UNITED STATES v. MAMMOTH OIL CO. et al. (Circuit Court of Appeals, Eighth Circuit. September 28, 1926.) No. 7188. 6732. 713 1636 1. Mines and minerals 5-Statute relating to naval petroleum reserves held independent of general statutes affecting public lands, and leasing of reserve without competitive bidding and advertising required was unlawful (Comp. St. §§ 28041 et seq., 46404-46401⁄4ss). Act June 4, 1920, § 1 (Comp. St. § 2804i), directing Secretary of the Navy to take possession of naval petroleum reserves, and to conserve, develop, use, and operate the same in his discretion, directly or by contract, lease or otherwise, held complete and independent of general statutes relating to public land matters, particularly General Leasing Act Feb. 25, 1920 (Comp. St. §§ 46404-46404 ss). and hence leasing of naval petroleum reserves without competitive bidding and advertising was not unlawful. 2. Mines and minerals 2-Statute relating to the conserving, developing, use, and operation of naval petroleum reserves by Secretary of the Navy held not to require him to employ all of methods suggested; "in his discretion" (Comp. St. § 28041). Act June 4, 1920, § 1 (Comp. St. § 28041), directing Secretary of the Navy to take possession of all properties within naval petroleum reserves, and "to conserve, develop, use, and operate the same in his discretion, directly or by contract, lease, or otherwise," held not to require Secretary to employ all the methods suggested; the words "in his discretion" meaning that Secretary should employ any or all of such methods as his discretion indicated. [Ed. Note. For other definitions, see Words and Phrases, First and Second Series, Discretion.] 3. Mines and minerals 5-Under statute relating to naval petroleum reserves, Secretary of the Navy was authorized to exchange roy alty crude oil for storage tanks for fuel oil (Comp. St. § 28041). Under Act June 4, 1920, § 1 (Comp. St. § 28041), authorizing Secretary of the Navy to develop and operate naval petroleum reserves by contract or lease, "and to use, store, exchange, or sell the oil, and gas products thereof," it was not an arbitrary exercise of discretion for Secretary, in exchanging royalty crude oil for fuel oil, to provide also for exchange of crude oil for storage tanks for fuel oil. 4. Mines and minerals 5-Navy department's use of royalty oil certificates to prevent proceeds of royalty oil from petroleum reserve going into Treasury held not improper (Comp. St. § 28041). Navy Department's use of royalty oil certificates in payment for storage tanks, though intended to prevent proceeds of sale of royalty oil from naval petroleum reserves going into Treasury of United States, if permitted by Act June 4, 1920, § 1 (Comp. St. § 28041), was not improper. 14 F. (2d)-45 705 5. Mines and minerals 5-Act relating to naval petroleum reserves, under which royalty oil certificates were used to pay for fuel oil storage tanks, held not to invade right of Congress to appropriate funds for naval use (Comp. St. § 28041). Act June 4, 1920, § 1 (Comp. St. § 2804i), authorizing Secretary of the Navy to conserve, develop, use, and operate naval petroleum reserves, and to use, store, exchange, or sell products thereof, held not to invade the exclusive right of Congress to appropriate funds for naval use, though under it royalty oil certificates were used to pay for construction of fuel oil storage tanks. 6. United States 85. A distinction exists between the appropriation of moneys by Congress and use of government property incidental to administration under an adequate grant of authority. 7. Statutes 2252. Where there are two statutes on same subject, the earlier being special and the later general, a presumption arises, in absence of express repeal or absolute incompatibility, that special statute is intended to remain in force as exception to the general. 8. Statutes 225/2. Specific legislation on particular subject is not affected by subsequent law relating to general subject, which neither refers to the earlier law nor is repugnant nor inconsistent with it. 9. Mines and minerals 5-Secretary of the Navy held not to have abdicated powers conferred by statute in favor of Secretary of the Interior, as affects validity of lease of naval petroleum reserve (Comp. St. § 28041). Secretary of the Navy held not to have abdicated powers conferred on him by Act June 4, 1920, § 1 (Comp. St. § 28041), relating to naval petroleum reserves, in favor of Secretary of the Interior, acting under executive order of May 31, 1921, as affected validity of lease neof control exercised by Secretary of the Navy gotiated by Secretary of the Interior, in view through a subordinate officer. 