Petitioners Brief — Bekins v. Lindsay-Strathmore Irrigation District

In the Supreme Court

OF THE

United States

OcToBER TERM, 1940

No.

‘

Mno W. Bexins and Reep J. Bekins, as trustees,

appointed by the will of Martin Bekins, deceased ;

Mito W. Bekins and Reep J. Bekins, as trustees,

appointed by the will of Katherine Bekins, de-

ceased; JAMES IRVINE, J. R. Mason, James H.

JoRDAN, A. HeBeR WINDER, as trustee of Eva A.

Parrington Trust; C. A. Moss, and H. E. Curtis, :

creditors of Lindsay-Strathmore Irrigation Dis-

trict,

Petitioners,

vs.

LINDSAY-STRATHMORE IRRIGATION DISTRICT, an in-

solvent taxing agency,

Respondent.

BRIEF IN SUPPORT OF PETITION FOR WRIT OF CERTIORARI.

OPINIONS BELOW.

Opinion of the trial court (R. 131), 25 Fed. Sup.

988.

Opinion of the Circuit Court of Appeals (R. 536,

547), 114 Fed. (2d) 680.

a

REITER AINE pee forse

™

eereersoreee PO ERAS Na ie STARS 35 TAS iE BS Ea TOE ELLE POLITE LLL LL FOOSE 31

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JURISDICTION.

The decision of the Cireuit Court of Appeals was

rendered September 5, 1940. (R. 595.) A petition for

rehearing was filed October 4, 1940 (R. 597) and de-

nied October 15, 1940. (R. 597.) The mandate was

stayed until disposition of the case by this Court. (R.

597.) The jurisdiction of this Court is invoked under

Section 240(a) of the Judicial Code (28 U.S.C. Para-

graph 347(a)).

STATEMENT OF THE CASE.

A concise statement of the case is contained in the

foregoing petition under the heading of Summary

Statement of the Matter Involved, to which reference

is made.

SPECIFICATION OF ASSIGNED ERRORS.

Statement of the points relied upon were filed in the

Circuit Court of Appeals as required by the rules of

that Court. These are set out at pages 488, 510, 527, et

seq. of the record and they constitute the errors that

were relied upon on the appeal. In the following

brief, we, petitioners, set forth the assigned errors

under each point which we urge in this Court.

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I. THE COURT WAS WITHOUT JURISDICTION TO ENTER

THE DECREE.

Chapter IX of the Bankruptey Act does not apply

to the Lindsay-Strathmore Irrigation District.

Assignment of Error No. 6 is as follows:

“‘The Interlocutory Decree in this cause inter-

feres with the political and governmental powers

of the Lindsay-Strathmore Irrigation District and

the property and revenues thereof necessarily

essential for governmental purposes.”’ (R. 489.)

Assignment of Error No. 7 is as follows:

“By the provisions of Section 83 of the Bank-

ruptcy Act the court is without power to apply

its order to this irrigation district.’’ (R. 489.)

Assignment of Error No. 14 is as follows:

“The court erred in making and entering its

Findings of Fact and Conclusions of Law herein,

and in entering the Interlocutory Decree.’’ (R.

490.)

Assignment of Error No. 1 is as follows:

“‘Chapter IX of the Bankruptcy Act of the

United States is unconstitutional and void and

affects the property interests of the appellants in

that it violates Article I, Section 10, Clause 1,

of the Constitution of the United States and the

Fifth, Tenth, and Fourteenth amendments to the

Constitution of the United States.’’ (R. 489.)

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A. BY THE TERMS OF THE STATUTE THE COURT WAS WITHOUT

JURISDICTION TO MAKE THE ORDER APPEALED FROM.

This is our first point on jurisdiction.

If the statute had been made to apply to public

agencies generally, and contained a provision by Con-

gress that the Act should not apply to irrigation dis-

tricts, there would be no need for argument upon the

point that the court would be wholly lacking in juris-

diction to make any judgment or decree which would

apply to such an irrigation district. It is well settled

that the jurisdiction of the court in bankruptcy mat-

ters is limited to that conferred by Act of Congress.

(Wheeling Structural Steel Co. v. Moss, 62 Fed. 37,

39, and the cases cited therein.)

Under those circumstances, the irrigation district

simply would not be authorized to avail itself of the

Act. Or, put another way, the court would have no

jurisdiction to make any order approving any com-

position by an irrigation district with its creditors.

Yet, as to the political or governmental powers of the

petitioner, the statute in effect stands exactly in that

condition.

Section 83 (c) of the Bankruptcy Act, which is

Section 403, Title 11, U. S. C., after stating that the

Court may enjoin proceedings and put the plan tem-

porarily into effect, provides:

‘‘* * * But shall not, by any order or decree, in

the proceedings or otherwise, interfere with (a)

any of the political or governmental powers of the

petitioner * * *.’”’ (Emphasis ours.)

This provision is in the statute itself.

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5

The Court below in the case of West Coast Life Ins.

Co. v. Merced Irrigation District, 114 Fed. (2d) 654,

662:

“The Court in the Bekins case did not premise its

decision on the fact that the District involved was

not a state agency, but rather that the Act as

drawn did not usurp state powers. Let us quote

again from the Bekins decision (p. 51) wherein

the Court quotes the Committee on the Judiciary :

“«¢ “The bill here recommended for passage ex-

pressly avoids any restriction on the powers of

the States or their arms of government in the

exercise of their sovereign rights and duties. No

interference with the fiscal or governmental af-

fairs of a political subdivision is permitted. The

taxing agency itself is the only instrumentality

which can seek the benefits of the proposed legis-

lation. *% & #99999

‘The Court then states:

‘**We are of the opinion that the Committee's

points are well taken and that Chapter X (§§ 81-

84) is a valid enactment. The statute is carefully

drawn so as not to impinge upon the sovereignty

of the State. * * *’’’ (Emphasis ours.)

From the above quotation the Court below recog-

nized that the Court in the Bekins case (Petitioners

throughout will refer to the decision of the U. S.

Supreme Court when the instant case was before that

Court as the ‘‘ Bekins case’’) did not premise its deci-

sion on the nature of the district, ‘‘but rather that the

Act a8 drawn did not usurp state powers”’.

6

The above quoted provision from the statute is the

one that expressly withholds jurisdiction to ‘‘usurp

state powers’’.

This Court in the Bekins case quotes the Committee

on the Judiciary as stating that

““* * * The bill here recommended for passage

expressly avoids any restriction on the powers

of the States or their arms of government in the

exercise of their sovereign rights and duties. No

interference with the fiscal or governmental af-

fairs of a political subdivision is permitted * * *

no control or jurisdiction over that property and

those revenues of the petitioning agency necessary

for essential governmental purposes is conferred

by the bill.’”’ (Emphasis ours.)

Then this Court concludes that the Committee’s

points are well taken, and states:

‘‘The statute is carefully drawn so as not to

impinge upon the sovereignty of the State.’’ (Em-

phasis ours.)

Again, the provision above quoted from the statute

is the one clearly that ‘‘expressly avoids any restric-

tion on the powers of the states or their arms of

government’’. (Emphasis ours.)

The above quoted provision from the statute is

clearly the one that provides:

‘‘No interference with the fiscal or govern-

mental affairs of a political or governmental sub-

division is permitted.”

The above quoted provision of the statute is clearly

also the one which makes the statute one ‘‘carefully

ee ae Re we eae eee ag yee Seen mage = |

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drawn so as not to impinge upon the sovercignty of

the State’’.

This Court in the Bekins case held the statute con-

stitutional because it ‘‘expressly avoids any restric-

tion on the powers of the States or their arms of gov-

ernment in the exercise of their sovereign rights and

duties’’.

Since Congress, by the portion of the statute above

quoted, has by mandatory language provided that the

court “‘shall not, by any order or decree, in the pro-

ceedings or otherwise, interfere with any of the politi-

cal or governmental powers of the petitioner’’, the

question is narrowed down to this: Are the powers

of petitioner that are being interfered with by the

order or decree appealed from ‘‘political or govern-

mental’’? If they are, then by the terms of the statute

the court had no jurisdiction. It is only by determin-

ing that they are not political or governmental that

the court can logically be held to have jurisdiction.

The suggestion on page 663 of the opinion of the

Court below that that portion of the Supreme Court’s

opinion (p. 54) that Congress may, with the consent of

the state, exercise the bankruptcy power over state

agencies, and the further suggestion that the Supreme

Court may have found procedural differences in the

two acts to justify the conclusion that the later act

did not impinge the sovereign rights of the state, in

no way weakens our argument. No act of the state,

affirmative or negative, and no consent of the state,

and no procedural differences, can in any wise change

the declaration of Congress in the later act now in

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force that the court ‘‘shall not * * * interfere with

any of the political or governmental powers of the

petitioner’’. The consent of the state that its agencies

may avail themselves of the provisions of the act is

necessarily subject to this provision of the statute just

quoted.

