Thompson v. Spear

• Decision Date: 26 August 1937
• Docket Number: No. 8440.,8440.
• Citation: Thompson v. Spear, 91 F.2d 430 (5th Cir. 1937)
• Parties: THOMPSON et al. v. SPEAR et al.
• Court: U.S. Court of Appeals — Fifth Circuit

91 F.2d 430 (1937)

THOMPSON et al. v.SPEAR et al.

No. 8440.

Circuit Court of Appeals, Fifth Circuit.

July 23, 1937.

Rehearing Denied August 26, 1937.

William McCraw, Atty. Gen. of Texas, and Harry S. Pollard, W. J. Holt, Wm. Madden Hill, Earl Street, and Wm. C. Davis, Assts. to Atty. Gen. of Texas, all of Austin, Texas, for appellants.

Fred Upchurch and Willis E. Gresham, both of Austin, Tex., and James F. Gray, of Dallas, Tex., for appellees.

Before FOSTER, HUTCHESON, and HOLMES, Circuit Judges.

HOLMES, Circuit Judge.

This appeal, by members of the Railroad Commission of the state of Texas, is from a final decree confirming the title of appellees to the oil hereinafter mentioned, and granting an injunction perpetually restraining the members of said commission, their agents, and attorneys from doing any act or thing to prevent or delay the sale or transportation of 102,000 barrels of oil produced in excess of proration orders promulgated under the laws of said state.The original bill was filed by Angus Spear against Thomas D. Humphreys and others.The relief sought against Humphreys was denied and no appeal is taken therefrom.However, in his answer, Humphreys joined with Spear in seeking relief against appellants, and is joined before this court as appellee.

On May 21, 1931, Spear, being the owner of a 20-acre tract of land in Gregg county, Tex., executed an oil and gas lease to Humphreys, under which the latter drilled 15 oil wells, all capable of producing oil and gas.All of the wells produce from the common pool of what is known as the East Texas Oil field.The total investment by Humphreys was $282,000, while the interest retained by Spear was the usual one-eighth royalty in the oil and gas produced on the leased premises.The 20-acre tract is completely surrounded by oil and gas producing lands, and is only a small unit of the large area which makes up the field.

Statutes of the state of Texas authorize the Railroad Commission to determine, after notice and hearing, a quota, or daily allowable production, for each oil or gas well in the state, in conformity with the fixed policy, established by statute, of conserving these natural resources in the public interest.The allowable quota for the area, including the Spear-Humphreys tract, had been determined for 1933, 1934, and 1935, and the validity of this determination is not brought into question.Adjoining landowners and lease operators vastly overproduced from their wells, violating the orders and regulations of the Railroad Commission, and draining the oil and gas bearing strata in the vicinity of appellees' wells to the extent that, whereas, if the production had been lawful, it is certain that the wells would have continued capable of producing several hundred times their allowable production without treatment or artificial aids; but, as a result of the excessive, wasteful, and unlawful production from adjoining wells, it became necessary for appellees to treat their wells in order to produce the quota allowed by the commission.During the period when the adjoining wells were being notoriously overproduced, appellees made repeated demands upon the commission and its field representatives for protection of its lease from draining by such overproduction, and undertook to, and did, co-operate with the commission in the performance of the function of enforcement by furnishing information as to what wells were running in violation of the law, when said wells were running, going with the agents to the adjoining premises to obtain evidence of violations of the law, discovering evidence of violations by investigations independently made and furnishing the same to the commission, joining an association formed to aid and support the commission, and by buying the deficiency warrants of the state when the commission was without funds properly to perform its functions.While the neighboring wells were overproducing, Spear and Humphreys, for the purpose of protecting their interests in the oil to whatever extent they could, entered into an agreement whereby Spear advanced $24,000 for the construction of two storage tanks, each to have a capacity of 55,000 barrels of oil, the tanks to be filled with oil produced from the leased premises in excess of the daily allowable production fixed by the commission, and thereafter to be disposed of when conditions were favorable, the proceeds to be applied, first to the repayment of Spear of the advance for the construction of the tanks, the remainder to be divided equally between them.This agreement was executed to the extent of constructing the tanks and running the oil to fill them.

The failure of the Railroad Commission to function effectively was not due to any evil motive or willful discrimination, either by its members or agents, but was caused by the inherent difficulty in enforcing the conservation statute with inadequate funds, particularly in view of the mild penalties provided in the act.A statement of the difficulties besetting enforcement is not necessary, but the condition is, in part, illustrated by the attitude and conduct of appellees.The maximum penalties of $1,000 for each act of violation for each day of the continuation thereof, when applied to the $102,000 worth of oil produced by appellees, amount in the aggregate to $10,000.So, whatever appellees' motives were at the time, assuming that the tanks would be worthless after the removal of the oil, the unlawful production of the oil would produce a profit of $68,000 after the payment of penalties.Injunctive procedure in aid of enforcement had proven of little value to the commission, and, as some of the neighboring leases and wells represented such large investments as to be unprofitable unless produced in excess of quotas, a situation was created where the violation of the state laws, and regulations thereunder, was more common than observance, the sovereign power of the state being taxed to the extent of requiring the declaration of martial law for a time.

On May 11, 1935, the Legislature of the state of Texas amended its conservation laws (ActsTex.1935, c. 246Vernon'sAnn.Civ.St. art. 6066a), providing new forms of procedure, new penalties, and a more effective agency for their enforcement.Among other things, the act provided that "all unlawful oil and unlawful products, regardless of the date of production or manufacture thereof, are hereby declared to be a nuisance and shall be forfeited to the State as hereinafter provided" (section 10(a), and defined "unlawful oil" as meaning oil which "has been produced within the State of Texas from any well or wells in excess of the amount allowed by any order of the Railroad Commission, and oil which has been produced within said State in violation of any law of said State or in violation of any order of the Commission" (section 1(d).The law further provides for judicial seizure and forfeiture of unlawful oil to the state of Texas.Section 10, art. 6066a, Vernon's Ann.Civ.St.Tex.This legislation was passed subsequent to and consonant with the so-called Connally Hot Oil Act, effective February 22, 1935(15 U.S.C.A. § 715 et seq.), under which appropriate enforcement agencies were established.The two agencies began to function, and, as a result of the more stringent provisions of the two acts, as well as the co-operative efforts of the two agencies, many cases were made for injunctions, forfeitures, and criminal prosecutions, so that in a comparatively short time orderly government replaced chaotic disorder.

On November 27, 1936, appellee Spear filed his original bill of complaint charging that appellee Humphreys had done nothing toward marketing the oil in storage; that both appellees were prevented from applying to the commission and to the Federal Tender Board for permission to remove said oil in commerce, or to market the same, by regulations of the commission which required the execution of an affidavit that the oil had been produced in accordance with its rules, regulations, and...