10. Mines and minerals 5-Lease of naval petroleum reserves and supplemental agree.ment held not invalid, as establishing fuel depot (Comp. St. § 28041). Lease of naval petroleum reserve, providing for exchange of royalty oil for fuel oil and storage tanks therefor, and supplemental agreement for construction of such tanks, held not invalid under Act June 4, 1920, § 1 (Comp. St. § 28041), as establishing fuel depots, which is a matter for Congress. 11. Mines and minerals 5. Evidence held to sustain government's claim that lease of naval petroleum reserve under Act June 4, 1920, § 1, and supplemental contract, were procured by fraud and corruption (Comp. St. § 2804i). 13. Fraud 50. Secretary of the Interior and S., where it ap Burden of proof is on party alleging fraud. peared that corporations in which S. was in Inferences of fact cannot be drawn from other inferences or rebuttable presumptions, but must arise from circumstances proved. 17. United States 61. Fraud on government is committed, if government contracting official receives pecuniary favor from one with whom he contracts, though government may suffer no pecuniary loss, and though contract may be advantageous to it. 18. Appeal and error 1012(1). Conclusion of trial court on issue of fraud will not be disturbed, unless appellate court deems it against the weight of evidence or based on mistake. terested had invested in bonds which were afterwards found in possession of son-in-law and partner of such Secretary, held, deposit tickets, book entries, and other records and papers of various banks concerning the handling of such bonds were admissible, as against objection that they were in part hearsay. 26. Evidence 99-In action to cancel lease of naval petroleum reserve, bank records, showing handling of bonds found in possession of son-in-law and partner of Secretary of the Interior, held not inadmissible, as res inter alios acta. In suit to cancel lease of naval petroleum reserve as resulting from conspiracy between Secretary of the Interior and S., where it appeared that corporations in which S. was in-. terested had invested in bonds which were afterwards found in possession of son-in-law and partner of such Secretary, held, deposit tickets, book entries, and other records of various banks concerned in handling of such bonds were not inadmissible under rule of res inter alios acta. 27. Fraud 52. Great latitude is allowed in introduction of evidence on issue of fraud. 28. Mines and minerals 5-In suit where cancellation of lease of naval petroleum reserve was decreed, companies asserting rights under lease held mala fide trespassers, not entitled to reimbursement for expenditures. In suit where cancellation of lease of naval petroleum reserve was decreed for fraud, oilpurchasing company and pipe line company controlled by same individual, controlling corporate lessee, who were asserting rights derived from corporate lessee, held mala fide trespassers on government lands, and entitled to no credit for expenditures made by them. Appeal from the District Court of the United States for the District of Wyoming; T. Blake Kennedy, Judge. Suit by the United States against the Mammoth Oil Company and others. From a decree dismissing bill (5 F.[2d] 330), the United States appeals. Reversed and remanded, with instructions. Owen J. Roberts, of Oklahoma City, Okl., and Atlee Pomerene, of Cleveland, Ohio (Albert D. Walton, of Cheyenne, Wyo., on the brief), for the United States. Martin W. Littleton, of New York City, John W. Lacey, of Cheyenne, Wyo., and Edward H. Chandler, of Tulsa, Okl. (George P. Hoover, of Washington, D. C., G. T. Stanford, of New York City, Herbert V. Lacey, of Cheyenne, Wyo., R. W. Ragland, of New York City, J. W. Zevely, of Washington, D. C., Ralph W. Garrett, of Tulsa, Okl., and Cravath, Henderson & De Gersdorff, all of New York City, on the brief), for appellees. 