It will be recalled that the Bekins case was before

the Court under the Act of August 24, 1937 (c. 754,

50 Stat. 751), which permitted a direct appeal from

the District Court where the constitutionality of the

federal statute is drawn into question.

At page 2 of the Brief of the United States in the

Bekins case, it is stated:

“QUESTION PRESENTED.

‘*Whether the Act of August 16, 1937, is a valid

exercise by Congress of its power ‘to establish

* * * uniform laws on the subject of bankruptcies

throughout the United States.’ ”’

The Court had before it simply the constitutionality of

the Act, and the Court in reading the Act found that

Congress had expressly denied jurisdiction to the

court to make any order that would interfere with the

political or governmental powers of the petitioner,

and further than this the court was not required to

go.

While the Court in the Bekins case did not find it

necessary to pass upon the nature of the petitioner

then before it, for reasons hereinabove suggested, it

was argued at considerable length by the Solicitor

General in his brief commencing at page 82 that the

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irrigation district then before the Court was not

strictly an agency exercising governmental or political

powers. After pointing out that the district in the

Ashton case was held to be a political subdivision, he

states (p. 82):

“* * * But in the case at bar the Lindsay-Strath-

more Irrigation District is not a ‘political subdi-

vision’ of the State of California, and Chapter

X is carefully constructed to permit a separable

operation.”’ ‘

He further states (p. 84):

“* * * Thus, while the irrigation district exer-

cises a narrowly restricted group of governmental

powers, the California courts have repeatedly an-

nounced that it ‘is not a political subdivision of

the state or county, or a political subsidiary at all’

* & #99

He further states (p. 85):

“If the State of California, for its domestic pur-

poses, itself refuses to give to the District all of

the investiture of the sovereignty of the State,

we submit that this Court should not invalidate

an Act of Congress because of a supposed inter-

ference with the sovereignty of California * * *.”’

The Solicitor General then concludes his statement

on that point (p. 86) in the following words:

“It is, therefore, perfectly plain that Congress

intended Chapter X to stand so far as it covered

any taxing agency to which it could constitu-

tionally be applied. It follows, since the Lindsay-

Strathmore Irrigation District is not a political

subdivision of the State, that the judgment must

10

be reversed whatever the validity of the Act as

applied to taxing agencies which under local law

share enough of the powers and immunities of the

sovereign to be termed political subdivisions.”

(Emphasis supplied.)

In the Bekins case the irrigation district, appellant,

at page 19 of their brief, makes similar argument as

to its own nature. Among other things it says:

‘*Any contention that it (an irrigation district

of California) is inextricably connected with the

sovereignty of the State of California finds no

support in the decisions of the highest court of

that state which would not result from the ad-

mitted impossibility (or undesirability) of formu-

lating a rule by which the ‘political’, ‘public’ or

‘governmental’ activities or functions of an

agency are to be distinguished from its ‘private’,

‘corporate’ or ‘proprietary’ activities or functions,

in tort cases, eminent domain cases, execution

upon property cases, and tax cases.”’

In passing, it should be noted that this Court in

the Bekins case followed these arguments and in fact

refers to California irrigation districts as merely

‘‘improvement districts’? when it said ‘improvement

districts, such as the petitioner, were in distress”’.

(304 U.S. 53.)

We mention these arguments of counsel in the

Bekins case to show that this Court had before it

in the Bekins case only the broad constitutional

question, and that counsel for appellants (both for the

district and for the United States) recognized that

the statute would be held to be unconstitutional unless

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the governmental or political functions of the district

could be taken out from under the control of the court

under the statute, and thus the extended argument

that California irrigation districts were not either

political or governmental, or that, if political or gov-

ernmental, yet to some extent they exercised proprie-

tary or private functions so that the statute could be

given some application to them, and would come

within the saving clause in Section 401, Title 11,

U.S.C.

The Supreme Court held the Act constitutional

because the Act by its terms (as shown by the extract

therefrom above quoted) especially and specifically

and by mandatory language withholds jurisdiction

from the Court to ‘interfere with any of the political

or governmental powers of the petitioner’’.

Now at the time the Bekins case was decided there

was no decision from any of the courts of California

holding directly that all of the functions of an irriga-

tion district were exclusively governmental, regardless

of what may have been suggested or hinted at. Since

the decision in the Bekins case, however, we have

the several cases, commencing with El Camino Trri-

gation District v. El Camino Land Corporation, 12

Cal. (2d) 378, 383 (85 Pac. (2d) 123), where the

Court said a California irrigation district is a district

““* * * whose functions are considered exclusively

governmental ; their property is state owned, held

only for governmental purposes; they own no land

in the proprietary sense, within the rule of de-

fendant’s cases * * *,”’

12

See also:

Moody v. Provident Irrigation District, 12 Cal.

(2d) 389, 395 (85 Pac. (2d) 128) ;

Anderson-Cottonwood Irrigation District v.

Klukkert, 13 Cal. (2d) 191, 197 (88 Pae. (2d)

685) ;

Peoples State Bank v. Imperial Irrigation Dis-

trict, 99 C. D. 317, 101 Pac. (2d) 466. (In

this case the Court indicated that it had not

intended to announce any new principle of

law as to the status of a California irrigation

district, but the fact remains that the Cali-

fornia courts had not only failed, up to the

time of the Bekins decision, to hold that the

functions of a California irrigation district

are exclusively governmental, but in some

instances went pretty far in the opposite

direction. )

It is respectfully submitted that, though the Act

may be held to be entirely constitutional, this Court

should not ignore the express mandate of the statute

that the district court cannot ‘‘by any decree or order

interfere with any of the political or governmental

powers of petitioner’’, and it should not ignore the

recent decisions of the highest court of California to

the effect that all of the functions of petitioner are

exclusively governmental. This is a matter of local

law as to which the decisions of the highest court of

the state are authoritative and conclusive in the fed-

eral courts.

Bank of Augusta v. Earle, 13 Peters 519, 10 L.

ed. 274, 310;

ah

13

Norton v. Shelby County, 118 U. 8. 425, 30 L.

ed. 178, 185;

Baltimore & Ohio R. R. Co. v. Baugh, 149 U.S.

368, 371-372, 37 L. ed. 772, 775;

Claibourne County v. Brooks, 111 U. 8. 400, 28

L, ed. 470, 474;

W. T. Waggoner Estate v. Wichita County, 273

U.S. 113, 117, 71 L. ed. 566, 568 ;

Sutter Butte Canal Co. v. Railroad Commis-

sion, 279 U.S. 125, 139, 73 L. ed. 637, 641;

Memphis & C. R. Co. v. Pace, 282 U.S. 241,

244, 75 L. ed. 315, 319;

Bandini Petroleum Company v. Superior Court,

284 U.S. 8, 18.

Had the decree been permissive merely the objection

would be equally good but the decree in this case

actually commanded the district to deposit certain

funds. The Court below surely erred in declaring in

its opinion (114 Fed. (2d) 685) that this is not a

matter of which the bondholders can complain.

For the very purpose of these proceedings by the

petitioner for composition of its indebtedness under

the statute is to interfere in the fiscal and other affairs

of the district, and it cannot be successfully denied

but that such is the effect of the order appealed from.

Since all of the functions of petitioner are exclusively

governmental, the conclusion is inescapable that the

order appealed from interferes with the governmental

powers of the petitioner. Yet the statute declares that

the Court ‘‘shall not, by any order or decree, interfere

with any of the political or governmental powers of

the petitioner’’,

FS eS ee or eS _ TF

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We respectfully submit that it logically follows that,

by the terms of the statute, the Court was without

jurisdiction to make the order appealed from.

We have dealt with this point at considerable length,

as it is one that goes to the very foundation of the

case. Since Congress has not given the court the

power to deal with these functions, and has expressly

prohibited it from so doing, it requires no argument

to show that the Court is wholly lacking in juris-

diction.

In closing on this point may we suggest that to

uphold jurisdiction is to determine that ‘‘ability to

pay’’ must necessarily become the gauge of the power

of taxation.

B. IN VIEW OF THE CALIFORNIA DECISIONS RENDERED SINCE

THE BEKINS CASE, HOLDING THAT ALL OF THE FUNCTIONS

OF AN IRRIGATION DISTRICT IN CALIFORNIA ARE EXCLU.

