1. The evidence sustains findings that the making of the leases
and contracts involved herein was dominated by the Secretary of the
Interior, acting collusively with the representative of the two
defendant oil companies; that the Secretary of the Navy took no
active part in the negotiations, and that the leases and contracts
were procured by corruption and fraud. P.
273 U. S.
498.
2. The finding that the Secretary of the Navy signed the
documents under misapprehension and without full knowledge of their
contents is not sustained. An opposite finding is required by the
record. P.
273 U. S.
498.
3. In a suit by the United States to annul contracts made
through its officials with private corporations the
bona
fides of which had been investigated by a committee of the
Senate, statements made to the committee by the companies'
representative, who voluntarily appeared in defense of their
interests, showing that he gave money to one of the officials who
dominated the procurement, and participated in the execution of the
contracts, were admissible against the defendant corporations in
proof of fraud. P.
273 U. S.
498.
So
held where he who made the statements was the
representative of both companies in procuring the contracts; was at
that time president of one company and chairman of the board of
directors of the other, having been its president also; controlled
both companies through stock ownership, and was chairman of both
boards of directors when he testified.
Page 273 U. S. 457
4. A lease of the land of a naval reserve and related contracts,
which were procured by private corporations as the result of
collusion and corrupt conspiracy between their representative and a
high government official who, under an executive order, dominated
the administration of the reserve, may be avoided by the United
States without regard to whether money paid the official by the
representative constituted bribery as defined in the Criminal Code,
or whether the official was financially interested in the
transaction, or the United States suffered or was liable to suffer
any financial loss or disadvantage as a result of the contracts and
leases. It is enough if the official's interest and dominating
influence were corruptly obtained. It was shown that he so favored
the lease and contracts that he could not loyally serve the
interests of the United States. P.
273 U. S.
500.
5. The Secretary of the Navy was not empowered by the
Appropriation Act of June 4, 1920, to enter into contracts
involving the leasing of all the unleased land of a naval petroleum
reserve, and providing for the use of the crude oil, to be derived
by the United States as royalties under such leases, for the
acquisition of extensive storage facilities filled with fuel oil
for the Navy. Pp.
273 U. S.
501-502,
273 U. S.
508.
6. Under the proviso of the Naval Appropriation Act of June 4,
1920, the authority of the Secretary of the Navy to provide
facilities in which to "store" naval reserve petroleum or its
products did not extend beyond those that might be provided by use
of the money made available by that act. P.
273 U. S.
509.
7. While the general principles of equity are applicable in a
suit by the United States to secure the cancellation of a
conveyance or the rescission of a contract, they will not be
applied to frustrate the purpose of its laws or to thwart public
policy. P.
273 U. S.
505.
8. In this suit brought by the United States to set aside
illegal and fraudulent leases and contracts which were made for the
purpose of circumventing its laws and defeating its policy for the
conservation of its naval petroleum reserves, the United States
does not stand on the footing of an individual suing to annul a
deed for fraud; its position is not that of a mere seller or lessor
of land; the purpose is to vindicate the policy mentioned, the
financial element being secondary; the defendants are wrongdoers,
and have no equity to reimbursement for their expenditures as a
condition to the granting of the relief sought by the government.
Pp.
273 U. S. 503,
273 U. S.
508.
Page 273 U. S. 458
9. In a suit by the United States to set aide for illegality and
fraud leases made, in contravention of the policy of conserving
naval petroleum reserves, and contracts made, as part of the same
transaction, for erection of oil storage facilities for the Navy,
not authorized by Congress, on land of the United States and for
storing them with fuel oil, equity does not exact as a condition to
the relief prayed that the defendants be compensated for the cost
to them, or the value to the government, of the construction work
performed or fuel oil furnished under the contracts, or for the
amount they expended in drilling or operating oil wells or in other
improvements on the leased premises, but their compensation, if
any, must depend on Congress. Pp.
273 U. S. 503,
273 U. S.
508.
9 F.2d 761 affirmed.
Certiorari (27 U.S. 640) to a decree of the circuit court of
appeals which affirmed in part and in part reversed a decree of the
district court (6 F.2d 43) in a suit by the United States to cancel
two leases of land in a naval petroleum reserve and two contracts
for erecting storage facilities and supplying fuel oil for the
Navy. The bill also prayed an account. The decree of the district
court cancelled the leases and contracts for fraud and illegality,
but, in the accounting, allowed credits to the two corporations for
their expenditures under the leases and contracts, with interest.
The circuit court of appeals denied such credits, but in other
respects affirmed the decree.
Page 273 U. S. 485
MR. JUSTICE BUTLER delivered the opinion of the Court.
This suit was brought by the United States in the Northern
Division of the Southern District of California against the
petitioners, Pan-American Petroleum and Transport Company and
Pan-American Petroleum Company. The former will be called the
Transport Company, and the latter the Petroleum Company. The relief
sought is the cancellation of two contracts with the Transport
Company, dated April 25, and December 11, 1922, and two leases of
lands in Naval Petroleum Reserve No. 1, to the Petroleum Company,
dated June 5 and December 11, 1922, an injunction, the appointment
of receivers, and an accounting. The complaint alleges that the
contracts
Page 273 U. S. 486
and leases were obtained and consummated by means of conspiracy,
fraud, and bribery, and that they were made without authority of
law. Receivers were appointed to take possession of and operate the
properties pending the suit. At the trial, the court heard much
evidence and later made findings of fact, stated its conclusions of
law, announced an opinion (6 F.2d 43), and entered its decree. It
adjudged the contracts and leases void and ordered them cancelled;
it directed the Petroleum Company to surrender the lands and
equipment, and stated an account between the United States and each
of the companies. The Transport Company was charged the value of
petroleum products received by it and the amount of profits derived
upon their sale, and was given credit for the actual cost of
construction work performed and of fuel oil delivered under the
contracts. The Petroleum Company was charged the value of the
petroleum products taken under the leases and given credit for
actual expenditures in drilling and operating wells and making
other useful improvements. Interest was added to each of the items.
