United States v. Pan-American Petroleum Co.

• Decision Date: 28 May 1925
• Citation: 6 F.2d 43
• Parties: UNITED STATES v. PAN-AMERICAN PETROLEUM CO. et al.
• Court: U.S. District Court — Southern District of California

6 F.2d 43 (1925)

UNITED STATES v. PAN-AMERICAN PETROLEUM CO. et al.

District Court, S. D. California, N. D.

May 28, 1925.

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Atlee Pomerene, of Cleveland, Ohio, and Owen J. Roberts, Sp. Counsel, of Philadelphia, Pa., and Joseph C. Burke, U. S. Atty., and Robert B. Camarillo, Asst. U. S. Atty., both of Los Angeles, Cal., for the United States.

Frederic R. Kellogg, of New York City, Frank J. Hogan and Joseph J. Cotter, both of Washington, D. C., Henry W. O'Melveny, Walter K. Tuller, Charles Wellborn, Olin Wellborn, Jr., and Olin Wellborn, III, all of Los Angeles, Cal., Marc F. Mitchell, Dean Emery, of New York City, and Harold Walker, of Washington, D. C., for defendants.

McCORMICK, District Judge.

This is a suit in equity, wherein the United States of America seeks to have declared null, void, and of no effect two contracts, dated April 25, 1922, and December 11, 1922, respectively, and two oil and gas leases to lands in the naval petroleum reserves in California, dated June 5, 1922, and December 11, 1922, respectively. The prayer of the bill is that these agreements and leases be canceled, for an accounting, and for general relief. The relief is sought upon two grounds: First, fraud in the making of the contracts and leases; and, second, lack of legal authority for their making.

The case has received the careful consideration that its importance demands, but existing circumstances, due to pressure and volume of work in the court, do not admit of the preparation of a detailed opinion upon every issue. The formal decision upon all issues consists of the findings of fact and conclusions of law filed herewith. I feel impelled, however, to amplify such decision by this statement.

I will first consider the charge of fraud and official misconduct in the making of the contracts and leases in suit; and, secondly, whether the agreements were made pursuant to any legal authorization. The first involves mixed questions of law and fact, while the latter is solely a legal question. The contracts and leases in suit may be epitomized as follows:

The agreement of April 25, 1922, is between the Pan-American Petroleum & Transport Company, a corporation, called the "contractor," and the United States of America, by the Acting Secretary of the Interior and the Secretary of the Navy thereof, denominated the "government." It recites "that by virtue of authority contained in and the policy expressed by applicable acts of Congress, and in accordance with `Proposal B' of the contractor, dated April 14, 1922, the parties hereto have mutually covenanted and agreed with each other as follows":

Article I — The contractor, for the consideration mentioned in the contract, and under the penalty of a bond of $250,000, agrees to faithfully and fully furnish 1,500,000 barrels of fuel oil and storage facilities for said fuel oil, which the contractor also agrees to construct at Pearl Harbor, territory of Hawaii, in accordance with "Proposal B" and plans and specifications to be furnished by the government.

Article II — Declares the intention of the parties is to effect an exchange of crude oil unsuitable for Navy use for fuel oil, the crude oil being produced from naval petroleum reserves Nos. 1 and 2, in California, and being property of the government, and the fuel oil to be delivered by the contractor at the naval station at Pearl Harbor, territory of Hawaii.

Article III — The contractor covenants to furnish the 1,500,000 barrels of fuel oil and to deliver such oil into storage facilities, to be constructed and erected by the contractor for a lump sum, of 5,878,905 barrels of crude oil from naval petroleum reserves Nos. 1 and 2 "of from 14 to 17.9 degrees (Baume) gravity, or crude oil in such other quantity and quality as shall be of equal value, which lump sum is termed the `proposal sum.'" Article III further provides: "It is hereby mutually understood and agreed that said `proposal sum' is based upon the November-December, 1921, published field price of California crude oil of from 14 to 17.9 degrees (Baumé) gravity ($1.10 per barrel), which for the purposes of this agreement shall be termed the `reference price of basic crude oil,' and upon the November-December, 1921, market price of fuel oil at Bay Point, Cal. ($1.50 per barrel), which for the purposes of this agreement shall be termed the `reference price of fuel oil.'" Then follows a clause that deals with the change of gravity of oils, in which computations and allowances are made under the contract, dependent upon the variations in the market prices of crude and fuel oil during the life of the contract, and provision is made for the acceptance of "basic crude oil" of other gravity, which is termed "particular crude oil." It is provided that, if delivery of "particular crude oil" is made under the contract, certain debits and credits will be extended at the ratio which the "published field price" of such "particular crude" on the date of delivery bears to the "reference price of basic crude." It is further agreed that any difference in debits and credits under the contract shall bear interest at the rate of 5 per cent. per annum, the interest to be allowed in barrels of basic crude oil.