14 F. (2d) 705 Before KENYON and VAN VALKENBURGH, Circuit Judges, and CANT, District Judge. KENYON, Circuit Judge. This suit is one in equity brought by the United States in the District Court of the United States for the District of Wyoming, to secure the cancellation of a certain lease of date April 7, 1922, made by the United States with the Mammoth Oil Company, one of the appellees, for the development and exploitation of the oil and gas within naval petroleum reserve No. 3, in Natrona county, Wyo., embracing approximately 9,000 acres, commonly known as Teapot Dome; also to secure the cancellation of the contract supplemental to said lease signed February 9, 1923, between the same parties, on the ground (a) that the lease and supplemental agreement were fraudulently secured as a result of a conspiracy between Albert B. Fall, the then Secretary of the Interior, and Harry F. Sinclair, organizer of, and owner of all the capital stock of, the Mammoth Oil Company, who negotiated the lease on behalf of said company; and (b) that the lease and supplemental agreement were without authority of law and contrary thereto. March 13, 1924, a temporary restraining order and one appointing receivers for the property involved were entered. Answers were filed by all defendants, and the case was tried in March, 1925, after two continuances had been granted to the United States of America, appellant (so hereinafter designated). The trial court held against the contentions of the United States, and decided that the lease and supplemental agreement were not procured by fraud, that there was no conspiracy between Fall and Sinclair to defraud the United States or otherwise, and that both the lease and agreement were authorized by a special act of Congress, which took the matter out of the operation of general laws. Numerous findings of fact were made by the court, and the bill was dismissed on the merits. Prior to trial the appellant attempted to secure a continuance in order to procure the evidence of certain witnesses residing in Canada, particularly one H. S. Osler. The court refused the request for continuance, and denied the petition to reopen the case after trial and before decree, in order to permit the United States to then secure the evidence of the said Osler and other Canadian witnesses; the appellate court of Ontario having in the meantime held that answers must be made to the questions theretofore propounded to Os ler in the attempt to take his evidence prior to trial. Sixty-four assignments of error are presented. They relate to the validity of the ex ecutive order of President Harding of May naval reserves was committed to the Secretary 31, 1921, under which the administration of of the Interior; to the question of alleged fraud; to the action of the court in striking from the record certain exhibits and testimony; to the action of the court in sustaining the refusal of M. T. Everhart, son-in-law of Secretary Fall, to testify on the ground of incriminating himself; to alleged abuse of discretion in denying the motion for continuance, and in refusing to reopen the case after hearing and before decree in order to secure the evidence of said Osler. The vitally important questions presented may be grouped as follows: the lease of April 7, 1922, and the supplemen(a) Was there authority of law to make tal agreement of February 9, 1923, and were they made in compliance with law? the supplemental agreement of February 9, (b) Were the lease of April 7, 1922, and 1923, procured by fraud, as claimed by the appellant? (c) Was there an abuse of discretion in cure certain evidence or in refusing to re-open not granting the continuance asked for to sethe case for that purpose? I. History and Facts. It is advisable briefly to review the situation with reference to its historical aspect and the matters leading up to the execution of the lease and supplemental agreement. What the policy of the federal government may have been as to oil and mineral lands in the past, or whether it had any policy, may not be clear. However, on September 27, 1909, a federal order was issued, withdrawing as part of the public domain part of the oil lands now constituting a portion of naval reserve No. 3, the subject of this controversy. June 18, 1910, another executive order was issued to the same effect, covering other lands now included in said naval reserve No. 3. April 30, 1915, naval petroleum reserve No. 3 was created by executive order. The General Leasing Act applying to oil and gas lands became a law February 25, 1920 (chapter 85, §§ 1-38, 41 Stat. 437 [Comp. St. Ann. Supp. 1923, §§ 46404-46404ss]). After the passage of this act it was reasonably probable that the Salt Creek field bordering naval reserve No. 3 would be partially, if not entirely, developed, and that this would probably affect the question of drainage as to said na val reserve. Other naval reserves would also be affected by development of adjacent territory. Actuated presumably by said situation Congress passed the Act of June 4, 1920, c. 228, § 1, 41 Stat. 813 (Comp. St. Ann. Supp. 1923, § 2804i). This section was