Cal-Bay Corporation v. United States

Citation169 F.2d 15
Decision Date08 November 1948
Docket NumberNo. 11695.,11695.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

A. J. Scampini, Walter E. Hettman and Herbert Chamberlin, all of San Francisco, Cal., for appellant.

A. DeVitt Vanech, Asst. Atty. Gen., M. Mitchell Bourquin, Sp. Asst. to the Atty. Gen., and Rogert P. Marquis and S. Billingsley Hill, Attys., Dept. of Justice, both of Washington, D. C., for appellee.

Before GARRECHT, DENMAN and HEALY, Circuit Judges.

Writ of Certiorari Denied November 8, 1948. See 69 S.Ct. 134.

DENMAN, Circuit Judge.

Appellants appeal from a decree in a condemnation proceeding awarding to each damages for the taking of the lessors' and lessees' mineral rights in land under leases for oil and gas development, upon which it is claimed there had been a discovery of petroleum gas of commercial quantities. They claim, inter alia, that by the refusal of a proper instruction on the valuation of the oil and gas leases, the amount of damage awarded by the jury is grossly inadequate.

The maps in evidence, referred to in appellants' briefs, show these oil and gas leases are of land in northern Contra Costa County about 25 miles northeast of the city of Oakland and about 32 miles from the city of San Francisco. Locally, they are situated about 2½ miles southeast of Port Chicago, on Suisun Bay, a branch of the Bay of San Francisco, 5 miles southwest of the city of Pittsburg, and 3 miles northeast of the town of Concord.

The claimed discovery of natural gas in commercial quantities is thus seen to be in the second largest metropolitan area in California having a population in 1940 of 1,500,000 people — increased by at least 25% since that time. If, as appellants' testimony is, there is the likelihood that the gas bearing land also contains oil, the maps in evidence show it is within ten miles of one of the largest concentrations of oil refineries in the Pacific states, those of the Standard, Shell, Union and Associated oil companies.

We take judicial notice that this metropolitan area is a large consumer of natural gas. Since there are no sizable gas producing areas in northern California, we know it is brought through pipe lines from gas producing areas between 200 and 300 miles distant.1

Appellants are here concerned with the question of the value of lessors' and lessees' interests in petroleum deposits in land located within this San Francisco metropolitan area, there being evidence that a well drilled upon it disclosed gas in commercial quantities.

The leases provided for the drilling of a well for oil and gas to a depth of 5,000 feet and for the successor wells if the predecessor wells proved dry holes. The lessee, Cal-Bay Corporation, had leases on 687 acres of the land surrounding a well drilled by it, of which the government condemned 217.79 acres. The surface value of the land has been adjudicated and is not in question here.

The Corporation Commissioner of the State of California, on the surface showings of possible oil and gas, gave permission for the issuance and sale of $250,000 par value of the Cal-Bay Corporation stock upon its leasehold interest. Investors were found who bought this stock at par — that is at the rate of $366 per acre for the 687 acres in the leasehold.

A well was drilled to 5,000 feet. Its cost of over $250,000 is not recoverable as an item of damage but was admitted in evidence by the district court for its bearing upon values of the oil and gas development. Its large amount and possible successor amounts showed how the lessee regarded the value of the hazards of the venture.

Appellants to sustain their burden of proof introduced testimony that the drilling of the well was commenced in July 1943, discontinued in November 1943, and resumed in June 1944. At a depth of 3,000 feet gas showings were found. At a depth of 4,268 feet the volume of gas amounted to 100,000 cubic feet a day, and this increased to 125,000 cubic feet a day as greater depths were reached.

Location of the well was made on the recommendation of Byron Norris, a consulting geologist and petroleum engineer, and developments were supervised by him. He had been an inspector in the Division of Oil and Gas of the State of California for nine years. His qualifications as an expert are not questioned. His first inspection of the Cal-Bay properties in March 1942, was followed by careful examinations and tests. He found pronounced surface indications of oil and gas. He found pronounced favorable formations. He recommended the drilling of the well at the point where it was drilled and was of the opinion that oil or gas would there be encountered at a depth of 5,000 feet.

