Opinion
No. 5245.
September 3, 1930. Rehearing Denied September 27, 1930.
Appeals from the District Court of the United States for the Western District of Texas; Duval West, Judge.
Action commenced by E.O. Burton against Edward Roos, the Texas Company of Mexico, S.A., and others. The bills filed by plaintiff were dismissed, but the court retained jurisdiction to determine issues raised by Roos against the Texas Company of Mexico, S.A., and another, and, from the decree, Roos and the Texas Company of Mexico, S.A., appeal.
Affirmed.
The questions in this case grow out of an oil and gas lease on land in Mexico.
Edward Roos obtained an option, dated April 19, 1915, to purchase the lease from Obando, the owner. On May 15, 1915, with Roos' consent and approval, Obando executed the lease direct to R.E. Brooks. Upon securing the lease Brooks prepared, signed, and tendered to Roos a draft of contract which contained a provision to the effect that Brooks or his assignee should develop the lease and account to Roos for half of the net profits.
Roos refused to sign or accept the proposed contract on the principal ground that he was entitled under his agreement with Brooks to a half interest in the lease itself, and not merely to a half interest in the net profits. Brooks, on the other hand, refused to make any change in the draft of contract tendered by him, insisting that it correctly represented the agreement or understanding between him and Roos. As a result of this disagreement, the execution of the contract sued on, hereinafter called the contract, was delayed for a period of nearly two years, during which Roos had employed the law firm of Lane, Wolters Storey to represent him, as he claims, not only in securing a satisfactory contract, but also in any controversy that might arise in connection with the proper development of the lease. It is the contention of that firm of attorneys, however, that their services were to end with the execution of a contract defining the rights and obligations of the parties interested in the lease. It is undisputed that they were to have for their legal services, whatever they were to be, a fourth of Roos' interest in the lease.
Brooks at the time he acquired the lease had advanced to Roos $10,000, payable a year after date, and agreed to advance to him an additional $10,000, both loans to be renewed from time to time until oil was produced in paying quantities or until the lease was abandoned. He caused an additional loan of $5,000 to be made at some time before the contract was executed, and required Roos to execute a mortgage to an attorney of the Texas Company of his interest in the lease, which was dated July 2, 1917, and conditioned that both loans be paid one year after the date thereof, upon penalty of foreclosure.
The contract was finally entered into on February 16, 1917, by Brooks as party of the first part, Roos as party of the second part, and Lane, Wolters Storey as parties of the third part. It recited that Brooks held the lease in his own name, but in joint ownership with Roos, and that the latter's half interest was subject to, and should forever be charged with, a one-fourth interest in the net profits in favor of Lane, Wolters Storey.
Brooks agreed that, within thirty days or as soon thereafter as political conditions in Mexico would permit, he would cause the drilling of a test well on the lease to be begun and prosecuted with due diligence; that if the test well should produce oil in paying quantities he would promptly, conditions in Mexico permitting, cause operations for the drilling of a second well to be begun and prosecuted with like diligence, for the purpose of further testing the lease for oil and increasing production; and that after the discovery of oil in paying quantities he would cause the lease to be explored and developed in good faith and with due diligence. The second paragraph of the contract reads as follows:
"Party of the first part, though only a joint owner as hereinbefore stated, shall retain the legal title of said properties, subject to his right of transfer as hereinafter provided, and he shall have full and exclusive control of all operations under said leases and the marketing of all products obtained, without hindrance or interference by other parties hereto or any of them, and he shall exercise due diligence and good faith in so doing."
Other provisions were to the following effect: Brooks was to advance the necessary funds, collect all revenues and income, and account to the parties of the second and third part for their respective shares and portions after deducting the loans of $10,000 and $5,000, with interest. Brooks was to render monthly statements of oil produced and prices at which it was sold. Arbitration was provided for in the event of disagreement as to prices realized for oil sold, extent of exploration and development, or quantity of oil that should be produced and sold. Brooks was to be at liberty to assign the lease, "charged with the obligations herein imposed to a corporation all or substantially all of the stock of which may be owned by the Texas Company." In the event of assignment, the assignee corporation was to assume all the obligations of Brooks, and he was to be relieved from all further liability.
The Texas Company of Mexico, S.A., was incorporated under the laws of Mexico in March, 1917, and in October of that year Brooks assigned the Obando lease to that company, all the stock of which was owned by the Texas Company, a Texas corporation.
The Obando lease granted the right to drill for oil on lots 153, 154, and a narrow strip off the northern part of lot 96, all in Chinampa, canton of Tuxpan, state of Vera Cruz. That lease will be referred to herein as though the lots just described were all that were affected by it; for, while it also covered other lots, they play no part in this litigation. Two producing wells were drilled on the Obando lease, one being completed in December, 1918, and the other in July, 1920.
This suit was brought in a state court at San Antonio in 1919, after the completion of the first well, by E.O. Burton, a citizen of Texas, against Roos, the Texas Company of Mexico, hereinafter called the Mexican company, and also against the Texas Company, and other citizens of Texas. Burton sought an accounting on the theory that he was entitled to an undivided half of Roos' interest in the contract and the lease. The Texas Company filed a general answer of denial. Roos filed a motion to remove the suit to the federal District Court, alleging that he was then a citizen of New York, and that the defendants who were citizens of Texas were made parties defendant for the fraudulent purpose of depriving the federal court of jurisdiction. The suit was removed, and Conn, who in the meantime had been appointed Burton's trustee in bankruptcy, filed an amended bill which sought relief only against Roos and the Mexican company. Roos and the Mexican company filed answers to Burton's suit; Roos denied Burton's claim in toto. The Mexican company alleged that it had faithfully performed its obligations, and accounted for profits up to date to the parties entitled to receive the same, under the contract, and was able, ready, and willing to account in the future to such parties as the court should determine were entitled to receive such accounting; that Burton had served notice on it not to pay the share of profits claimed by him to Roos; that Roos was denying Burton's claim, had served notice on it not to make any further payments to Lane, Wolters Storey, was also denying that it had performed its obligations under the contract, and was refusing to settle on the basis of the accounting tendered him by it. Lane, Wolters Storey intervened to protect the interest claimed by them. Roos took issue with the Mexican company in an answer denying that it had properly accounted to him for his share of the net profits, or had complied with its contract obligation to develop the lease. He incorporated in his answer a counterclaim against the Mexican company alleging that it had breached the contract in the following particulars: It had delayed the beginning and completion of drilling operations on each of the wells that had been drilled on the lease; had drilled one well in the wrong place and to an unnecessary depth, and allowed another to blow itself in with the result that the drill stem which was caught in it impeded its flow; had failed to drill offset wells so as to protect the two producing wells on the lease from drainage; had discriminated against the Obando lease in which it had only a half interest by shutting down or reducing the flow of the wells on it, and at the same time operating to full capacity wells on leases in which it owned the entire interest; had permitted other wells in which it had no interest to drain off the oil under the Obando lease; and had failed to drill other wells on that lease from which it could and should have produced vast quantities of oil. Roos finally alleged that in the doing of these things the Mexican company was guilty of negligence, bad faith, and fraud, because of all of which it had become liable to account to him for damages, which he laid at $20,000,000. Roos sought to assert his counterclaim against the Mexican company against the Texas Company also; and to that end moved to have the Texas Company made a party to the suit; but his motion was denied, and by an order entered in 1925 the Texas Company was dismissed from the suit. Again, on the date of the final decree, the court denied another motion submitted by him to bring in the Texas Company as a party defendant.
