Oil Lease Service, Inc. v. Stephenson

• Decision Date: 14 July 1958
• Citation: 162 Cal.App.2d 100,327 P.2d 628
• Parties: , Blue Sky L. Rep. P 70,392 OIL LEASE SERVICE, INC., a corporation, Petitioner and Appellant, v. W. H. STEPHENSON, Commissioner of Corporations, Defendant and Respondent. Civ. 22725.
• Court: California Court of Appeals Court of Appeals

Page 628

327 P.2d 628

162 Cal.App.2d 100, Blue Sky L. Rep. P 70,392

OIL LEASE SERVICE, INC., a corporation, Petitioner and Appellant, v. W. H. STEPHENSON, Commissioner of Corporations, Defendant and Respondent.

Civ. 22725.

District Court of Appeal, Second District, Division 1, California.

July 14, 1958.

Rehearing Denied Aug. 1, 1958.

Hearing Denied Sept. 10, 1958.

Ellis D. Reiter, Los Angeles, Thomas J. Kelley, Beverly Hills, R. S. Jones, Los Angeles, for appellant.

Edmund G. Brown, Atty. Gen., Lee B. Stanton, Deputy Atty. Gen., for respondent.

LILLIE, Justice.

Petitioner appeals from a judgment denying a petition for writ of mandate.

On November 8, 1954, the corporations commissioner issued a desist and refrain order against petitioner directing it not to deal in, or sell, offer or negotiate for the sale of, any securities consisting of certificates of interest in oil, gas or mining titles or leases.

After a hearing before the commissioner, the order was affirmed and in paragraph IV of his findings of fact the commissioner found:

'That Respondent offers to the public, through advertising in Los Angeles newspapers and its Oil News Letters, United States Government Oil and Gas Leases; that it receives from those members of the public who become its clients, authorization to acquire for them such leases upon a specified number of acres of land which is not described other than by the county and state in which it is located and by a tract number assigned by Respondent to an area within a certain Township and Range in which it can acquire such leases; that Respondent recommends 160 acre leases although leases of 80 acres, 320 acres and 640 acres are also offered; that pursuant to Government regulations the minimum oil and gas lease which may be obtained from the United States Government is 640 acres; that when respondent receives from a client an authorization to acquire for such client a United States Government Oil and Gas Lease of less than 640 acres, such as 160 acres, in an area described as above stated, Respondent secures in the name of its secretary a lease on 640 acres selected by it in the area chosen by its client and thereafter causes its secretary to assign to its client its interest in 160 acres specifically described and chosen by Respondent out of the 640 acres so acquired by it in the name of its secretary.'

Thereafter petitioner filed its petition for writ of mandate. No evidence was taken, but a transcript of the testimony at the administrative hearing, the original exhibits and the complete record of the administrative proceedings were filed with the court below. It denied the petition; found the commissioner's findings were supported by substantial evidence and affirmed them; adopted paragraph IV thereof; and expressly concluded that in its transactions petitioner would be 'offering, issuing and dealing in 'certificates of interest in oil, gas or mining titles and leases' for value' which constitute securities under the Corporations Code; and that its transactions would be unfair, unjust and inequitable to persons solicited therefor.

Although the issue before this court is whether there is substantial evidence in the light of the entire record to support the trial court's findings, the basic legal question is whether appellant was engaged in the business of 'selling, offering for sale, or negotiating for the sale, or dealing in' securities.

The testimony of George Muser, appellant's president, the exhibits and the respondent's return by way of answer to the alternative writ of mandate, not denied or contradicted by proof, establish the business operations of appellant corporation. Its business consisted of obtaining from the government, for members of the public, government oil and gas leases in varying acreage up to 640 acres on unproved government land. Under federal regulations, the minimum oil and gas lease which may be obtained from the government by an individual is 640 acres. The manner in which appellant obtained leases on acreage less than 640 acres was described by it in newspaper advertising, brochures and an Oil News Letter, by which it offered its various transactions to the public.

The Oil News Letter, for example, contained two sketch maps showing tracts Nos. 38-41 in Emery and Grant Counties, Utah, which were open for leasing. In referring to these counties appellant represented therein that:

'Leases are already changing hands at very fancy prices with substantial overriding royalties being held by the original owner. There is little doubt but that many Government lease holders will become wealthy, not only from cash bonuses they may receive, but also from monthly royalty checks they will receive because of the overriding royalties they hold.

