Petitioners Brief — Thomas v. El Dorado Irrigation District

In the Supreme Court

q OF THE

a United States

a OcToBER TERM, 1942

e No.

Sel

B,J. Tuomas, J. R. McDonato, J. R.

' Mason, E. G. WuiiaMs and A. ©.

| Cappy,

Petitioners,

ty

me

VS.

g

_ Et Doravo Irrication District,

3 Respondent. :

BRIEF IN SUPPORT OF PETITION FOR CERTIORARI.

4 FACTUAL BACKGROUND OF THE CASE.

_ A statement of the facts surrounding the case is

‘nade in the preceding petition.

16

I THE PLAN OF COMPOSITION DISCRIMINATES UNFAIRLY

AGAINST THE APPELLANTS WHO ARE CREDITORS OF THE

PUBLIC DEBTOR AND IN FAVOR OF THE RECEIVER OF

THE CALIFORNIA NATIONAL BANK. THE PREFERENCE IN

FAVOR OF THAT CREDITOR CONSTITUTES LACK OF GOOD

FAITH.

In Luehrmann v. Drainage Dist. No. 7, 104 Fed,

(2d) 696, 308 U. 8S. 604, which was the first important

case on the question of consent involving the Recon-

struction Finance Corporation and in which case cer-

tiorari was denied by this Court, a case which has been

repeatedly cited by other Courts and by the Court

below, one of the contentions made was that the bond-

holders who had already scaled their debt before the

petition was filed could not be counted as acceptors of

the plan. The Court declared: ‘‘it is apparent that

all parties to the transaction acted upon the under-

standing that the disbursements made were in con-

formity with the plan of readjustment then in process

under the first Act and later continued in substance

under the second Act.’’ And for this reason ‘these

classes of bondholders retained their original status

and were entitled to be counted acceptors of the plan.

In the case of Bekins v. Lindsay Strathmore Irriga-

tion District, 114 Fed. (2d) 680 at 684 the lower Court

quoted with approval the language of the District

Court as follows:

‘‘we think it clear that the R. F. C. loaned its

money for the benefit of the district and that the

district accepted the financial help from the R.

F. C. with the joint central purpose and mutual

intent that all outstanding bonds be kept alive

until such time as R. F, C. determined that the

_—

17

project of bond debt reduction agreed to had been

attained,”’

A transaction which took a period of some six years.

It would seem quite obvious that all of the rules

regarding good faith, discrimination, unfair or double

dealing should be kept alive and operative during all

of this period of time, and would not be cut off by

the operation of 11 U. S. C. Section 96. The filing

of the petition has nothing whatever to do with the

undertaking of the plan of composition because ob-

viously the district has to have its 51% before it

files the plan, and it may have been soliciting those

consents over a long period of time. It was said by

the lower Court in West Coast Life v. Merced Irriga-

tion District, 114 Fed. (2d) 654 at 666:

“It may be safely stated that from the date last

mentioned up to the first suggestion of relief

through R.F.C. and thereafter, the problem has

been a continuous one of refinancing for the dis-

trict.’’

This was a long period of time.

Subdivision j of Section 403 (11 U. S. C.) was en-

acted for the very purpose of creating the legal fiction

that ‘“‘The partial completion or execution of any plan

of composition as outlined in any petition filed under

the terms of this title by the exchange of new evidences

of indebtedness under the plan for evidences of in-

debtedness covered by the plan, whether such partial

completion or execution of such plan of composition

occurred before or after the filing of said petition,

shall not be construed as limiting or prohibiting the

a WORSE OG NE OTR AG BLING SDE RENIN ED PES

ng

18

effect of this title, and the written consent of the

holders of any securities outstanding as the result of

any such partial completion or execution of any plan

of composition shall be included as consenting cred-

itors to such plan of composition in determining the

percentage of securities affected by such plan of com-

position.’’ 114 Fed. (2d) at 667.

The defeated parties in the West Coast Life case

argued that subdivision j was not enacted until after

the R. F. C. had acquired the bonds. The Court cited

the Luehrmann ease, supra, and pointed out that in’

that case as in the Merced case it was provided that

the outstanding bonds should not be cancelled until

refinancing was complete, and the question was

whether the old bonds were still outstanding. The

Court in the West Coast Life case at page 668 refers

to the discussion in Congress where the committee

pointed out that before the Act went into effect there

were a number of municipalities which engaged in

partial refunding, and in the absence of this new

law they would be ‘‘completely at the mercy of a re-

ealcitrant minority’’, and so passed subdivision j to

get around the decision in City of West Palm Beach,

96 Fed. (2d) 85, holding that consenters to an executed

plan out of Court cannot come into Court and consent.