The companies appealed to the circuit court of appeals, and the
United States took a cross-appeal. That court affirmed the decree
so far as it awards affirmative relief to the United States, and
reversed that part which gives credit to the companies. 9 F.2d
761.
Under R.S. §§ 2319, 2329, and the Act of February 11, 1897, c.
216, 29 Stat. 526, public lands containing oil were open to
settlement, exploration and purchase. Exploration and location were
permitted without charge, and title could be obtained for a nominal
amount.
United States v. Midwest Oil Co., 236 U.
S. 459,
236 U. S. 466.
Prior to the autumn of 1909, large areas of public land in
California were explored; petroleum was found, patents were
obtained, and large quantities of oil were taken. In September of
that year, the Director of the Geological Survey
Page 273 U. S. 487
reported that, at the rate oil lands in California were being
patented, all would be taken within a few months, and that, in view
of the increased use of fuel oil by the Navy, there appeared to be
immediate need for conservation. Then the President, without
specific authorization of Congress, by proclamation withdrew from
disposition in any manner specified areas of public lands in
California and Wyoming amounting to 3,041,000 acres. By the Act of
June 25, 1910, c. 421, 36 Stat. 847, Congress expressly authorized
the President to withdraw public lands containing oil, gas and
other minerals. An executive order of July 2, 1910, confirmed the
withdrawals then in force. By a later order, September 2, 1912, the
President directed that some of these lands
"constitute Naval Petroleum Reserve No. 1, and shall be held for
the exclusive use or benefit of the United States Navy until this
order is revoked by the President or by Act of Congress."
This reserve includes all the lands involved in this suit. By a
similar order, December 13, 1912, the President created the Naval
Petroleum Reserve No. 2.
The Leasing Act of February 25, 1920, c. 85, 41 Stat. 437,
regulates the exploration and mining of public lands, and
authorizes the Secretary of the Interior to grant permits for
exploration and make leases covering oil and gas lands, exclusive
of those withdrawn or reserved for military or naval purposes. The
Act of June 4, 1920, c. 228, 41 Stat. 812, 813, appropriated
$30,000 to be used, among other things, for investigating fuel for
the Navy and the availability of the supply allowed by naval
reserves in the public domain. It 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 oil and gas products thereof,
and those from all royalty
Page 273 U. S. 488
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:
Provided
further, that this appropriation shall be reimbursed from the
proper appropriations on account of the oil and gas products from
said properties used by the United States at such rate, not in
excess of the market value of the oil, as the Secretary of the Navy
may direct."
March 5, 1921, Edwin Denby became Secretary of the Navy and
Albert B. Fall Secretary of the Interior. May 31, 1921, the
President promulgated an executive order purporting to commit the
administration and conservation of all oil and gas bearing lands in
the reserves to the Secretary of the Interior, subject to the
supervision of the President.
The contract, dated April 25, 1922, was executed on behalf of
the United States by the Acting Secretary of the Interior and by
the Secretary of the Navy. The Transport Company agreed to furnish
at the naval station at Pearl Harbor, Hawaii, 1,500,000 barrels of
fuel oil and deliver it into storage facilities there to be
constructed by the company according to specifications of the Navy.
The company was to receive its compensation in crude oil to be
taken from the reserves. The quantity, on the basis of the posted
field prices of crude oil prevailing during the life of the
contract, was to be the equivalent of the market value of the fuel
oil and also sufficient to cover the cost of the storage
facilities. The United States agreed to deliver to the company at
the place of production month by month all the royalty oil
furnished by lessees in Reserves Nos. 1 and 2 until all claims
under the contract were satisfied. It was stipulated that, if
production of crude oil
Page 273 U. S. 489
should decrease so as unduly to prolong performance,
"then the government will, in the discretion of the Secretary of
the Interior, grant additional leases on such lands as he may
designate in Naval Petroleum Reserve No. 1 as shall be sufficient
to maintain total deliveries of royalty oil under this contract at
the approximate rate of five hundred thousand barrels (500,000) per
annum."
And, by article XI of the contract, it was agreed that if.
during the life of the contract. such additional leases should be
granted within specified areas,
"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 . . . , 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 . . . , 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."
The lease of June 5, 1922, was signed by the Assistant Secretary
of the Interior. It was made in accordance with a letter of April
25, 1922, signed by the Acting Secretary of the Interior and the
Secretary of the Navy, and sent to J. J. Cotter, who was
vice-president of the Transport Company. It covered the quarter
section described in the letter. This lease was assigned to the
Petroleum Company.
