United States v. Southern Pacific Company (251 U.S. 1)/Opinion of the Court

This is a suit by the United States to cancel a patent issued December 12, 1904, to the Southern Pacific Railroad Company for eight full and two partial sections of land within the indemnity limits of the grant made to that company by an act of Congress (Act July 27, 1866, c. 278, 14 Stat. 292), it being charged in the bill that the railroad company fraudulently obtained the patent by falsely representing to the land department that the lands were not mineral but agricultural, when it was known that they were mineral. From the evidence presented the District Court found that the charge was true and entered a decree of cancellation, and this was reversed by the Circuit Court of Appeals, one judge dissenting. Southern Pac. Co. v. United States, 249 Fed. 785, 162 C. C. A. 19.

'All mineral lands' other than those containing coal or iron were excluded from the grant, and this exclusion embraced oil lands. Burke v. Southern Pacific R. R. Co., 234 U.S. 669, 676-679, 34 Sup. Ct. 907, 58 L. Ed. 1527. As will be seen presently, there can be no doubt that the patent was procured by representing that the lands were not mineral. Whether this representation was false turns upon the character of the lands as known when the patent was sought and obtained. If they then were known to be valuable for oil, as the government asserts they were, they were mineral in the sense of the granting act.

To compensate for losses to the grant within its primary limits the railroad company was entitled to select other lands of like area within the indemnity limits, approval by the Secretary of the Interior being essential to passing the selections to patent. The established mode of making the selections was by presenting at the local land office selection lists designating the lands lost and those selected, with supporting affidavits showing, among other things, that the lands selected were of the character contemplated, that is to say, were not mineral but agricultural. These lists and affidavits would then be examined in that office and in the General Land Office, and until mately the selections would be passed to the Secretary of the Interior for his action. That course was followed here.

The original list was presented November 14, 1903, but it encountered obstacles which led to the presentation of a substituted list covering the same lands on September 6, 1904. Both lists were presented by the company's land agent, Mr. Eberlein, and were accompanied by affidavits made by him stating that the lands selected 'are not interdicted mineral,' but 'are of the character contemplated by the grant,' and that 'he has caused' them 'to be carefully examined by the agents and employes of said company as to their mineral or agricultural character, and that to the best of his knowledge and belief none of the lands returned in said list are mineral lands.' In acting on the substituted list the officers of the Land Department relied upon and gave effect to the statements in the supporting affidavits, and the selections were accordingly approved and passed to patent.

In truth Mr. Eberlein had not examined the lands or caused them to be examined by others. Nor had any examination of them been made on behalf of the railroad company, save such as is inferable from the conduct of its geologists and others presently to be noticed.

The lands were in the Elk Hills in Kern county, California; were rough, semi-arid and unfit for cultivation; were devoid of timber, springs or running water; and had but little value for grazing. Oil had been discovered in that region as early as 1899, and this had been followed by development and production on an extensive scale. In 1903 and 1904 there were many producing wells about 25 miles to the east and many within a much shorter distance to the west and south, some within 3 or 4 miles. The railroad company was then maintaining a corps of geologists-all informed by experience in the California oil fields-and under their supervision was searching for, developing and producing oil for fuel purposes. In 1902, upon the recommendation of one of its geologists, it withdrew from sale many of its patented lands surrounding and adjacent to those in suit 'because they were in or near oil territory,' and early in 1903 it entered upon a systematic examination of its lands in that territory 'to determine as far as can be done from surface indications and geological structure where oil is to be expected in this region.' In a letter to Mr. Kruttschnitt, one of the company's vice presidents, the chief geologist said when about to take up the examination:

'So far as I can judge from the trip I have just made over     this territory, this work promises results of greatest value      to the company.'

The lands in suit were surveyed in 1901 and the approved plat was filed in the local land office in May, 1903. The field notes denominated the lands as mineral and described them as in a mineral district 'within which many successful oil wells have been developed.' As before stated, the original selection list was presented November 14, 1903. Mr. Kruttschnitt already had written to the company's attorney at Washington requesting that 'special attention' be given to securing a patent for the lands when selected, and shortly thereafter Mr. Eberlein wrote to the attorney, saying:

'I am particularly anxious in regard to this list as the     lands adjoin the oil territory, and Mr. Kruttschnitt is very      solicitous in regard to it.'

