In Equity. Bill by the United States against the California Midway Oil Company, the Associated Oil Company, and others.

We are hereby concerned with a suit brought by the United States to enjoin the continued operation by the defendants of the northwest quarter of section 32, township 31 south, range 23 east, Mt. Diablo meridian, in Kern county, Cal., as an oil-bearing placer mining claim,* to cancel and set aside certain mineral locations thereon, and for an accounting for oil taken therefrom. The' result depends upon the bona fides of a paper location of the property in question under the placer mining laws, made in January, 1909, in the names of H. E. Bashore, B. B. Welch, W. A. Keenan, Eugene Metz, W. A. Mahr, H. M. Walker, F. H. Bomaine, and O. Bupert Walker, by L. B. Mc-Murtry, as their attorney in fact.

McMurtry is, and for many years has been, extensively engaged in speculating in and disposing of alleged locations of prospective and undeveloped oil lands, part of the public domain in California. In 1903, while in Chicago attempting to sell Stock in a company organized for the development of such locations, he became acquainted with L. A. Chadbourne and C. A. Dunbar, ana at his request Chadbourne and Dunbar obtained from their friends and acquaintances four powers of attorney, each executed by eight persons, known in the record as Chicago locators, authorizing him to locate in their names mineral claims in any part of the United States, and to improve, develop, and make proof thereof, and to grant, bargain, and sell the same. McMurtry caused these powers of attorney to be recorded in San Benito county, Cal., and acting under them posted notices of location in the names of his principals on numerous tracts of unoccupied possible oil properties in that county, which, however, were never developed or proved to he oil-bearing.

In 1906 or 1907 development in the Midway oil fields in Kern county became active, and McMurtry caused certified copies of the Chicago powers of attorney to he recorded' in that county, and about January 1, 1907, posted or caused to be posted location notices in the names of the Chicago parties on sundry quarter sections of land in that district, some 26 in number, including the property involved in this suit. The several tracts described in the location notices so posted were merely prospective or hoped-for oil lauds, and none of them were developed, and no discovery of oil was made on any of them until after the abandonment of the locations In January, 3909. In the fail of 1908, however, McMurtry, acting as attorney in fact for the Chicago locators, made a contract with Mrs. J. M. McLeod for the development of the property in controversy, and also the northeast quarter of the same section, upon which a location notice had been posted in the name of certain of the Chicago parties, under the terms of which Mrs. McLeod was to drill for oil on each tract, and if it proved to be oil-bearing she was to have as consideration therefor one-half (hereof, the remainder to belong to the locators. A short time thereafter the contract was modified by reducing the area to accrue to Mrs. McLeod to the south 60 acres of each quarter, and her interest became vested in the California Midway Oil Company, who, some time in November or December, 1908, moved lumber and other material onto the south 60 acres of the northwest quarter of .the section, preparatory to beginning active operations. Before it had commenced drilling, however, McMurtry discovered or was advised by his attorney that the locations in the names of the Chicago parties were defective, because of a mistake in some of the names, and because the notices Intended to cover the north half of section 32 had not, in fact, been posted on the land described therein, owing io an error as to the boundaries. He thereupon abandoned all the locations made by him in the names of the Chicago parties, and In January, 1909, posted and caused to be recorded new noil cos, covering practically the same tracts, in the names of certain residents of New York, under powers of attorney executed by them in December, 1907.

These powers of attorney were obtained under the following circumstances: During the summer and fail of 1907, McMurtry had transferred his activities lo New York and was engaged in selling slock in an oil company in that city. The financial panic of that year made it impossible for him to continue his operations, and in December he concluded to return to California. Before doing so, he asked associates of his by the names of Thorn, Thickens, and Powell to obtain four powers of attorney, each executed by eight qualified persons, authorizing him to locate, develop, and dispose of oil lands in their names, if he should be able to locate any such lands open to entry, on his return to California. Thickens, Thorn, and Powell thereupon approached their employes and friends, explained the matter to them, and requested the execution of such powers of attorney, assuring them that they would thereby incur no financial responsibility and there might be something in it for them. Four powers of attorney (one of which was used in making the location in suit) were thereupon executed and acknowledged, each by eight separate persons, authorizing and empowering McMurtry to locate in the names of the signers mineral claims, to develop and improve the same, and to bargain, sell, and dispose thereof. These powers of attorney were delivered to McMurtry and duly recorded in Kern counts', and were used by him in posting and causing to be recorded location notices on the several tracts mentioned in this suit and other property; eight names being used for each tract. In some instances he authorized third persons to use the names of the signers to the powers of attorney in making locations for thomseives.

