Petition for Writ of Certiorari — Taylor v. Provident Irrigation District

FEB 9 1942

CHARLES ELRsae caarLEy

wi. * call

In the Supreme Cr

OF THE

United States

OctToBER TERM, 1941

No. 934

NELSON Taytor, J. R. Mason, Guuzert |

Moopy, and N. O. Bowman,

Petitioners,

vs. z

PROVIDENT IRRIGATION District,

Respondent.

PETITION FOR WRIT OF CERTIORARI

to the United States Circuit Court of Appeals

for the Ninth Circuit

and

BRIEF IN SUPPORT THEREOF.

W. Copurn Cook,

Berg Building, Turlock, California,

Counsel for Petitioners.

PweERNAU-W4LS5H PRINTING CO., SAN FRANCISCO, CALIFORNIA

Subject Index

Page

NE TOON: Boek hv vk ndcuas sab t cane abe te ckenpan ween 2

PE TPO rE rrr rer Terre cre Ty re rer yf 2

OT eer Teor rT Te ree re et re ree 2

Summary Statement of the Matter Involved............... 3

Se SEO UE TO GUN inca cdancwsl dceveceesasesiens 5

Goowbicnn PROMONE iin cs vc cece ctv asnis dee cees cnn cue 8

Reasons for Granting Writ of Certiorari.................. 9

Brief in Support of Petition for Writ of Certiorari......... 13

Factual Background of Case... 2... ..cecesscccncsseccees 13

I.

The plan is unfair and discriminatory as to petitioner

WE: TRE ioe ck iccascresencaesaabecusecereeieee 13

I.

The highest court of California has established the facts

and law of this proceeding and the bankruptcy court was

bound to follow such decisions, but did not............. 16

Il.

The plan is unfair and discriminatory to petitioners........ 18

RSG TS ATEN. Sos 5 os lee eked ba OR TD ee bee Tate ee 22

——

Table of Authorities Cited

Cases Pages

American Un. Mut. Life Ins. Co. v. City of Avon Park,

en a ed a we an Son asks kame nk as 10, 11

American United Mutual Life Ins. Co. v. City of Avon

Park, 108 Fed. (2d) 1010, 61 S. Ct. 157................ 7

Anderson-Cottonwood v. Klukkert, 13 Cal. (2d) 191...... 19

Arkansas Corporation Comm. v. Thompson, 313 U. S. 1382.. =21

Rates v eB eS 5, 14

Carter v. Carter Coal Co., 298 U. S. 238................. 21

Case v. Los Angeles Lumber Products Co., 308 U. S. 106. .10, 11

Consolidated Rock Products Company v. Du Bois, 312

a a Ge a a 10, 11, 18

Cusick v. Second Nat. Bank, 115 Fed. (2d) 150........... 8

Erie Railroad v. Tompkins, 304 U. S. 64.............. 10, 11, 17

Ginsberg v. Lindel, 107 Fed. (2d) 721.................... 7,17

Ill. Centr. R. Co. v. Illinois, 146 U. S. 387................ 21

ET By 14

Moody v. Provident Irrigation District, 12 Cal. (2d) 389

ee era ec Cae nsud aenisicwsie vo de uted 6, 7, 9, 16

Mt. Forest Fur Farms, In re, 122 Fed. (2d) 232.......... 17

Preble Corp. v. Wentworth, 84 Fed. (2d) 73.............. 18

Provident Land Corp. v. Zumwalt, 12 Cal. (2d) 365.......

| EES RN 5, 6, 7, 9, 10, 14, 15, 16, 18, 19, 21

Roberts v. Board of Public Instruction, 117 Fed. (2d) 943 6

Security First National Bank v. Rindge Land & Nav. Co.,

Ne ea cing U ckunis ten dad neh se ae os 18

Wilson v. Standifer, 184 U. S. 399. ................ 0 eee 17

TABLE OF AUTHORITIES CITED ili

Codes and Statutes Pages

Bankruptey Act of 1898, Chapter IX (11 U. S. C. See.