Other letters and telegrams show that this special concern or anxiety persisted until the patent was issued.

In 1903 the company concluded to lease such of its lands as were considered 'valuable for oil purposes' to a subsidiary company, which was to be a sort of fuel department and to have charge of the development and production of oil. The geologists were requested to designate the lands to be thus leased and as a result of their investigation and recommendation several sections adjacent to and some immediately adjoining those in suit were included. The lease was to be signed on behalf of the railroad company by Mr. Eberlein as land agent and was laid before him for that purpose on August 2, 1904. Perceiving at once that its execution would not be in accord with his action in pressing the pending selection list he took the matter up with some of his superiors. To one he said in a letter:

'We have selected a large body of lands interspersed with the     lands sought to be conveyed by this lease, and which we have      represented as non-mineral in character. Should the existence     of this lease become known it would go a long way toward      establishing the mineral character of the lands referred to,      and which are still unpatented. We could not successfully     resist a mineral filing after we have practically established      the mineral character of the land. I would suggest delay at     least until this matter of patent can be adjusted.'

To the same officer he protested against the action of the geologists in examining unpatented lands because 'it was charging the company with notice.' And to another, in New York, he explained 'all phases of the matter,' with the result that the 'impropriety of the lease at that time' and the 'very ambiguous position in which we would be placed' were recognized, and he was instructed to withhold his signature and to place and keep all correspondence and papers relating to the lease in a separate and private file not accessible to others. He followed the instruction and the special or secret file remained in his possession 'until,' as he testified, 'it was pried out' at the hearing.

But, notwithstanding what was brought to his attention through the proposed oil lease, Mr. Eberlein continued actively to press the pending selection, and when, about a month later, he presented the substituted selection list it was accompanied by affidavits wherein he repeated his prior representation that the lands were not mineral. After presenting this list he had a conference with the chief geologist which prompted the latter, when writing to a superior officer, to explain that —

'For reasons of policy regarding certain unpatented lands it     will be best not to execute the lease *  *  * at present.' The lease was placed by Mr. Eberlein in the special or secret file and some time afterward, when an effort was made to find it, he denied all knowledge of it. The denial was brought to the attention of the chief geologist, and he at once wrote to Mr. Eberlein calling attention to the conference just mentioned, and stating:

'You explain that you were rushing certain lands for final     patent and that the immediate execution of the lease showing      our idea of what were oil lands might interfere with you and      we agreed to defer the execution until that danger was      passed.'

The chief geologist was a witness at the hearing and when asked what danger was meant, answered:

'The danger that these lands might be delayed and not be     patented because of their mineral character.'

All that has been recited thus far is proved so well that it is beyond dispute. Fairly considered, it shows that when the patent was sought and obtained the lands had no substantial value unless for oil mining; that the interest and anxiety displayed by the company's officers in securing the patent were wholly disproportionate to the value of the lands for any other purpose; that the lands lay within a recognized and productive oil region which the company's geologists had been systematically examining to determine in what lands oil was to be expected, and that upon the advice and recommendation of its geologists the company was treating and dealing with adjacent and adjoining lands, of which it was the owner, as valuable for oil. Of course among practical men the character-whether oil or otherwise-of these adjacent and adjoining lands had some bearing on the character of those in suit, and this was given pointed recognition when the company's officers halted the signing of the proposed oil lease pending action on the selection list and caused the correspondence and papers relating to the lease to be secreted in a special and private file.

We think the natural, if not the only, conclusion from all this is that in pressing the selection the officers of the railroad company were not acting in good faith, but were attempting to obtain the patent by representing that the lands were not mineral when they believed the fact was otherwise.

The observable geological and other physical conditions at the time of the patent proceedings, as shown by the evidence, were as follows: The area called the Elk Hills was about 6 miles wide and 15 long and constituted an anticlinal fold or elongated dome an occurrence favorable to the accumulation and retention of oil. The lands in suit were about its center. From 5 to 10 miles to the west was the Temblor Range, the main uplift of that region. Along the east flank of that uplift for a distance of 30 miles was a series of outcrops or exposures of Monterey (diatomaceous) shales, the source of oil in California, and porous sandstone in which oil generally finds its ultimate reservoir. These strata were of exceptional thickness and it was apparent that oil in considerable quantity had been seeping or wasting from the sandstone. The dip of the strata was towards the Elk Hills and there were no indications of any faulting or thinning in that direction. Between the outcrop and the Elk Hills upwards of 200 wells had found the oil-bearing strata and were being profitably operated, several of the wells being on a direct line towards the lands in suit and within 3 or 4 miles of them. In and beyond the Elk Hills were oil seepages and other surface indications of the existence of oil in the underlying strata, one of the seepages being near the lands in suit. Two wells had been sunk in the Elk Hills, but obviously had not gone to an adequate depth and were not productive, although some oil was reached by one.