Roos also filed an answer to the intervening petition of Lane, Wolters Storey denying that they were entitled to any share in the net profits derived from the lease, and in a counterclaim against them he sought a cancellation of his agreement under which they were to receive a fourth of his net profits, on the ground of partial failure of consideration, alleging that after the execution of the contract sued on they had refused to represent him in matters relating to the enforcement and protection of his rights under such contract.
The court first considered Burton's claim, and upon final hearing dismissed the bills filed by him and his trustee in bankruptcy by a decree which on appeal was affirmed, Conn v. Roos (C.C.A.) 14 F.2d 64; but retained jurisdiction to determine the issues raised by Roos against the Mexican company and Lane, Wolters Storey.
By a subsequent final decree dated March 26, 1927, and entered after hearings on the several issues reserved for further consideration, it was adjudged (1) that Roos recover from the Mexican company $1,500,672.70, being the balance with interest at the legal rate found to be due on accounting for oil actually produced during the accounting period from the Obando lease; (2) that, except as just above stated, Roos take nothing by reason of his alleged causes of action and counterclaim against the Mexican company; and (3) that Roos take nothing against Lane, Wolters Storey. The accounting period referred to in the decree extended from the beginning of operations up to and including January 31, 1922, and the decree reserved the matter of accounting for oil actually produced since that date.
Both the Mexican company and Roos have taken appeals, on the same record, from that decree.
The oil field in which the Obando lease is located is called the south field, and is about 80 miles south of Tampico, which was its nearest supply base. Supplies were transported from Tampico by boat through a canal for a distance of 70 miles, and then overland by wagons and trucks a further distance of ten miles to destination. The south field began to produce oil in large quantities as early as 1910, and, as more producing wells came in and production increased, a port at which oil could be sold or exported was established twenty miles to the east at Port Lobos on the Gulf. Port Lobos stretches along the shore of the Gulf for about twenty miles, and up and down this shore were built terminals and loading facilities. Oil was transported to Port Lobos through pipe lines and from it through sea lines to ships anchored in deep water. These pipe lines, terminals, and loading facilities were privately owned by oil producing companies. In October, 1918, the Mexican company completed its pipe line to Port Lobos, established a station for pumping oil through it at the small nearby village of Tepetate, which was 2.7 miles north of the Obando lease, and at the same time or later built terminals, loading facilities, and a refinery at Agua Dulce, Port Lobos. As the producing wells on the Obando lease came in they were connected by a lateral pipe line with the main pipe line at Tepetate. The Mexican company had taken over the oil produced from the Obando lease during the accounting period, and accounted to Roos on the basis of prices prevailing from time to time at the well mouth. This basis of accounting it offered testimony to prove was agreed upon by Roos and Brooks at the time they executed the contract, and also existed under a well-established custom, in the absence of express agreement providing for some other and different basis of accounting. But the court either rejected or refused to consider that testimony, holding that the Mexican company would have to account to Roos on the basis of the market value of oil; and appointed a special master to state an account based on market value at the mouth of the wells, at Tepetate, and at Port Lobos. The master was also required to make a report, together with his findings of fact, of all evidence submitted and considered by him in making up his statement of account. The court approved findings of the master to the following effect: There was no market value of oil at the well mouth, or at Tepetate, but oil had a market value at Port Lobos. The Obando lease produced during the accounting period 6,206,691.66 barrels of oil. Of this total production 427,281.29 barrels were sold by the Mexican company to the Metropolitan Company under a contract calling for delivery at Tepetate over a period of three months, at 75 cents per barrel. The market value per barrel averaged $1.785 during the first month, $1.40 during the second month, and $1.27 during the third month. The amount delivered was 919,138 barrels. During the period covered by this contract the Obando wells produced 536,815 barrels, and other wells owned exclusively by the Mexican company produced 2,000,000 barrels. The Mexican company sold to the Texas Company all the oil produced from the Obando lease, except that included in the just mentioned sale to the Metropolitan Company, of which approximately 22 per cent. was accounted for at the market value; and the remaining 78 per cent., or 4,455,914.39 barrels, at prices usually though not invariably below the market value, but always above the prices used as the basis of accounting to Roos.
There were no posted prices any where in the oil field, and such sales as occurred were made by subsidiary to parent companies, or by one producing oil company to another to enable the seller to dispose of a surplus of the purchaser to fill its sales contracts. The pipe lines were not common carriers. It is agreed that there was no market at Tepetate. There were no posted prices at Port Lobos, and as a rule the ships that came there for cargoes were owned by large oil companies which were interested in leases in the south field. But sales were frequently made to purchasers who were not producers of oil. Every sale under consideration called for the delivery of a large quantity of oil, usually a ship's cargo. It is conceded that there was a market for oil at Port Lobos. The master arrived at market prices usually by taking two or more sales and dividing the sum of prices per barrel by the number of sales. As the prices increased or diminished, a new period of accounting would be selected, and in this way the whole accounting period was cut up or subdivided into twentytwo periods, the majority of which extended over a month or more, though some were of shorter duration and at least one was changed at the end of the third day.
The court adopted the market values recommended by the master.
In instances where sales were made at prices above market prices as thus established, the accounting had was on the basis of receipts from sales.