SIVELY GOVERNMENTAL, WHETHER THE STATUTE AS AP.

PLIED TO SUCH A DISTRICT IS CONSTITUTIONAL IS STILL

AN OPEN QUESTION. THE STATUTE AS SO APPLIED IS

UNCONSTITUTIONAL.

Our second point as to lack of jurisdiction goes to

the constitutionality of the Act as applied to one of

these districts and is based upon the proposition

that since all of the functions of an irrigation dis-

trict in California are governmental and that point

has been definitely settled and made clear beyond dis-

pute since the decision in the Bekins case, the consti-

tutional question as applied to such a district is still

an open one.

Since it appears by both the Bekins and the Ashton

decisions that the strictly governmental functions of

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the petitioner are beyond the control of Congress, un-

der the Bankruptey power, the Act is actually uncon-

stitutional as applied to one of these districts. The

Act simply does not apply, and cannot be made to

apply, to a California Irrigation district.

In the Bekins case the Court did not pass upon

the nature of the petitioner. It was perhaps not even

necessary. It was strongly argued, as we have also

seen, that the petitioner was either not governmental

at all or was only partly governmental. If at that time

it had been settled by California decisions that all

functions of such a district are governmental there can

be little doubt but that this Court would have accepted

that determination and held the Act void as to such

districts. But it was not settled at that time. Since

then, however, it has become thoroughly settled that

urigation districts ‘‘* * * are agencies of the state

Whose functions are considered exclusively govern-

mental; their property is state owned, held only for

governmental purposes; they own no land in the pro-

prietary sense, within the rule of defendant’s eases

** *. (El Camino Irrigation District v. El Camino

Land Corporation, supra.)

The rule is well settled that in dealing with local

law the United States Courts will follow the decisions

of the highest Court of the state, and will change their

position if necessary.

See:

Elmendorf v. Taylor, 10 Wheat. 152, 6 L. ed.

289 ;s

Chicago M. St. P. & P. R. Co. v. Risty, 276

U.S. 567, 72 L. ed. 703;

16

Green v. Lessees of Neal, 6 Pet. 291, 8 L. ed.

403, 405 ;

Fairfield v. Gallatin Co., 100 U.S. 47, 25 L. ed.

544, 546;

Wade v. Travis Co., 174 U.S. 499, 43 L. ed.

1060, 1064.

The Circuit Court of Appeals for the Eighth Dis-

trict in Luehrmann v. Drainage District No. 7, 104

Fed. (2d) 696, 698, after pointing out that the district

involved in the Ashton case was held to be a political

subdivision of the state, and that Drainage District

No. 7 ‘‘is not a governmental agency’’, upheld the

constitutionality of the new Municipal Bankruptcy

Statute (Act of August 16, 1937, 50 Stat. 654, 11 U.S.

C. §§401-404), and said:

‘“‘This ruling is based upon the decisions of the

Supreme Court of Arkansas holding that drain-

age districts are quasi-public corporations which

are not political or civil divisions of the state like

counties and municipal corporations created to

aid in the general administration of the govern-

ment. They are not created for political pur-

poses, nor for the administration of the govern-

ment. Appellants do not contend that the peti-

tioner falls within the limitation upon the power

springing from this amendment to the Bank-

ruptey Act, which limitation was declared in the

Ashton case.”’

Since under the recent decisions of the Supreme

Court of California (decided since the Bekins case) it

is now settled that a California irrigation district is

a state agency whose functions are exclusively govern-

17

mental, we respectfully submit that the statute, if ap-

plied to a California irrigation district, is unconstitu-

tional, both under the Ashton case and under the

Bekins ease.

II. THE CAUSE IS RES JUDICATA.

Assignment of Error No. 4 is as follows:

‘*The cause is res judicata.”’ (R. 489.)

Assignment of Error No. 48 is as follows:

‘The court erred in failing to find that the

particular issue as to the validity of the powers

referred to in said subdivision (e) and the right

of the trial court to exercise said powers were

involved and were necessarily involved in the

trial of said prior proceeding, and said issue was

determined in favor of the dissenting bondholders

in this case.”’ (R. 497.)

In 1935 the Lindsay-Strathmore Irrigation Dis-

trict filed a petition under the first Municipal Bank-

ruptey Act. This petition involves the same plan of

composition as the instant proceedings. (R. 363.) The

petitioners also appeared by answer and objections.

The Court heard the case on the merits and made

findings of fact and conclusions of law (R. 423) and

entered a decree confirming the plan of composition.

(R. 452.) These petitioners appealed to the Circuit

Court of Appeals, which court reversed. (R. 468-9.)

(Bekins v. Lindsay-Strathmore Irr. Dist., 88 Fed.

(2d) 1004.) The assignment of errors specified that

the plan was unfair, inequitable, unlawful, the statute

18

unconstitutional and other grounds. The lower Court

following the issuance of the mandate entered judg-

ment, dated July 26, 1937, in favor of these petitioners

which judgment became final. (R. 470.) Neither the

Circuit Court of Appeals opinion nor the mandate

(R. 469) specified the exact grounds of reversal.

It is therefore contended that this cause is res

judicata on all points between these parties. The first

Municipal Bankruptcy Act has not been repealed.

Sections 78 through 84 constitute the present Munici-

pal Bankruptcy Act. The second statute is merely an

amendment of the first. It is all one law on the subject

of municipal bankruptcy. Congress could have pro-

vided that a decree entered under Section 80 would

not be a bar to a proceeding under Section 81, but did

not do that. It merely provided that ‘‘the initiation

of proceedings * * * under Section 80 shall not con-

stitute a bar’’ to a proceeding under Section 81 (Sec-

tion 83(h)).

So far as the form of the decree is concerned, either

decree could equally have been entered under either

one of these two enactments, Section 80 or Section

81. Both decrees are equally embraced within the

power purportedly granted by Congress under each

of these acts. Comparing the language of the two

decrees (R. 452, 187) it will be seen that they are in

substantial identity. In other words, the district here

seeks to obtain, in effect, the same decree which it

first obtained under the former proceeding. In logical

effect it was adjudged in the first case that the decree

in the second case could not be entered.

“20, RA ETA RRO NG SAP LCS TR MAR SAR ap MN eI —

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Where a rule of law becomes res judicata, the ques-

tion in the second case only arises because the judg-

ment would be different but for the former adjudi-

cation.

In the opinion in the case of West Coast Life In-

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

(2d) 654, 661, the Court seems to hold that it does not

appear from the Merced record, the grounds upon

which the decree was reversed, saying:

‘‘There is nothing to indicate whether we re-

lied upon the argument made at the hearing that

the legislation was beyond the power of Con-

gress, or upon the argument that consent of the

State would constitute an impairment of the obli-

gation of contract. In fact, it does not even ap-

pear that we based our decision on either of these

arguments.”’

The Court goes on to say:

‘*Tt cannot be said that the decision is res judicata

as to either rule of law relied upon by appel-

lants.”’

and seems to us to state that where a number of grounds

are urged the decision ‘‘cannot be res judicata of all

possible grounds for such order’’. There is no sep-

arate discussion of this matter in the opinion in the

Lindsay-Strathmore case, and we look to the Merced

case for the reasons for the confirmation of the

Lindsay-Strathmore decree.

In the case of Chicot County Drainage District v.

Baxter State Bank, 60 8S. Ct. 317, 308 U.S. 371, this

Court said: |

= Meee areR DTM SoM:

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20

“*The remaining question is simply whether re-

spondents having failed to raise the question in the

proceeding to which they were parties and in

which they could have raised it and had it finally

determined, were privileged to remain quiet and

raise it in a subsequent suit. Such a view is con-

trary to the well-settled principle that res judicata

may be pleaded as a bar, not only as respects

matters actually presented to sustain or defeat the

right asserted in the earlier proceeding, ‘but also

as respects any other available matter which might

have been presented to that end’. Grubb v. Public

Utilities Commission, supra; Cromwell v. County

of Sac., supra.’’

The former judgment, therefore is res judicata, not

only that Congress does not have the power requisite

to these proceedings, but that the plan is inequitable,

unjust. and unfair.

Ill. THE PLAN LACKS CONSENT.

Assignment of Error No. 17 is as follows:

“‘The court erred in finding and holding that

the Reconstruction Finance Corporation is a

creditor affected by the plan.’’ (R. 490.)

Assignment of Error No. 4? is as follows:

‘‘The court erred in not granting the motion of

respondents to classify the Reconstruction Fi-

nance Corporation’s claims separately and as

claims not affected by the plan.’’ (R. 495.)