contained in the Naval Appropriation Act of June 4, 1920, and is as follows: "The Secretary of the Navy is directed to take possession of all properties within the naval petroleum reserves as are or may become subject to the control and use by the United States for naval purposes, and on which there are no pending claims or applications for permits or leases under the provisions of an act of Congress approved February 25, 1920, entitled 'An act to provide for the mining of coal, phosphate, oil, oil shale, gas, and sodium on the public domain,' or pending applications for United States patent under any law; 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 oil from lands in the naval reserves, for the benefit of the United States: And provided further, that the rights of any claimant under said Act of February 25, 1920, are not affect ed adversely thereby: 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." Prior to the time that Mr. Denby and Mr. Fall became respectively on March 4, 1921, Secretaries of the Navy and of the Interior, some leases requiring drilling had been made by the retiring Secretary of the Interior for oil drilling on lands in the Salt Creek field, and he had also offered other leases for sale at public auction subsequently to be held. In May, 1921, Secretary Denby suggested to the President that the Secretary of the Interior be placed in charge of the administration of the naval reserves. Secretary Fall on May 11, 1921, wrote to Secretary Denby concerning the matter, and inclosed a letter for him to sign and send to the President, together with an executive order for the President's signature, placing in the Interior Department the control and development of the naval re serves. There was opposition to this order in the Navy Department, and changes were made therein which were assented to by Secretary Fall. The order as finally agreed upon by Secretary Denby and Secretary Fall was taken to the President by Assistant Secretary of the Navy Roosevelt, and signed by the President May 31, 1921. It is as follows: "Under the provisions of the Act of Con gress approved February 25, 1920 (41 Stat. 437), authorizing the Secretary of the Interior to lease producing oil wells within any navy petroleum reserve; authorizing the President to permit the drilling of additional wells or to lease the remainder or any part of a claim upon which such wells have been drilled, and under authority of the Act of Congress approved June 4, 1920 (41 Stat. 812), directing the Secretary of the Navy to conserve, develop, use and operate, directly or by contract, lease, or otherwise, unappropriated lands in naval reserves, the administration, and conservation, of all oil and gas bearing lands in naval petroleum reserves Nos. 1 and 2, California, and naval petroleum reserve No. 3 in Wyoming and naval shale reserves in Colorado and Utah, are hereby committed to the Secretary of the Interior subject to the supervision of the President but no general policy as to drilling or reserving lands located in a naval reserve shall be changed or adopted except upon consultation and in cooperation with the Secretary or Acting Secretary of the Navy. The Secretary of the Interior is authorized and directed to perform any and all. acts necessary for the protection, conservation and administration of the said reserves subject to the conditions and limitations contained in this order and the existing laws or such laws as may hereafter be enacted by Congress pertaining thereto. "Warren G. Harding. "The White House, May 31, 1921.” July 8, 1921, Secretary Fall wrote to Mr. Doheny, who was interested in a lease upon other naval reserves, as follows: "There will be no possibility of any further conflict with Navy officials and this de partment, as I have notified Secretary Denby that I should conduct the matter of naval leases under 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 of his department, but only with himself, and such consultation will be confined strictly and entirely to matters of general policy." 14 F.