OIL AND TIMBER LAND LITIGATION

Oil Land Ownership

The discussion in the previous chapter dealt with litigation under the Sherman law which checked the absorption of the Southern Pacific by the Union Pacific system and profoundly altered the relations of these two companies to each other. Our narrative will close with the mention of two other suits or groups of suits which concerned, the one, the possession of certain oil properties in southern California, and the other, the administration of lands—mainly timber lands—granted to the Oregon and California Railroad in the North by federal legislation of 1866 and 1869. The Southern Pacific Company took part in both of these controversies as a principal interested party.

The oil lands which until recently belonged to the Southern Pacific Railroad lay principally in the West San Joaquin fields in southern California. They covered an area of between 160,000 and 170,000 acres. In 1917, a committee of the California State Council of Defense estimated that the Southern Pacific and its subsidiary companies controlled 26.4 per cent of the total output of the state, although much of the oil so controlled was not produced upon the company’s own land. The actual production of oil by the Southern Pacific Company in June, 1918,[599] was 49,679 barrels out of 282,672 barrels of production by all companies in the state, or a little less than 18 per cent.[600] No later statistics of production by companies have been made public. In June, 1920, however, the Southern Pacific Land Company owned 19.38 per cent of all the proven oil land in California, and in addition the Southern Pacific Company held a controlling interest in the Associated Oil Company, also a large producer.

Unquestionably the Southern Pacific oil lands are valuable. A witness in one of the recent cases testified that he had told Mr. Huntington in 1893 that the railroad oil lands were worth more than the entire Southern Pacific Railroad, while it is common report that the value of the properties may run into the hundreds of millions of dollars. All this is, moreover, recent. The discovery of oil in large quantities was first made in southern California in the Kern River field, near Bakersfield, in the spring of 1899. This was followed by discoveries in the so-called McKittrick and Sunset fields, and by an oil boom of extraordinary proportions. In so far as the railroad owns oil lands, it has therefore recently secured an unearned increment which is not only of great size, but of a character entirely unanticipated by legislators of earlier days. This has given rise to controversy, in which the government has questioned the railroad title.

The peculiarity of the oil land litigation, and the reason why the federal government is involved, is found in the fact that the railroad land is mostly land-grant land, lying within the limits laid down by the Act of 1866 from which the Southern Pacific Railroad took its life. It follows from this that the railroad title was affected by certain reservations in the land-grant legislation, such as that of exempting mineral lands from the operation of the grants. The government offered to convey certain land to the railroad free of charge when it undertook to stimulate railroad building in California, but it did not include mineral land in this offer, except coal land and iron land. Not only this, but the exception of mineral lands was repeated in the patents later issued by the Department of the Interior, and in such patents the words, “excluding and excepting all mineral lands should any such be found in the tracts aforesaid,” were used, making the exemption apply to future discoveries as well as to discoveries occurring before the patents were issued. Evidently the legislature and the land office intended to limit the donations to the Southern Pacific by excluding unknown and immeasurable increments of value in so far as this might be done. Coal and iron were left, for the reason that these minerals were intimately connected with the construction and operation of the road.

Test Case

In 1910, one Edmund Burke filed a bill in equity in the Circuit Court of the United States for the Southern District of California, in which he challenged the title of the railroad to oil lands in an area covering five sections in Fresno County, California. This was a test case. Disregarding minor points, the larger questions at issue were the following:

The first question was as to whether or not oil was a mineral. The plaintiff said that it was a mineral, the defendant said that it was not. If oil was a mineral, then the railroad could not obtain title under the land-grant laws to land which was known to contain oil at the time the patent was applied for. If oil was not a mineral, there was no limitation. Now matters of definition always cause trouble. The word “mineral” is sometimes associated with metallic ores, a notion which would not include a resultant from the decomposition of organic matter such as California petroleum. Indeed, the Secretary of the Interior once held that the word “mineral” embraced only the more precious metals, such as gold, silver, cinnabar, etc., although on rehearing this view was rejected. Common usage includes more than the metallic ores, and the courts have considered as mineral such articles as clay, coal, and marble, and even deposits such as guano.[601] When the matter was presented to it, the United States Supreme Court followed common usage and held that petroleum was a mineral.[602]

The second point had to do with the effect of a patent. It was shown that the Southern Pacific had received patents as early as 1892 to lands which ultimately proved to contain petroleum, and there was dispute as to whether this subsequent discovery invalidated title to property once patented. On this point, fortunately, the law was clear. Quoting the Supreme Court:

The settled course of decision ... has been that the character of land is a question for the Land Department, the same as the qualifications of the applicant and his performance of the acts upon which the right to receive the title depends, and ... [that] when a patent issues it is to be taken upon a collateral attack, as affording conclusive evidence of the non-mineral character of the land and of the regularity of the acts and proceedings resulting in its issue, and upon a direct attack, as affording such presumptive evidence as to require plain and convincing proof to overcome it.