Neither the R.F.C. nor Burns as trustee are credi-

tors affected by the plan.

RESETS REE POTS PTD SB UR TE RR a a ES ER — |

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Section 81 of the Bankruptcy Act requires that not

less than 51% of the securities affected by the plan

(excluding any owned, held or controlled by the dis-

trict) have accepted it in writing.

21

Petitioners made a motion in the trial Court to

classify the creditors. (R. 109.) The Court gave no-

tice (R. 110) to these parties.

The classification by the Court we contend was

erroneous. Subdivision (a) of Section 83 provides:

‘‘No creditor shall be deemed to be affected by

any plan of composition unless the same shall

affect his interest materially, ..., * * *’’,

In Section 82 it is provided that the term “security

affected by the plan’’ means security as to which the

rights of the holder are to be modified materially by

the composition. This, of course, means adversely

affected. We have already explained the mechanics of

this transaction in the statement made in our ac-

companying petition. Even though Section 82 enacts

that ‘“‘Any agency of the United States holding se-

curities acquired pursuant to contract with any peti-

tioner under this chapter shall be deemed a creditor

in the amount of the full face value thereof’. We

point out that these bonds were not acquired by the

R.F.C. “‘under this Chapter’’, since the bonds, if ac-

quired at all by the R.F.C., were acquired under the

former Chapter IX. Nor are they ‘‘acquired”’, since

they are merely held as collateral. Furthermore, the

main block of the bonds are owned and held by W. J.

Burns (R. 117) and they are not owned or held by the

R.F.C. except as collateral and in consequence this

RES aE ITS a AEE eee

22

clause in Section 82 does not give any validity to the

consent of the R.F.C. In fact this enactment in no way

applies to such a situation as in this case. Finally we

point out that so far as subdivision (j) of See. 83, is

concerned, providing that consent to plans partially

completed may be given by the holders of exchanged

securities, it was enacted after the petition in this

case was filed. The date of that enactment is June 28,

1938, and the date of the filing of this petition is Sep-

tember 21, 1937. It does not appear to be intended to

vitalize a proceeding that was otherwise lifeless.

Ginsberg v. Lindel, 107 Fed. (2d) 721, 726.

Title 43, Section 403, U.S.C., under which the loan

in this case was given by the R.F.C. provides that no

loan shall be made until an agreement has been made

between the district and its bondholders ‘‘under which

a substantial reduction will be brought about in the

amount of the outstanding indebtedness of the appli-

cant’’. Therefore the R.F.C. had no authority to

make a disbursal unless the reduction of indebtedness

was immediately as opposed to ultimately effected.

As a matter of fact the R.F.C. agreement (R. 202)

did not require that all of the debt should be liqui-

dated, but only “‘the greater part’’. The clause in the

R.F.C. resolution (R. 207) regarding the maintenance

of ‘‘parity”’ of rights, which provides that the division

chief of the R.F.C. may elect to keep the deposited

securities alive to maintain a parity of rights shows

upon examination that the intention was to maintain a

parity of rights between the holders of the deposited

securities and of the securities which were not de-

posited and in case it is necessary to keep them

-

23

alive then owners’ agents are to be appointed. But

no owners’ agents were appointed. An entirely dif-

ferent procedure was set up by which the bonds were

transferred to a man by the name of Burns, eliminat-

ing all rights of the former depositors.

Subdivision (b) of Section 5 of the R.F.C. resolu-

tion (R. 207) goes on to provide that in case the dis-

trict pays interest on the note the corporation will

accept such interest payments and give credit to the

district for payment of interest of the deposited se-

securities. (Interest at 4% has been paid the R.F.C.

since the disbursal of the loan on the amount disbursed

(R. 573-574).) Therefore in this case there is no ques-

tion but that the payment of 4% to the R.F.C. was a

preference. And also there is no question but that this

payment of 4% interest resulted in discrimination

since we did not get any interest. Our interest coupons

are still unpaid. Burns’ coupons are liquidated.

Burns’ deposition shows him to be a mere willing

tool of the district, created to give color to its con-

tention made in bad faith that the bonds are still

alive. He testified that he was a ‘“‘trustee of the

Lindsay-Strathmore Irrigation District’’. (R. 393.)

‘The trust agreement represented his entire authority

as trustee. . .”’. (R. 404.) ‘‘Mr. McBride! handled

all the transactions for him’’. (R. 403.) Upon eross-

examination by Mr. McBride Burns said he made a

mistake if he said he was trustee for the district. For

whom was Burns trustee? Trustee for Bad Faith.

He did not dare comply with Section 83(a) requiring

ELL SNL RE ENS, LET PETE ED EH BREE NEA IS 9 ae ee

l. The District ’s counsel.

24

a statement by the trustee of his beneficiaries and his

authority and his compensation. Petitioners’ motion

to strike the consents and the claims of Burns and the

R.F.C. on this ground and the ground that neither are

creditors adversely affected by the plan was denied.

(R. 351.) This was error.

IV. THE PLAN WAS FULLY EXECUTED OUT OF COURT.

Assignment of Error No. 22 is as follows:

‘*The court erred in finding that said plan was

not prepared or substantially completed or exe-

cuted several vears before the commencement of

this proceeding, and in finding that said plan is

a plan of composition pursuant to said Chapter

IX.”’ (R. 491.)

Assignment of Error No. 30 is as follows:

‘“‘The court erred in holding that sub-para-

graph (j) of Section 83 of the Bankruptcy Act

of the United States in any way applies to the

consent of the Reconstruction Finance Corpora-

tion or to these proceedings.’’ (R. 493.)

The R. F. C. has no authority to extend the time

of the loan beyond a year. Title 15, Section 604(a)

U.S.C. provides:

‘*No funds shall be disbursed on any commitment

or agreement to make a loan or advance here-

after made by the Reconstruction Finance Cor-

poration after the expiration of one year from

the date of such commitment or agreement;

* # & 99

>

25

This is further shown by the District’s Exhibit 7

(R. 241), which is a resolution of the R.F.C. reciting

the two previous loans have expired and granting :

a new loan and incidentally requiring that $100,000.00 f

be escrowed and held for the benefit of the R.F.C. (R. &

241.) The apparent purpose of this requirement of :

the deposit of $100,000.00 was (it should be noted it ;

is not in any way authorized by the vote of the people e

at the election for approval of the plan (R. 361)) a .

guarantee against the claims of the non-depositing

bondholders.

The conduct of the parties shows that the trans-

action was complete and ended. The old loans ex-

pired. The R.F.C. demanded a cash deposit of $100,-

000.00. The district paid interest on the R.F.C. loan.

(R. 573-4.) The R.F.C. reports to Congress that it

made a loan to the district (not Burns). (R. 478.)

The petition in the former bankruptey case (R.

411) recited (R. 415) that creditors of petitioner

“owning not less than 30 per centum in amount of

bonds, * * * have accepted said plan in writing, by

the deposit of said bonds in escrow as hereinafter

set forth,’’.

The findings in that case (R. 423, 443) determined

that creditors holding more than two-thirds, namely,

85%, had accepted the plan in writing and that the

writing had been filed in that proceeding. The find-

ings and decree there indicated that the bondholders

deposited their bonds and accepted the plan. Those

bonds were made subject to the plan. The plan was

fully executed as to those bonds which were sur-

26

rendered. On the other hand the decree was reversed

as to the petitioners. They only are not bound by the

plan. The plan has been fully executed and adjudi-

cated as between the original bondholders and the

district. Chicot County Drainage District v. Baxter

State Bank, 308 U.S. 371.

V. THE PLAN OF COMPOSITION IS UNJUST, UNFAIR,

INEQUITABLE AND DISCRIMINATORY.

Assignment of Error No. 8 is as follows:

‘*The plan of composition herein is unfair, in-

equitable, and unjust and is not for the best in-

terests of the creditors and it discriminates un-

fairly in favor of the Reconstruction Finance

Corporation.’’ (R. 489.)

Assignment of Error No. 66 is as follows:

‘‘The court erred in finding that the taking of

title by the district to one-third of its lands had

any substantial effect on the ability of the district

to carry its bonded indebtedness since there is not

and never has been any water available for the

irrigation of the lands to which title was taken,

and they never supported any substantial part of

the bonded debt.”’ (R. 501.)

PAYMENT OF INTEREST.

