Kinney-Coastal Oil Co. v. Kieffer, 277 U.S. 488 (1928)

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Kinney-Coastal Oil Company v. Kieffer

No. 64

Argued October 25, 1927
Decided June 4, 1928
277 U.S. 488

CERTIORARI TO THE CIRCUIT COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Syllabus

1. The Acts of July 17, 1914, 38 Stat. 509, and February 25, 1920, 41 Stat. 437, read together, disclose an intention to divide public oil and gas lands affected into two estates for the purposes of disposal, viz., a dominant estate including the underlying oil and gas deposits and a servient estate including the surface. P. 504.

2. Where one person has a homestead patent and another an oil and gas lease covering the same land, and both drafted in keeping with these Acts, the lessee has the right to extract and remove the oil and gas, and the appurtenant right to use the surface so far as may be necessary to that end; these rights are excepted and reserved from the estate granted by the homestead patent; their exercise involves no taking of anything granted thereby; the owner of the surface is not entitled to compensation for the minerals taken or the use of the surface pursuant to the lease, and, though he may rightfully demand compensation for the damages caused by the mining operations to his crops and agricultural improvements, he cannot include improvements placed on the land after the mining operations are under way for purposes plainly incompatible with the right of the lessee to proceed, with due care, until the oil and gas are exhausted. P. 504.

3. Semble that the lessee would be liable for any damage to the surface estate caused by negligence in conducting mining operations. P. 505.

4. Lessees under the Act of 1920, supra, of a tract within the producing structure of an oil field entered, drilled a producing well, and were preparing to continue and extend operations under the lease, necessitating use of practically the entire surface, all with the knowledge and acquiescence of the owner of the surface under the Act of 1914, supra, when the surface owner platted part of the land as a town site and began selling lots to purchasers who erected dwellings for residential and business purposes, and was contemplating like action as to the other part. Interference with the mining operations and irreparable damages to the lessees was thus threatened. Held: that the lessees were entitled to an injunction to prevent the threatened occupancy and use of the premises for purposes incompatible with their right to continue mining and their necessary use of the surface. P. 505.

5. The condition imposed by the Act of 1914, supra, that the mining lessee shall pay the damages to crops and agricultural improvements of the surface owner caused by the lessee’s entry, occupancy of surface, and mining, or shall give a bond therefor in an action instituted in any competent court to ascertain and fix such damages is not satisfied by the bond approved by the Secretary of the Interior at the issuance of the lease, but may be complied with by giving bond and ascertainment and settlement of damages in the injunction suit. A separate action at law to assess such damages is not necessary. P. 506.

6. A court of equity, in a suit of which it has taken cognizance, may administer complete relief even though this involve determination of legal rights not otherwise within the range of its authority, and, in awarding relief to one party, may impose conditions protecting and giving effect to correlative rights of the other. P. 507.

9 F.2d 260 reversed; 1 F.2d 795 modified.

This case presents a controversy over the relative rights conferred by an oil and gas lease and by a homestead patent for the same lands -- both issued by the United States and each containing a reservation of the rights conferred by the other.

The lands in question are two adjoining 40-acre tracts within the Salt Creek oil field, in Natrona County, Wyoming, which became a producing field, widely known as such, before any step was taken to secure either the lease or the patent.

By executive order issued July 2, 1910, under the Act of June 25, 1910, c. 421, 36 Stat. 847, these lands -- being then public lands of the United States -- were withdrawn from settlement, location, sale, or entry under the existing public land laws and were reserved as being valuable for oil to await further legislation respecting the disposal of lands of that character. The contemplated legislation came in part in the Act of July 17, 1914, c. 142, 38 Stat. 509, and in part in the Act of February 25, 1920, c. 85, 41 Stat. 437.

The Act of 1914 looks to the severance and separate disposal of the surface and the underlying minerals. It provides that lands of the United States withdrawn, classified, or reported as valuable for oil, gas, or other designated mineral deposits shall be subject to disposal under the nonmineral land laws, but that the disposal shall be with

a reservation to the United States of the deposits on account of which the lands were withdrawn or classified or reported as valuable, together with the right to prospect for, mine, and remove the same,

and that such deposits shall be "subject to disposal by the United States only as shall be hereafter expressly directed by law." The act further provides:

Any person qualified to acquire the reserved deposits may enter upon said lands with a view of prospecting for the same upon the approval by the Secretary of the Interior of a bond or undertaking to be filed with him as security for the payment of all damages to the crops and improvements on such lands by reason of such prospecting, the measure of any such damage to be fixed by agreement of parties or by a court of competent jurisdiction. Any person who has acquired from the United Stated the title to or the right to mine and remove the reserved deposits, should the United States dispose of the mineral deposits in lands, may reenter and occupy so much of the surface thereof as may be required for all purposes reasonably incident to the mining and removal of the minerals therefrom, and mine and remove such minerals, upon payment of damages caused thereby to the owner of the land, or upon giving a good and sufficient bond or undertaking therefor in an action instituted in any competent court to ascertain and fix said damages.