But the Ninth Circuit Court declared: ‘‘ However, the

section does provide that the partial completion of a

plan ‘shall not be construed as limiting or prohibiting

the effect of this title’.”’

The main point here is that the plan is still m

course of being accepted.

19

To arrive at the conclusion that the payment of

8214% to the California National Bank does not viti-

ate the plan of composition because it is unequal treat-

ment in favor of one creditor, repudiates and destroys

the very basis upon which the consents to the plan

are considered valid in every previous case.

We take it that it is well established that the plan

of composition in these cases is a continuing transac-

tion which may have been commenced before the en-

actment of the municipal bankruptcy act, but is never-

theless a plan of composition and so the consents are

good. It is not thinkable that the Court would adopt

a theory of the continuity of the plan of composition

in order to validate the consents on the one hand and

then hold that because a claim was paid the 82.5%

February 5, 1937 which was more than one year prior

to the filing of the bankruptcy petition it does not eon-

stitute a preference under Stat. 11 U. S. C. A. See.

% when 90% were paid the composition figure of

30.570 in 1933-35. The plan cannot be a continuing

plan for one purpose and not be a continuing plan for

another purpose.

Furthermore, bad faith is shown by the whole trans-

action. Roberts v. Board of Public Instruction, 117

Fed. (2d) 943; U. S. v. Greer Dr. Dist., 121 Fed. (2d)

675; Clarke v. White, 12 Pet. 178, 9 U. 8. (L. Ed.)

1046; Zavelo v. Reeves, 227 U. S. 625; Texas Hotel

Corp. v. Waco Dev, Co., 87 Fed. (2d) 395, 399; John

Hancock Mutual Life Inswrance Co. v, Bartels, 308

U. S. 180, 60 S. Ct. 221; American United Mutual

Life Ins. Co. v. City of Avon Park, 311 U. 8. 138, 61

8. Ct. 157.

SIT LES PAE HINA SED 2 SLL LF PENA ile

RE RE Ee IE hay 9 Rd tL iy

20

TITLE 11, SEC. 96, U. S. C. A. APPLIES TO PRIVATE BANKRUPTCY

ONLY.

Section 96 has no application to this case whatever.

It merely provides what a preference is so far as

private bankruptcy is concerned. The four months

period relates to obtaining judgments and unlawful

preferences by creditors of insolvent private debtors.

It seems obvious on the face of the statute itself that

it does not apply in any of its operations to a public

debtor nor to the municipal bankruptcy section of the

bankruptcy act. See Evergreen Farms Co. v. Willacy

Co. Water Control & Impr. Dist., 124 Fed. (2d) 1

The preference that we are talking about in this case

consists in a discrimination in favor of the California

National Bank to the detriment of the appellants. Call

it unequal treatment, discrimination, bad faith, it is of

course a preference, but it is not good faith merely

because the preferential payment was made more than

four months prior to the filing of the petition for

composition.

IL THE INTERLOCUTORY DECREE IN THIS CASE IS NOT GooD

BECAUSE THE COURT DID NOT FOLLOW THE MANDATORY

PROVISIONS OF THE BANKRUPTCY ACT REQUIRING IT

TO INVESTIGATE THE CIRCUMSTANCES SURROUNDING

THE DEPOSIT OF THE SECURITIES AND THE QUESTION

WHETHER FISCAL AGENTS WERE OR WERE NOT PROP-

ERLY COMPENSATED, AND FAILED TO MAKE A FINDING

AND ADJUDICATION ON THAT QUESTION.

The Court’s opinion below suggests that this point

is an afterthought of a ‘‘recalcitrant minority”.