Geologists and men of wide experience and success in oil mining-all of whom had examined that territory and some of whom had been familiar with it for years-were called as witnesses by the government and gave it as their opinion, having regard to the known conditions in 1903 and 1904, as just outlined, that the lands were valuable for oil, in that an ordinarily prudent man, understanding the hazards and rewards of oil mining and desiring to engage therein for profit, would be justified in purchasing the lands for such mining and making the expenditures incident to their development, and in that a competent geologist or expert in oil mining, if employed to advise in the matter, would have ample warrant for advising the purchase and expenditure.

Other geologists and oil operators, called by the company, gave it as their opinion that the lands were not, under the conditions stated, valuable for oil; but as respects the testimony of some it is apparent that they were indisposed to regard any lands as within that category until they were demonstrated to be certainly such by wells actually drilled thereon and producing oil in paying quantities after a considerable period of pumping. This is a mistaken test, in that it takes no account of geological conditions, adjacent discoveries and other external conditions upon which prudent and experienced men in the oil-mining regions are shown to be accustomed to act and make large expenditures. And the testimony of some of these witnesses is weakened by the fact that their prior acts in respect of these lands, or others in that vicinity similarly situated, were not in accord with the opinions which they expressed.

After considering all the evidence, we think it is adequately shown that the lands were known to be valuable for oil when the patent was sought and obtained, and by this we mean that the known conditions at that time were such as reasonably to engender the belief that the lands contained oil of such quality and in such quantity as would render its extraction profitable and justify expenditures to that end. See Diamond Coal Co. v. United States, 233 U.S. 236, 34 Sup. Ct. 507, 58 L. Ed. 936.

The railroad company places some reliance on the fact that after the presentation of the original selection list and before the substituted one was tendered a special agent of the General Land Office examined the lands and reported them as nonmineral. But there is nothing in this that can help the company. The agent's report was made in another connection and was not considered by the land officers when they approved the selection. It did not relieve the company from showing that the lands selected were not mineral; nor did the company understand that it had any such effect. Mr. Eberlein knew of the report several months before he and other officers of the company became troubled over the proposed oil lease and concluded that, if given publicity, it would endanger the pending selection. Besides, if the report could be considered here, it would be without any real evidential value, for it appears from testimony given by the agent at the hearing that he was not a geologist or familiar with oil mining and that his examination of the lands was at best only superficial.

The company makes the contention that drilling done since the patent was issued has demonstrated that the lands have no value for oil. Assuming, without so deciding, that the contention would help the company if sustained by the evidence, we think it is not sustained. The drilling relied upon was done after 1909 upon lands in the Elk Hills other than those in suit. Several wells were started and not more than three were successful. The three were the only ones that were drilled in favorable locations and to an adequate depth, and they penetrated oil sands of considerable thickness and produced a large quantity of oil, but were shut down for reasons not made clear by the record. They were drilled by an oil company which was controlled by the railroad company. The other wells failed for reasons which prevent the outcome from having any significance here. In some the drilling was not carried to an adequate depth because the right to proceed was thought to be uncertain by reason of an executive withdrawal of the lands.

We conclude that the application of prior decisions to the case made by the evidence entitles the government to the relief sought as was held by the District Court. See United States v. Minor, 114 U.S. 233, 5 Sup. Ct. 836, 29 L. Ed. 110; McCaskill Co. v. United States, 216 U.S. 504, 30 Sup. Ct. 386, 54 L. Ed. 590; Diamond Coal Co. v. United States, supra; Washington Securities Co. v. United States, 234 U.S. 76, 34 Sup. Ct. 725, 58 L. Ed. 1220.

Decree of Circuit Court of Appeals reversed.

Decree of District Court affirmed.