The Act of 1920 relates particularly to the disposal of oil, gas, and other designated mineral deposits in the lands of the United States, including those specified in the Act of 1914. In the main, it provides that the disposal of such deposits shall be through leases entitling the lessees to extract and remove the deposits and to make such use of the surface as may be necessary for that purpose, and requiring the lessees to pay fixed royalties, and in some instances a further compensation, to the United States. The parts of the act having a present bearing are as follows:

Sec. 17. That all unappropriated deposits of oil or gas situated within the known geologic structure of a producing oil or gas field, . . . not subject to preferential lease, may be leased by the Secretary of the Interior to the highest responsible bidder by competitive bidding, . . . such leases to be conditioned upon the payment by the lessee of such bonus as may be accepted and of such royalty as may be fixed in the lease. . . . Leases shall be for a period of twenty years, with the preferential right in the lessee to renew the same for successive periods of ten years upon such reasonable terms and conditions as may be prescribed by the Secretary of the Interior, unless otherwise provided by law at the time of the expiration of such periods. . . .

Sec. 29. . . . Provided, that said Secretary, in his discretion, in making any lease under this Act, may reserve to the United States the right to lease, sell, or otherwise dispose of the surface of the lands embraced within such lease under existing law or laws hereafter enacted insofar as said surface is not necessary for use of the lessee in extracting and removing the deposits therein: Provided further, that if such reservation is made, it shall be so determined before the offering of such lease. . . .

Sec. 32. That the Secretary of the Interior is authorized to prescribe necessary and proper rules and regulations and to do any and all things necessary to carry out and accomplish the purposes of this act, also to fix and determine the boundary lines of any structure, or oil or gas field, for the purposes of this Act. . . .

Sec. 34. That the provisions of this Act shall also apply to all deposits of coal, phosphate, sodium, oil, oil shale, or gas in the lands of the United States, which lands may have been or may be disposed of under laws reserving to the United States such deposits, with the right to prospect for, mine, and remove the same, subject to such conditions as are or may hereafter be provided by such laws reserving such deposits.

April 2, 1920, the Secretary of the Interior, pursuant to § 32 of the Act of 1920, determined the boundary lines of the known oil structure or deposit in the Salt Creek field. The lines so determined included the two 40-acre tracts in question.

December 29, 1921, as a result of competitive bidding invited under § 17 of that Act, and in consideration of a bonus of $51,750 paid to the United States, the Secretary of the Interior, conformably to existing regulations,{1} awarded and issued to Oscar W. Rohn a lease of the oil and gas in these tracts and in another 40-acre tract in the same field. The lease was given for a term of 20 years, with a conditional privilege of renewal under § 17, and granted to the lessee the exclusive right to drill for, extract, and remove the oil and gas deposits in the three tracts, together with the right to construct and maintain on the surface "all works, buildings, plants, waterways, roads, telegraph or telephone lines, pipelines, reservoirs, tanks, pumping stations or other structures" needed in such mining operations. It required the lessee to exercise reasonable diligence in drilling and operating wells for oil and gas and to pay to the United States a royalty of 25 percent on the oil produced and a royalty varying from 12 1/2 percent to 16 2/3 percent on the gas, and it reserved to the United States the right to dispose of "the surface of the lands" under existing or future laws "insofar as said surface is not necessary for the use of the lessee in the extraction and removal of the oil and gas." It also required the lessee:

To comply with all statutory requirements and regulations thereunder, if the lands embraced herein have been or shall hereafter be disposed of under the laws reserving to the United States the deposits of oil and gas therein, subject to such conditions as are or may hereafter be provided by the laws reserving such oil or gas.

At the time the lease was issued the lessee, pursuant to the existing regulations,{2} executed, with approved surety, a bond to the United States in the amount of $5,000

for the use and benefit of the United States and of any entryman or patentee of any portion of the land . . . heretofore entered or patented with a reservation of the oil and gas deposits to the United States,

conditioned on the lessee’s faithful compliance with "all the provisions" of the lease.

August 9, 1922, that lease was consolidated with others into a new lease of like character and tenor issued by the Secretary of the Interior to the Kinney-Coastal Oil Company, and a bond like that above described was given by the company, with approved surety, to secure its faithful compliance with all the provisions of the consolidated lease.

In 1918, Michael F. Kieffer made application at the local land office to make a preliminary homestead entry of the two 40-acre tracts in question and other contiguous lands. He knew the lands were within the executive withdrawal of July 2, 1910, and the Salt Creek oil field, and he assented that, if his application was granted, the oil and gas deposits should be reserved by the United States for disposal under future laws as contemplated in the Act of 1914. The preliminary homestead entry was allowed with that reservation (see Regulations of March 20, 1915, paragraphs 5-8, 44 L.D. 32, 34), and in due course was carried to a final entry, on which a homestead patent was issued to Kieffer October 12, 1923. The patent was for 320 acres, including the two 40-acre tracts in question, and contained the following exception and reservation:

Also excepting and reserving to the United States all the oil and gas in the lands so patented, and to it, or persons authorized by it, the right to prospect for, mine, and remove such deposits from the same upon compliance with the conditions and subject to the provisions and limitations of the Act of July 17, 1914.