The Supreme Court therefore held that the Southern Pacific was secure in its possession of lands to which it held patent, unless fraud could be shown, and this irrespective of any saving clause in the patent itself, and without regard to the nature of the investigation by which the Land Office had originally satisfied itself as to the character of the land.[603]

Elk Hills Suit

The effect of the rulings of the Supreme Court in the test case of Burke v. Southern Pacific was not only to cause the dismissal of the pending suit, but to make it evident that the government must show fraud on the part of the railroad company before the company’s title could be disturbed. The holding of the court that oil lands were mineral lands was, however, an important victory for the government. It was under these circumstances that the federal government instituted a fresh series of suits. Of these, one suit called in question the title of the Southern Pacific to some 6,109 acres of land in the Elk Hills region of southern California, held under a patent issued December 12, 1904. The other suits attacked the legality of the railroad’s possession of substantially all its remaining oil lands, obtained at various dates from 1892 to 1902. The value of the lands involved in the second proceedings was estimated by the government as in excess of $421,000,000. Counsel alleged that the company’s land agents, Messrs. Eberlein and Madden, had accompanied the lists, which they had submitted to the government for patenting, with affidavits stating that the lands were not mineral lands, although both agents knew at the time the patents were applied for that the lands in question contained oil. This charge, if substantiated, amounted to a showing of fraud. In both cases the government sought to show that the presence of oil upon the lands sought was a matter of common knowledge, and that there was reason to believe that the company was fully cognizant of the facts.

Most of the sensational testimony taken in the oil land cases appeared in the so-called Elk Hills case. Mr. Eberlein here figured as the land agent for the Southern Pacific. Omitting again all relatively unimportant detail, it appeared that Mr. Eberlein had filed an affidavit with the Land Office in November, 1903, in which he swore to two pertinent facts: first, that he had caused the lands for which the railroad applied to be carefully examined by the agents and employees of the company as to their mineral or agricultural character; and second, that to the best of his knowledge and belief, none of the lands returned in the list were mineral lands. These statements had been repeated in September, 1904, when a substitute list was filed.

In the face of these sworn assertions, the United States Supreme Court later found that Mr. Eberlein had not examined the lands in question, nor had he caused them to be examined by others. Indeed, Eberlein had even objected to the examination of the lands. He had protested verbally to Judge Cornish, vice-president of the Southern Pacific Company against examination, and to Mr. Markham, its general manager, and in 1908 he had summed up his repeated objections by writing to the assistant land agent of the company as follows:

The examination of our S. P. lands not yet patented by our oil experts must be stopped as information that they may obtain or give as to mineral character prior to patent will forever prevent our getting title.... Mr. Dumble (the company’s geologist) and his men should not be furnished by us with any data whatever except as to patented lands. For reasons above given such information will be embarrassing to them and us and may make them witnesses against this company in mineral contests hereafter.[604]

The most that can be said for such an epistle is that it indicated an anxiety to keep within the letter of the law.

Government Victory and Defeat

Besides falsely swearing that he had made an examination of the lands involved in the Elk Hills case, Mr. Eberlein made the positive statement in his affidavit that none of the lands covered by his application were mineral lands, in so far as he was informed. Now in this matter it is clear that the evidence before Mr. Eberlein, such as it was, pointed to a mineral and not to a non-mineral content of the land in question. This evidence consisted primarily in the results of work of Southern Pacific geologists in the general region of which the Elk Hills were a part, and in the presence there of a certain number of producing wells. It is on record that in 1902 the Southern Pacific withdrew from sale many of its patented lands which surrounded or were adjacent to the land in controversy “because they were in or near oil territory.” The following year the company decided to lease such of its lands as were considered valuable for oil purposes to a subsidiary company—the Kern Trading and Oil Company. The proposed lease was laid before Eberlein in August, 1904. He at once objected. In a letter to C. H. Markham, general manager of the Southern Pacific Company and second vice-president of the Southern Pacific Railroad Company, Eberlein set forth (September 10, 1904) the reasons for his opposition in these words:

