Opinion
No. 4566.
October 20, 1933. Rehearing Denied November 2, 1933.
Appeal from District Court, Rusk County; Renne Allred, Jr., Judge.
Suit by the State and another against J. D. Wrather and another. From an order denying defendants' motion to vacate an interlocutory order appointing a receiver, defendants appeal.
Reversed, appointment of receiver dissolved, and cause remanded for trial.
An interlocutory order appointing a receiver in the cause was entered on July 13, 1933, by the judge of the district court upon the filing of the petition and before issuance of notice to defendants. The defendants presented their motion for a vacation of the order, and, after full hearing upon the facts introduced in evidence by both the defendants and the plaintiffs, the judge on July 25, 1933, refused the motion to vacate. The defendants have appealed, as is authorized by statute, from the refusal of the court to vacate the order appointing the receiver.
The state of Texas, with joinder therein by the Railroad Commission, through the Attorney General of the state, instituted the suit against the Overton Refining Company, a corporation, and J. D. Wrather as the manager and the general and local agent of the company. The petition is substantially the same as in the other case before this court of John C. Crossman et al. v. State of Texas, 65 S.W.2d 380. It was specially alleged that certain gross production taxes were due to the state, and that there was due statutory penalties incurred for violation of the orders respectively of the commission of February 15 and previous thereto, of April 22 and June 13, 1933; that the defendant willfully and wantonly violated and daily in open defiance was willfully violating the orders of the Railroad Commission, and was depleting and wasting the oil property, injuring the property of others, and failing to make reports or abide by any of the orders of the Railroad Commission; that the defendant was resorting to subterfuges and schemes in producing oil in excess of the daily allowable amount; that defendant had defiantly violated an injunction issued by the court on May 27, 1933; that a receivership was the only means by which the state could enforce its injunction or compel observance of the orders of the commission and the conservation laws of the state, and enforce collection of the gross production tax and penalties, and enforce the property rights of the state. The prayer was for the appointment of a receiver to take over and operate the oil property according to the rules and orders of the Railroad Commission and the conservation laws of the state, and for dissolution of the defendant corporation, and for judgment for the penalties incurred and for the gross production tax due and unpaid, and foreclosure of the state's lien, as claimed, for the gross production tax.
The defendant pleaded, as grounds for vacation of the order, besides general denial, that it has paid, and has never failed to account for all gross production tax on oil produced from the well; that it has not and does not use subterfuges, schemes, or devices in the operation of the oil royalty, and has not prevented the state and its agents from ascertaining the true facts with reference to the amount of oil daily produced on the lease; that the oil tanks are free of any inclosure and may be gauged at any time.
The Overton Refining Company, a corporation, and of which J. D. Wrather is president, has and maintains its office at Overton, Tex. It owns and operates two producing oil wells on the L. L. Jones lease, Cordova survey. Rusk county. These are the two oil wells directly involved in this suit. The lease was acquired in 1931. The company owns other leases in the same vicinity on which there are twelve producing oil wells. The company also owns and operates an oil refinery plant which is located at Overton. It has laid in the oil field approximately twenty miles of pipe line in varying sizes of two to six inches, in order and which is used to transport oil to the refinery. The oil that is produced from the two wells on the L. L. Jones lease, and the oil produced from wells on its other leases are run from the several leases to the refinery. The company also purchases oil from other operators of oil wells and runs it through its pipe lines to the refinery. The defendant was shown to be solvent.
The Railroad Commission of Texas, in the exercise of its power of conservation and prevention of waste of crude oil, passed and promulgated an order on February 15, April 22, and June 13, 1933, respectively. The order of February 15, in effect, required the gauging and measuring of crude oil, a seal to be put on lease tanks, monthly reports to be made showing the amount of oil produced, meters to be installed in pipe lines transporting oil in the oil field, and other matters. The order of April 22, 1933, allocated to the various oil wells in the East Texas oil field, which included Overton and Rusk county, the maximum amount, of oil to be produced. The owner or manager of each well was permitted by the order to produce daily from each well and no more "a maximum of fifteen per cent of its average hourly potential producing capacity as determined by the Commission." That amounted to "forty barrels per day." In the previous order of March, 1933, about 30 barrels per day was the allowable amount. Thereafter, on June 13, 1933, the order of April, 1933, was amended by the Railroad Commission so as to limit the daily production of oil from each well to "a maximum of ten per cent of its hourly producing capacity."