The district put in escrow $62,000.00 to pay interest

at 4% from November 1, 1934 upon the refunding

value of the bonds deposited. (R. 243.) This interest

was paid up to the date of disbursal by the R.F.C. on

April 26, 1937. Subsequently interest at 4% has been

paid to the R.F.C. on the amounts borrowed. The

plan of composition itself does not provide for interest

‘hms

es

-

27

NN a

to depositing bondholders. The district stipulated

“It was actually a contribution by the irrigation

district to the depositing bondholders. The offer of

interest originated from the district in order to induce

deposit of the bonds * * *’’, (R. 261.) The Court below

does not touch upon this question in the instant case

but refers to it in the Merced case where the Court’s

position seems to be that because the interest paid to

the depositing bondholders was not a part of the plan

it is an outside matter and does not concern the Court.

We contend that it is discriminatory and coercive.

The fact it was outside the plan would appear to be

sufficient lack of good faith to invalidate the plan

under the decision in the City of Avon Park case

(supra). Furthermore we point out that the 4% in-

terest paid to the R.F.C. is available under the plan

itself and that the money is provided by the plan and

if denied to the petitioners it is only denied as a matter

of coercion and there is no reason why the alleged

bankrupt should benefit at the expense of the peti-

tioners. These interest items amount to roughly

$150.00 per bond. (4% on $600 from Nov. 1, 1934.)

Would it have been proper to pay a greater lump

sum of money as a consideration to acceptors of the

plan? Would not such a payment have been an un-

lawful preference? And how indeed can the district

pay anything outside the plan?’ We have shown that

the R.F.C. agreed that the 4% interest received would

be accepted in lieu of the payment of the interest

coupons on the deposited securities. (R. 208.) There-

fore the payment of this interest to the R.F.C. and the

denial of it to the petitioners is essentially discrim-

Bevirronsecmenrorip itm ncesia eur

EEF LE PE RR

28

inatory and amounts to saying that the creditors who

accept the plan will be paid this interest, but those

who do not accept it will be denied interest. When it

is considered that the petitioners successfully con-

tested the first bankruptcy proceeding, the injustice

of depriving them of interest during the period of

this litigation is all the more apparent.

THE PRINCIPLE OF THE BOYD CASE.

The principle of the Boyd case (Northern Pacific

Ry. Co. v. Boyd, 228 U. 8S. 482), if applied to this

case would seem to require reversal. It is no answer

to say that debtor is a public corporation and that

its assets cannot be taken over by the Court. In New-

house v. Corcoran Irrigation District, 114 Fed. (2d)

690, the Court below in a case decided the same day

as the instant case said:

‘‘The bankruptcy of a public entity, however, is

very different from that of a private person or

concern.”’

saying further:

‘*such assets and such property within the Dis-

trict cannot be disposed of as in the ordinary

bankruptcy proceeding for the benefit of a

debtor.”’

Yet in the case of Fano v. Newport Heights Irriga-

tion District, 114 Fed. (2d) 563, also decided the same

day the same Court said:

‘Tt is undoubtedly true that the District has not

funds in hand to fully pay this due interest and

in that sense is insolvent, but it is not only far

from insolvent in the bankruptcy sense, but owns

SELES REPS RY REN BU HR as

Emests — |

29

debt free, except for the interest mentioned, as-

sets in value many times the indebtedness, all

in most excellent physical and almost new con-

dition.”’

Thus it appears that the Court below deemed that

the words ‘‘fair and equitable’’ signify something

which is fair and equitable in the mind of the judge

but do not connote any definite standard or yard-

stick to be applied in these cases, and this solely be-

cause a public corporation is involved and its assets

are not subject to seizure for the debts of the creditor.

It is the position of the petitioners that the same

principles which apply to a private corporation in

determining the question of fairness and equity apply

with like force in the case of a public corporation.

As bearing, therefore, upon the question that the

plan of composition here is not fair or equitable, we

respectfully suggest the following considerations:

1. The assets of the bankrupt exceed its debts

many times over. The total assessed value of the dis-

trict (R. 343) is $1,648,700.34. This is for raw land

without improvements. In addition the financial

statement of October 31, 1935 shows capital assets

in excess of the debts amounting to $731,544.60. The

same condition is true as of October 30, 1938 (R.

347), except that by 1938 the capital assets have in-

creased. See, also, R. 441, where the same Court in

the first case made a special finding as to assets, which

did not include land or private improvements, find-

ing them to equal over two million dollars. The bond

debt is $1,427,000.00 principal which with interest ag-

30

gregates $1,981,920.57. The district in its application

for a loan to the R.F.C. represented that the assessed

value of the land was $80.00. The percentage used

by the assessor is 40%, which would mean an average

of $200.00 per acre. This application by the district

(R. 407) also states that the fair value of citrus lands

is bet een $750.00 and $1000.00 per acre. This means

that 8000 acres of the 14,000 are worth $6,000,000.00.

The district itself estimated the value at $10,000,000.00.

(R. 408.)

2. The District Securities Commission having

jurisdiction over the affairs of the district made a

finding (R. 231) (as is required by law) that the

new refunding bonds do not exceed 60% of the ag-

gregate value of the water, water rights, and other

properties owned by the district and the reasonable

value of the lands. In other words the plan of compo-

sition offers not to exceed 60% of the value of a por-

tion of the bankrupt’s assets.

3. This district has a bonded debt of $1,427,000.00,

yet in the past ten years it expended one million

dollars in litigation. (R. 382, 379.) The fact that this

district was able to make such tremendous expendi-

tures over and above meeting its bond obligations in

full up to 1933 is impressive of the ability of the dis-

trict to pay.

4. The fact that the bond issues were scheduled

to mature over a short period of twenty years when

the California law permits a period of fifty years

was one of the vital factors affecting the default of

the district. Under ordinary circumstances such a

SRI LEYS SOS ie cctaiciane eet

31

bond issue would be refunded and the maturities ex-

tended over a further period of probably forty years

without capital loss to the creditors. Why not such

a plan now?

5. During the period that this district has been

in default it has purchased capital assets in the

amount of $300,000.00 (R. 382), and in addition has

deposited a cash reserve of $100,000.00 (R. 383) with

the R.F.C. and has substantial cash on hand, $121,-

332.32. (R. 347.) If these amounts alone were ap-

plied to the indebtedness in addition to the composi-

tion offer, it would amount to an offer of 100 cents

on the dollar of principal (excluding interest) in-

stead of 60 cents.

6. The cost of production per acre is $154.89. (R.

308.) This includes $7.00 an acre for district taxes.

(R. 322.) If the condition of the district is as bad

as represented, $7.00 out of $154.00 cannot save the

district, and it is unfair to take over 50% of the in-

vestment of the petitioners if it will only reduce a

part of $7.00 expenses out of every $154.00. (This

$154.00 includes $30.00 per acre for water toll. The

district may lawfully levy water tolls or taxes. There-

fore the water cost is really $37.00 per acre and of

this only a part of $7.00 will be affected by the plan.)

7. The plan gives bonds to the R.F.C., but requires

the petitioners to take cash.

8. Payment of 4% interest to the consenting credi-

tors and denial of it to the objecting creditors was

discrimination.

—_— ne ah era ae

a

32

9. Petitioners have vested rights, Provident Land

Corporation v. Zumwalt, 12 Cal. (2d) 365, 85 Pace.

(2d) 116. These vested rights consist of (a) the

money in the bond fund, (b) $100,000.00 deposited

with the R.F.C., (¢) $300,000.00 water stock, (d) tax

sale certificates, (e) tax deeded lands, 5000 acres.

10. The Court below in its opinion in the Fano

case, supra, in spite of the fact that the tax delin-

quency reached 30.3%, pointed out that over a period

of years the delinquency, when credit is given for the

collections actually made, amounted to less than 5%

and the same line of reasoning in the instant case

leads to the same conclusion. In the Fano case

seven years of aggregate tax delinquencies amounted

to 141.1%, whereas in the instant case (R. 331) tax

delinquencies for the same period is the aggregate

of 90.6% or some 50% less than in the Fano ease.

The average delinquency in the Lindsay-Strathmore

case is less than 13%, whereas the statute antici-

pates a delinquency of 15%. In effect, the district

collected $102.00 for every $100.00 in its budget

during this period. Of course it did not levy suffi-

cient to pay its debt in full, but it could have levied

more and during the last three years the tax delin-

quency is less than 3%. In fact, an examination of

the disbursements and receipts for the years 1921 to

1938 shows the total income for these years is $5,-

889,328.94, and expenditures $5,768,796.62. (R. 330.)