A few days after the location in controversy in this suit, McMurtry, in the names of Bashorc and others, under one of the powers of attorney referred to, agreed with the California Midway Oil Company, through its representative, J. M. McLeod, that it should proceed with the development of the property covered thereby and the northeast quarter of the section, located by him in the names of another group of the New York parties, on substantially the same terms as the previous contract with Mrs. McLeod, as modified, but under the New York locations.

Some time thereafter, and in January, 1909, the California Midway Oil Company commenced drilling for oil on the south 60 acres of the northwest quarter and continued such work to a discovery in the summer of that year. On May 17, 1909, the New York locators, acting by McMurtry, their attorney in fact, conveyed their interest in the entire north half of the section to J. M. McLeod, subject to the outstanding contract under which the California Midway Oil Company was in possession and at work, and simultaneously therewith and as a part, of the same transaction McLeod agreed in writing that, if oil should be discovered on either of the quarters, he would immediately make application for patent therefor and upon issuance of the receiver’s final receipt would, by good and sufficient deed, grant, bargain, sell, and convey to the locators the north one hundred acres of each quarter. On December 3, 1909, the New Yorklocators, by McMurtry as their attorney in fact, assigned their interest in the contract of May 17, 1909, with McLeod, to Judge Claflin, his attorney, and on the following day Claflin transferred the same to Mc-Murtry.

Early in 1910, McMurtry, as attorney in fact for the New York locators, sold or contracted to sell the west 40 acres of the north 100 acres of the northwest quarter to the Columbus Midway Oil Company for $100,000, and received as payment thereon the sum of $10,000, and on M,arch 22,1911, as such attorney in fact, deeded the property to the company, taking back a mortgage to secure the payment of the balance due thereon. The Columbus Midway Oil Company subsequently made default in the payment of the balance of the purchase price, and on November 22, 1912, conveyed the property to McMurtry individually in satisfaction thereof, and the record now so stands.

In June, 1910, overtures were made by a representative of McMurtry to the Associated Oil Company to sell to it the locators’ interest in the remaining 60 acres in the northwest quarter and the north 100 acres in the northeast quarter of section 32, and 1,280 acres in various other tracts covered by paper locations made by him in the name of the New York parties. Considerable negotiation and correspondence were had concerning the matter; it being agreed at one time that if the sale was consummated holders of the title would each execute declarations of trust to the effect that the title was held in trust for the original locators as evidence that they were in, fact the owners of the property. This plan, however, was abandoned, and on August 4, 1910, a written contract was entered into between the New York locators, acting by McMurtry as their attorney in fact, and W. F. Herrin and others, known as the Herrin grantees, acting for the Associated Oil Company, which agreement, after stating that 16 named persons (each of whom had executed a power of attorney to McMurtry) represented that on January 1, 1909, they had legally located the northwest quarter and the northeast quarter of section 32, township 31 south, range 23 east, Mt. Diablo meridian, under the mining laws of the United States, that they were still the owners thereof, subject to the deed to and agreement with McLeod, of May 17, 1909, that a discovery of oil had been made on the northwest quarter in May, 1909, and that ever since that time they, either by themselves or their agent or representative, had diligently and continuously operated the property, to the end that discovery of oil should be made upon each and both of the quarter sections, alleged that the Thirty-Two Oil Company and McMurtry individually had an apparent interest in the property, and that McMurtry is the duly authorized, empowered, and acting attorney in fact for each and all of the 16 named persons, with a right to sell their interest in the property and make conveyance thereof. The contract then provides that, in consideration of $5,000 paid to McMurtry by the Herrin grantees, he would place in escrow deeds executed by himself as attorney in fact for each and all of the locators, conveying to the Herrin grantees all his interest in the north 100 acres of the northeast quarter, and the north 100 acres of the northwest quarter, except the west 40 acres of the latter tract, and also deeds from McLeod, the Thirty-Two Oil Company, and himself individually conveying to said grantees their interest, if any, in tne property; that he would proceed forthwith to obtain from the various locators, in proper form to be recorded pursuant to the laws of California, an acknowledgment that at the date of such agreement his power of attorney was in full force and effect, and also a ratification and confirmation by each and «11 of such persons of the execution of such deeds. The purchase price of the ICO acres in the north half of section 32 was to be the suin of $430,000, $175,000 of which was to be paid in cash and the balance, with interest, in production.