MMS . Siw eckdeedeue Coke veda wer Cae wR Marine bab Nd Ke 3

Bankruptey Act of June 22, 1938, ¢. 575, See. 3(b) (52

NE, SEE 0. Gio 6.x ede Ch eee Mee de et bN Soaks RAR 2

Bankruptey Act of August 16, 1937, c. 657 (50 Stat. 654),

11 U. S. C. 401-404, adding Sections 81-84.............. 2

Bankruptey Act, Section 406 (8) ....006ceiecescccseccses 6

Bankraptey Act, Section 400 (G)........cccccsevcseseces 4

Bankruptcy Act, Section 403 (e)..............0 ee eeeenes 4,7

California Districts Securities Commission Act, Cal. Stat.

Be OE Ns oc AW dnb ew kkee ieee aban cenneess

California Irrigation District Act, Cal. Stat. 1897, p. 254.. 2,3

California Irrigation District Act, Secs. 17, 29, 74-80, Cal.

ee rere rr Ce et oe eer eT Te 21

California Irrigation District Act, Sec. 47................ 21

California Irrigation District Act, Sees. 74-84............. 7

ee eG SS rrr errr sy ere rT tere 14

Judicial Code, Section 240 (a) (28 U.S. C., para. 347(a)) 2

Municipal Bankruptcy Act of May 24, 1934, ¢. 345 (48

Stat. 798), 11 U. S. C. 301-303, adding Sections 78-80 to

the Remiratny Bit OF Boles ovcce sk ciccnssepacevsusnes 2

Political Code of California, Section 3773................ 20

In the Supreme Court

OF THE

United States

OcTOBER TERM, 1941

No.

+

NELSON TAyYLor, J. R. Mason, GILBERT

Moopy, and N. O. Bowman,

Petitioners,

vs. ’

PROVIDENT IRRIGATION DISTRICT,

Respondent.

a

PETITION FOR WRIT OF CERTIORARI

to the United States Circuit Court of Appeals

for the Ninth Circuit.

To the Honorable Harlan F. Stone, Chief Justice of

the United States, and to the Associate Justices

of the Supreme Court of the United States:

Petitioners pray that a writ of certiorari issue to

review the decision (R. 234) of the Cireuit Court of

Appeals of the Ninth Circuit made in the above en-

titled cause on December 4, 1941, which affirmed the

——

2

interlocutory decree of the District Court of the

Northern District of California, Northern Division,

rendered against petitioners on January 21, 1941. (R.

200.)

———

OPINIONS BELOW.

Opinion of the Cireuit Court of Appeals, ...... Fed.

| oo (R. 234.)

JURISDICTION.

The decision in the Circuit Court of Appeals was

rendered December 4, 1941. (R. 234.) The mandate

was stayed until disposition of the case by this Court.

(R. 244.) The jurisdiction of this Court is invoked

under Section 240 (a) of the Judicial Code (28 U.S.

C., paragraph 347 (a)).

STATUTES INVOLVED.

Municipal Bankruptcy Act of May 24, 1934, ¢. 345

(48 Stat. 798), 11 U. S. C. 301-303, adding Sections

78-80 to the Bankruptey Act of 1898; Act of August

16, 1937, ¢. 657 (50 Stat. 654), 11 U. 8. C. 401-404,

adding Sections 81-84; and Act of June 22, 1938, ¢. 575,

Sec. 3 (b) (52 Stat. 940). Principal California stat-

utes involved are ‘‘the California Irrigation District

Act’’, Cal. Stat. 1897, p. 254 as amended; the ‘‘Cali-

fornia Districts Securities Commission Act’’, Cal.

Stat. 1931, p. 2263 as amended.

3

SUMMARY STATEMENT OF THE MATTER INVOLVED.

This is a proceeding brought by the respondent

Provident Irrigation District, a California irrigation

district, for confirmation of composition of debts under

Chapter IX of the Bankruptey Act of 1898 as

amended. (11 U.S. C. Sec. 401-404.)

The matter came on before the Court for hearing on

November 18, 1940 on the petition filed by the Provi-

dent Irrigation District, hereinafter called the dis-

trict, the petition having been filed May 29, 1940, and

the answer and objections to the petition.