The contract dated December 11, 1922, is signed for the United
States by the Secretary of the Interior and the Secretary of the
Navy. It declares that it is desired to fill storage tanks at Pearl
Harbor promptly as they are completed and also to procure
additional fuel oil and other petroleum products in storage there
and elsewhere; that the Secretary of the Navy requested the
Secretary of the
Page 273 U. S. 490
Interior as administrator of the naval petroleum reserves to
arrange for such products in storage and to exchange therefor
additional royalty crude oil, "the probable cost of the additional
products and storage immediately planned for being estimated at
$15,000,000 more or less;" that this cannot be done on the basis of
exchange for the crude oil coming to the government under the
present leases; that, under the contract of April 25, 1922, the
company is granted preferential right to leases to certain lands in
Naval Reserve No. 1, and that the company was planning to provide
refinery facilities at Los Angeles, together with pipelines from
the field to the refinery and docks, and to erect storage having
capacity of 2,000,000 barrels or more. The company agreed to
furnish, as directed by the Secretary of the Interior, the fuel oil
in storage at Pearl Harbor covered by the earlier contract; to
construct for actual cost additional storage facilities there, as
required, up to 2,700,000 barrels; to furnish without charge, other
petroleum products in the proposed storage as and when completed on
the basis of market prices plus transportation cost at going rates;
to furnish without charge, until expiration of the contract,
storage for 1,000,000 barrels of fuel oil at Los Angeles; to fill
it with fuel oil for the Navy at such time as government royalty
oil should be available for exchange, and to bunker government
ships from such oil at cost; to maintain for 15 years subject to
the demands of the Navy 3,000,000 barrels of fuel oil in the
company's depots at Atlantic Coast points; to furnish crude oil
products and storage facilities at other points, designated by the
government, when sufficient crude oil has been delivered to satisfy
the Pearl Harbor contract; to sell the Navy at 10 percent less than
market price additional available fuel oil produced from the
reserves and manufactured products from its California refineries;
to credit the Navy for crude oil at published prices and for gas
and casinghead gasoline at prices fixed
Page 273 U. S. 491
in the leases, and to satisfy any surplus credits of the
government by delivery of fuel oil or other petroleum products, by
construction of additional storage facilities, or by payment in
cash as the government might elect. The United States agreed to
deliver to the company in exchange all royalty oil, gas and
casinghead gasoline produced on Reserves Nos. 1 and 2 until its
obligations were discharged and, in any event, for 15 years after
the expiration of the contract of April 25, 1922 (which was without
specified time limit), and to lease to the company all the unleased
lands in Reserve No. 1.
The lease of December 11, 1922, is signed for the United States
by the Secretary of the Interior and the Secretary of the Navy. It
covers all unleased lands in Reserve No. 1, but with a provision
that no drilling shall be done on approximately the western half
without the lessor's consent. It runs for 20 years and so long
thereafter as oil or gas is produced in paying quantities. The
royalties range from 12 1/2 to 35 percent.
A joint resolution adopted by the Senate and House of
Representatives and approved by the President February 8, 1924, 43
Stat. 5, stated that it appeared from evidence taken by the
committee on public lands and survey of the Senate that the
contract of April 25, 1922, and the lease of December 11, 1922,
were executed under circumstances indicating fraud and corruption,
without authority on the part of the officers purporting to act for
the United States and in defiance of the settled policy of the
government to maintain in the ground a great reserve supply of oil
adequate to the needs of the Navy. It declared the contracts and
leases to be against public interest, and that the lands should be
recovered and held for the purposes to which they were dedicated.
And it authorized and directed the President to cause suit to be
prosecuted for the annulment and cancellation of the lease and all
contracts incidental and supplementary thereto,
Page 273 U. S. 492
and to prosecute such other action or proceedings, civil and
criminal, as might be warranted.
The findings contain what in abridged substance follows:
E. L. Doheny controlled both companies. Fall as active in
procuring the transfer of the administration of naval petroleum
reserves from the Navy Department to the Interior. And, after the
executive order was made, he dominated the negotiations that
eventuated in the contracts and leases. From the inception, no
matter of policy or action of importance was determined without his
consent. Denby was passive throughout, and signed the contracts and
lease and the letter of April 25, 1922, under misapprehension and
without full knowledge of their contents. July 8, 1921, Fall wrote
Doheny:
"There will be no possibility of any further conflict with Navy
officials and this department, as I have notified Secretary Denby
that I should conduct the matter of naval leases under the
direction of the President, without calling any of his force in
consultation unless I conferred with himself personally upon a
matter of policy. He understands the situation, and that I shall
handle matters exactly as I think best and will not consult with
any officials of any bureau in his department, but only with
himself, and such consultation will be confined strictly and
entirely to matters of general policy."
After that, Doheny and his companies acted upon the belief that
Fall had authority to make the contracts and leases. Doheny and
Fall conferred as to a proposal to be made by the Transport Company
whereby it should receive from the United States royalty oil for
constructing storage facilities at Pearl Harbor and filling them
with fuel oil. They discussed the matter of granting other leases
in Reserve No. 1. They also discussed a petition of the Petroleum
Company for reduction of royalties under an existing lease. Fall
and Admiral John K. Robison, personal
Page 273 U. S. 493
representative of the Secretary of the Navy in naval reserve
matters, agreed that the proposed contract should be kept secret,
so that Congress and the public should not know what was being
done. (But it is to be said that Robison's motives in this were not
the same as Fall's.)
November 28, 1921, Doheny submitted to Fall a proposal stating
that, in accordance with a suggestion from Fall, he had made
inquiries as to cost of constructing storage for 1,500,000 barrels
of fuel oil at Pearl Harbor. He gave in detail figures relating to
such cost, the price of crude oil in the field and of fuel oil at
Pearl Harbor, and stated the total amount of crude oil necessary to
pay for the tanks and fuel oil "on the basis of our being paid for
both tanks and oil in royalty crude oil produced from lands within
the naval reserves and to be leased to us." The letter
concluded:
"I suppose you will turn this matter over to First Assistant
Secretary Finney, who, with Rear Admiral Robison, may arrange the
details of it during your absence, and as I also expect to be
absent, I am confidentially furnishing Mr. Cotter with the
information so that he can intelligently discuss the matter with
Mr. Finney."
And the next day Fall wrote Robison:
"Mr. Cotter will wait upon you with data, etc., with relation to
oil tanks and royalty oils in connection with Pearl Harbor demands.