It was agreed that, immediately on the deeds referred to being placed in escrow by McMurtry, the oil company would deposit with the Bank of California $85,000, which should remain in escrow until the ratification and confirmation provided for should be obtained from the locators, when it and the $5,000 previously paid to McMurtry should be applied on the purchase price of the property. The remaining $85,000, with interest, was to he paid within 6 moilflis thereafter, and in case the ratifications were not obtained the $5,000 should be returned, and the $85,000 deposited with the bank withdrawn by the oil company. The balance of .8255,000 was to be paid from production at the rate of 20 cents per barrel. The contract also recites that the Associated Oil Company, as the agent of the Herrin grantees, had made and entered into contracts with McMurtry as attorney in fact for the purchase of other tracts of land located by him in the name of the New York locators, aggregating 1,280 acres, at an agreed price of $1,593.75 per acre, payable from tne oil produced from such property, and it was agreed that the oil company would, immediately upon being let into the possession of the 160-acre tract in section 32, start at least one string of tools for the purpose of obtaining oil, and would continuously operate the same, barring accidents and delays, until at least one well should have been drilled upon each 10 acres thereof, providing it should be proven to be oil-bearing in paying quantities; that immediateiy on being let into possession of each of the other 160-acre tracts it would start at least one string of tools thereon, and continuously operate the same, barring accidents and delays, until it was determined whether it was oil-bearing or not, and that production from each tract should be applied to the purchase price thereof at the rate of 20 cents per barrel, but in case the grantees should be dispossessed by the United States, or other claimants of any of the property, it should not be responsible for the unpaid purchase price of such property or for damages on account thereof.

The deposits in escrow were made by the respective parties as provided in the contract, and the attorney for the proposed purchaser prepared a form of ratification to be executed and acknowledged by the several locators, as follows: “I. the undersigned, do hereby acknowledge that that certain power of attorney of date--day of December, 1807, and recorded in Book 10 of Powers of Attorney, at page 13, records of Kern county, state of California, by me together with seven others, executed to D. B. McMurtry, is and at all limes since said date has been in full force and effect, and lias never been revoked or modified, and I do hereby ratify, approve, and confirm that certain contract of sale made for me and in my name by L. B. McMurtry as my said attorney in fact, with W. F. Herrin et al., of date the 4th day of August, 1910, and all contracts, agreements, deeds, and conveyances made by said attorney for me and in my name, and concerning said contracts of sale and sale, and also all oilier contracts and transactions and acts made or done under said power of attorney by said McMurtry. Witness my hand and seal this -day of---, 1910.”

McMurtry thereupon went to New York and in due time obtained from ail the 32 persons who had previously given him powers of attorney (except one who was dead) the execution and acknowledgment of the above ratification; the several blanks therein being filled in. It was represented to them, at the time the ratifications were requested, that McMurtry had made locations in their names under the powers of attorney given him, and had sold or contracted to sell part of the land so located in order to obtain money with which to develop the remainder, and that their share of the proceeds of such sale was the sum of $250, which was paid to each of the locators, either at the time of the signing of the ratification or subsequently thereto, by a check signed by one Soarls, but which was cashed by him upon being indorsed by the payee thereof. Upon the back of each check, and immediately above the indorsement of the payee, was the following: “Received from I¿. B. McMurtry $250 in full payment for all my right, title, and interest in and to the lands located by said Tj. B. McMurtry on my behalf in Kern county, California, pursuant to a power of attorney made by myself and others to said D. B. MeMurtry, bearing date the 19th day of December, 1907.” Thereafter, and in-1910, the ratifications were delivered to the Associated Oil Company, the deeds previously deposited in escrow by McMurtry withdrawn by it, the money deposited by the Oil Company paid over to McMurtry, and the sale consummated. The oil company immediately went into possession of the property, and has ever since occupied, improved, and developed the same at a very great expense.