The district, a state agency, was organized in 1918

pursuant to the California Irrigation District Act

(Cal. Stat. 1897, p. 254, as amended), is located in the

counties of Glenn and Colusa in California, and com-

prises approximately 22,805 acres. In 1918 the district

issued a first issue of general obligation coupon bonds

in the amount of $1,000,000 and in 1921 a second issue

of $190,000, all bearing interest at 6%. Present out-

standing indebtedness is $957,000. At the time of the

hearing $341,000 of this amount had matured and in-

terest coupons in the amount of $415,192.50 had ma-

tured and were unpaid. Total outstanding indebted-

ness of the district was $1,400,672.50. The district

applied to the Reconstruction Finance Corporation for

a loan and on December 20, 1939, was granted such in

the amount of $193,500. The plan offered to the bond-

holders 20 cents for each dollar of unpaid principal

amount of the old bonds, plus the full amount of any

interest coupons prior to July 1, 1931. The terms of

the loan provided among other things that the district

“7

4

was to reduce its size to approximately 13,000 acres.

The petitioners have resisted the plan and the proceed-

ings in the courts relative thereto, and own principal

of bonds as follows: Nelson Taylor $3000; J. R. Mason

$17,000; Gilbert Moody $3000; N. O. Bowman $9000.

The Nelson Taylor bonds matured August 15, 1930

and were presented for payment January 30, 1931 but

not paid. Other bonds, later in maturities and presen-

tations, were paid in full. Taylor’s bonds, due in 1930

were evidently not paid because the district took the

erroneous position that they were ‘‘outlawed’’. (R.

181.) ‘There are no other unpaid bonds of the 1930

maturity.

The fiscal agent for the district was to receive $20,-

300 for his services. (R. 123.)

The Bankruptcy Act (Sec. 403 (e)), provides that a

plan may be confirmed if ‘‘(1) it is fair, equitable, and

for the best interests of the creditors and does not dis-

criminate unfairly in favor of any creditor or class of

creditors; (2) complies with the provisions of this

chapter; (3) has been accepted and approved as re-

quired by the provisions of subdivision (d) of this

section; (4) all amounts to be paid by the petitioner

for services or expenses incident to the composition

have been fully disclosed and are reasonable; (5) the

offer of the plan and its acceptance are in good faith;

and (6) the petitioner is authorized by law to take all

action necessary to be taken by it to carry out the

plan.”’

Also, that ‘‘(i) Nothing contained in this chapter

shall be construed to limit or impair the power of any

aaa

B)

State to control, by legislation or otherwise, any mu-

nicipality or any political subdivision of or in such

State in the exercise of its political or governmental

powers, including expenditures therefor.”’

Our view of the case.

The plan of composition provides for the payment

of obligations of the district maturing up to and in-

eluding January 1, 1931 in full, but does not provide

for the payment in full of the bonds of Nelson Taylor,

amounting to $3000 which matured August 15, 1930,

and which the district admittedly should have paid

prior to filing in bankruptcy.

Other bonds of the same and later maturities and

presentations were paid in full. (R. 118, 181, 189.)

Many interest coupons of later presentations than

Taylor’s bonds were paid in full, and in fact the plan

is that all coupons of January 1, 1931 maturity are to

be paid in full. This is directly contrary to Bates v.

McHenry, 123 Cal. App. 81, and Provident Land Corp.

vu. Zumwalt, 12 Cal. (2d) 365,’ which held that pay-

ment must be in order of presentation. At the time

of the latter case, the district had a ‘‘surplus’’ of

$10,000 (R. 179), and under the law as declared by

the highest court of California payment should have

been made to Taylor from that money before any

bonds or interest coupons of later presentations were

paid. At the time of the bankruptcy hearing, the dis-

trict had that $10,000 and also $5500 in redemption

money. The ‘‘plan’’ wholly disregards this right by

1This case is set forth in the Appendix p. i, substantially in

full.

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6

providing for payment in full of all January 1, 1931

interest coupons regardless of their later maturity and

regardless of their dates of presentation for payment.