The Court seemed further to be impressed by the

view that the plan of composition was ‘‘recommended

be tic ind (PRN eNs ong. —

Seas ra cern a pet eee —

a PORTE NONE EE

_

21

by 95% of the creditors’. We believe that the trial

Court also was unduly impressed by this factor. It is

respectfully represented that a minority, regardless

of how small it may be, has the undeniable right to

protect its property interests. It is always a recal-

citrant minority which asserts and establishes rights

in a democracy, for the majority can always get its

own way without such actions. In the very case of

Case v. L. A. Lumber Products Co., 308 U.S. 106,

60 S. Ct. 1, which the Circuit Court does not even men-

tion in its opinion, where the plan was consented to by

over 90% of the creditors the Court declared: ‘‘All

those interested in the estate are entitled to the Court’s

protection’’, and declared that ‘‘the fact that the

vast majority of the security holders have approved

the plan is not the test of whether the plan is a fair

and equitable one’’. The fact that they did so approve

“is as immaterial on the basic issue of its fairness as is

the fact that petitioners own only $18,500 face amount

of a large bond issue’, (The bond issue was nearly

$4,000,000. )

The present bankruptcy act was passed August 16,

1937. (¢. 657, 50 Stats. 654.) When the statute was so

passed it had no provision requiring the Court to make

the examination which appellants claim the Court

failed to make. Appellants’ answer was filed Decem-

ber 10, 1938. (R. 36.) The case was heard February

27, 1940. (R. 49.) At this stage in the proceedings it

was Congress that had an afterthought, for on June

28, 1940, by c. 438, sees. 2, 3, 54 Stats. 668, 669, Con-

gress amended the statute to ‘provide that the Court

should make the examination referred to. It was not

‘

= ; : PPLE OS cs ap yea PRN RAT, ARTE. LEONE PLA) RU

22

until March 8, 1941 (R. 241-263) that the Court made

its findings and decree. The duty was upon the Court

to make this examination, which it did not do, but

should have done with view to satisfying the statute

which was passed after the hearing. There was no

obligation upon the appellants to object to the findings

or decree on this basis. No cross findings need be sub-

mitted by the defeaied parties. Penmack Corp. v.

Esterbrook Steel Pen. Mfg. Co., 27 Fed. Supp. 86.

Detective Comics, Inc. v. Bruns Publications, Inc., 28

Fed. Supp. 399. See Rule 52, Federal Rules of Civil

Procedure.

While the amounts which were paid in costs and

expenses could not serve to diminish the amount (as

shown by the record) which the appellant was to re-

ceive by the plan, the appellants pointed out in their

prief that nothing was shown e. g. as to what compen-

sation Paul W. Curtis as Secretary of the Bondhold-

ers’ Protective Committee might have obtained. (R.

88.) Nor were any of the circumstances surrounding

the obtaining of the consents of the original bond-

holders shown to the Court. We believe it was the

intent of Congress that an inquiry should be made

by the Court into all these circumstances. In the case

cited by the lower Court in its opinion (American

United Mutual Life Ins. Co. v. City of Avon Park, 61

S. Ct. 157, 311 U. S. 138, the Supreme Court said:

“The responsibility of the court entails serutiny

of the circumstances surrounding the acceptances,

the special or ulterior motives which may have

induced them, the time of acquiring the claims

so voting, the amount paid therefor and the like.

LEER FREE RE SYST IS SN EEN

_— Tee BS

———e

23

Only after such investigation can the court ex-

ercise the ‘informed, independent judgment * * *

which is an essential prerequisite for confirmation

of a plan.’ And that is true whether the assents to

the plan have been obtained prior to the filing of

the petition or subsequent thereto.”’

We respectfully contend that the investigation posi-

tively must be made and that in this case it was not

made.

Il. AS A MATTER OF LAW THE FINDINGS, DECREE AND

RECORD FAIL TO ESTABLISH THAT THE PLAN IS FAIR;

NOR CAN FAIRNESS BE DETERMINED FROM THE REC-

ORD, FINDINGS OR DECREE.

There is a conflict in the opinions of the lower Cir-

cuit Court with respect to the necessity of findings to

establish fairness as required by the rule in the Du-

Bois case ‘(Consolidated Rock Products Company v.

DuBois, 312 U. 8. 510).

In the case of Lorber v. Vista Irrigation District,

127 Fed. (2d) 628, decided by the same Court on

April 16, 1942, which decision it will be noted was

rendered only two weeks after the decision in the in-

stant case, the Circuit Court pointed out that since the

decisions of that Court in the case of West Coast Iife

Insurance Co. v. Merced Irrigation District, 114 Fed.

(2d) 654; Bekins v. Lindsay-Strathmore Irrigation

District, 114 Fed. (2d) 680, Jordan v. Palo Verde

— Irrigation District, 114 Fed. (2d) 691 and Moody v.