On August 17, 1911, McMurtry caused to be organized a corporation known as the Pacific Oil Lands Company, with a capital of 1,000,000 shares, of the par value of $1 each, and himself subscribed for all of the stock except 3 shares. On September 1, 1911, acting as attorney in fact for the New York locators, he transferred to such corporation their interest in the contract of August 4,1910, with the Associated Oil Company, and a contract with McLeod covering another section. Prior to such transfer there had been paid to Mc-Murtry by the oil company on its contract $172,000. After the transfer of the contracts to the Pacific Oil Lands Company, the Associated Oil Company continued to deal with such corporation, and to make payment to it on such contracts and a subsequent modification thereof of date August 1, 1913, by which the company bound itself to pay $1,375,000 for the property, $75,000 in cash and the balance in payments of $20,000 a .month, until the full consideration for the property of more than $1,500,000 had been paid; the last payment of $812,353.18 being made February 15, 1916, more than a year before-this suit was commenced.

In 1911, before the modification of the contract, applications had been made to the local land office for patents to six or eight tracts located by McMurtry in the name of the New York locators under his power of attorney, but not included in the contract with the oil company. Early in 1912 final certificates were issued on these - applications, and in one or more instances the claims passed to patent. These facts were known to the Associated Oil Company before it completed payment of the purchase price for the lands now in controversy, and were to some extent relied upon by it in agreeing to a modification of the original contract in August, 1913, and in making subsequent payments of the purchase price.

A few days after the organization of the Pacific Oil Lands Company, and on September 5, 1911, McMurtry canceled or caused to be canceled his subscription to the capital stock of the company, or a part thereof, and to be issued in lieu thereof certificates for 500,000 shares to E. A. Hoeppner, 140,000 shares to W. R. Harrison, 130,000 shares to E. W. Kay, 90,000 shares to Fred1 D. Hughes, and 1,000 shares to each of the 32 New York locators. The certificates of stock in favor of the locators were delivered to them some time about. September, 1911, by McMurtry, or his agent; it being explained to them at that time that McMurtry had caused the organization of the Pacific Oil Lands Company for the purpose of handling the property located by him under the power of attorney, for their' protection, and that such shares represented their interest therein. They were advised at the time to hold the.stock, as it would prove valuable. In August, 1913, the several locators, with one or two exceptions, at the request of the secretary of the Pacific Oil Lands Company, gave to McMurtry a proxy authorizing him to represent them and vote their stock at a meeting of the stockholders of the corporation to be held in San Francisco. In December, 1913, they were advised by letter from the secretary of the Pacific Oil Lands Company that the corporation had $20,000 in cash which it wished to distribute among its stockholders as a dividend, but under the laws of California the directors could not do so without the consent of the stockholders, and inclosing a written consent to such distribution, with-the request that it be signed and returned, which was done accordingly.

