cases. Hanson v. Keating, 8 Jur. 949. In that case the Vice Chancellor said:

"It is a rule which per se can by no possibility decide what the rights of the defendant are. It only raises the question what equity, if any, the defendant has against the plaintiff in the circumstances of the case to which the rule is sought to be applied."

And it is held that the maxim is restricted to cases where the plaintiff is wholly without remedy at law, and is entirely dependent upon a suit in equity for relief. Gilliat v. Lynch, 2 Leigh. (29 Va.) 493; Scott v. Scott, 18 Grat. (59 Va.) 150; Dranga v. Rowe, 127 Cal. 506, 59 P. 944. Here the plaintiff had a remedy at law, but resorted to equity to avoid a multiplicity of suits. It is well settled also that the maxim is not applicable in the case of a suit by the United States to *772 vindicate its dominion over the public lands and to avail itself of substantial rights under statutory provisions. In United States v. Trinidad Coal Co., 137 U.S. 160, 170, 11 S. Ct. 57, 61 (34 L. Ed. 640) Mr. Justice Harlan said:

"If the defendant is entitled, upon a cancellation of the patents fraudulently and illegally obtained from the United States, in the name of others, for its benefit, to a return of the moneys furnished to its agents in order to procure such patents, we must assume that Congress will make an appropriation for that purpose, when it becomes necessary to do so. The proposition that the defendant, having violated a public statute in obtaining public lands that were dedicated to other purposes, cannot be required to surrender them until it has been reimbursed the amount expended by it in procuring the legal title, is not within the reason of the ordinary rule that one who seeks equity must do equity; and, if sustained, would interfere with the prompt and efficient administration of the public domain."

In Heckman v. United States, 224 U.S. 413, 447, 32 S. Ct. 424, 435 (56 L. Ed. 820), Mr. Justice Hughes, answering the contention that there should be equitable restoration before enforcement of the law in a case involving the violation of statutory restrictions on the alienation of Indian lands, said:

"The effectiveness of the acts of Congress is not thus to be destroyed. The restrictions were set forth in public laws, and were matters of general knowledge. Those who dealt with the Indians contrary to these provisions are not entitled to insist that they should keep the land if the purchase price is not repaid, and thus frustrate the policy of the statute."

In Causey v. United States, 240 U.S. 399, 402, 36 S. Ct. 365, 367 (60 L. Ed. 711), Mr. Justice Van Devanter, after observing that the public lands are held in trust for all the people, and that, in providing for their disposal, Congress has sought to advance the interests of the whole country by opening them to entry under restrictions, said:

"And when a suit is brought to annul a patent obtained in violation of these restrictions, the purpose is not merely to regain the title, but also to enforce a public statute and maintain the policy underlying it. Such a suit is not within the reason of the ordinary rule that a vendor suing to annul a sale fraudulently induced must offer and be ready to return the consideration received. That rule, if applied, would tend to frustrate the policy of the public land laws; and so it is held that the wrongdoer must restore the title unlawfully obtained and abide the judgment of Congress as to whether the consideration paid shall be refunded."

In line with the foregoing decisions are Washington Sec. Co. v. United States, 234 U.S. 76, 34 S. Ct. 725, 58 L. Ed. 1220, United States v. Poland, 251 U.S. 221, 40 S. Ct. 127, 64 L. Ed. 236, and Diamond Coke & Coal Co. v. Payne, 271 F. 362, 50 App. D. C. 288.

To the proposition that the equitable claims of the government appeal to the conscience of a chancellor with no greater force than do those of private citizens under like circumstances, the defendants cite, among other cases, United States v. Stinson, 197 U.S. 200, 25 S. Ct. 426, 49 L. Ed. 724, and United States v. The Thekla, 266 U.S. 328, 45 S. Ct. 112, 69 L. Ed. 313. In the first of these cases, a suit was brought by the United States to set aside patents alleged to have been fraudulently acquired. The decision was that in such a suit the government is subjected to the same rules as is an individual respecting the burden of proof, quantity and character of evidence, and presumptions of law and fact, and that in a case of that kind equity will protect the rights of an innocent purchaser for value and without notice. In the second case, a libel had been filed by the owners of the Luckenbach against the bark Thekla for damages resulting from a collision. The owners of the bark filed a cross-libel. The United States became a party libelant as owner pro hac vice of the Luckenbach, and made claim thereto, and filed a stipulation to pay any amount awarded against that vessel by the final decree. Concerning the effect of the claim and the stipulation, the Supreme Court said:

"When the United States comes into court to assert a claim, it so far takes the position of a private suitor as to agree by implication that justice may be done with regard to the subject-matter. The absence of legal liability in a case where, but for its sovereignty, it would be liable, does not destroy the justice of the claim against it."

