Mammoth Oil Co v. United States

• Decision Date: 10 October 1927
• Docket Number: No. 140,140
• Citation: 48 S.Ct. 1,275 U.S. 13,72 L.Ed. 137
• Parties: MAMMOTH OIL CO. et al. v. UNITED STATES
• Court: U.S. Supreme Court

275 U.S. 13

48 S.Ct. 1

72 L.Ed. 137

MAMMOTH OIL CO. et al.

v UNITED STATES.

No. 140.

Argued April 12 and 13, 1927.

Decided Oct. 10, 1927.

[Syllabus from pages 13-15 intentionally omitted] Messrs. John W. Lacey, of Cheyenne, Wyo., Edward H. Chandler, of Tulsa, Okl., Martin W. Littleton, of New York City, and George P. Hoover, of Washington, D. C., for petitioners.

[Argument of Counsel from pages 15-23 intentionally omitted]

Page 23

Messrs. Owen J. Roberts, of Philadelphia, Pa., and Atlee Pomerene, of Cleveland, Ohio, for the United States.

Mr. Justice BUTLER delivered the opinion of the Court.

This suit was brought by the United States against the petitioners in the District Court of Wyoming to secure the cancellation of an oil and gas lease made by the United States to the Mammoth Oil Company April 7, 1922, and to set aside a supplemental agreement made by the same parties February 9, 1923. An accounting and possession of the leased lands and general relief were also demanded. The complaint alleged that the lease and agreement were made without authority of law and in consummation of a conspiracy to defraud the United States. The District Court held that the transaction was authorized by the Act of June 4, 1920, 41 Stat. 812, 813 (34 USCA § 524 (Comp. St. § 2804i)), found that there was no fraud, and dismissed the case. 5 F.(2d) 330. The Circuit Court of Appeals sustained that construction of the act; but, on an examination of the evidence, held that the lease and agreement were obtained by fraud and corruption, reversed the decree, and directed the District Court to enter one canceling the lease and agreement as fraudulent, enjoining petitioners from further trespassing on the leased lands, and providing for an accounting by the Mammoth Oil Company for all oil and other petroleum products taken under the lease and contract. 14 F. (2d) 705.

The lease covered 9,321 acres in Natrona county, Wyo.-commonly known as Teapot Dome-being Naval Reserve No. 3 created April 30, 1915, by an executive order of the President made pursuant to the Act of June 25, 1910, c. 421, 36 Stat. 847, as amended August 24, 1912, c. 369, 37 Stat. 497 (43 USCA §§ 141-143 (Comp. St. §§ 4523-4525)). The part of the Act of June 4, 1920, relied on to sustain the lease contains the following:

'Provided, that the Secretary of the Navy is directed to take possession of all properties within the naval petroleum reserves * * * 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

[Argument of Counsel from pages 23-31 intentionally omitted]

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oil and gas products thereof, and those from all royalty oil from lands in the naval reserves, for the benefit of the United States: * * * And 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 $500,000, are hereby made available for this purpose until July 1, 1922.'

March 5, 1921, Edwin Denby became Secretary of the Navy and Albert B. Fall, Secretary of the Interior. May 31, 1921, the President made an order purporting to commit the administration of all oil and gas bearing lands in the naval reserves to the Secretary of the Interior, subject to the supervision of the President. The lease and agreement were signed for the United States by Fall as Secretary of the Interior and by Denby as Secretary of the Navy. The evidence shows that the latter was fully informed as to the substance of the transaction, and it is not necessary here to consider the validity or effect of the executive order.

The purpose and scope of the lease and agreement may be indicated by a statement of their principal features. The preamble to the lease stated that it was the duty of the government to secure and store oil for the navy; that the government desired to avoid the loss of oil resulting from the drilling of wells outside the reserve, to create a market and receive the best prices obtainable for royalty oil from the Salt Creek field (adjoining the reserve on the north), to exchange royalty oil from the reserve for fuel oil for the navy, and to secure facilities for the storage of such fuel oil; and that the government proposed to secure these objects by entering into a contract providing for the development and exploitation of the oil and gas within the reserve and for the construction of a pipe line if necessary, for the transportation of royalty oil from the reserve and from the Salt Creek field.