In January, 1914, they received from the secretary of the Oil Lands Company a check for $20 inclosed in a letter, saying that it represented their dividend as declared by the directors in pursuance of their written consent, and there was also inclosed in such letter what purported to be a copy of the first report to-the stockholders of the company. In this report it stated in substance: That for a number of years prior to January, 1909, McMurtry and his associates had located and relocated some 2,880 acres of supposedly oil-bearing government land in the Midway field of Kern county, Gal. That because of lack of funds to prosecute development work on the lands McMurtry was obliged to transfer to third persons one-half, or 1,440 acres, thereof. That at great personal sacrifice and effort on the part of McMurtry the remainder of the lands had been held and the work done necessary to preserve the possessory title up to the early part of 1910. That the situation then became desperate. Mc-Murtry was unable to borrow money and found himself without funds to do any more work and without means of raising the money. Just at this time he fortunately made an arrangement with the Associated Oil Company by which it agreed to take over the 1,440 acres and do all work necessary to preserve the title and to pay therefor out of the oil produced from the lands, if any, at 20 cents per barrel. That the company, however, had the right to abandon any part of the land at any time and turn it back. That there were also many other onerous conditions in the agreement, whioh it was not necessary to detail, but was the best that could he made at the time, and was the only thing to do to save the property. That there were many people whom McMurtry felt should be beneficiaries of this agreement, the locators, the people who had given money to aid in carrying on the work of holding the lands until they were sold, those who had worked and watched, night and day, to see that hostile parties should not jump the lands, those who had labored on the land doing assessment work, and finally Mr. McMurtry himself and Mr. Hoeppner, the first of whom had conceived and carried out the plan of getting, and holding the land, and the latter had done yeoman work in keeping oil the trespassers and jumpers. In order that all of these people should share in the contract with the Associated Oil Company, the Pacific Oil Lands Company was formed. Its stock was divided among the various people above named, and provision made to reimburse such as were given no stock. To this company Mr. McMurtry transferred the contract with the Associated Oil Company covering the 1.440 acres of land in Kern county and 640 acres in San Benito county, and the stock of the company had gone to those who had contributed in any way to securing and holding the lands. That in the performance of the contract various difficulties presented themselves, and finally in August, 1913, a new agreement was entered into between the Oil Lands Company and the Associated Company, by which the latter agreed to pay for the 1,440 acres 81.375,000, §75,000 in hand and the balance in monthly installments of §20,000. That this contract for the first time gave the Oil Lands Company the assurance of the receipt of a definite sum for the property, and left only one contingency on which future payments could be defeated, and that was if the government should take possession of the land sold, the payment under the contract would cease, and there would be no further obligation on the part of the purchaser. That up to this time no title to any of the land sold had been obtained from the government, the Associated Oil Company simply holding possession, but it was believed that everything had been done to entitle It ■fo a patent. However, there is always the danger of the government refusing to grant patents, in which event all our rights under the contract will cease. That the animal meeting of the stockholders was held on November 17, 1913 (same having been adjourned from August 18th), at which time McMurtry, .Hoeppner, and Harrison were elected directors, and the president of the company presented a report showing receipts and disbursements from the date of the organization to August 1, 1913, as follows:

Cash received by company from production of oil under agreement with Associated Oil Company....................... §165,246.00

Disbursements: Commissions ..................................§16,524.60

Liquidation of outstanding and assumed obligations ....................................... 92,665.41

Paid to locators direct and attendant expenses of securing ratification of powers of attorney, etc... 9,991.30

Salaries, managers, secretaries, etc.............. 38,166.60

Incorporation Pacific Oil Lands Company....... 300.00

Field, office, and operating expenses............. 3,680.50

Cash on hand July 31, 1913............. 3,917.59

The agreement with the Associated Oil Company of August, 1913, calling for payment to the Pacific Oil Lands Company of §1,375,000 constitutes the main asset of the company. As against this there are the outstanding obligations assumed at the time of the incorporation of approximately $150,000.

Thereafter and in the spring of 1914 a representative of McMurtry called upon the several locators and stated to them that the government was attempting or threatening to regain possession of the lands involved in this contract with the Associated Oil Company; that it was necessary to concentrate all of the stock of the Pacific Oil Lands Company in McMurtry, so that he could better defend the government’s action; that under the circumstances the stock was of but little, if any, value, but that McMurtry would pay each of them $250 for their stock, if they cared to take it, and, if not, they could keep their stock and take chances on the outcome. In view of these statements, each of the locators transferred his stock in blank to a representative of McMurtry and accepted the $250. This sum, together with the $250 previously paid and the $20 dividend, is all the locators ever received on account of the locations made in their names by McMurtry, and no accounting of the money received by McMurtry or the Pacific Oil Lands Company for the sale of any of the property located in their names has ever been made to them by McMurtry, or any one else, other than the report to the stockholders heretofore mentioned.