In addition to this there is a very urgent reason for delaying the execution of these papers. We have selected a large body of lands interspersed with the lands sought to be conveyed by this lease and which we have represented as non-mineral in character. Should the existence of this lease become known, it would go a long way toward establishing the mineral character of the lands referred to and which are still unpatented.[605]

A similar letter addressed the week before to Judge Cornish in New York contained arguments of a similar nature. The protests were heeded, and the leases of lands in the McKittrick and Coalinga districts were held up. It was recognized, moreover, that the matter was a delicate one, and the papers relating to the proposed leases were placed in a special and private file separate from the general file of the land department of the railroad company. Summing up the evidence in the case, the United States Supreme Court later observed that the natural, if not the only, conclusion from the facts was that in pressing the selection the officers of the railroad company were not acting in good faith, but were attempting to obtain the patent by representing that the lands (covered by the Elk Hills litigation) were not mineral when they believed the fact was otherwise.[606] The decree of the United States Supreme Court requiring the cancellation of the railroad patents to the 6,000 acres of land in the Elk Hills district was given on November 17, 1919.

Three months before this Supreme Court decision, Judge Bledsoe, in the District Court for the Southern District of California, dismissed a suit challenging title to some 165,000 acres of land in the oil territory on the west side of the San Joaquin Valley.[607] This suit represented a consolidation of the oil land suits other than those included in the Elk Hills case. Perhaps 156,000 of the acres under litigation were claimed by the railroad. Cases are seldom alike, and the Bledsoe case differed from the Elk Hills controversy in several important details. In this case, for example, it appeared that the railroad had sold lands in the disputed territory at agricultural prices—a policy which it presumably would not have followed had it believed that these lands had mineral value. There was also lacking much of the direct evidence which had helped to demonstrate the fact that Mr. Eberlein had distorted the truth in his representations to the government. On the other hand, the refusal of Judge Bledsoe to believe that men like the general manager of the Southern Pacific, its land agent, and its vice-president would lend themselves to fraud, is less impressive after a perusal of the Elk Hills material. The government has announced that it will not appeal from Judge Bledsoe’s ruling—a decision which, on the face of things, appears to be a mistake.

Sale of Oil Lands

The most recent development in connection with the Southern Pacific oil lands is associated with the organization of the Pacific Oil Company. The formation of this company was announced in March, 1921. It purchased from the Southern Pacific Land Company, for the sum of $43,750,000, about 259,000 acres of lands in California, most of which were proven oil lands, and 200,690 shares (50.48 per cent) of the capital stock of the Associated Oil Company. This was the whole of the Southern Pacific interest in the oil fields. The Southern Pacific Company provided the funds for the purchase by subscribing to 3,500,000 shares of the Pacific Oil Company at $15 per share, but the railroad disposed of its newly acquired shares by extending to holders of its own stock the right to purchase Pacific Oil stock at $15 per share, one share of stock of the new company for each share of the Southern Pacific Company stock so held. This transaction will transfer the ownership of the railroad oil lands from the Southern Pacific Company to the stockholders of that company as fast as the subscription rights are taken up. Commenting on the plan for the separation of the oil and railroad properties, President Sproule observed that the plan was simply responsive to the spirit of the times. It seems likely, however, that it will have the additional result of preventing further action tending to disturb the railroad title. The president of the Pacific Oil Company is Mr. Shoup and its directors are men of influence in the East.[608]

Timber Land Grant

This summary discussion of the oil land litigation in California brings us to the last of the great cases with which the Southern Pacific has, in recent years, been concerned, namely, to the dispute between the federal government and the Oregon and California Railroad over the administration of timber lands in Oregon. By the Act of July 25, 1866,[609] Congress authorized the California and Oregon Railroad to build a railroad and telegraph line in the state of California from a point on the Central Pacific in the Sacramento Valley to the northern boundry of the state. The same act empowered “such company, organized under the laws of Oregon, as that state should designate,” to construct a railroad from Portland, Oregon, to a junction with the California and Oregon upon the Oregon-California boundary line. The legislature granted to the company mentioned a right-of-way, and in addition ten alternate sections of public land on each side of its track.