The master in stating the account allowed as a deduction from market prices which he found to exist at Port Lobos 15 cents per barrel for transportation through the Mexican company's pipe line from the wells. He made findings to the effect that the amount so deducted represented the usual and customary charge for such transportation, that at all times the Mexican company's pipe line had a surplus capacity sufficient to transport all the oil produced from the Obando lease and sold to the Texas Company, and that evidence submitted to him as proof of the actual cost of transporting oil was inconclusive and therefore unsatisfactory. Those findings, as well as the deduction allowed by the master, were also approved by the court. The evidence without serious dispute sustains the findings that the original pipe line equipment had sufficient surplus capacity at all times, except perhaps at the very beginning, to take care of the oil produced from the several leases, and that 15 cents was the usual charge made for transporting oil to Port Lobos. The Mexican company itself entered into at least eight contracts involving altogether several million barrels of oil, which it agreed to transport at that price. The contract contained a clause under which the Mexican company, in accounting to Roos, was authorized to deduct and retain "all expenses of carrying on operations," together with interest thereon at 6 per cent. per annum. The master reported it as his opinion that the Mexican company was entitled to deduct the actual cost of transportation, provided the usual and customary charge was not exceeded. The District Judge expressed the view, however, that under the contract the actual cost of transportation formed a part of the operating expenses; but held that such costs had not been satisfactorily shown, and therefore adopted the customary charge as the best proof before him concerning the amount which should be deducted from the market price at Port Lobos. The books and cost statements of the Mexican company were filed in evidence for the purpose of showing the actual cost of transportation per barrel.
They purported to show the following total investment, together with operating expenses, in pipe lines, terminal and loading facilities during the years 1917 to 1921 inclusive:
Date Investment Expenses Total
1917 ......... $ 372,940.00 $321,111.75 $ 694,051.75 1918 ......... 2,104,176.20 321,711.75 2,425,887.95 1919 ......... 2,483,838.34 524,662.53 3,008,500.87 1920 ......... 3,750,741.37 951,479.69 4,702,221.06 1921 ......... 4,744,965.02 607,332.29 5,382,297.31
The equipment as it existed at the end of 1919 was sufficient to serve all the needs of wells then being operated by the Mexican company. None of the increase in investment or operating expenses after 1919 was used or useful for the Obando lease; but the whole of such increase was made for the benefit of the Mexican company's refinery at Agua Dulce, Port Lobos, and was spent in providing additional facilities there, and in building 21 miles of new pipe line in order to get oil from wells in Zacamixtle and Amatlan, south of the territory served by the original pipe line. The refinery had a daily capacity of 10,000 barrels, and during the accounting period refined 7,000,000 barrels of oil. The "Agua Dulce Works" were provided for receiving, storing, and loading oil, and for crude distilling, but were treated as a part of the refinery plant. There was no segregation of investment as between the refinery on the one hand and the pipe line, terminal, and loading facilities on the other, but the accounts were all kept in the name of the Agua Dulce Works. All the general and departmental expenses throughout the accounting period were charged to expenses of operation, though it was stated by the Mexican company's accountant that, after the construction work was completed, correct bookkeeping methods would have required one-third of such expenses to be charged to the investment account and the balance to operating expenses. The results were that, beginning with 1919, the investment that should have been amortized was shown to be less than it really was, and that by paying off the investment overhead year by year the cost of transportation was improperly increased. The Mexican company's books did not purport to show the barrel cost of transporting oil. D.J. Moran, its vice president and general manager, testified that in his opinion it was impossible to arrive at such actual cost from the books of account; its accountant testified that it was possible to develop the amount which should be prorated to investment, but that never was done. There were transported through pipe lines during the accounting period 29,706,161 barrels of oil, of which 15,540,967 barrels were produced from wells in original pipe line territory, and 14,165,194 barrels came from Zacamixtle, Amatlan, and other territory to the south, passed first through the pipe lines constructed after 1919, and then through the original pipe line constructed before or during that year. Moran appeared at the hearings before the master as a witness and undertook to apportion or allocate in percentages such part of the investment as should be charged to the refinery with the idea of having the balance of the investment and operating expenses considered in arriving at the actual cost of pipe line transportation. Jesse Corry, a man who was familiar with the south field and an expert accountant, testified for Roos. He said that in his opinion the cost of transporting oil from the part of that field in which the Obando lease was located to Port Lobos was 8 cents per barrel in a plant adequately but not extravagantly equipped, and operated at full capacity, of which 4 cents should be charged to investment and 4 cents to expenses of operation, and that, if the plant were operated at half capacity, the cost of investment would remain the same, but the operating cost would be doubled, thus making 12 cents the total cost. His estimate of cost allowed 12 per cent. for depreciation and included a charge for return on the investment calculated at 6 per cent. per annum; and his estimate of salvage value was 20 per cent. of the original investment. He gave his opinion, in answer to questions on cross-examination, as to the amount that should be apportioned to the refinery, and said that none of the investment appeared to be excessive; but it is apparent from his testimony that he was not familiar with the relative investments in the several branches of the Agua Dulce Works. Counsel for the Mexican company have taken Corry's testimony, and had a calculation made which it is contended shows that the cost of transporting oil from the territory covered by the pipe line as extended after 1919, including 12 per cent. for depreciation and allowing 6 per cent. interest as a return on the investment, as Corry had done, was 31.6 cents per barrel, whether the calculation were based on the total number of barrels or the yearly average investment.
An allowance of one-fifth of the overhead expenses incurred in producing oil from wells operated by the Mexican company, including the cost of transporting supplies, was approved as against Roos, on the undisputed testimony of witnesses who said that allowance was fair, considering the actual work done. Supplies and materials for several wells would sometimes be brought on the same boat, and the cost of transportation would be charged to each well in proportion to the supplies and materials distributed to it. In the same way, if, for example, laborers worked half a month on the Obando lease and the other half on some other lease, half of their wages for that month would be charged to each lease. These were called proportion charges, and were allowed. The Mexican company made a payment of $58,000 after the expiration of the accounting period, and credit for that amount was not given in the master's statement of account. The court allowed credit for that payment, but in doing so failed to give Roos credit for $557.25 as interest which had accrued at date of payment.