The record indicates (R. 67) that most of the January

1, 1931 coupons are in the hands of one man. This

should have prompted an inquiry under the rule of

Roberts v. Board of Public Instruction, 117 Fed. (2d)

943.

But the essential fact is that Nelson Taylor’s bonds

through error or deliberately were not paid prior to

the bankruptcy petition. They admittedly should have

been so paid. The bankruptcy petition and decree do

not right this wrong but condone it. Equity and right

could be done and should be done.

The case of Moody v. Provident Irrigation District,

12 Cal. (2d) 389, in effect holds that after presentation

for payment bond obligations of California irrigation

districts are not due until funds are on hand available

for payment. The bonds involved in that case are the

same held in this case by Moody. The district is there-

fore able to meet its debts as they mature and the in-

ability required by Bankruptey Act, Section 403 (a)

is not present.

In Provident Land Corp v. Zumwalt, Appendix p. i,

the Supreme Court of California, with reference to

this district, said that the land of this district can

never be released from the obligation of its bonds until

they are paid and that the district only exercises its

powers as a trustee for the payment of these obliga-

tions. There were only three resident landcwners in

ON RO BN CTY PEE ATE Te PRU ET A BO LU RE Damn Omran Re EENSs aay — .

tie a BENE RRS ARES TEEN EIT BERIT TICE UNL ae PETE OR ae

PORERE LIES IED ELOG

7

the district and therefore nearly all the land of the

district is to be held and operated exclusively for the

benefit of the bondholders. The court below ignored

this declaration of law as to this district.

The Provident cases referred to are not only state-

ments of general law applicable to this field, but are

adjudications of the facts and law pertaining to this

particular district. In passing upon a plan of compo-

sition, a bankruptey court is bound by local law.

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

American United Mutual Life Ins. Co. v. City of Avon

Park, 108 Fed. (2d) 1010, 61 S. Ct. 157.)

The arrangement to pay the fiscal agent of the dis-

trict $20,300 is unreasonable in that it is more than

10% of the amount paid to the bondholders.

The district was not shown to be authorized by law

(Bankruptey Act, Sec. 403 (e) (6)) to exclude ap-

proximately 10,000 acres under Sections 74 to 84 of

the California Irrigation District Act. This land has

an apparent value of $7 an acre to the Biological

Survey, but the landholders receive nothing from it.

The district has sold 46 parcels of land, 11,294.49

acres, for nearly $10 an acre or approximately $112,-

000. This money was properly payable to bondholders,

since the land was taken by the district for non-pay-

ment of taxes, but instead was used to relieve the lands

of Reclamation District and county taxes, and to pay

interest coupons to January 7, 1931 in full. (R. 104.)

Under the California law, and by practice among

the districts, irrigation districts ean and this district

8

does exclusively rent its land to tenants. This practice

is more beneficial to the bondholders than sale which

produces nothing for the bondholders.

The Bankruptcy Act requires a comparison of total

assets to liabilities. (Cusick v. Second Nat. Bank, 115

Fed. (2d) 150.) But the district produced no ap-

praisals, no land valuations, no valuations of district

property, nor a statement of income and expenditures

since its default. No balance sheet or statement of

capital assets or income, or financial history was pro-

duced. The only evidence on the ability of the district

was that of two or three witnesses who were of the

opinion the plan is fair.

QUESTIONS PRESENTED.

1. May creditors subsequent in right of payment

secure full payment as against 20% payment to one

having a vested prior right to payment in full?

2. May a court of bankruptcy disregard the local

law applicable to a state agency, declared by the

highest court of California?

3. May a court of bankruptcy refuse to follow the

facts and law pertaining to this particular district de-

termined and stated by the highest court of Cali-

fornia ?

4. Is payment of $20,300 to a fiscal agent of a dis-

trict, such amount being more than 10% of that to be

paid to bondholders, reasonable ?

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9

5. Is exclusion of land (worth $50,000 to $70,000

and held in trust for bondholders) with no benefit to

district or bondholders, fair and equitable?

6. Does approval of a plan of composition require

evidence of assets and liabilities, and earning capacity

or is mere opinion evidence that it is fair sufficient ?