James Irrigation District, 114 Fed. (2d) 685 (all of

which decisions are cited by the lower Court in the

RITTER LBS MELTS NPIL LO AION RNR ISSA TA HT SIE ETISALAT COME NR

a

24

instant case) ‘“‘The Supreme Court decided the case

of Consolidated Rock Company v. DuBois, supra,’

which case would indicate that in order to ‘exercise

the informed, independent judgment * * * which

appraisal of the fairness of a plan of reorganization

entails’, the trial Court should make some finding to

support a conclusion that the payments provided for

in the plan of composition are all that the District is

reasonably able to pay in the circumstances.”

Subsequently in the case of Covell v. South San

Joaquin Irrigation District, No. 9788, the same Court

on April 20, 1942 (Mr. Justice Wilbur presiding)

made the same ruling, refused to hear arguments on

the appeal, and remanded the cause for further pro-

ceedings and to make findings on the question of the

ability of the district to pay, in other words, on the

question of the fairness of the plan.

The gist of this determination by the lower Court

in these later cases is that the trial Court failed to

find specially the facts upon which to base a conelu-

sion of fairness of the amount offered by the plan.

The findings in the imstant case are even more

meager than they were in the Vista case or in the

South San Joaquin Irrigation District case (R. 241

at 247); the only finding is that the ‘‘plan is fair and

equitable and for the best interest of the creditors”.

In the South San Joaquin case there was a finding

(R. 151 in that case) ‘‘That the payments to be made

as provided in said plan of composition are the full

1Consolidated Rock Products Co. v. DuBois, 312 U. 8. 510,

61 S. Ct. 675.

CaS A RE are

a

25

amount which petitioner is able to pay on its afore-

said indebtedness’’. Mr. Justice Stephens (who wrote

the opinions in the first group of water district

cases cited above) stated at the hearing on April 20,

1942 that the Court had considered that finding and

was of the opinion that it was a conclusion of law and

not a finding of fact.

It will appear from the decision in the Vista case

(supra) that the Ninth Circuit Court of Appeals did

noti remand the case for further hearing based upon

a determination which was or could be made from

the record as to the fairness of the plan. The Court

definitely thought that the case should be remanded

because the lower Court had failed to make findings

indicated by the DuBois case and presumably to estab-

lish a rule for lower Courts to follow in the prepara-

tion of their findings. Subsequently, when the case

of Paradise Irrigation District (J. R. Mason, 'A ppel-

lant v. Paradise Irrigation District, Appellee, No. 9925

in the United States Circuit Court of Appeals for the

Ninth Circuit) came up for consideration in that

— same Court, an order was made remanding that case

on May 14, 1942 the order reading:

ORDER REMANDING CAUSE FOR FINDINGS, ETC.

‘Upon appeal from the District Court of the

United States for the Northern District of Cali-

fornia, Northern Division.

This cause came on to be heard on the tran-

script of the record from the District Court of the

United States for the Northern District of Cali-

fornia, Northern Division, and was duly sub-

mitted :

26

On Consideration Whereof, It is now hereby

ordered by this Court that this cause be, and

hereby is remanded to the said District Court

with directions to make specific findings bearing

on the question of the maximum amount that the

District is reasonably able to pay is bondholders

in the circumstances, either with or without the

taking of additional evidence as said District

Court in its discretion may determine. See Lorber

v. Vista Irrigation District, ...... Fed. (2d) ......

(CCA 9 Apr. 16, 1942) Consolidated Rock Pro-

ducts Co. et al. v. DuBois, 312 U. S. 510, 65 §,

Ct. 675. The District Court shall further clarify

its findings on the question whether the plan of

composition provides for deductions from the

amount to be paid for coupons which have been

voluntarily paid by the Irrigation District.

It Is Further Ordered that the submission of

said cause be, and hereby is set aside. (Garrecht,

©. J. does not concur.) ”’

C siias Os AEE nce )

It will be noted that Circuit Judge Garrecht who

wrote the opinion in the instant case for the Ninth

Circuit Court of Appeals did not concur in the order

made in the Paradise Irrigation District case and his

non-concurrence is evidently the view of Circuit

Judges Wilbur? and Healy, who joined with him in

making the order refusing to grant a rehearing in

the instant case on the grounds, presumably, that in

the view of the Court the record does sustain the prop-

2But Judge Wilbur joined in the order in the Covell case,

supra.

ERC SSRIS —

_——

27

osition that 50.5 cents is all that the district is able

to pay and that the case should not be remanded for

failure of the findings to support this conclusion.