I have asked him also to hand you, for your inspection, the
original of a letter from Colonel Doheny addressed to myself,
containing a resume of the data. Should you think best to accept
this proposition then, of course, it would be necessary, in my
judgment, to turn over to Col. Doheny, if we can do so, leases upon
further wells or area in the naval reserve in which he is now
drilling. If this is done, it must be understood that the royalty
must be made less than are the present royalties being paid by the
Midway and Pan-American."
The letter stated that the gas pressure was lessening, and that
the companies were suffering loss in the payment of the
Page 273 U. S. 494
55 percent royalty:
"If you approve the proposition, will you kindly indicate to me
such approval by simple endorsement upon Col. Doheny's letter to
myself, signed by yourself. Your simple O.K. will be
sufficient."
Doheny had agreed to advance $100,000 to Fall as and when he
should need it. November 30, at Fall's request, Doheny sent him
$100,000 in currency. The money was obtained in New York on the
check of Doheny's son who carried it to Washington and gave it to
Fall, and Fall sent to Doheny by the son a demand note for
$100,000. No entry of the advance was made in the accounts of
Doheny or the petitioners. Nothing has been paid on account of
principal or interest. At that time, it was understood between
Doheny and Fall that the latter need not repay it in kind. Doheny
intended, if Fall did not dispose of a certain ranch in New Mexico,
to cause the Transport Company to employ him at a salary sufficient
to enable him, out of one-half of it, to pay off the amount in five
of six years, and he knew that Fall expected to leave the service
of the government and accept employment with one of his companies.
A few weeks after it was given, Doheny tore Fall's signature off
the note so that it would not be enforceable in the hands of
others. December 1, Fall gave instructions to subordinates that the
petition of the petroleum Company for reduction of royalties should
not be granted, but that, as relief, the company be given another
lease at regulation royalties.
Long in advance of receipt of bids, Fall knew that the Transport
Company would offer to construct storage facilities at cost, and to
fill them with fuel oil in exchange for royalty oil and for the
assurance that other leases on lands in Reserve No. 1 would be
granted to it. Others were not advised that the United States would
consider a bid conditioned on assurance to the bidder of other
leases or preferential right to leases. Due to the interest of
Fall, the Transport Company had opportunities for conference
with
Page 273 U. S. 495
and advice from those acting for the United States which were
not given to others. There were five other oil companies with which
officers or employees of the United States conferred as to the
proposed contract. Fall knew that two of these would not bid
because they considered the proposed contract illegal, that two of
the others had not been invited to bid, and that the other one
would refuse to bid unless authority for the contract should be
obtained from Congress. Invitation for proposals was sent two
construction companies, but Fall understood and stated that it was
impossible for either of them to bid because payment had to be made
in royalty oil. April 13, Fall left Washington for Three Rivers,
New Mexico. Before leaving, he gave instructions that no bids
should be accepted or contract awarded without his consent. The
bids were opened April 15. Four were received; one was conditioned
upon congressional approval of the contract; one did not cover the
construction work, and applied only to furnishing the fuel oil; the
other two proposals were from the Transport Company; one of them,
designated A, was in accordance with the invitation for bids, but
the other, called B, was not. The latter named the smaller lump sum
in barrels of crude oil; it stated that, if actual cost was less
than a specified amount, the saving should be credited to the
government, and it was conditioned upon granting the bidder
preferential right to become lessee in all leases that thereafter
might be granted by the United States for recovery of oil and gas
in Reserve No. 1. On April 18 Edward C. Finney, Acting Secretary of
the Interior, telegraphed Fall that certain officials and employees
of the United States recommended acceptance of proposal B; on the
same day, Fall consented by telegram, and Finney sent a letter to
the company purporting to award the contract to it. Cotter then
stated that the Transport Company did not desire to make the
contract unless the United States would agree, within 12
Page 273 U. S. 496
months, to grant the company a lease or leases of lands in
Reserve No. 1. He also raised the question whether the executive
order of May 31, 1921, had any legal force, and refused to permit
the company to make the contract unless Denby should sign as
Secretary of the Navy. April 20, Arthur W. Ambrose of the Bureau of
Mines as sent from Washington to Three Rivers with the papers in
the case. He was instructed to consult Fall as to whether Denby
should be made a party to the contract. April 23, Fall by telegram
agreed that Denby should be made a party, and directed Finney to
execute the contract for the Department of the Interior. While it
is not clearly shown that Ambrose took with his a draft of the
letter of April 25, signed by Denby and Finney and sent to Cotter,
he was instructed to, and did, consult Fall concerning it. That
letter declares that the company's proposals were the lowest
received by the government. After stating that, expressed in money,
proposal B is the better by $235,184.40, and by the possible saving
by performance for less than the estimated cost of construction, it
said:
"It is evident from our conversation of April 18 that your
interpretation of preferential right was to the effect that the . .
. Transport Company desired the right to lease certain specified
land in naval petroleum reserve No. 1, as well as preferential
right to lease other land in naval petroleum reserve No. 1 to the
extent described in article XI of contract. It is also my
understanding from your conversation that, unless the . . .
Transport Company could get a lease to certain lands, your company
would not desire to enter into a contract under the terms outlined
in proposal (B), and preferred the government would accept proposal
(A)."
The letter then stated that the department favored proposal B,
and reiterated its stated advantages over the other proposal. Then
it said:
"In order that the government may take advantage of a contract
embodying the terms outlined in proposal (B), I wish to advise you
that
Page 273 U. S. 497
the Department of the Interior will agree to grant to the . . .
Transport Company within one year from the date of the delivery of
a contract relative to the Pearl Harbor project leases to drill the
following tracts of land."
The letter specified the quarter section covered by the lease of
June 5, 1922, and an additional strip, and stated that the
royalties to be required would not be greater than specified rates
ranging from 12 1/2 to 35 percent. The preferential right was
inserted to prevent competition. The assurance that additional
leases would be given was not necessary or required under proposal
B.