Drilling of the well was actively in progress when the present action was commenced on July 25, 1944, and the appellant Cal-Bay Corporation was served with notice that the appellee required immediate possession of the land subject to the action. All work was stopped. Conferences with representatives of the Navy resulted in the resumption of drilling operations in August 1944. With the approval of the district court, a stipulation was entered into on September 28, 1944, between the appellee and Cal-Bay Corporation, whereby the latter was permitted to remain in possession of two of the parcels and prosecute its drilling and other operations thereon "until one month after service by the plaintiff on said defendant, or on its attorneys herein, of written notice of the termination of said right to possession." Such notice of termination was served upon the appellant Cal-Bay Corporation on December 5, 1944, and possession was surrendered pursuant thereto on January 15, 1945.

When drilling had been resumed in August 1944, with the consent of the Navy representatives, gas showings were encountered at 4,760 feet and steadily increased. On November 28, 1944, so great a volume of gas was encountered at a depth of 4,975 feet that it "blew out" the contents of the well and temporarily disabled the well. In the opinion of Byron Norris a "commercial discovery" of natural gas had been made, stating of that phrase, "I mean gas in sufficient quantity to be saleable at a profit." What the amount of gas and hence profit would be he states is speculative. The jury was thus entitled to infer that such a commercial discovery had been made.

Expert Norris' testimony was strongly controverted by competent experts introduced by the government. They testified that no such discovery had been made and the highest value they gave for the lessees' gas and mineral rights in the land was the nominal sum of $1,513 for the 217.90 acre total of the three parcels of land, that is less than $6.91 per acre. They gave similar testimony regarding the gas and mineral rights of the lessors who had 1/8th royalties on the production, that is but $11.09 per acre. These were the amounts of the jury's verdict.

The court instructed the jury that "The defendants in this case are not entitled to make a profit because the interests which they claim they have were taken from them by the Government. By that I mean that they may not obtain more compensation by reason of the condemnation proceeding than they would obtain as the fair market value of such interest if there had not been a condemnation proceeding. The Government's wartime necessity for the use of this property, for the particular purpose standing alone, cannot be considered in estimating the value of the property taken. Demand created by wartime necessity cannot be considered in estimating the value of the interest taken. Future income or speculative productive value contemplated is not a measure of condemnation value. Profits which might be derived* from devoting the property to a particular purpose depends so much on conditions that cannot be foreseen that they have no competency. * * *"

The statement that "Future income or speculative productive value contemplated is not a measure of condemnation value" is clearly likely to confuse the jury. An oil and gas lease with a proven discovery of gas in paying quantity but speculative as to its amount, of which there is here evidence, has its market value determined by arms length bargaining of buyers and sellers on the future income contemplated by each. This instructed sentence almost certainly would be considered by the jury as a statement that neither future income nor speculative production value, contemplated by the jury, is to be considered in their determining market value. This is so though the instruction may have been intended to convey the idea that neither future income nor speculative production value contemplated alone by either party is the same as market value.

With the likelihood of the Jury's interpretation so adverse to appellants, they were entitled to the requested and refused instruction making it clear that the jury could consider possible future income and speculative production value in their determination of market value.

The next sentence that "Profits which might be derived from devoting the property to a particular purpose depends so much on conditions that cannot be foreseen that they have no competency" is clearly erroneous. Gas and oil leases, the property here condemned, have as the "particular" and only "purpose" to which they are "devoted" the production of oil and gas. To say to the jury that evidence of the value of that purpose has no "competency" is taking sides with the government's contention that the purpose to produce oil and gas is a negligible factor in the leases' market value. Practically it is saying to the jury: "In determining the value of the leases you are concerned only with the surface value of the land."

In this situation appellants requested an instruction that, in the determination of the value of gas and oil leases, it may be based on the reasonable possibility of production in paying quantities, even though there were not a reasonable prob...

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