The Texas Company became interested in the north oil field west of Tampico as early as 1912, and in the south oil field, in which the Obando lease was located, in 1915; its interests being represented by three corporations which it controlled through stock ownership or otherwise. Those corporations were the Producers' Oil Company, the Tampico Company, both Texas corporations, and the Panuco Transportation Company, a Mexican corporation. Brooks obtained the Obando lease for the Producers' Oil Company, of which he was president.
He was also attorney for the Texas Company, and acquired for it, or for some one or more of the other companies just named, a number of oil leases in the south field and a concession to construct pipe lines. An act of the Texas Legislature, chapter 31, approved February, 1917, conferred authority upon Texas corporations engaged in the business of producing oil to organize and own the capital stock of foreign corporations engaged in the same business outside the limits of that state. In October, 1917, there were transferred to the Mexican company the leases and concession for pipe lines acquired by Brooks, and all the properties of the Producers', Tampico, and Panuco Companies. A majority of the board of directors of the Mexican company during the time practically all the Obando lease oil was produced and disposed of were not officers or directors of the Texas Company, though some of the officers of the former company were all the while officers or directors of the latter company. There was no other evidence or circumstance from which it reasonably could be inferred that the directors of the Mexican company were controlled by officers of the Texas Company in respect of the prices at which oil was sold or the manner in which the Obando lease was developed. In 1915 decrees were promulgated by Carranza, as "First Chief * * * in charge of the executive power" of Mexico, suspending work connected with the exploitation of oil, and claiming all the deposits of oil brought to the surface by a continuance of such work as the property of that Republic. The Constitution of Mexico, adopted in 1917, in article 27, declares that the ownership of petroleum deposits is vested in the Republic, that only Mexican citizens and corporations shall have the right to obtain concessions to develop mineral fuels, but that the Republic may grant the same right to foreigners who agree to be considered Mexicans and not to invoke the protection of their governments in respect of such property.
The district judge heard all the witnesses except those who testified only before the master on the subject of accounting. On the Lane, Wolters Storey branch of the case, the testimony for each side supported the case stated in the respective pleadings. That testimony was therefore in direct conflict; and which way the controversy would be decided depended upon whether the court accepted the statement of Roos or of Wolters, as these two were the principal witnesses. In support of his testimony Roos introduced a number of letters he had written to Wolters during a period of time extending from May to August of 1917, insisting that Wolters had agreed to see to it that the lease was promptly developed, and complaining of a delay in drilling operations. No definite denial of the agreement thus asserted was made by Wolters or his firm until August, 1917, when, in reply to a letter from Roos stating his intention to cancel the fee agreement because of a failure of consideration and to employ other attorneys, Wolters replied that the employment of his firm to represent Roos ended with the execution of the contract. Roos, proceeding apparently on the theory that the court might cancel his agreement with his attorneys on the ground of failure of consideration, and allow them only a reasonable fee for services actually rendered, testified that Wolters, who acted for his firm, had been of no real assistance in securing the contract, and had failed to have incorporated in it any provision of substance that was not included in the original draft of contract tendered by Brooks. In this connection he complained bitterly because, as he said, Wolters agreed with Brooks that the mortgage of July, 1917, which was held for the benefit of the Texas Company by one of its attorneys, was in proper form, notwithstanding that it shortened the time provided in the contract for repayment of the loans. Wolters testified that the obligation of his firm to represent Roos ended with the execution of the contract, and claimed credit for the insertion therein of the clause providing for the marketing of oil with due diligence. He further testified that he advised Roos not to sign the mortgage as it had been prepared and submitted for execution. It is undisputed that the attorneys selected by Roos were to his knowledge attorneys for the Texas Company, and were on friendly terms with Brooks. Roos and Wolters were related to each other and had been friends for a long time. The evidence on this branch of the case was heard in 1921, and at its conclusion the District Judge, in commenting on the conflict of evidence, stated that he accepted the statement of Wolters as against that of Roos; and announced his intention to find in favor of Lane, Wolters Storey when the time came for the entry of a final decree. Afterwards Wolters appeared as a witness for the Mexican company, and testified that it was the intention of the parties interested in the contract at the time of its execution to allow the assignee of Brooks to take over the oil produced and settle for it on the basis of its reasonable value at point of production. In a motion filed before the entry of the final decree, Roos brought to the court's attention the testimony of Wolters given before and after the hearing on this branch of the case, and, on the ground that such testimony was contradictory and destroyed the credibility of Wolters as a witness, prayed for a decree in favor of himself as against Lane, Wolters Storey.
The claim of damages asserted by Roos, because of the alleged failure to develop the lease promptly and properly and protect it against drainage, can perhaps be more readily understood by referring to a map of a section of the south oil field received in evidence which shows the locations of the Obando lease, of other leases owned exclusively and developed by the Mexican company, and of still other leases in the vicinity which were developed by other oil producing companies. We insert a copy of that map, indicating on it by heavy black lines the Mexican company's lease on lot 11, called the Rosas lease at the north; the Obando lease on lots 153, 154, and part of 96, near the middle, and further south, the Mexican company's lease on lots 114 and 133, the last named being known also as the Beyers lease. Oil wells are indicated on the map by circles, and are numbered to show the order of drilling upon each lease or lot.