REASONS FOR GRANTING WRIT OF CERTIORARI.

(1) The courts below in this case have decided im-

portant questions of law conflicting with local de-

cisions.

The Supreme Court of California in Provident

Land Corp. v. Zumwalt, supra, decided that bonds of

the Provident Irrigation District must be paid in the

order of their presentation for payment. In this case

the courts below have held that bond obligations later

in maturity and presentation for payment should be

paid in full while those earlier are to be paid at the

rate of 20%. In doing so the bankruptcy court con-

doned an admitted act of wrongdoing by the district, |

when it could have righted this wrong by a conditional

decree requiring payment in full of Taylor’s claim.

The Supreme Court of California decided in Moody

v. Provident Irrigation District, supra, that bonds of

the Provident Irrigation District are not due until

funds are available for their payment. In this case

the lower courts have held that the Provident Irriga-

tion District is unable to meet its obligations as they

mature because it does not have sufficient money on

hand.

10

The Supreme Court of California, in Provident

Land Corp. v. Zumwalt, Appendix p. i, decided that

nearly all the lands of the district are owned by the

district and are held by the district in trust, the bond-

holders being a beneficiary of that trust, and that the

land ‘‘can never be permanently released from the

obligation of the bonds until they are paid’’. In this

case the lower courts have held that the district may

secure a loan on the land and remove this trust prop-

erty from the bondholders, and terminate the bond-

holders’ right to further payment.

(2) The lower courts have decided important ques-

tions in conflict with the weight of authority.

The Erie Railroad v. Tompkins case, 304 U. S. 64,

requires federal courts to follow the law as stated by

the state courts.

The cases of Consolidated Rock Products Company

v. Du Bois, 312 U. 8. 510, and Case v. Los Angeles

Lumber Products Co., 308 U. 8. 106, require evidence

and findings on the fairness of a plan based on the

assets and earning capacities of a debtor. This should

be particularly true of a trust relationship such as we

have here, yet the record is without such evidence.

The case of American Un. Mut. Life Ins. Co. v. City

of Avon Park, 311 U. 8. 138, requires inquiry into and

reasonableness in payments of fees and expenses in

connection with reorganization and composition mat-

ters.

Further, settled principles of law require that ques-

tions once determined by a court cannot be again ques-

11

tioned. The doctrine of res judicata requires the

bankruptcy court to follow the facts and law stated

by the Supreme Court of California in the cases re-

ferred to which involved this district.

(3) The lower courts have decided an important

question of federal law which has not been but should

be settled by this Court, this question being whether

or not the bankruptcy power extends to reversal of

trust declarations made by highest state courts.

(4) The lower courts have decided federal ques-

tions in conflict with decisions of this Court.

They have not followed the Erie Railroad v.

Tompkins ease by failure to give effect to the decisions

of the Supreme Court of California.

They have disregarded an unreasonable payment

made to a fiscal agent contrary to American Un. Mut.

Infe Ins. Co. v. City of Avon Park, supra.

They have given unlawful preference to certain

creditors in disregard of principles stated by this

Court in Case v. L. A. Lumber Products Co., supra,

and Consolidated Rock Products Co. v. Du Bois,

supra.

Wherefore, petitioners pray that a writ of cer-

tiorari be issued out of and under the seal of this

Honorable Court, directed to the United States Cir-

cuit Court of Appeals for the Ninth Circuit, com-

manding that Court to certify and to send to this

Court for its review and determination a full and

complete transcript of the record and of the proceed-

ings of said Court in the case numbered and entitled

12

in its dockets as ‘‘No. 9809, Nelson Taylor, J. R.

Mason, Gilbert Moody, and N. O. Bowman, Appel-

lants, v. Provident Irrigation District, Appellee’’,

and that the decree of said Court be reversed by this

Court with directions to dismiss the bill, and for such

other relief as to this Court may seem proper.

Dated, Turlock, California,

February 2, 1942.

NELSON TAYLOR,

J. R. Mason,

GILBERT Moopy,

N. O. BowMAN,

Petitioners.

W. CosBurn Cook,

Counsel for Petitioners.