After the making of the contract of April 25, the posted field
price of crude oil declined rapidly. In the autumn of 1922, the
Transport Company and Doheny were in correspondence or consultation
with Fall for the purpose of at once securing additional leases in
Reserve No. 1. Doheny submitted a proposition to Fall which the
latter delivered to his subordinates with his favorable
recommendation. Later Doheny enlarged the proposition, and there
followed negotiations concerning the proposed lease. Doheny and
Fall agreed upon a schedule of royalties. The lease of December 11
was arranged without competition of any kind. Plans for the
proposed construction work had not been prepared. Before the
contract and lease were made, Fall and others in his department
stated to persons making inquiries that it was not the intention to
make leases or to drill in that reserve. The danger of drainage had
been eliminated by agreement between the United States and oil
companies operating in the vicinity that no drilling should be done
by either except on six months' notice to the other.
The district court concluded that the contracts and leases were
obtained by corruption and fraud. On their appeal, petitioners
challenged practically all the findings of the trial court. The
circuit court of appeals, after
Page 273 U. S. 498
stating the issue and the substance of the facts found and
conclusions reached below, said:
"We find no ground for disturbing the findings of fact which we
deem essential to the decision of he case, and, while the evidence
may be insufficient to support certain contested findings, the
disputed facts, in view of our conclusions upon the law applicable
to the case, become of little importance."
The petitioners here argue that the Secretary of the Navy did in
fact exert the authority conferred by the Act of June 4, 1920, and
that Fall did not dominate the making of the contracts and leases;
that it was not proved by any evidence competent or admissible
against the companies that Doheny gave Fall $100,000; that the
giving of the money did not affect the transaction; that it was a
loan, and not a bribe, and that the record does not sustain the
conclusion of the district court.
We have considered the evidence, and we are satisfied that the
findings as to the matters of fact here controverted are fully
sustained, except the statement that Denby signed the contracts and
leases under misapprehension and without full knowledge of the
contents of the documents. As to that, the record requires an
opposite finding. Under the Act of June 4, 1920, it was his
official duty to administer the oil reserves; he was not called as
a witness, and it is not to be assumed that he was without
knowledge of the disposition to be made of them or of the means
employed to get storage facilities and fuel oil for the Navy. He is
presumed to have had knowledge of what he signed; there are direct
evidence and proven circumstances to show that he had. But the
evidence sustains the finding that he took no active part in the
negotiations, and that Fall, acting collusively with Doheny,
dominated the making of the contracts and leases.
The finding that Doheny caused the $100,000 to be given to Fall
is adequately sustained by the evidence.
Page 273 U. S. 499
Early in 1924, during the investigation of these contracts and
leases by the Senate committee, Doheny voluntarily appeared as
witness and there gave testimony for the purpose of explaining the
money transaction between him and Fall at the time the initial
contract was being negotiated. At the trial of this case, over
objections of the companies, his statements before the committee
were received in evidence. Petitioners insist that they were not
admissible. But Doheny acted for both companies when the contracts
and leases were negotiated. He controlled the voting power of one
that owned all the shares of the other. He was President of the
Petroleum Company up to July 24, 1922, and then became chairman of
its board. He was President of the Transport Company until December
7, 1923, when he became chairman of its board. He was chairman of
both when he testified. There is no evidence that his control over
or authority to act for these companies was less in 1924, when he
appeared for them before the committee, than it was in 1921 and
1922, when he negotiated and executed the contracts and leases. The
companies were much concerned as to the investigation lest it might
result in an effort to set aside the transaction. The hearing
before the committee was an occasion where it was proper for them
to be represented. Doheny had acted for them from the inception of
the venture. The facts and circumstances disclosed by the record
justified the lower courts in holding that, when he testified
before the committee, he was acting for the companies within the
scope of his authority. His statements on that occasion are
properly to be taken as theirs, and are admissible in evidence
against them.
Chicago v.
Greer, 9 Wall. 726,
76 U. S. 732;
Xenia Bank v. Stewart, 114 U. S. 224,
114 U. S. 229;
Fidelity & Deposit Co. v. Courtney, 186 U.
S. 342,
186 U. S.
349-351;
Aetna Indemnity Co. v. Auto-Traction
Co., 147 F. 95, 98;
Joslyn v. Cadillac Co.,
Page 273 U. S. 500
177 F. 863, 865;
Chicago, Burlington & Quincy R. Co. v.
Coleman, 18 Ill. 297, 298.
The facts and circumstances disclosed by the record show clearly
that the interest and influence of Fall, as well as his official
action, were corruptly secured by Doheny for the making of the
contracts and leases; that, after the executive order of May 31,
1921, Fall dominated the administration of the naval reserves, and
that the consummation of the transaction was brought about by means
of collusion and corrupt conspiracy between him and Doheny. Their
purpose was to get for petitioners oil and gas leases covering all
the unleased lands in the reserve. The making of the contracts was
a means to that end. The whole transaction was tainted with
corruption. It was not necessary to show that the money transaction
between Doheny and Fall constituted bribery as defined in the
Criminal Code, or that Fall was financially interested in the
transaction, or that the United States suffered or was liable to
suffer any financial loss or disadvantage as a result of the
contracts and leases. It is enough that these companies sought and
corruptly obtained Fall's dominating influence in furtherance of
the venture. It is clear that, at the instance of Doheny, Fall so
favored the making of these contracts and leases that it was
impossible for him loyally or faithfully to serve the interests of
the United States. The lower courts for that reason rightly held
the United States entitled to have them adjudged illegal and void.
Crocker v. United States, 240 U. S.