The exhibits at R. 329 and 330 show that the differ-

ence between the income of the district for the period

1921 to 1938 is two and a half million dollars over

PME SE MEN LEN IS ESTEL LETTE A OILERS SEN RMN I EO ate — |

33

and above its necessary operating expenses, not tak-

ing into account one million dollars for litigation costs

for that period. It is respectfully submitted that where

the assets of a bankrupt exceed its liabilities, that the

principal of an obligation should never be cut, but

the payment of the debt should be amortized in the

future so as to come within the income.

11. The District Court in its ‘‘Conclusions of the

Court’’ (R. 131, 139), which were made part of the

findings (R. 158), said:

‘the strongest evidence of the fairness and equity

of the settlement is the indisputable fact that

creditors representing more than 87 per cent. of

the total amount of the outstanding indebtedness

have voluntarily agreed to it * * *.”

12. Both lower Courts commit error in stating that

one-third of the land has gone to the district for tax

delinquency. By 1933 the district had taken title to

4524 acres. (R. 331.) The district secretary said

“The district does not have water for that land’’.

(R. 386.) The basis of the Court’s conclusions of

fairness fall.

VI. THE PLAN OF COMPOSITION IS NOT PRESENTED

OR ACCEPTED IN GOOD FAITH.

Assignment of Error No. 11 is as follows:

‘“‘The offer of the plan and its acceptance are

not in good faith.’”’ (R. 490.)

A want of good faith is shown in these proceedings

by the following facts:

RIOR ARLES EAB TSO MGI I GE BIE

34

1. The failure of the district since 1933 to levy

assessments under the provisions of Section 39 of

the California Irrigation District Act.

2. Payment of interest to the depositing bond-

holders and to the R.F.C. and withholding similar

advances from the non-depositing bondholders.

3. Assisting a creditor to ‘“‘buy its way into

Court”’, in that the district aided the R.F.C. at every

turn té acquire its bonds which is denounced in In re

Hudson Coal Co., 22 Fed. Supp. 768 at 770.

4. By contributing to the cost of the so-called

‘*purchase’’ of the depositing bonds $62,000.00 paid

the bondholders. (R. 243.)

5. Because the district has relief under Section

11 of the California Statutes, and the Districts Se-

curities Commission Act. (Appendix p. i.)

6. Burns and the R.F.C. declined to comply with

Section 83(a) requiring the filing of a statement as

to beneficiaries and compensation and he does not

disclose for whom he is trustee.

7. The bonds come within that category of control

which clearly indicates that the ownership of the

bonds in any event is not in the hands of an investor

who is adversely affected. The petitioners are all

bondholders who have held their bonds for many

years. They are not speculators. The holders of the

consenting bonds paid sixty cents per dollar of their

bonds and their consent is simply the product of the

district’s influence and reflect more the district’s de-

sire rather than an expression of an investor’s inde-

ELLEN ANE LES AS PIER LEON ISLE TEAL LRTI Y AE PMLA SE LS EET SBE RN at MARE RIT I HS —

ll

pendent business judgment. American United Mutual

Life Insurance Co. v. City of Avon Park, 61 S. Ct.

157, November 25, 1940.

35

VII. THE CREDITORS WERE NOT PROPERLY CLASSIFIED.

Assignment of Error No. 16 is as follows:

“The Court erred in classifying the creditors,

including the Reconstruction Finance Corpora-

tion, as one class’. (R. 490.)

Assignment of Error No. 33 is as follows:

“The Court erred in finding and holding that

equity requires that any composition under the

Bankruptcy Act, that all the bondholders should

be considered as of equality and dealt with on a

parity.”” (R. 494.)

We now come to one of the most important factual

and legal questions involved in this case and one upon

which neither of the Courts below made any comment

in their respective opinions. From the opinions is-

sued by the same Courts, however, in other cases it

appears that the theory of the trial Court and the

Circuit Court of Appeals is that the preference

claimed by the petitioners is not a ‘‘preference as

allowed by law’’ and that in any event that when

bankruptcy intervenes these preferences cease to have

place.

Section 83(b) provides that ‘‘the judge shall

classify the creditors according to the nature of their

respective claims and interests: Provided, however,

ERTS ERASE Slt i R

36

That the holders of all claims, regardless of the man-

ner in which they are evidenced, which are payable

without preference out of funds derived from the

same source or sources shall be of one class. The

holders of claims for the payment of which specific

property or revenues are pledged, or which are other

wise given preference as provided by law, shall ac-

cordingly constitute a separate class or classes of

creditors. ”’

Subsection (e) provides that at the conclusion of

the hearing the judge shall enter an interlocutory

decree if satisfied that the plan

**(1) * * * does not discriminate unfairly in

favor of any creditor or class of creditors ;”’

Petitioners claim that under Section 52 of the

California Irrigation District Act and the California

decisions construing it, they have a preferential right

to have their matured bonds and coupons which

were the only matured bonds and coupons presented

for payment paid in the order in which they were

presented for payment, and consequently that peti-

tioners are ‘‘holders of claims for the payment

of which specific property or revenue are pledged”’,

or that if this be not true, in any event they are the

holders of claims ‘‘which are otherwise given prefer-

ence as provided by law’’ within the meaning of Sec-

tion 83(b) of the Bankruptcy Act, and! that accord-

ingly they ‘‘constitute a separate class or classes of

creditors’’ within the meaning of the Bankruptcy Act.

37

THE FACTS.

The proofs of claim by Burns and by the R.F.C.

do not claim interest nor interest coupons nor show

any dates of presentation of any matured obligations

to the treasurer (R. 40), but the proofs of claim of

petitioners showed the dates of presentation of the

matured obligations owned by petitioners. (R. 38, 75,

78, 72, 64, 80.)

$123,195.00 of the claims of petitioners matured

and had been presented to the treasurer for pay-

ment and stamped by the treasurer as provided

by Section 52 and established in the record. This

record, therefore, presents the situation that the only

matured claims that were ever presented to the treas-

urer are those of the petitioners, and if Section 52

gives a preference, it is a preference provided by

law, and these claims should have been separately

classified.

There is a second point of discrimination involved

under this heading as shown by the following facts.

Mr. Hubert, secretary of the district, testified that

the district quit paying during the month of July,

1933. The Estate of Martin Bekins on November 7,

1933 presented seven matured bonds of $1000.00 each,

which were due July 1, 1933, and they were not paid,

and the Estate of Katherine Bekins on the same day

presented about three coupons of $30.00 each due

July 1, 1933, which were not paid. (R. 380.) The

secretary of the district further testified that after

the district quit paying, it continued to receive assess-

ments from the 1932-33 levy which was made for the

Fea ee ee TS

ee ee ee ee

ee ET ee ee ee ee

38

payment of these particular bonds and coupons, and

about $17,000.00 had been so received in the bond and

interest fund, and at the time of the hearing there

was approximately $15,000.00 in the bond principal

fund, in addition to about $17,000.00 in the bond in-

terest fund and most of this money was in these funds

before these proceedings were filed. (R. 380.) It is

contended, therefore, that these bonds and coupons

of the two Bekins’ estates should in any event be paid

in full.

A total of $123,195.00 of bonds and coupons be-

longing to the petitioners matured from July 1, 1933

to January 1, 1938 (R. 38-60), and have been pre-

sented for payment and are secured by the bond funds

on hand, and by other surplus funds and by other

properties under the provisions of the California Ir-

rigation District Act and must be paid in the order

of presentation.

THE LAW.

Section 52 of the California Irrigation District Act

provides (see Appendix p. vi) :

‘“‘(pon presentation of any matured bond of

the district, the treasurer shall pay the same

from the bond principal fund, and upon presen-

tation of any matured interest coupon of any

bond of the district, the treasurer shall pay the

same from the bond interest fund. If money

is not available in the fund designated for the

payment of any such matured bond or interest

coupon, it shall draw interest at the rate of

ESR AOTRE Mc Ute TTR ES sl

39

seven per cent per annum from the date of its

presentation for payment until notice is given

that funds are available for its payment, and it

shall be stamped and provision made for its pay-

ment as in the case of a warrant for the pay-

ment of which funds are not available on its

presentation.’’ (Emphasis ours.)

Section 61(a) of the California Irrigation District

Act makes provision for the payment of warrants

for the payment of which funds are not available on

presentation, and the pertinent portions thereof are

printed in the Appendix. (See p. vii thereof.)

These provisions of the California Irrigation Dis-

trict Act have been construed by a long line of deci-

sions as requiring that matured bonds or matured

coupons shall be paid in the order in which they are

presented for payment, and, if not paid on presen-

tation, that they shall be stamped or registered, and

shall bear interest at seven per cent per annum from

date of registration and shall be paid in the order of

registration as soon as funds are available.