There was filed in evidence a statistical table which was approved by the District Judge as being correct. It shows as to each well indicated on the above map, among other things, the dates on which drilling operations were begun and completed, depth below sea level, total production in barrels, and date of abandonment. That table discloses the following information concerning the wells drilled by the Mexican company:
Lot Well Date Date Depth Production Abandoned No. No. Begun Completed
153 1 6/ 4/17 12/24/17 3005 None-dry 153 2 4/13/18 12/ 2/18 1766 | 5,205,085 153 4 10/29/19 7/17/20 1810 | 11 1 12/__/16 6/12/17 2284 none-dry 11 2 7/ 7/17 1/16/18 1907 | 1/13/20 4,000,000 11/19/19 11 3 10/11/17 9/25/18 1929 | 114 2 3/31/20 1870 4,434,276 133 1 10/29/19 1731 800,000 1/__/21
The cause of the abandonment of the well on the Beyers lot 133 is not stated, but cessation of production on Rosas No. 2 and No. 3, lot 11, was attributed to salt water. By way of further explanation it should be said that the above table of statistics was compiled before the end of the accounting period, and therefore shows less total production from the Obando lease, and also from lot 114, than was shown at the close of that period. At the end of March, 1924, the Obando wells had a total production of a little over 6,300,000 barrels, and were still flowing, though during the last month production had dwindled down to 600 barrels. As of the same date the well on lot 114 had a total production of approximately 5,844,000 barrels, and during the last month the production amounted to 22,046 barrels. Uncontradicted evidence discloses that there was no negligent delay either in beginning or continuing drilling operations on the Obando lease. Such delay as existed was caused by the Mexican Revolution. Possession of the oil field was sought by the contending forces, with the result that the Mexican company's supplies and materials were seized and its employees interfered with in their work. The lease was in unproven territory, between producing wells to the north and south. Obando No. 1 was located as an offset to a well being drilled at the same time on lot 148 and which later also proved to be dry. It was drilled to no greater depth than was insisted upon by Roos, and was abandoned without striking oil-bearing rock. Drilling operations on Obando No. 2 were suspended about 4 o'clock in the afternoon immediately upon striking what was taken to be shale above the oil-bearing rock. That well blew itself in about six hours later and in doing so caused a four-inch drill stem to be caught in it. It was the intention of those in charge to drill to within 150 or 200 feet of the shale, and then to take out the rotary drill which was being used and substitute for it a standard rig. The daily capacity of the well with the drill stem in it was about 10,000 barrels. A permit to drill Obando No. 3 was obtained, but that well was not drilled; instead Obando No. 4 was driven as an offset to two wells on the adjoining lot 162, designated on the map as Libertad No. 1 and No. 2, but referred to in the testimony as wells of the Metropolitan Company. Libertad No. 1 was completed in December, 1918, at a depth of 1,831 feet, and produced over 11,000,000 barrels of oil. Salt water appeared in it March 1, 1920, but the statistical table does not show the date of abandonment. Libertad No. 2 was commenced August 17, 1919, completed April 3, 1920, at a depth of 1,881 feet, produced 1,789,000 barrels of oil, and was abandoned May 30, 1920, on account of salt water which first made its appearance three days before date of abandonment. Under a decree of the Mexican government, issued in February, 1918, permits to drill oil wells were refused. That decree was modified by Carranza in January, 1920, so as to authorize permits. Notwithstanding that decree the Mexican company began to drill Obando No. 4 in October, 1919, but was promptly compelled to suspend operations by Mexican troops. Between the Obando lease and lot No. 114 was a place referred to in the testimony as kilometer 22, which it seems was the dividing point between the forces of Carranza on the north and those of Palaez on the south. The Palaezistas did not require permits for drilling oil wells, and so the Mexican company was not delayed in the drilling of its well on lot 133, known as the Beyers lease. The period of alleged discrimination against the Obando lease in favor of the Rosas lease was the last half of 1919. During that period the capacity of the former lease was about half that of the latter, and the production of oil from the two leases was practically in the same proportion.
There were two pools of oil in the south field, designated as the north pool and the south pool. The Obando wells were in the extreme southern part of the north pool, and 2.7 miles from the Mexican company's Rosas lease, which was in the northern part of the same pool. In between these two leases were a number of producing wells, among them being the Juan Casiano No. 7 on lot 165, which was completed in 1910 to a depth of 1,920 feet below sea level, and abandoned on account of salt water in November, 1919, after it had produced over 78,000,000 barrels of oil — a production which it is said had not been equalled by any oil well in the world. There is a structural break or fault between the north and south pools. It extends in a northwesterly and southeasterly direction across lot 153, the southwest part of lot 162, and the extreme northeast part of lot 98. Obando No. 4 is just inside the north pool; Obando No. 1 on lot 153, and Union No. 1 on lot 162 are south or southwest of the fault line. According to the great weight of testimony given by the geologists, the southwest two-thirds of lot 153, all of lot 154, the northwest part of lot 96, of the Obando lease, and lots 98, 99, and other lots to the northeast, are in dry territory. Libertad or Metropolitan No. 2 on lot 96, and Union No. 1 on lot 162, both completed in 1920, were dry holes. One geologist, named Small, testified for Roos, and stated that in his opinion there was a possibility, but hardly a probability, that oil circulated freely from one pool to the other, or that there was only one pool. Before he testified in this case, Small had prepared a contour map on which he indicated the structural break and dry territory as they were described by all the other expert witnesses. The oil-bearing formation underneath the south pool is a porous rock known to geologists as "Tamasopa lime," and was encountered at an average depth of approximately 2,000 feet below sea level. The Tamasopa lime in this field is not, however, of uniform depth below sea level; elevations and depressions appear in it, much as they do in a chain of hills on the earth's surface. Its average width is about half a mile, with downward slopes on the sides toward the east and the west. It contained salt water as well as oil. The water, being heavier, forced the oil up against the overlying impervious rock. As oil was removed by wells, salt water rose to take its place, and so a well when the oil below it was exhausted could produce only salt water. Upon the assumption that the Tamasopa lime was of uniform porosity, the well deepest below sea level would come to salt water first, the next deepest next, and so on to the shallowest well, which would come to salt water last.
The Mexican company contends that the court erred (1) in holding that it did not have the contract right to take over the oil and account to Roos on the basis of prices prevailing at the wells, or to sell at less than established well prices and settle with Roos on the basis of receipts from sales, provided such sales were made in the exercise of good faith and due diligence; and in adopting, instead, as a basis of accounting the market value of oil at Port Lobos; (2) in refusing to approve the sale made under contract to the Metropolitan Company, and in requiring an accounting for oil sold to that company at the market value; (3) in adopting arbitrary accounting periods during which isolated sales were made at prices in excess of market prices, with the result that the values thus arrived at were higher than the prevailing market values; (4) in requiring oil which it sold at prices above market prices to be accounted for on the basis of receipts from sales; (5) in refusing to allow the alleged actual cost of 31.6 cents, or more, per barrel, and in allowing instead only the usual and customary charge of 15 cents per barrel, for transportation of oil through pipe lines from the oil field to ships at Port Lobos; (6) and in allowing any interest on the amount found to be due.
Roos contends that the court erred, (1) as to matters concerning which an accounting was decreed (a) in making excessive allowances for overhead expenses and proportion charges, (b) in not giving him the benefit of the highest market value of oil produced from the Obando wells between the dates of production and accounting, (c) in not allowing interest on the amount due at the highest legal rate, and (d) in not allowing interest on $58,000 paid by the Mexican company after the expiration of the accounting period; (2) in denying his motion to make the Texas company a party to the suit; (3) in refusing to cancel, or to grant other equitable relief against, his agreement with Lane, Wolters Storey; and (4) in denying his claim that he was entitled to recover as damages the value of his share of oil which in the exercise of good faith and due diligence would have been produced from the Obando lease, but which was lost to him because of a failure properly to develop the lease within a reasonable time and protect it against drainage by other wells in the oil field.
