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]