'It is our sincere opinion that now is the time for you to acquire a U. S. Government Oil & Gas Lease in either Grand or Emery County, Utah, ahead of the big drilling campaign. On the maps of Emery or Grand Counties, on pages 2 and 3 of this letter, we have shown certain areas where we can acquire for you Oil & Gas Leases on U. S. Government land. Our regular schedule of fees for this service is as follows:

                640 Acres ..... $750.00               160 Acres ....... $250.00
                320 Acres .....  450.00                80 Acres ........ 130.00
                

'If you wish, you can take advantage of our time-payment plan which is 20% down and 20% per month for four months. Remember, now is the time to acquire Government Oil & Gas Leases in southeastern Utah. Get in ahead of the drill while opportunities for big profits exist.' (Emphasis added.)

On page 5 thereof, the Letter continued

'Our business is serving clients and acquiring for them U. S. Government Oil Leases or assignments in areas that are considered favorable for the production of oil or gas or both. We gather information regarding drilling activities, new fuel discoveries, leasing activities, etc., in areas that seem to be well located for future production, also check the records to learn what companies and individuals are leasing and where these activities are taking place. From all of this and other information we locate areas that appear favorable for future development. We do all the work necessary to acquire for you a U. S. Government Oil and Gas Lease in your name, and our fees shown below include payment of all Government charges for the first three years. * * * A question frequently asked of us is, how much money may I expect to make out of a U. S. Government Oil & Gas Lease? This question is, of course, impossible to answer definitely. However, there are constant examples which we can cite which will show what the possibilities are.' (Emphasis added.)

The Letter then referred to situations in other states in which large profits were made by persons who bought oil leases in known oil structures. Such reference sought to identify the oil land in the instant case with known oil structures in other states while the noncompetitive leases at bar specifically apply 'only to lands not within a known geologic structure of a producing oil or gas field.'

Another brochure entitled 'U. S. Government Oil and Gas Leases' published by appellant is of the same tenor. It refers to the purchasers as 'investors' and discusses at length the large profits which they could anticipate.

The lease recommended by appellant, and most commonly sold, was the 160-acre lease. Appellant's profits constituted the difference between what it paid the government for the lease and what it charged its purchaser--for example, on an 80-acre lease the cost was $52.50, the charge $130, and the profit $77.50; on a 640-acre lease the cost was $330, the charge $750, and the profit $420.

The operations of appellant were flexible, the modus operandi varying with the circumstances. Of the 450 transactions closed by it, approximately six different types of operation were used. They differed in detail, but common to all were the inducements. By way of advertising and brochures, appellant induced the prospective purchaser to buy an assignment of an interest in an oil lease as an investment in potential oil land representing to him that it would, for a fee, do all the work of selecting the best lease within a general area, using its expert knowledge, and secure the lease from the government. The land was located in unproved territory in another state. The purchaser, who had neither the ability nor the money to prospect for oil on his own account, was to do nothing more than pay the 'fee.' It was the plan, scheme and intention of appellant to induce the prospective purchaser to part with his money upon the expectation, created by its representations, that he would be able at some future time to assign his interest to some oil producing company for a large cash bonus and profitable overriding royalties when and after oil was actually discovered on the land. Such event would occur as the result of drilling by an unidentified oil company, or companies.

Of the six types of transactions used the first permitted the purchaser to choose the location of the lease. Appellant discouraged this practice and it was seldom used. In the few instances it was employed the prospective purchaser sent to appellant an authorization slip directing it to secure for him a government oil and gas lease on certain described government land. Upon receipt of this, appellant issued to him a signed confirmation slip confirming receipt of the authorization and describing the section proposed to be leased to him. Then appellant secured a lease thereon direct from the government in his name. A variation of this operation occurred when the purchaser authorized appellant to secure a 640-acre lease in a certain numbered tract containing 23,000 acres in a named county. Appellant then issued the confirmation slip to him and, purportedly using its superior knowledge and skill, selected the best and most promising 640-acres in the tract upon which to...