It was proven by the state that the defendant Overton Refining Company made no reports to the Railroad Commission as to the amount of oil that it purchased for its refinery, from whom purchased, and the disposition thereof in terms as required by the commission's orders. That a distinct daily record of oil production was not kept. That no pipe line seals were kept on the tanks located near the oil wells. A ledger record was not made and kept of the gauging of the tanks of the amount of oil daily produced and run from the Jones lease. But as proven by defendant, a record was kept in "the form of run tickets" showing the amount of oil run from the defendant's lease to the refinery. It was shown by defendant in this connection that upon the petition of defendant Overton Refining Company the United States District Court for the Eastern District of Texas by order of record of date January 23, 1932, granted an interlocutory injunction in terms restraining the Railroad Commission of Texas, namely: "From seeking to demand the filing of reports and from investigating and seeking to investigate the affairs of this complainant in any manner or from going into the books, records, accounts, contracts, minutes, letters, memoranda, stocks, documents, telegrams, constitution, by-laws or other records, or from in any manner going upon the premises of this complainant gauging its tanks or pipe lines until hearing hereof upon the plea for an interlocutory injunction." This injunction was in force at the time of the appointment of the receiver and the present motion to vacate. Since that date the injunction was made perpetual.
It was proven by the state that on May 27, 1933, on the petition and at the instance of the Railroad Commission of Texas, a temporary injunction was issued by the state district judge, and the writ served on May 27, 1933, on the manager and general agent, J. D. Wrather, in terms, as shown in the present record, restraining the Overton Refining Company, agents, and employees, viz.: "From producing oil in excess of the allowable fixed by the Railroad Commission anywhere in the East Texas oil field."
The evidence goes affirmatively to show that the defendant overran the daily allowable amount of oil to be produced by a well from January to March, 1933. There is also affirmative evidence sustaining the state's specific allegations of overproduction, as follows: On May 22, 1933, 29 barrels; on May 25, 55.4 barrels; on June 20 and 21, two days, 236 barrels; on July 8 and 9, two days, 444 barrels; on July 10, 56 barrels. The evidence by the defendant affirmatively shows that defendant made a report of gross production of oil from its leases, including the leases in suit, as well as oil purchased for refinery, to the comptroller of public accounts of Texas, for the quarter ending March 31, 1933. The report gave a detailed statement of production, amounting in value to $50,320.09. The comptroller issued a receipt for the tax of $1,190.33. In the list appeared "Total runs (of all wells owned) 183,930 barrels, miscellaneous purchases 143,104 barrels." The testimony of the auditor of the defendant, which is undisputed, was that the item of "miscellaneous purchases" covered oil that was bought by the defendant: from those who had first gathered the oil from wells, and that the defendant had no record as to the wells from which the same was produced and that "I didn't know, couldn't find out, where it came from — I think it (tax) should be paid by somebody. I didn't think it made any difference to the State who paid it. The question of oil I couldn't account for was discussed with the Comptroller's Department when I first started making out these reports. I paid the tax." He further testified in behalf of defendant:
"Q. Does the Overton Refining Company owe the State of Texas any gross production tax upon oil produced from the Jones Lease that is past due? A. No, sir.
"Q. Have you paid any gross production tax for the second quarter of April, May and June? A. No, it isn't due until July 31st. I have always considered that date as set for the due date."
It was affirmatively proven by the defendant. The witness Miller testified:
"Q. Do you know what by-passes are? A. Yes.
"Q. Do you know where this Jones lease is? A. Yes.
"Q. Have you been on that lease? A. Yes, sir.
"Q. Have you been on it from time to time since you went to work for the Overton Refining Company? A. When my duties called me there.
"Q. Do you know the arrangement of the tanks and pipe lines on that lease? A. Yes, sir.
"Q. Is there any by-passes on that lease? A. There is not.
"Q. Has there ever been one on there that you have seen? A. There is none there that I ever knew of.
"Q. Has there been one on there? A. No, sir.
"Q. Is there any obstruction or anything to prevent the Railroad Commission men from gauging the tanks on that lease when they want to? A. Absolutely none.
"Q. Have you, as the agent of the Overton Refining Company, refused the Railroad Commission the right of gauging the tanks? A. No, sir.
"Q. Is the oil out there handled in any manner so that the Railroad Commission can't keep an absolutely accurate track on it if they want to? A. No, sir.
"Q. How is the oil handled? A. It is pulled from the well to the tanks through the separator.
"Q. Are the tanks on the lease where the wells are located? A. Yes, sir.
"Q. Is the separator on the lease? A. Yes, sir.
"Q. How far is the tanks from the wells? A. I couldn't tell you exactly, approximately 100 yards.
"Q. Are they open so that anybody may see the tanks? A. The manholes and vents are open.
"Q. Is there any obstruction around the tanks to keep anyone away from the tanks? A. No, sir.
"Q. Did you ever have any instructions from Mr. Wrather or anybody about producing on the lease out there? A. I had specific instructions from Mr. Wrather not to overproduce on any lease owned by the Overton Refining Company.
"Q. Have you carried out that instruction? A. The best I could."
The witness Lowe testified:
"Q. When you went out there at the various times and gauged the tanks for the Commission, have they ever been refused admittance by Mr. Wrather or anyone working for the Overton Refining Company? A. No, sir.
"Q. Is there any structure around the tanks that prevents you from inspecting them freely? A. No, sir.