T.J. Lawhon, of Houston, Tex., Howard Templeton and S.J. Brooks, both of San Antonio, Tex., and C.B. Ames, of Oklahoma City, Okla., for Texas Co. of Mexico, S.A.
R.L. Batts, of Austin, Tex., and J.B. Lewright, of San Antonio, Tex., for Edward Roos.
Thos. B. Blanchard, of Houston, Tex., and Claude V. Birkhead, of San Antonio, Tex., for Lane, Wolters Storey.
Before BRYAN and FOSTER, Circuit Judges, and GRUBB, District Judge.
We come now to dispose of the various contentions of the parties.
As to the accounting. In our opinion the contract as written did not confer upon the Mexican company, as assignee of Brooks, the right to take over the oil and account to Roos on the basis of its value at the wells. In several places the contract speaks of accounting for all oil produced at the prices realized upon sales, but never once of an accounting upon any other basis. Besides, all net profits were required to be distributed in proportion to the shares of the parties interested. The inference is clear that the oil was to be sold in solido for the benefit of all parties concerned. It is argued that the clause which provided for the "marketing of all products obtained" conferred a right and not a duty; but, if so, it was a right coupled with a duty, because good faith and due diligence were required to be exercised in marketing. The contract could not be varied by contemporaneous parol evidence of the understanding of the parties. Nor was proof of custom in the absence of express agreement material, for the contract construed as a whole affirmatively imposed the duty to sell. There was no market for oil at the wells. Such sales as occurred there were not made by independent sellers to independent buyers, except that occasionally oil was exchanged, sold, or bought by a producer to meet an emergency. In the main, sales at the wells were made by subsidiary to parent companies. No prudent unhampered owner would voluntarily have sold his own oil at the well mouth, because the prices obtainable there were controlled by the purchasers, and there was an available market within easy reach. The contract was silent as to the place of sale, but it became the duty of the Mexican company, in the exercise of that good faith and due diligence which it had assumed, to seek to obtain the reasonable value of the oil. It is conceded that such value was not obtainable at Tepetate, or elsewhere in the oil field.
Port Lobos was the nearest available market, and the oil would have been taken there for sale by a prudent owner, or by one performing the duty of exercising reasonable care to realize its fair value. Port Lobos was not a standard market in the sense that there were posted prices at which oil could always be immediately bought and sold, but frequent sales, from which values could be determined, were made there. It is frankly conceded by the Mexican company that if it rested under the duty to sell at Port Lobos and reasonably could have sold for the prices found by the master and approved by the court, it should have done so. But it is argued that in arriving at market values the master adopted, and the court approved, the wrong method, in that such values were determined by using arbitrary periods; that the method so adopted and approved was not correctly applied, because the average market price for a given period was based upon the number of sales contracts, whereas it should have been calculated upon the number of barrels. The periods were not arbitrary, but were changed to keep up with the rapid fluctuations in prices. It may be conceded that under some circumstances the number of barrels sold should be considered in arriving at the average prices. But all the sales in question here involved large quantities of oil, and the difference in prices does not seem to have been dependent upon the quantity sold. It therefore was proper to calculate the average price upon the basis of the number of sales contracts; and a calculation based upon the number of barrels would have been unfair, because a sale involving the greatest number of barrels, though the mere size of the sale was without influence on the market, would have shown a less average price than was realized upon smaller but substantial sales. It is not necessary to hold that all sales should have been made on a spot market; for it may very well be that a sale at a price, reasonably close to the market value, for future delivery would be permissible. We are concerned with only one contract for future delivery, and that was made to the Metropolitan Company. That contract was made at Tepetate, where admittedly there was no market, much below the market price obtainable at Port Lobos. Besides, in making deliveries under it, 80 per cent. of the total production from the Obando lease was used, whereas only 25 per cent. of the total production was taken from wells which were owned exclusively by the Mexican company. In this way the Mexican company threw an undue burden of a losing contract on Roos, freed its own oil practically to the full extent possible, and made it available for sale at more favorable prices. We think the trial court was right in refusing to sanction this sale. The Mexican company was bound to account to Roos for his share of the net profits. The minimum requirement to sell at the best price which reasonably could be obtained cannot be used by it as an excuse for taking advantage of and profiting by sales which were made above the market. Under the contract the Mexican company was entitled to interest at 6 per cent. on operating expenses. The cost of transporting through the pipe lines was clearly an operating expense; but, on the theory that it was not so treated or considered by the parties at interest, the Mexican company contends that it was entitled to interest at 25 per cent. because of the uncertain and hazardous nature of its investment. Although the company so interpreted the contract as to relieve itself of the obligation to market oil, certainly Roos did not agree to such interpretation.
And so there did not exist the practical construction insisted upon. But when the duty of transporting the oil to Port Lobos was imposed, of course it became necessary in determining net profits to deduct the cost of transportation to place of sale. The Mexican company was therefore entitled to recover the actual cost of transportation, together with interest at the contract rate.
Upon proof of such cost, the usual or customary charge was immaterial. If, however, actual cost was not satisfactorily shown, it was not error to accept the customary charge as the only fair and reasonable measure of compensation shown by the evidence. The Mexican company's method of keeping its books made it difficult to calculate with accuracy the cost of transportation. Those books did not purport to show such cost, as was admitted by the company's general manager and accountant, but a consolidated investment account was kept, and hence it became the task of experts to segregate and make apportionments, with the result that at last only an estimate could be or was given. It so happens, as we understand the evidence, that there was only a slight difference between the customary charge and the estimated actual cost.