74,
240 U. S. 80-81;
Garman v. United States, 34 Ct.Cls. 237, 242;
Herman
v. City of Oconto, 100 Wis. 391, 399;
Harrington v.
Victoria Graving Dock Co., L.R. 3 Q.B.D. 549;
Tool Co. v.
Norris, 2 Wall. 45,
69 U. S. 54-56;
Trist v.
Child, 21 Wall. 441,
88 U. S. 448,
88 U. S. 452;
Meguire v. Corwine, 101 U. S. 108,
101 U. S. 111;
Oscanyan v. Arms Co., 103 U. S. 261,
103 U. S. 275;
Washington Irr. Co. v. Krutz, 119 F. 279, 286.
Page 273 U. S. 501
The transaction evidenced by the contracts and leases was not
authorized by the Act of June 4, 1920. The grant of authority to
the Secretary of the Navy did not indicate a change of policy as to
conservation of the reserves. The Act of June 25, 1910, the Act of
February 25, 1920, the executive orders, and the Joint Resolution
of February 8, 1924, show that it has been and is the policy of the
United States to maintain a great naval petroleum reserve in the
ground. While the possibility of loss by drainage might be a reason
for legislation enabling the Secretary to take any appropriate
action that at any time might become necessary to save the
petroleum, it is certain that the contracts and leases have no such
purpose. The work to be paid for in crude products contemplated the
construction of fuel depots. The one covered by the first contract
was a complete unit sufficient for 1,500,000 barrels, including
pumping stations, fire protection, and its own wharf and channel.
It is not necessary to consider the possible extent of the
construction that might be required under the later contract.
Indeed, it could not then be known how much work and products in
storage it would take to exhaust the reserve. The record shows that
the Navy Department estimated the cost of proposed storage plants
and contents at approximately $103,000,000. Congress has not
authorized any such program. The department tried and failed to
secure additional appropriations for the Pearl Harbor storage
facilities. The Act of August 31, 1842, 5 Stat. 577 (R.S. § 1552),
gave the Secretary authority to construct fuel depots. But it was
taken away be the Act of March 4, 1913, 37 Stat. 898. Since that
time, Congress has made separate appropriations for fuel stations
at places specifically named. [
Footnote 1] And it has
Page 273 U. S. 502
long been its policy to prohibit the making of contracts of
purchase or for construction work in the absence of express
authority and adequate appropriations therefor. R.S. §§ 3732, 3733;
Act of June 12, 1906, 34 Stat. 255; Act of June 30, 1906, 34 Stat.
764. The Secretary was not authorized to use money received from
the sale of gas products. All such sums are required to be paid
into the Treasury. R.S. §§ 3617 and 3618, as amended, 19 Stat.
249.
The words granting authority to the Secretary are "use, store,
exchange, or sell" the oil and gas products. As the Secretary,
among other things, was authorized until July 1, 1922, to use money
out of the appropriation to "store" oil and gas products from these
lands, it will not be held, in the absence of language clearly
requiring it, that he was also empowered without limit to use crude
oil to pay for additional storage facilities. Unless given him by
"exchange," the Secretary had no power by such contracts to locate
or construct fuel depots. It is not contended that the clause
confers unlimited authority, and the petitioners say that the word
"exchange" must have some reasonable limitation. But they insist
that it is broad enough to authorize the contracts. If it is, there
is no reason why crude oil may not be used to pay for any kind of
construction work or to purchase any property that may be desired
by the department for the use of the Navy.
The purpose and scope of the provision are limited to the
administration of the reserves. The clause is found in a proviso to
an appropriation for an investigation of fuel adapted to naval
requirements and the availability of the supply in the naval
reserves. If "exchange" has
Page 273 U. S. 503
the meaning contended for by petitioners, it must be taken to
indicate that Congress intended by the clause in question not only
to restore to the Secretary authority in respect of fuel depots
that had been taken from him by the Act of March 4, 1913, but also
to enable him, by means of contracts and leases such as these, to
reverse, if he saw fit, the established policy of the government as
to the petroleum reserves. The circumstances of the enactment, as
well as the terms of the provision, indicate a purpose to authorize
exchange of crude petroleum from these reserves for fuel oil and
other petroleum products suitable for use by the Navy. The
Secretary was not authorized to refine the crude product. A draft
of the Act included that authority, but the word "refine" was
stricken out. This made necessary the exchange of the crude product
for fuel oil and other products suitable for use. Whatever the
meaning rightly to be attributed to the words employed, it is clear
that they stop short of authorizing the Secretary to pay for
improvements such as were covered by the contracts.
The petitioners insist that, in any event, they are entitled to
credit for the cost of construction work performed and of the fuel
oil furnished at Pearl Harbor, and also for the amount they
expended to drill and operate oil wells and to make other
improvements on the leased lands.
The substance of the account, as stated in the decree of the
district court, is printed in the margin. [
Footnote 2] The
Page 273 U. S. 504
findings show that the storage facilities at Pearl Harbor
covered by the contracts were economically completed on the lands
of the United States under the direction of the companies and the
supervision of officers of the Navy; that they are of benefit to
the United States and are now available for use and should be
retained by it; that the
Page 273 U. S. 505
Transport Company delivered into the storage constructed a
specified quantity of fuel oil of value to the United States equal
to what it cost the company; that, under the supervision of
government officials, the Petroleum Company economically expended
money for development of the leased lands to produce oil, gas, and
gasoline and to make thereon permanent improvements that resulted
in benefit to the United States equal to the amount expended.
They maintain that, as a condition of granting the United States
the relief it claims, equity requires it to give credit to them for
their expenditures; that, if this be denied, they will be required
to pay double the value of the royalty oil they have received, and
that the United States thereby will be unjustly enriched; that,
except the balance shown by the account, they have paid in full for
such oil; that the United States has fully paid for the benefits it
received from petitioner's expenditures, and that, in effect, it
now seeks to recover the payments it made voluntarily. And they
insist that the United States must be made to bear these amounts
even if the contracts were made without authority of law or were
tainted with fraud, violation of public policy, conspiracy, or
other wrongful act.