At the time Congress acted, there was no company in Oregon in condition to become the beneficiary of the grant. In 1867, however, the Oregon Central Railroad Company of Salem was incorporated, and the following year this railroad received the needed legislative designation. It appears that there was some dispute between the Oregon Central of Salem and another organization known simply as the Oregon Central Railroad Company, and that the doubt as to which of these two was entitled to receive the granted lands in Oregon delayed the filing of the necessary formal assent to the terms of the Congressional Act of 1866. In 1869, therefore, Congress extended the time for the filing of the required assent.[610]

At the time this privilege was accorded, however, Congress introduced an important limitation to its previous action, by providing that the lands granted by the Act of 1866 should be sold to actual settlers only, in quantities not greater than 160 acres to one purchaser, and for a price not exceeding $2.50 per acre. So amended, the Act of 1866 was accepted by the Oregon Central, and on March 16, 1870, the rights acquired were assigned to the Oregon and California Railroad. In 1887, the Oregon and California was absorbed by the Southern Pacific.

As a result of the legislation described, the Oregon and California Railroad Company received a total grant estimated at 3,821,902 acres, which it held subject to the requirement that it should dispose of the property to actual settlers, in small lots, at prices not exceeding $2.50 per acre. Now the simple facts with regard to the company’s administration of this estate are that it did not limit the price which it charged to $2.50 per acre, that it took no pains to ascertain whether or not, purchasers of its lands were actual settlers, and that it sold in whatever quantities were convenient from the point of view of revenue. Between 1894 and 1903, to take the period when the company neglected its obligations most grossly, there were sales at prices ranging from $5 to $40 an acre, and in amounts which in one instance reached the figure of 45,000 acres to a single purchaser. Out of 820,000 acres sold during this period, approximately 370,000 were sold to 38 purchasers in quantities exceeding 2,000 acres to each purchaser, and at prices higher than $2.50. These sales, according to the Supreme Court, were to persons other than actual settlers, and for other purposes than settlement. On January 1, 1903, the company reached the climax of its disobedience to law by withdrawing all of its lands from sale and refusing to accept offers for any of them, asserting that they were timber lands and unsuitable for settlement. In 1911 there were 2,360,492.81 acres unsold, of which 2,075,616.45 had been patented. Only a comparatively small part of the grant, that is to say, had been disposed of.

Land Rebought by Government

It is somewhat amazing that so clear a violation of the terms under which the Oregon and California held its land grant should have passed unchallenged. Nor can the obstinacy of the company’s defense fail to excite surprise. When the Attorney-General of the United States sought to have the Oregon and California grant declared forfeit[611] because of the company’s disregard of the terms of the law, it proved necessary to litigate for eight years, to take seventeen volumes of testimony, to consider 2,500 pages of briefs, and to obtain three court decisions and the enactment of a new law before the matter could be finally set at rest. It is unnecessary to go into the elaborate record, or the arguments by which counsel sought to demonstrate that the restrictive provisions of the Act of 1869 were beyond the power of Congress to enact, or to discuss the contentions that breaches of the law had been condoned and that the covenants were not in any case enforceable. The case was considered by the Circuit Court of the United States for the District of Oregon in 1911,[612] and by the Supreme Court of the United States in 1915.[613] Both courts pronounced the restriction on the alienation of Oregon and California lands binding.

The controversy was at last settled by a new Act of June 9, 1916, in which Congress resumed possession of the unsold lands appertaining to the grant, while appropriating the sum of $2.50 an acre for these lands as a payment to the railroad company.[614]

Under the terms of the act, the Secretary of the Interior was directed to ascertain the exact number of acres of land patented to the railroad company, and the number of acres of unpatented land which the company was entitled to receive in the future according to the original grants. The Secretary was then to calculate the value of all this land at $2.50 per acre, and to pay over the amount so ascertained to the railroad company from time to time from the proceeds of future sales of the lands or of the timber upon it, after deducting from the valuation the amounts already received by the railroad and by its predecessors in interest. The intent was clearly to allow to the railroad $2.50 per acre of the original grant, no more and no less, taking full account of the sums already received by the company. The constitutionality of the law was later upheld by the Supreme Court.[615]