That difference becomes negligible upon consideration being given to inaccuracies inherent in the attempted apportionment and in the bookkeeping method adopted of treating unascertained general and departmental overhead expenses as capital investment. After deducting the 20 per cent. salvage estimated by Corry, the total investment claimed at the end of 1919, by which time all the equipment which was of any use to the Obando lease had been installed, amounted to $2,406,800; and the total investment claimed as of July 31, 1921, amounted to $4,907,538, the increase being made up of investments for pipe line in new territory and of improvements at the Agua Dulce Works for the benefit of the refinery. For purposes of comparison, and in order to avoid unnecessary repetition of figures, we shall assume that the total investment at the end of 1919 was half that of July 31, 1921, that the total production was 30,000,000 barrels, that there was an equal production in barrels as between the original pipe line territory and the new pipe line territory, and that 30 cents was the amount contended for as the actual cost per barrel. These assumptions do no violence to the facts, as it is conceded by the Mexican company that the cost per barrel would be the same, whether based on yearly average investment or on number of barrels. The total production of 30,000,000 barrels of oil at 15 cents per barrel was sufficient to retire that half of the total investment which was made by the end of 1919 in the original pipe line territory. Half of that production came from that territory and included the oil taken from the Obando lease; the other half came from the new pipe line territory, but passed through and had the equal use of the original pipe line equipment. If each half contributed equally, 15 cents per barrel would have been the actual cost of transportation. There would then be left half of the total investment which was created after 1919 to be retired, either with or without the aid of production that came from the original territory. It is on the theory of equal contribution by the production in the old territory to the cost of transportation in the new, resulting in a flat rate for both, that the claim is advanced that the actual cost was 30 cents or more per barrel. But we are of opinion that this theory ought not to be accepted. It is conceded in the brief of counsel for the Mexican company that the pipe line in the new territory added very little to the investment and operating expenses, and this concession is in harmony with the evidence. In the first place, the additional investment was made for the benefit of the refinery, and, regardless of the apportionment of the experts, it is apparent that no investment after 1919, aside from the cost of extending the pipe line, was necessary to afford transportation of oil from point of production to ships at Port Lobos. The terminal and loading facilities were adequate after as well as before 1919, due to the decreased production in the original pipe line territory. There may have been, as it seems to us was admitted, unwise and unnecessary expenditures for the benefit of the refinery; but in any event it does not appear that such expenditures or any part thereof should be taxed against the production in the vicinity of the Obando lease. The capital investment was practically doubled after salt water began to make its appearance in the Mexican company's wells, and in other wells in which it had no interest, in the original pipe line territory. The wells on the Rosas lease had gone dry, and so had the wells on lot 162 adjoining the Obando lease. In the nature of things, the new capital investment could not have been intended to benefit the wells that had become or were rapidly becoming exhausted. Under the circumstances, we are of opinion that the production in the original territory, in which the Obando lease is located, should not be taxed anything on account of the increased investment after 1919 which inured principally to the benefit of the refinery.
It was not error to require the payment of interest at the legal rate. Although the amount due is in dispute and is unliquidated, yet, if a claim represent a pecuniary loss which may be ascertained with reasonable certainty, interest should be allowed. Miller v. Robertson, 266 U.S. 243, 258, 45 S. Ct. 73, 69 L. Ed. 265; Kishi v. Humble Oil Co. (C.C.A.) 10 F.2d 356. Roos contends that the allowance made for overhead expenses and proportion charges was excessive. The evidence shows that they were just and fair considering the work done and the services rendered.
The Mexican company did not become liable for the highest market value of oil produced from the Obando lease between the dates of production and accounting on the theory advanced by Roos that it converted the oil. It did not. It had legal title to the oil, and the undoubted right to sell it. Nor did the Mexican company become liable to Roos for interest at the highest rate on the theory advanced by him that it was a trustee and had used trust funds for its own benefit. The general rule is that a lessee in an oil lease is not a trustee for the lessor, but that the two deal with each other at arm's length. The lessee is not bound to work unprofitably for himself for the profit of the lessor. 18 R.C.L. 1212. While the parties at interest here were not lessor and lessee, yet the general rule just stated applies to them; for the rights of Roos were not greater than those of the lessor, nor were the obligations of the Mexican company more burdensome than those of the lessee, under an ordinary oil lease. Their contract is the measure of their rights and obligations; and it is very clear that it was not the intention to limit the right of the Mexican company to develop its own wells. There was nothing inconsistent in the provision that it should also develop the lease in which Roos was interested. The sum of $58,000, on which Roos claims interest, was paid after the end of the accounting period. Nothing more need be said about the interest item, since the account was not closed by the decree.
As to the Texas Company. The ground on which Roos sought to assert his several claims against the Texas Company was that the Mexican company was its mere instrumentality or agent. It is insisted in the first place that the Texas Company is still a party to the suit, because it was originally made a party and filed an answer, and no order was entered dismissing it from the case. After the answer referred to was filed in the state court, Roos secured an order of removal to the federal court on the ground, not that he had a separable controversy, but that Burton had made the Texas Company a party fraudulently, in order to deprive the federal court of jurisdiction. While a motion to remand was pending, Burton's trustee in bankruptcy filed an amended bill of complaint which asserted no cause of action against the Texas Company, and did not even name it as a party defendant. Roos first sought to bring the Texas Company back into the case in his counterclaim, but in this he failed; and an order was entered, according to the record before us, dismissing that company from the suit.
The reason for the organization of the Mexican company is not left open to doubt. The Texas Company was unwilling to surrender its right to appeal to the government of the United States for the protection of its property, in order to comply with the decrees of Carranza and article 27 of the Constitution of Mexico. For the purpose of doing business which it was unable or unwilling to do itself, it organized a company under the laws of Mexico. Roos thoroughly understood the situation and was bound to know that the contract might, and in all probability would be performed by just such a corporation as the Mexican company; for that corporation was organized in literal compliance with the contract. The Texas Company subscribed to all its capital stock, and Roos agreed to accept its obligation to perform the lease and pay him for his share of the oil. The circumstance that the Texas Company owned all the stock of the Mexican company is not sufficient to support the inference that the former either dominated the board of directors of the latter or was transacting business in Mexico. Porter v. Pittsburgh Bessemer Steel Co., 120 U.S. 649, 670, 7 S. Ct. 741, 30 L. Ed. 830. Any corporation has the power of control over another in which it owns all the capital stock, but that is immaterial in the absence of proof of the exercise or use of that power in such manner as to cause a wrong or injury to the complaining party. Peterson v. Chicago, etc., Ry. Co., 205 U.S. 364, 27 S. Ct. 513, 51 L. Ed. 841. It was not shown that the Texas Company interfered with the directors of the Mexican company in any matter connected with the development of the lease or dominated it in fixing the prices paid for the oil. That it may have controlled its subsidiary in other matters, in the view we take of the case, affords to Roos no cause for complaint.