In suits brought by individuals for rescission of contracts, the
maxim that he who seeks equity must do equity is generally applied,
so that the party against whom relief is sought shall be remitted
to the position he occupied before the transaction complained
of.
"The court proceeds on the principle that, as the transaction
ought never to have taken place, the parties are to be placed as
far as possible in the situation in which they would have stood if
there had never been any such transaction."
Neblett v. Macfarland, 92 U. S.
101,
92 U. S. 103.
And, while the perpetrator of the fraud has no standing to rescind,
he is not regarded as an outlaw; and, if the transaction
Page 273 U. S. 506
is rescinded by one who has the right to do so, "the courts will
endeavor to do substantial justice so far as is consistent with
adherence to law."
Stoffela v. Nugent, 217 U.
S. 499,
217 U. S. 501.
The general principles of equity are applicable in a suit by the
United States to secure the cancellation of a conveyance or the
rescission of a contract.
United States v. Detroit Lumber
Co., 200 U. S. 321,
200 U. S. 339;
United States v. Stinson, 197 U.
S. 200,
197 U. S. 204;
Iowa v. Carr, 191 F. 257, 266;
cf. Mason v. United
States, 260 U. S. 545,
260 U. S. 557
et seq. But they will not be applied to frustrate the
purpose of its laws or to thwart public policy.
Causey v. United States, 240 U.
S. 399, was a suit in equity brought by the United
States to recover title to public lands conveyed to defendant under
the homestead laws. The patent was obtained by fraud. The defendant
paid the United States for the land in scrip at the rate of $1.25
per acre. The complaint did not contain an offer to return the
scrip, and it was insisted by the defendant that, because of such
failure, the suit could not be maintained. The Court said (p.
240 U. S.
402):
"The objection assumes that the suit is upon the same plane as
if brought by an individual vendor to annul a sale of land
fraudulently induced. But, as this Court has said, the government
in disposing of its public lands does not assume the attitude of a
mere seller of real estate at its market value. These lands are
held in trust for all the people, and in providing for their
disposal Congress has sought to advance the interests of the whole
country by opening them to entry in comparatively small tracts
under restrictions designed to accomplish their settlement,
development and utilization. And when a suit is brought to annul a
patent obtained in violation of these restrictions, the purpose is
not merely to regain the title, but also to enforce a public
statute and maintain the policy underlying it. Such a suit is not
within the reason of the
Page 273 U. S. 507
ordinary rule that a vendor suing to annual a sale fraudulently
induced must offer and be ready to return the consideration
received. That rule, if applied, would tend to frustrate the policy
of the public land laws, and so it is held that the wrongdoer must
restore the title unlawfully obtained and abide the judgment of
Congress as to whether the consideration paid shall be
refunded."
Heckman v. United States, 224 U.
S. 413, was a suit by the United States to cancel
conveyances of allotted lands made by members of the Cherokee
Nation and to have the title decreed to be in the allottees and
their heirs, upon the ground that the conveyances were made in
violation of restrictions upon the power of alienation. On demurrer
to the complaint it was insisted that the allottees had received
considerations for the conveyances and should be made parties to
the suit in order that equitable restoration might be enforced. The
court said (p.
224 U. S.
446):
"Where, however, conveyance has been made in violation of the
restrictions, it is plain that the return of the consideration
cannot be regarded as an essential prerequisite to a decree of
cancellation. Otherwise, if the Indian grantor had squandered the
money, he would lose the land which Congress intended he should
hold, and the very incompetence and thriftlessness which were the
occasion of the measures for his protection would render then of no
avail. The effectiveness of the acts of Congress is not thus to be
destroyed. The restrictions were set forth in public laws, and were
matters of general knowledge. Those who dealt with the Indians
contrary to these provisions are not entitled to insist that they
should keep the land if the purchase price is not repaid, and thus
frustrate the policy of the statute."
United States v. Trinidad Coal Co., 137 U.
S. 160, was a suit brought by the United States to set
aside patents conveying certain coal lands on the ground that they
were obtained by fraud and in violation of R.S. §§ 2347,
Page 273 U. S. 508
2348, 2350. The company, in furtherance of a fraudulent scheme
to get the lands, furnished the money that was paid to the United
States by the fraudulent patentees who conveyed the lands to the
company. The complaint did not contain an offer by the United
States to return the money. The company contended that the United
States was subject to the rules that apply to individuals and that
relief should be conditioned upon return of the money. The Court
held that the rule should not be applied in a case like that one.
It laid down and applied the principles on which rest the decisions
in
Causey v. United States, supra, and
Heckman v.
United States, supra. Among other things, the court said (p.
137 U. S.
170):
"If the defendant is entitled, upon a cancellation of the
patents fraudulently and illegally obtained from the United States,
in the name of others, for its benefit, to a return of the moneys
furnished to its agents in order to procure such patents, we must
assume that Congress will make an appropriation for that purpose
when it becomes necessary to do so. The proposition that the
defendant, having violated a public statute in obtaining public
lands that were dedicated to other purposes, cannot be required to
surrender them until it has been reimbursed the amount expended by
it in procuring the legal title is not within the reason of the
ordinary rule that one who seeks equity must do equity, and, if
sustained, would interfere with the prompt and efficient
administration of the public domain. Let the wrongdoer first
restore what it confesses to have obtained from the government by
means of a fraudulent scheme formed by its officers, stockholders
and employees in violation of law."