The propositions involved in those cases are not in dispute here. But the defendants cite also cases such as United States v. Debell, 227 F. 775, 142 C. C. A. 299, and United States v. Midway Northern Oil Co. (D. C.) 232 F. 619, which apply the equitable maxim to the United States when it resorts to equity in suits of the kind there involved. There can be no doubt that, where a patent *773 to public land has been acquired by fraud, and the patentee has conveyed the land to an innocent purchaser for value, the remedy of the United States is to resort to a suit in equity to set aside the patent, the patent having been issued in due and proper form and under authority of law as attested by the action of the officials of the Land Office. In so doing the government, being required to seek equitable relief, must, as incident thereto, deal equitably with defendants, who in good faith have acquired title from the patentee, and there can be no doubt that in a suit brought by the United States for accounting against trespassers who entered upon public lands in good faith, through a mistake of law, and in the belief that they could acquire title under the mineral laws, the plaintiff will be required to do equity. But, in the present case, although the suit is in form a suit to cancel leases of the public domain, the United States is not seeking equity. It is but fulfilling its duty to protect the public domain and to compel compliance with fundamental laws of the United States. To do what the defendants here claim to be equity would be to require the court to exercise functions which belong to the legislative branch of the government, to legalize demands founded upon violations of the laws of the United States, and to make judicial disposition of the public resources of the United States.

To hold in the present case that the defendants have equities which demand the protection of the court would be to ignore the fundamental distinction between cases brought to determine rights as between the United States and citizens depending upon contracts made under the authority of the laws of the United States and cases in which the contracts have been made without authority of law or in violation thereof. In The Floyd Acceptances, 7 Wall. (74 U. S.) 666, 680 (19 L. Ed. 169), it was said:

"Our statute books are filled with acts authorizing the making of contracts with the government through its various officers and departments, but, in every instance, the person entering into such a contract must look to the statute under which it is made, and see for himself that his contract comes within the terms of the law." That doctrine is exemplified in numerous decisions. Whiteside v. United States, 93 U.S. 247, 23 L. Ed 882; Hooe v. United States, 218 U.S. 322, 31 S. Ct. 85, 54 L. Ed. 1055; Chase v. United States, 155 U.S. 489, 15 S. Ct. 174, 39 L. Ed. 234; Sutton v. United States, 256 U.S. 575, 41 S. Ct. 563, 65 L. Ed. 1099, 19 A. L. R. 403.

Credit for moneys expended by the petroleum company in drilling and operating oil wells and making improvements on Naval Reserve No. 1 could be allowed only on the theory that said corporation committed innocent trespass upon the naval reserve and in good faith expended said money and made said improvements. The mala fides of the trespasses, however, follows from the findings of the court below. That such credits could lawfully be decreed only in a case where the trespass upon the lands was innocently made in good faith is well established. Pine River Logging Co. v. United States, 186 U.S. 279, 22 S. Ct. 920, 46 L. Ed. 1164; Wooden Ware Co. v. United States, 106 U.S. 432, 1 S. Ct. 398, 27 L. Ed. 230; Union Naval Stores v. United States, 240 U.S. 284, 36 S. Ct. 308, 60 L. Ed. 644.

The decree of the court below, so far as it awards affirmative relief to the United States in ordering the cancellation of the leases and contracts, and commands the defendants to surrender possession of the lands mentioned in the bill of complaint, and enjoins them against trespassing thereon or removing property therefrom, is affirmed. That portion of the decree which directs that the defendants be credited with the cost price of the storage facilities for crude oil products at Pearl Harbor and the cost price of the fuel oil contents thereof and the actual expenditures of money in drilling and putting on production any wells drilled under the leases is reversed; and the cause is remanded to the court below for further proceedings in accordance with the foregoing opinion.

[*] Rehearing denied February 1, 1926. Certiorari granted 46 S. Ct. 356, 70 L. Ed. ___.