As to the Lane, Wolters Storey branch of the case. The burden was on Roos to prove that the services of his attorneys were to continue after the contract was executed. His letters to Wolters cannot be used to corroborate his testimony, as they were mere self-serving declarations; and, unlike unchallenged oral statements made face to face by one party to another, they have no probative force in the absence of an assenting reply. 10 R.C.L. 1150. Wolters, it is true, advised Roos about the mortgage which postdated the contract; but it is to be remembered that they were kin, and that Wolters too had a personal interest in the contract. He was also attorney for the Texas Company, and it was not unreasonable that he would refuse to agree to take a case or urge a claim against it, though he might be willing to attempt to persuade Brooks, another of that company's attorneys, to sign a contract that was acceptable to Roos. Before the decision on this branch of the case was announced, Wolters claimed credit for the insertion in the contract of the clause which made it the duty of the Mexican company to market the oil. After that decision was announced, he testified that the parties to the contract understood and agreed that the oil was to be marketed at the wells. The inconsistency between these two statements, the one given before and the other after the judge's decision, if any exists, is so slight, and so subject to the explanation that on both hearings Wolters had in mind value of oil at the wells, that it cannot be said Wolters was shown by a preponderance of the testimony to be unworthy of belief. We accept the decision of the district judge on the conflict in testimony given by these two witnesses. Assuming the decision of the District Judge to be correct, Roos appeals to those provisions of the contract which authorize the deduction of the $10,000 loan received by him before it was executed in support of a contention that the fourth interest of Lane, Wolters Storey should have been charged with a fourth of the loan. But the fact that the whole half interest was made security for the loan is no proof of the agreement between Roos and his attorneys.
Quite naturally, Brooks was not going to give up any of his security. The construction of the contract contended for would equally as well hold the fourth interest of the attorneys for the $5,000 loan also, thereby securing what Roos admits was his debt, and for which he alone was responsible as between himself and his attorneys. This final contention on this branch of the case is not aided by the contract.
As to the claim for damages. Roos cannot complain of delay prior to the execution of the contract in February, 1917, nor, as against the Mexican company, prior to its organization in March of that year. We pass without further comment the claim of subsequent negligent delay in beginning and continuing operations on the wells that were drilled on the Obando lease; for, as has been stated, such delay as occurred was caused by political conditions in Mexico, which were always excepted, and was not attributable to any negligence on the part of the Mexican company. The lease was in undeveloped territory, though the prospects of discovering oil on it were good, since it lay between wells that were producers, both to the north and to the south. The inference that Obando No. 1 was deliberately placed in dry territory is unsupported by the evidence. There was good reason for locating it as an offset to Mexican Gulf's well No. 1, which was then being driven on the adjoining lot 148, but which as it turned out was also dry. Nor can it be said that Obando No. 1 was drilled to too great a depth; Roos himself did not think so at the time, for the continuance of drilling met with his approval. The loss of the drilling tools in Obando No. 2 cannot fairly be attributed to any intention to impede the flow of that well; because it was in undeveloped territory and the depth to the Tamasopa lime was unknown. As soon as shale was reached, drilling was stopped. Nor can it be inferred that the loss of drilling tools was due to negligence. The only just inference is that the depth to the pool of oil was underestimated. Obando No. 4 was drilled as an offset to the completed and large producing well Libertad No. 1, and to Libertad No. 2 then in process of being drilled. It is rather extreme to argue that the completion of Obando No. 4 was either negligently or intentionally delayed, in the face of testimony that it was impossible to get a permit, and that drilling when it was attempted without a permit was stopped by the Carranzistas. That drilling was allowed to proceed south of kilometer 22 is explained by the circumstance that the Paelazistas were in control of that part of the oil field and allowed explorations for oil to be carried on without a permit. Discrimination against the Obando lease in favor of the Rosas lease was not shown; as the wells on each lease were made to produce up to their full capacity. To say that the wells on the Rosas lease drained the wells on the Obando lease is merely to speculate about things incapable of proof. The two leases were a considerable distance apart and between them were other wells. The Juan Casiano alone, it would seem, was sufficient to prevent the passage of oil from the Obando to the Rosas lease. All the geologists who testified in the case, except Small, were of the opinion that a structural break or fault separated the oil field into two pools, and prevented the flow of oil from one into the other; and that the lots immediately south of the break were in dry territory. Their opinion, if not in large part founded upon, was at least greatly strengthened by, the fact that dry holes were encountered on lots 148, 153, 96, and 162 just south of the line where the break was supposed to be. Small's contour map also corroborated his brother geologists in every detail; and in his testimony he only suggested the bare possibility that oil circulated through the break, or that there was only one pool. As lawsuits ought not to be decided on mere possibilities, as we take it, the evidence establishes that the Obando wells in the north pool were not drained by the Mexican company's wells on lots 114 and 133, or by any other well located in the south pool. All of lot 153, except the part on which wells were drilled, lot 154, and the northern part of lot 96 of the Obando lease, according to the overwhelming weight of the evidence, were south of the break and in dry territory, and reasonably had been demonstrated to be so before the Mexican company in the development of the lease was under a duty to drill wells on them. The theory that salt water would always cause the abandonment of the deepest well first and the shallowest well last must be given up in the light of the facts. The Beyers well ceased to produce in 1919, yet the well on lot 114 was drilled afterwards to a greater depth, produced 6,000,000 barrels, and was still flowing in 1924. Libertad No. 1 went to salt water before Libertad No. 2 did, yet the two wells were close to each other and the former was 50 feet shallower than the latter. Other similar comparisons could be made, but enough has been said to indicate the unreliability of the theory advanced. It may be that this theory failed because the assumption upon which it was founded, namely, that the Tamasopa lime was equally and uniformly porous throughout the oil field, was an erroneous one; but, if so, it was not possible to prove that the lime was equally or uniformly porous in any particular part or section of the field. The assumption was as unreliable as the theory. In the face of proof that the undrilled territory was dry, and that the assumption of uniform porosity was too uncertain and speculative, the trial court cannot be put in error for refusing to allow the claim of Roos for damages.
The conclusion is that reversible error is not made to appear by any of the assignments. Each appellant will be ordered to pay its or his own costs.
The decree is affirmed.