It was the purpose of those making the contracts and leases to
circumvent the laws and defeat the policy of the United States
established for the conservation of the naval petroleum reserves.
The purpose of the representatives of the department was to get for
the Navy fuel
Page 273 U. S. 509
depots or storage facilities that had not been authorized by
Congress. The leases were made to obtain the crude products for use
as a substitute for money to make good the amounts advanced by
petitioners to pay for such improvements. The Secretary's authority
to provide facilities in which to "store" naval reserve petroleum
or its products did not extend beyond those that might be provided
by use of the money made available by the Act of June 4, 1920. And,
in order to get control of the oil lands covered by the leases, the
companies agreed to pay for these unauthorized works of
construction and to furnish fuel oil and other products of
petroleum suitable for naval use to fill the storage facilities so
added. The contracts and leases and all that was done under them
are so interwoven that they constitute a single transaction not
authorized by law and consummated by conspiracy, corruption, and
fraud. The United States does not stand on the same footing as an
individual in a suit to annul a deed or lease obtained from him by
fraud. Its position is not that of a mere seller or lessor of land.
The financial element in the transaction is not the sole or
principal thing involved. This suit was brought to vindicate the
policy of the government, to preserve the integrity of the
petroleum reserves, and to devote them to the purposes for which
they were created. The petitioners stand as wrongdoers, and no
equity arises in their favor to prevent granting the relief sought
by the United States. They may not insist on payment of the cost to
them or the value to the government of the improvements made or
fuel oil furnished, as all were done without authority and as means
to circumvent the law and wrongfully to obtain the leases in
question. As Congress had not authorized them, it must be assumed
that the United States did not want the improvements made or was
not ready to bear the cost of making them. No storage of fuel oil
at Pearl Harbor was authorized to be made in excess of the
Page 273 U. S. 510
capacity of, or in any places other than the facilities provided
for that purpose pursuant to authorization by Congress. Whatever
their usefulness or value, it is not for the courts to decide
whether any of these things are needed or should be retained or
used by the United States. Such questions are for the determination
of Congress. It would be unjust to require the United States to
account for them until Congress acts, and petitioners must abide
its judgment in respect of the compensation, if any, to be made.
And this applies to the claim on account of the fuel oil, as well
as to the other items. Clearly petitioners are in no better
position than they would be if they had paid money to the United
States, instead of putting the fuel oil in storage. Equity does not
condition the relief here sought by the United States upon a return
of the consideration.
United States v. Trinidad Coal Co.,
supra; Heckman v. United States, supra; Causey v. United States,
supra.
Decree affirmed.
MR. JUSTICE STONE took no part in the consideration or decision
of this case.
[
Footnote 1]
March 4, 1913, c. 148, 37 Stat. 891, 898; June 30, 1914, c. 130,
38 Stat. 392, 401; March 3, 1915, c. 83, 38 Stat. 928, 937; August
29, 1916, c. 417, 39 Stat. 556, 570; March 4, 1917, c. 180, 39
Stat. 1168, 1179; June 15, 1917, c. 29, 40 Stat. 182, 207; July 1,
1918, c. 114, 40 Stat. 704, 726; November 4, 1918, c. 201, 40 Stat.
1020, 1034; July 11, 1919, c. 9, 41 Stat. 131, 145; June 5, 1920,
c. 253, 41 Stat. 1015, 1030; July 12, 1921, c. 44, 42 Stat. 122,
130.
[
Footnote 2]
A. Transport Company is debited:
1. All royalty oil, etc., delivered under
contracts of April 25, 1922, and
December 11, 1922, to May 31, 1925 . . . . . . . .
$7,889,759.21
2. Profit on their resale . . . . . . . . . . . . . . .
791,012.03
3. Interest on No. 1. . . . . . . . . . . . . . . . . .
684,625.55
4. Interest on No. 2. . . . . . . . . . . . . . . . . .
94,351.36
--------------
Total . . . . . . . . . . . . . . . . . . . . . .
$9,459,748.15
B. Transport Company is credited:
1. Actual cost of storage facilities at
Pearl Harbor, under contracts of
April 25, 1922, and December 11, 1922. . . . . . .
$7,350,814.11
2. Interest on No. 1, . . . . . . . . . . . . . . . . .
820,922.43
3. Cost of fuel oil delivered to tanks. . . . . . . . .
1,986,142.47
4. Interest on No. 3. . . . . . . . . . . . . . . . . .
259,569.11
--------------
Total. . . . . . . . . . . . . . . . . . . . . . .
$10,417,448.12
Balance due Transport Company . . . . . . . . . $957,669.97
C. Petroleum Company is debited:
1. Value of petroleum products taken under
leases of June 5, 1922, and December
11, 1922 (other than those included
in the account of the Transport
Company) . . . . . . . . . . . . . . . . . . . . .
$1,556,861.15
2. Interest on No. 1. . . . . . . . . . . . . . . . . .
170,650.02
--------------
Total. . . . . . . . . . . . . . . . . . . . . . .
$1,727,511.19
D. Petroleum Company is credited:
1. Actual cost of drilling, putting on production,
maintaining and operating wells, and other
useful improvements to property under leases . . . .
$1,013,428.75
2. Actual cost of constructing, maintaining
and operating compressor and absorption
plant less value of use for products of
other lands and less gasoline manufactured
and sold from gas produced from lands in
controversy. . . . . . . . . . . . . . . . . . . .
194,991.01
3. Interest on No. 1 and No. 2. . . . . . . . . . . . .
161,060.43
--------------
Total. . . . . . . . . . . . . . . . . . . . . . .
$1,369,480.19
Balance due United States . . . . . . . . . . . $358,031.00
NOTE.-Interest is at the rate of 7 percent and is calculated
on monthly balances to May 31, 1925.