After his preliminary homestead entry was allowed, Kieffer constructed a residence and several outbuildings on part of the lands included therein other than the tracts in question, and resided there with his family. He inclosed the tracts in question with a barbed wire fence, and in each of two years planted and harvested about 7 acres of oats thereon; but in no other way did he improve or cultivate these tracts.

The Kinney-Coastal Oil Company, soon after receiving its lease, entered on one of the tracts in question, stored thereon equipment and supplies required in operations under the lease, erected buildings needed for its employees, and began drilling for oil and gas. Kieffer knew of the lease and acquiesced in these operations under it. One well was completed in the latter part of 1923 at a cost of $32,152.66, and oil and gas were produced therefrom in paying quantities. The company proceeded with the extraction of oil and gas from that well, and also made preparation for drilling others. Stakes were driven marking places for eight more, distributed over the tract in accordance with applicable regulations.

In January, 1924, Kieffer, without any concurrence by the United States or by the company, platted that tract as a townsite -- with blocks, lots, streets, and alleys -- and caused the plat to be filed and recorded in the office of the clerk of the county. Although knowing of the producing well and that the company was intending to proceed with further drilling and operations under the lease, Kieffer began selling and contracting to sell lots in the townsite and encouraging purchasers to build thereon. Several lots were sold or contracted to be sold, and the purchasers began hastily to place buildings thereon for residential and business purposes.

Thereupon the lessee company and another company which had acquired an interest in the lease -- one a corporate citizen of Maine and the other of Colorado -- brought a suit in the federal district court for Wyoming against Kieffer and others -- all citizens of that state -- to prevent the sale and use for townsite purposes of the tract on which operations under the lease were proceeding, to prevent a contemplated platting and disposal of the other tract as a townsite, and to enforce the plaintiffs’ right to use all the surface of both tracts in the operations under the lease, the use of all being alleged to be necessary. There was also a prayer for general relief. The prayers for specific relief were limited to the term of the lease.

The defendants answered jointly. The material portions of the answer were to the effect (a) that the court was without jurisdiction, in that the value of the matter in controversy was less than the jurisdictional requisite; (b) that the bill was without equity, in that there was an adequate, if not exclusive, remedy at law; (c) that a large portion of the lands in question was without oil or gas content; (d) that the platting, sale, and use of the lands for townsite purposes would not interfere with the full enjoyment of the plaintiffs’ rights or operations under the lease, and (e) that the defendants

have at all times been ready and willing that plaintiffs have the full, beneficial use of their lease upon their complying with the law, and defendants are now ready and willing to enter into negotiations with plaintiffs with the view of fixing the amount of damages which may be done by plaintiffs to defendants’ improvements, or submit said question to a court of competent jurisdiction as provided in the Act of July 17, 1914.

The district court, after a full hearing on the issues, gave a decree awarding the plaintiffs, by way of injunction, most of the relief sought in their bill. 1 F.2d 795. The court found, as recited in the decree, that the value of the matter in controversy was in excess of the jurisdictional requisite; that the lands in question "are practically all within the producing structure of the Salt Creek oil field;" that use of "practically the entire surface" is necessary "for the full development" of the underlying oil and gas deposits and for "reasonably economical, efficient operations" under the lease; that the buildings constructed and intended to be constructed as part of the townsite venture will "take up space required by plaintiffs in their lawful operations;" that the occupancy and use of the lands as a townsite will interfere with such operations, will increase the expense of conducting them, and will enhance the danger of explosion and fire which otherwise attends the production of oil and gas, and that the plaintiffs will thus be subjected to continuing and irreparable injury and damage.

On an appeal by the defendants, the circuit court of appeals said:

There is substantial evidence in support of the court’s finding that the tract is within the producing structure of the oil field, and that the entire surface will be necessary for the use of plaintiffs in its development and in the production and removal of the oil and gas that will be found. There was testimony to the contrary, but the court’s findings of fact have ample support. It had better opportunity to weigh the evidence than we have, and we accept those findings.

Then, coming to the equitable remedy invoked by the plaintiffs, that court held that the Act of 1914 prescribes a mode of procedure for enforcing the lessee’s right to use the surface; that this procedure is intended to be exclusive and in the nature of a condemnation proceeding, which is regarded as a proceeding at law, rather than in equity, and that, by the course taken in the district court, Kieffer and his grantees were denied a constitutional right to have the issues tried by a jury. Accordingly, the decree was reversed, with a direction to dismiss the bill and leave the plaintiffs to their statutory remedy. Kieffer v. Kinney-Coastal Oil Co., 9 F.2d 260.