The leading case on this subject is Bates v. Mec-

Henry, 123 Cal. App. 81, a case which involves

the Merced Irrigation District. At the time of the

presentation of interest coupons to the treasurer in

that case there was not sufficient money in the bond

fund to pay in full all matured coupons. It was con-

tended that payment should be made in order of pres-

entation as long as there is any money in the fund.

The Court said:

-

40

“‘The portion of section 52 of the California

Irrigation District Laws which we have quoted

specifically provides that upon the presentation

of any matured bond, or of any matured interest

coupon, or any bond of the district, the treasurer

shall pay the same from the bond interest fund.

There is no provision in the section that pay-

ment shall be withheld until all of the matured

bonds, or until all of the matured interest cou-

pons have been presented. If there is any money

in the fund available for payment, the section

makes it the duty of the treasurer to pay the

same.’’

The Court further said:

‘“‘Again, the treasurer of the district has au-

thority to perform two acts: He must either pay

the bond or interest coupon when presented, or

register the same. The irrigation laws do not

confer upon the treasurer of the district any

authority to prorate payments. If the money

is there and the bond or interest coupon is due,

his legal duty is to pay. If money is not there,

his legal duty is to register the bond and interest

coupon and make payment, with the added in-

terest, as soon as sufficient money is available.”’

The order of the Court was:

‘that a writ of mandate issue in this cause, di-

rected to the respondent, to forthwith proceed

to make payment in full of any and all interest —

coupons, in the order in which they were pre- —

sented for payment, until the entire fund in his —

hands, available for that purpose, is exhausted, —

and then to forthwith proceed to register any —

ei ead

41

and all interest coupons on which payment is

not made, if so demanded by the holders thereof.”’

The next important decision was that of Shouse v.

Quinley, 3 Cal. (2d) 357, involving the Waterford

Irrigation District. In this case the Court held Sec-

tion 52 (a) of the California Irrigation District Act

unconstitutional. This section sought to authorize

landowners to pay their taxes with matured bonds and

coupons. The Supreme Court of California said in

holding the Act unconstitutional :

‘‘ By the general terms of the act, the bondholder

had the right to have his bonds paid upon presen-

tation if money were available and if not to have

them registered and paid in the order of presen-

tation. (Bates v. McHenry, 123 Cal. App. 81 (10

Pac. (2d) 1038).)

‘It thus becomes apparent that the result of

the questioned section is first of all to abrogate

the law with respect to the order of payment. So

changed, it is as though the law read: Land-

owners who are the owners or who become such

by purchase or otherwise of matured bonds or

interest coupons shall be entitled to payment in

preference to or without regard to bonds or cou-

pons which have matured and which have been

presented and registered previously for payment.

* * * The two results mentioned very obviously

demonstrate that the nonlandowning bondholder

would suffer a very severe change of his contract

were it to be held that the section does not impinge

upon the constitutional provision against the im-

pairment of the obligation of contracts. It re-

quires no argument to establish that time and

{See eeaat

42

method of payment are material and vital parts of

the obligations of a contract.

66% * *

The very statement of the argument

refutes itself, because the bondholder next in

order of presentation is entitled to be paid with

the sums realized from the assessment for that

purpose and not to be indefinitely postponed.

* &# #99

.

The third leading case is that of Selby v. Oakdale

Irrigation District, 140 Cal. App. 171. The Oakdale

Irrigation District was in default at the time and had

a refunding plan and subsequently filed a bankruptcy

petition. The district made an insufficient levy for its

bonds. The suit was a mandamus proceeding to com-

pel the payment of matured bonds and coupons in the

order in which they had been presented for payment,

notwithstanding that the moneys on hand in the bond

funds were insufficient to pay all maturities.

In discussing the question of priority of payment,

the Court said:

‘*Likewise, in the case of Rohwer v. Gibson, 126

Cal. App. 707, 14 P. (2d) 1051, this court held

that there being no provision in the law relating

to reclamation districts providing for the order

in which interest coupons or bonds should be paid,

the obligations should be marshaled and_ the

moneys on hand apportioned. Here, again, there

is a marked distinction between the reclamation

laws and the Irrigation Act. Section 52 of the

Irrigation Act, as we held in Bates v. McHenry,

supra, provides for the order of payment, and,

if not paid, for the registration of both bonds and

Pie eh pe TAN AR I pay sana a |

43

interest coupons, and that thereafter, payment

shall be made in the order of registration.”

The Court then proceeded to discuss the economic

question and said:

‘Though discussed by counsel, the fact that the

bonded indebtedness of the district and the low

price of farm products indicate that both bond-

holders and property owners are suffering, and

probably will suffer excessive losses, we do not

find that such facts should enter into or determine

the rights of the respective bondholders as to what

moneys there may be on hand for making pay-

ment of the legal oblizations of the district.”’

In the case of El Camino Irrigation District v. El

Camino Land Corporation, 12 Cal. (2d) 378, 85 Pac.

(2d) 123, the Supreme Court of California in holding

that the bondholder could not levy execution upon an

irrigation district said:

“Moreover, to permit successful judgment cred-

itors, whose bonds may not be prior in registra-

tion, to be paid by the proceeds of execution sales,

would result in an unjustified preference in favor

of those who brought the actions and procured

the levies. The lower court in the instant case

made an express finding to this effect, and the

procedure, unless restricted in some manner un-

known to us, would operate to violate the rule of

priority established by the decisions in this state.

Bates v. McHenry, 123 Cal. App. 81, 10 P. (2d)

1038; Selby v. Oakdale Irrigation District, 140

Cal. App. 171, 35 P. (2d) 125; Strasburger v. Van

4H

Delinder, 17 Cal. App. (2d) 437, 62 P. (2d) 387;

Shouse v. Quinley, 3 Cal. (2d) 357, 45 P. (2d)

701.”’

The District Court of Appeal in California (not the

highest Court in the state) in Clough v. Baber, 100

Pac. (2d) 519, 101 C. A. D. 306, sought to distinguish

these cases as to a district having but $15,000 of assets

and bonds of $575,000 in the following language:

‘In none of those cases was the application of

sections 52 and 6la of the act involved under

circumstances like those of the present proceeding

where the district is insolvent and the fund on

hand is inadequate to pay more than a small per-

centage of the matured bonds and obligations of

the district, and where all of the lands of the dis-

trict have been sold and conveyed to the state for

delinquent assessments, thereby exhausting all

available means of levying future taxes to pay the

bondholders. In those cases there was no showing

of the injustice of directing the payment of regis-

tered bonds so as to deprive all other bondholders

of the possibility of ever recovering any substan-

tial portion of their investments therein.”’

The Court also said:

‘*A construction of those cases should not obtain

which will absolutely impair or destroy the obli-

gations of the contracts to pay other bonds or

coupons by distributing to those who have first

registered their bonds all of the funds which the

district will ever be able to raise.”’

However, in the case of Provident Land Corpora-

tion v. Zumwalt, 12 Cal. (2d) 365, 85 Pac. (2d) 116,

>

45

in a case involving a district in much the same circum-

stances where all the land had been taken by the dis-

trict itself for non-payment of assessments, the Su-

preme Court of California, the highest Court in the

state, held differently. In this case, the District issued

$1,190,000 of bonds. In January, 1936, bonds in the

amount of $152,000 and interest coupons in the amount

of $225,000 were past due. From 1933 to 1936 the

District acquired title to over 10,000 acres of land by

tax deed. On January 6, 1936, the Board of Directors

passed a resolution to purchase $50,000 of unmatured

bonds using $10,000 of ‘‘general’’ fund moneys derived

from rentals of tax deeded lands.

The plaintiff was the holder of $86,000 past due

bonds and $125,000 of past due coupons which were of

course prior in date of presentation and registration

to the bonds so purchased and brought suit to set

aside the sale and restore the money to the treasury.

The Court pointed out that the ordinary method of

payment to bondholders had broken down; that

farmers were unable to meet their obligations; that

delinquencies mounted, which became increased by the

pyramiding system; and that as a result some of these

districts now own practically all of the land within

their boundaries. The Court said:

“It is further apparent that the district’s method

of buying outstanding unmatured bonds at a dis-

count is in effect the giving of a preference to

bondholders who are not legally prior in time to

others.”’

46

The Supreme Court of California further said (pp.