(2d) 705 On July 23, 1921, Secretary Fall wrote Secretary Denby as to the use of the government's royalty crude oil in exchange for storage facilities. This letter is as follows: "In connection with the recent authorization to the Pan-American Petroleum Company and the United Midway Oil Company to drill 22 offset wells in naval petroleum reserve No. 1, California, I would like to be advised, as promptly as possible, what arrangements the Navy desires to be made for the handling and disposition of its royalty oil from said wells, as well as from any other wells in naval reserves, to which the Navy is entitled to royalty in kind. "As the lease provides that purchasers will take care of the oil only for a limited period, it is important that provision be made to dispose of same promptly. I suggest the desirability of effecting an exchange of the crude oil received as royalty for an equivalent value of fuel oil, to be stored without expense to the United States by the other party to the exchange, preferably the exchange should be not only of crude oil for fuel oil in storage but for the tanks containing the Navy's stored oil. In other words, my suggestion is that the crude oil be exchanged for tanks and fuel oil, the title to both to be vested in the Navy as a result of the exchange. If this plan meets with your approval, and you desire me to undertake to consummate the arrangement, I shall be glad to do so. In any event, I should like to hear from you on the subject as soon as possible." Secretary Denby acquiesced in this suggestion by letter of July 29, 1921, as follows: "Replying to your letter of the 23rd of July, I am glad to acquiesce in the suggestion made by you. It will be of great benefit to the Navy to have the royalty crude oil from wells on the naval reserves (both those already in operation and those to be drilled by the Pan-American Petroleum Company and the United Midway Oil Company) exchanged for fuel oil at tidewater, to be stored if practicable without expense to the government, and if possible for tanks in which such fuel oil can be stored. As the Navy has no appropriation to pay for the cost of construction of tank storage, the acquisition of tanks by exchange for crude oil from naval reserve wells will be most acceptable. amount available under the appropriation 'fuel and transportation' for the present fiscal year, it would be of special benefit to the Navy to obtain royalty fuel oil at this time, as such oil would not involve a charge against the appropriation." Shortly thereafter Secretary Fall went West to confer with oil men and returned in October, 1921. In September, 1921, Harry Foster Bain, Director of the Bureau of Mines, Department of the Interior, made an inspection trip to the West and inspected naval reserve No. 3. He was accompanied by Arthur W. Ambrose, Chief Petroleum Technologist of the Bureau of Mines. They conferred at Denver with Mr. C. A. Fisher, a geologist, and Mr. Carroll H. Wegemann, who had previously been connected with the Geological Survey, and had made an examination and report as to the geological structure of naval reserve No. 3. In September, 1921, Wegemann submitted a report to the Geological Survey differing somewhat from the previous report in that it placed the saddle between Salt Creek and Teapot Dome further south than in the preceding report. This later report states: "From consideration of the above facts, it is obvious that as wells are drilled along the northwest line of the naval reserve, part of the oil produced by these wells will be drawn from the naval reserve itself." October 1, 1921, Admiral John K. Robison became Chief of the Bureau of Navy Engineering in charge of the Naval Petroleum Reserves, and on October 8, 1921, took personal charge of all naval petroleum reserve matters on the part of the Navy. In October, 1921, Secretary Fall, Robison, Bain, and Ambrose in conference discussed the Wegemann report recently submitted. As a result of this meeting, through instructions by Secretary Fall to the Director of the Geological Survey, Mr. K. C. Heald was selected to make further investigation of the drainage question as affecting Teapot Dome. He submitted a written report on November 30, 1921, which contains the following: "At the present rate of production a year or more must elapse before any part of the reserve is appreciably damaged. Only one producing well has been drilled within one location of the line of the reserve, and this well "While these tanks could be readily utiliz- will not be likely to affect the territory more ed at any point at tidewater, the usefulness than 300 to 400 feet distant for some months. to the Navy would be increased if they could That part of the reserve which it will affect be located at any one of the following points: must be regarded as one of its poorest porSan Diego, San Pedro, San Francisco Bay, tions. No further leasing should be Puget Sound, Honolulu, or Pearl Harbor, done. The lands last leased will permit some Hawaii. In view of the greatly reduced slight drainage of unleased land within the |