"Q. Is there any device out there to conceal the amount of oil diverted from the stock tanks on the lease? A. Not that I know of
"Q. You have been there and inspected it just like you inspect all of these wells for bypasses? A. There is inspection, and very close inspection. I haven't made a very close inspection.
"Q. You haven't found any by-passes or anything to conceal the correct amount of oil that is being produced? A. No, sir."
The above statement reflected by the record is sufficient, as we conclude, for the determination of the points for review.
Fischer Fischer, of Tyler, A. A. Garrett, of Overton, and R. E. Prothro, of Tyler, for appellants.
James V. Allred, Atty. Gen., and Neal Powers and A. R. Stout, Asst. Attys. Gen., for appellees.
The controlling inquiry is that of whether or not the special circumstances are such as demand summary relief of the appointment of a receiver of the oil property pendente lite. It is concluded that there is a clear preponderance of evidence considered as a whole, against the propriety of the appointment. The general object of the present receivership is the operation of the oil property, through the progress of the litigation and continuing after final judgment, through a receiver appointed by the court, to prevent persistent acts on the part of the defendant, acting through its authorized representatives, with respect to the operation of the oil property, claimed to be in the nature of fraud, unfair advantage, violations of law, and the violations of certain oil proration orders made by the Railroad Commission to prevent waste of oil and inequitable taking thereof from the common pool. The circumstances as a whole may not be deemed sufficiently satisfying that there was wanton defiance and willful violations of the orders of the Railroad Commission. There was the existence during the period of time in suit of a temporary injunction restraining the Railroad Commission and its employees from carrying into effect certain of the regulations promulgated. The injunction was issued out of a suit in the District Court of the United States for the Eastern District of Texas which the defendant was prosecuting in good faith attacking the validity of the order of the Railroad Commission respecting reports of oil produced and the gauging of oil. And the circumstances seem to show that the methods employed by defendant of records of oil produced and purchased, and of gauging, and of accounting for gross production of oil, reasonably produced accurate results. That the report to the comptroller of public accounts of Texas gave a detailed statement of oil production and purchases for the quarter ending March 31, 1933. That the gross production tax was paid to the comptroller. It does not appear that the comptroller was dissatisfied with the report and the tax paid, or required additional or supplemental reports. That there was no additional report and payment of gross production tax due until July 1, 1933. Article 7071, R.S. That there were no fraudulent or unfair advantages taken in the production of oil or to accomplish fraudulent evasion of the record and accounting of production of oil by resorting to by-passes or schemes or tricks or subterfuges. That the defendant was solvent and able to respond to a personal judgment against it.
In the circumstances above it is doubtful that unlawful violations of the orders of the Railroad Commission may be predicated, and penalties provided by the statute imposed, while the defendant was legally attacking the order. Wadley Southern Rwy. Co. v. Georgia, 235 U.S. 651, 35 S.Ct. 214, 59 L.Ed. 405; Gulf, C. S. F. Rwy. Co. v. Texas, 246 U.S. 58, 38 S.Ct. 236, 62 L.Ed. 574. The statute of Texas gives the defendant the right of judicial review. Section 11f of article 6049a (Vernon's Ann.Civ.St.). Although it does appear quite clearly that the defendant did violate the proration order of the commission and overran the daily allowable amount of oil production, yet such acts, in the absence of fraud or unfair advantage, would not afford ground for the appointment of a receiver. The statute expressly creates and specially gives the remedy of receiver to the Railroad Commission, distinctively as such, for violation of its orders, upon the happening of certain circumstances. Section 11f of article 6049a; Ortiz Oil Co. v. Railroad Commission (Tex.Civ.App.) 62 S.W.2d 376.
In this connection the present proceeding presents a different situation from, and there is distinguishment between the case of Patton v. State (Tex.Civ.App.) 62 S.W.2d 381. In that case the remedy of receiver, independent of statute, and existing in equity, was held allowable at the instance of the state upon the grounds alone of alleged acts on the part of the defendant in the nature of unfair advantage and fraud in the use and in the operation of the oil property persisted in to the harm, injury, and loss of the state in taxes laid upon the gross production of oil from each oil well. The allegations were taken as true that "the defendant uses numerous subterfuges, tricks, schemes and devices," in the operation of the oil well, in order "to prevent the State of Texas, and its agents and representatives and the Railroad Commission and its employees and representatives from ascertaining the true facts with reference to the amount of oil which the defendant is producing from the property herein." Acts on part of a defendant in the nature of fraud and undue advantage persisted in the use and operation of property of a special character resulting in injury and loss will in general afford equitable ground for the appointment of a receiver. 2 Tardy's Smith on Receivers (2d Ed.) § 516, p. 1517; 53 C.J. § 22, p. 37: 23 R.C.L. § 12, p. 18. In the present proceeding the evidence goes to affirmatively show that no devices or by-passes were used in fraudulent and undue advantage in the use and operation of the oil property.
The order refusing to vacate the appointment of a receiver is reversed, and judgment is here entered dissolving the appointment of a receiver, and the cause is remanded for trial in regular course.