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The lease granted to the company the exclusive right to take and dispose of oil and gas so long as produced in paying quantities. The lessee agreed to drill test wells, and, after their completion, fully to develop the reserve, to construct, or cause its nominee to construct, a common carrier pipe line (about 1,000 miles in length) from the leased lands to a line from the mid-continent field to Chicago; to pay as royalties specified percentages of products taken from the land; to purchase all royalty oil when and as produced, and in payment to set up an oil exchange credit to the lessor and issue certificates showing the amount and value of royalty oil received by lessee. It was provided that lessee would redeem the certificates by giving lessor credit on its obligations to lessee for the construction of tanks to store fuel oil for the navy under the agreement contained in the lease for the exchange of crude oil for fuel oil storage, or by delivering to lessor fuel oil or other products of petroleum for the use of the navy, or by cash under certain conditions. And it was agreed that the lessee, when requested by the lessor, would construct or pay the cost of constructing steel tanks necessary for such storage; that lessor would pay in oil certificates of face value equal to such cost; that in exchange for crude oil lessee would deliver fuel oil and other petroleum products for the navy at places¹ on the Atlantic Coast, the Gulf of Mexico, and at Guantanamo Bay, Cuba. Lessee agreed diligently to drill and continue operations of oil wells unless by the Secretary of the Interior

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permitted temporarily to suspend operations. And it was provided that, with the consent of the Secretary of the Interior, the lease might be terminated. By a separate agreement dated December 20, 1922, the lessee designated, and the lessor accepted, the Sinclair Pipe Line Company as the nominee of lessee to construct the pipe line, having a daily capacity of 40,000 barrels.

The supplemental agreement of February 9, 1923, relates to storage tanks to be provided by the lessee. It deals with four projects covering construction work at Portsmouth, Melville, Boston, and Yorktown. The total capacity-some expressed in tons and some in gallons-to be constructed at these places was sufficient to store 2,550,000 tons of fuel oil, 37,500 tons and 625,000 gallons of Deisel oil, 26,500 tons and 2,330,000 gallons of gasoline, 13,800 tons and 1,161,000 gallons of lubricating oil. The lessee agreed to provide the tanks and fill them in exchange for royalty oil certificates. The government was not obligated to lessee otherwise than to deliver it oil certificates for redemption in accordance with the lease, and, until the agreement was fully performed, all certificates received by the government were to be used for constructing and filing storage for fuel oil and other petroleum products. And it was further provided that upon completion of these projects other facilities for the storage of petroleum products required by the navy were to be constructed and filled by the lessee.

The evidence shows that the storage facilities to be furnished under the lease were to be complete reserve fuel stations, such as are known in the Appropriation Acts as 'fuel depots'; that the arrangement to use royalty oil to pay for such construction was made for the purpose of evading the requirement that the proceeds of the royalty oil, if sold, be paid into the Treasury, and to enable the Secretary of the Navy to locate, plan, and have constructed fuel stations that had not been authorized by

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Congress; that the approximate cost of construction so to be done on the Atlantic Coast would be at least $25,000,000, of that on the Pacific under arrangement with the Pan American Petroleum & Transport Company $15,000,000, and for the whole program-including the products to be put into these fuel depots when constructed-a little in excess of $100,000,000. The cost of the pipe line is not included in any of these figures. It was not deemed to be a facility merely for the development of the reserve, but was desired by those acting for the government for the transportation of oil obtained in that part of the country, to create competition in the oil market, and as an instrumentality for national defense in case of war.

A construction of the act authorizing the agreed disposition of the reserve would conflict with the policy of the government to maintain in the ground a great reserve of oil for the navy. Joint Resolution, approved February 8, 1924, 43 Stat. 5. It would restore to the Secretary of the Navy authority of which he had recently been deprived, to construct fuel depots without express authority of Congress. Act of August 31, 1842, 5 Stat. 577 (R. S. § 1552); Act of March 4, 1913, 37 Stat. 898. It would put facilities of the kind specified outside the operation of the general rule prohibiting the making of contracts of purchase or for construction work in the absence of express authority and adequate appropriations therefor. R. S. §§ 3732, 3733 (41 USCA §§ 11, 12 (Comp. St. §§ 6884, 6886)); Act of June 12, 1906, 34 Stat. 255 (41 USCA § 11 (Comp. St. § 6885)); Act of June 30, 1906, 34 Stat. 764 (31 USCA § 627 (Comp. St. § 6763)). It would be inconsistent with the principle upon which rests the law requiring purchase...