Here, however, is a definite, positive disagreement

evidenced by the opinion of the same Circuit Court of

Appeals, made May 29, 1942 in the instant case which

reads:

‘Before: WILBUR, GARRECHT and HEALY,

Circuit Judges:

It is hereby ordered that the opinion of this

Court filed in the above entitled case on the 30th

day of March 30, 1942, be, and the same hereby

is amended by adding to the paragraph ending on

line 6, page 6 of said opinion, the following

sentence :

‘It is apparent from the record that the amount

to be paid the bondholders of 50144 cents on

the dollar is all that can reasonably be paid

in the circumstances.”’

Cat Ss ROE otseees ) CR. 307.)

Petitioners urge that a review of this case should

be granted.

Petitioners go further and contend that as a matter

of law the record in this case cannot support a find-

ing of fact or a conclusion of law as to fairness, be-

cause the taxpaying ability of the property in the City

of Placerville was not taken into consideration and no

examination was made as to the property values in

this city. The entire area and real property in this

city is within the El Dorado Irrigation District and is

a part of the security for this bonded indebtedness.

Unless it be known what the taxpaying ability is, how

28

can it be determined as a matter of law whether the

plan is fair? Asa matter of fact, the evidence in the

case was based almost exclusively upon the taxpaying

ability of the pear growers occupying about one-sixth

of the area of the district.. The Court did not seem to

be interested in industries, mining, or the taxpaying

ability of the City of Placerville.

Further, unless the evidence furnished the Court by

a petitioner under this statute includes the customary

financial statement supplied by a municipality when it

enters the market to borrow money, including the

assessed valuation of property subject to tax, and its

estimated true value, the record of taxes levied, delin-

quencies, tax sales and amount realized from the sale

of escheated lands, value of land acquired for delin-

quent taxes and unsold, revenue derived anually from

tax levies, water tolls, redemptions of delinquent prop-

erty, ground rents, crop shares and other sources of

revenue available, how is it possible to determine as a

matter of law or fact whether the money offered in a

plan of composition is ‘‘fair and equitable’’ and ‘‘does

not discriminate either for or against any creditor”,

especially when the bonds which it is sought to get a

discharge from are held by the State Supreme Court

to constitute general obligations payable from un-

limited ad valorem taxes on all privately held land

within the district boundaries, and which taxes must

be levied annually at rates sufficient to pay contracts

due and to become due within the year, and which

taxes if not collected when due become alien against

the property taxed ranking ahead of pre-existing

_ <a

29

mortgages and even maturing into tax title ahead of

general taxes levied by other taxing’ authorities.

Bolton v. Terra Bella Irr. Dist., 106 Cal. App.

313;

Calif. Loan & Trust Co. v. Weis, 118 Cal. 489;

Anderson Cottonwood I, D. v. Klukkert, 13 Cal.

(2d) 191;

Anderson Cottonwood I. D. v. Zinzer, 51

A. C, A. 791 (Apr. 29, 1942).

Respondent, ever since 1932 has violated the manda-

tory laws of its creator, in that it has failed to levy the

taxes at rates annually as is mandatory under Sec. 39

(Cal. Stat. 1919, p. 472).

Selby v. Oakdale Irr, Dist., 140 Cal. App. 171.

To allow the decree below to stand would be to give

a windfall to every holder of a mortgage on property

within this district, and also sanction many years of

law violation before the filing of the petition.

Your petitioners have had no interest at all for ten

years and very respectfully submit that to now be

forced to take $505 for each $1000 6% bond, although

not due for many years, with less than 20% of more

than $600 of defaulted interest on each bond (R. 259),

from a thriving community that is more than solvent,

while others have been paid 82144% of principal and

'The State takes 5 years to obtain tax title; Irrigation District

only 3 years.

Cal. Political Code 3785;

See. 47, ‘‘the California Irrigation District Act’’ amended

Cal. Stat. 1939, p. 1576.

Ce RS 4

os

LO aig eS al a

BP a N22

30

interest, would not qualify as ‘‘fair and equitable” by

any known standard, and would more correctly be

branded as confiscation than composition.

CONCLUSION.

It is respectfully submitted that a writ of certiorari

should be granted, the decree of the Court below re-

versed, and the proceeding directed to be dismissed.

Dated, Turlock, California,

August 12, 1942.

Respectfully submitted,

W. Copurn Cook,

Counsel for Petitioners.