Article IV — The government agrees to deliver to the contractor at the place of production each month "all the royalty oil that may be furnished by its lessees in reserves Nos. 1 and 2, until all claims of the contractor under the contract are satisfied."

Article V — Vests the Secretary of the Interior with exclusive discretion to grant additional leases on any lands he may designate in reserve No. 1, so as to maintain total deliveries of royalty oil under the contract at the approximate rate of 500,000 barrels per annum.

Article VI — Requires the government to deliver to the contractor on account of the "proposal sum" all royalty oil from reserves Nos. 1 and 2 which had been accumulated and was in storage at the time the contract was made.

Article VII — Requires the contractor to take the crude oil at the wells and bear every expense incident to its movement, and further requires the contractor to deliver the fuel oil in storage at Pearl Harbor, T. H., and to pay for the transportation of the fuel oil to storage, and permits the contractor to supply the fuel oil in storage in any amount it may elect, providing that the required contract amount be entirely furnished and delivered in storage within the time that the government has furnished sufficient royalty oil to pay for the contracted fuel oil and storage facilities.

Article VIII — Specifies how and where the fuel oil is to be gauged.

Article IX — Concerns the payment of demurrage in the event that the contractor's tankers are delayed in discharging fuel oil at Pearl Harbor, the calculation of demurrage being made in barrels of oil and added to the "proposal sum."

Article X — Relates to increasing or diminishing the "proposal sum" to meet the contingency of more or less or different concrete piles being required to provide the storage facilities at Pearl Harbor than are shown by the drawings and specifications.

Article XI — Confers the preferential right on the contractor, and covenants that "if, during the life of this contract, future leases shall be granted" — within a certain portion of reserve No. 1 — "the contractor shall first be called upon by the Secretary of the Interior to meet such drilling conditions and to pay such royalties as the Secretary may deem just and proper, and in the event of his acceptance of such conditions, and of his agreement to pay such royalties, the contractor shall be granted by the government a preferential lease on such tracts as the Secretary of the Interior may decide to lease in the event of the failure of the contractor to agree to the conditions and royalties as proposed by the Secretary of the Interior, then said lease or leases may be offered for competitive bidding, but the contractor shall have a right to submit a bid on equal terms with others engaged in said bidding."

Article XII — Provides for the giving to the government of any saving in the cost of the construction of the storage facilities, should said cost be less than 3,197,086 barrels of "basic crude oil" at "reference price" thereof, such saving to be determined by agreement between the Secretary of the Interior and the contractor, and to be expressed by crediting such saving in barrels of "basic crude oil" on account of the "proposal sum."

The lease of June 5, 1922, was incidental to and in pursuance of the April 25, 1922, contract. It was granted at the request of the defendants and to enable the contractor to more speedily perform the said contract. It was given without competitive bidding and solely to effectuate the preferential right of article XI of the April 25 contract. The parties were the United States of America, acting through the Secretary of the Interior, and the Pan-American Petroleum & Transport Company, a corporation. It recites, inter alia, that it is made pursuant to authority of an act of Congress approved June 4, 1920 (41 Stat. 812), making appropriations for naval service and other purposes. It granted the exclusive right to drill for, extract, remove, and dispose of all oil and gas deposits in the northeast quarter of section 3, township 31 south, range 24 east of the Mt. Diablo meridian, California, for a period of 20 years, with a certain preferential right of 10 years additional. Certain drilling requirements are stated, and the royalties to be paid the government under the lease range from 12½ per cent. for 20 barrels or less per day to 45 per cent. for 400 barrels or more per day for oil produced of 30 degrees or over (Baumé), and from 12½ per cent. to 35 per cent. for oil of less than 30 degrees (Baumé). The lease also provides for payment of certain royalties for gas and casing-head gasoline produced from wells under the lease. There are...