373-374) :

‘“‘We do not understand how a debtor owing

$360,000, long overdue, can have a surplus of

$10,000. Nor do we understand how the district

can be entitled to take all of the money derived

from the land, whether by sale or lease, and use it

for purposes other than payment of the primary

obligations of holders of overdue bonds. It is

within the discretion of the directors to use some

portion of it for running expenses, and where this

use is necessary, their discretion will be upheld

on familiar principles. But when the directors

themselves declare that a surplus exists, over and

above the operating needs of the district, two

things should be clear: first, that this money

should go to the bondholders; and second, that in

any event, it should not be given to junior bond-

holders in preference to those with prior claims,

but should be paid on past due bonds and coupons

in the order of their presentation.’’ (12 Cal. (2d)

365, 373-374.)

We respectfully submit that the foregoing Cali-

fornia decisions clearly establish that Section 52 of

the California Irrigation District Act requires that

matured bonds and matured coupons of an irrigation

district be paid in the order of their presentation for

payment, and that any such bond or coupon not so

paid be stamped or registered, to be thereafter paid in

the order of registration, and inhibits the disburse-

ment of moneys on hand in the District’s bond fund

on a pro rata or any other basis. These decisions are

binding upon this Court under the doctrine of Erie

_

47

Railroad Co. v. Thompkins, 304 U. S. 64. The Circuit

Court of Appeals refused to follow them, thus creating

a conflict of decisions, which this Court should correct.

Since this California statute provides that matured

bonds and coupons of an irrigation district must be

paid in the order of their date of presentation for pay-

ment, and confers upon bondholders the substantive

correlative right to have their bonds so paid, we re-

spectfully submit that the moneys on hand in the bond

fund of the District are in effect *“‘pledged’’ for the

payment of the matured bonds and coupons of peti-

tioners within the meaning of Section 83(b) of the

Bankruptcy Act.

Likewise the surplus moneys over and above neces-

sary operating expenses, such as the $100,000 deposited

with the R.F.C. as security (R. 383) against the possi-

bility of the petitioners being ultimately successful,

and all other surplus funds (R. 347) and tax process

property constitute trust funds securing the prefer-

ence claimed. In Provident Land Corporation v.

Zumwalt, 12 Cal. (2d) 365, 85 Pac. (2d) 116, the

Court said:

“In our opinion, the statute was intended to

secure the bonds by the proceeds of the land in

the district.”’

The Court also said:

“but the lands remain in trust, and the district

exercises its powers, however broad, as a trustee.

Once it is made clear that the lands are held in

trust, it necessarily follows that their proceeds,

whether by sale or lease, are likewise subject to

the trust.”’

AREER Be,

eV

48

It is well settled that words used in a statute, includ-

ing acts of Congress, are to be given their ordinary

and common meaning, unless there is something in the

statute itself clearly indicating otherwise.

Columbia Water Power Co. v. Columbia Elec-.

tric Street R. L. & P. Co., 172 U.S. 475, 48

L. ed. 521;

Blair v. Chicago, 201 U.S. 400, 51 L. ed. 801;

Caminetti v. United States, 242 U. S. 470, 61

L. ed. 442;

De Ganay v. Lederer, 250 U.S. 376, 63 L. ed.

1042;

Woolford Realty Co. v. Rose, 286 U.S. 319, 76

L. ed. 1128;

Avery v. Commissioner of Internal Revenue,

292 U.S. 210, 78 L. ed. 1216;

Old Colony T. Co. v. Commissioner of Internal

Revenue, 301 U.S. 379, 81 L. ed. 1169;

United States v. Wurts, 303 U.S. 414, 82 L. ed.

932.

The term “‘ pledged’’, given its ordinary and common

meaning, signifies a solemn promise made which is not

to be violated. In Brook v. City of Philadelphia, 162

Penn. 123, 29 Atl. 387, 390, this was held to be the

meaning of the word in a constitutional provision

directing that every city shall create a sinking fund

which shall be inviolably pledged for the payment of

the public debt. We therefore respectfully submit that

the term ‘‘pledged’”’ as used in Section 83 (b) of the

Bankruptey Act, was used in the same sense, and in-

cludes the claims of petitioner by reason of the fact

_

49

that Section 52 of the California Irrigation District

Act in effect “‘pledged”’ the use of the moneys on hand

in the bond fund of the District to the payment of

matured bonds and coupons in the order of their date

of presentation.

This Court in City of Lincoln v. Luning, 133 U. S.

529, 33 L. ed. 767, referring to a similar statute pro-

viding for the registry of overdue coupons and impos-

ing upon the county treasurer the duty of thereafter

paying the coupons as money came into his possession

applicable thereto in their order of registration (Stats.

of Nev. 1877, et), said:

“This Act, providing for registration and for

payment in a particular order, was a new provi-

sion for the payment of these bonds, which was

accepted by the creditor, and created a new right

upon which he might rely. It provided, as it

were, a special trust fund, to which the coupon

holder might, in the order of registration, look

for payment, and for payment through which he

might safely wait. It amounted to a promise on

the part of the county to pay such coupons as

were registered, in the order of their registration,

as fast as money came into the interest fund; and

such promise was by the creditor accepted ;’’.

This construction of the statute is made doubly cer-

tain by the words ‘‘without preference”’ appearing in

Section 83 (b).

This Court should not hold that the word ‘‘ pledged”

is used in a technical sense and as referring to a bail-

iment to be maintained by delivery and possession of

50

specific property or revenues for the additional reason

that the statute is dealing with municipal and other

public corporations, very few of which are ever au-

thorized to deliver specific property or funds as secur-

ity for the payment of its obligations.

But even if it should be so held, certainly the claims

of petitioners ‘‘are otherwise given preference as pro-

vided by law”’ within the meaning of Section 83 (b),

and heace according to the express provision thereof

*‘shall accordingly constitute a separate class or classes

of creditors’’.

Any claim that the preferences and priorities which

petitioners have under the state law are to be ignored,

is answered by the following extract from In re Con-

solidated Iron & Steel Mfg. Co. (C. C. A. 6), 76 Fed.

(2d) 837:

‘‘This does not signify that the law of Ohio can

or does of its own force determine priorities under

the National Bankruptcy Act. It means that the

National Bankruptcy Act prescribes that effect

shall be given to state laws which do give priority

to certain debts. In re Bennett, 153 F. 673 (€ C.

A. 6).”’

Ginsberg v. Lindel, 107 Fed. (2d) 721, 725, 726.

The contracts and claims of creditors of the District

arose and are governed by state laws, and the refer-

ence in Section 83 (b) to claims ‘‘which are otherwise

given preference as provided by law’’ obviously refers

to the law of the state, for the same reason that this

Court held in United States v. Bekins, 304 U.S. 27,

that the provision in subdivision (e) of Section 83 of

a

51

the Bankruptey Act, to the effect that it must appear

that petitioner ‘‘is authorized by law to take all action

necessary to be taken by it to carry out the plan’’,

‘“‘manifestly refers to the law of the state’’.

The petitioners were the only creditors having ma-

tured claims presented to and registered by the Treas-

urer. This situation did not exist in the Merced case

where the lower Court discussed the point.

The obvious purpose of the statute in requiring that

creditors be classified ‘‘according to the nature of

their respective claims and interests’? is that those

who are entitled to be in a separate class be separately

treated in the plan of composition in order to conform

to the requirement of the statute (Sec. 83(e)) that

the plan be ‘‘fair, equitable, and for the best interests

of the creditors’’, and that it ‘‘does not discriminate un-

fairly in favor of any creditor or class of creditors;”’.

Further, how are creditors who are in the position of

petitioners to protect the preferences and priority

which they have under the above California decisions

construing Section 52 of the California Irrigation

District Act, if they are not separately classified ?

They at least were entitled to be placed in one general

class, separate and apart from other creditors not hav-

ing similar preferences and priorities, so that it could

be determined whether they as a class assented by the

required majority to the plan of composition. Putting

them into the same class with other creditors, merely

put them at the merey of the holders of a larger

amount of bonds, with everything to gain and nothing

PRTG Pisprs> eae RET UO

52

to lose by ignoring and disregarding the preferences

and priorities of petitioners.

This branch of the case presents several important

questions of wide public interest as to the proper con-

struction of the provisions of Section 83 (b) of the

Bankruptcy Act relating to the classification of cred-

itors which should be determined by this Court; it also

presents a case where the Circuit Court of Appeals

has refused to follow the decisions of the highest Court

of the state on a question of state law. This makes an

additional reason why certiorari should be granted.

CONCLUSION.

It is submitted that the writ of certiorari should be

granted, the decree of the Court below reversed and

the proceeding directed to be dismissed.

Dated, Turlock, California,

January 6, 1941.

Respectfully submitted,

W. Copurn Cook,

Counsel for Petitioners.

(Appendix Follows.)