Wells Fargo Bank & Union T. Co. v. Imperial Irr. Dist.

• Decision Date: 07 June 1943
• Docket Number: No. 9988.,9988.
• Citation: 136 F.2d 539
• Parties: WELLS FARGO BANK & UNION TRUST CO. v. IMPERIAL IRR. DIST. et al.
• Court: U.S. Court of Appeals — Ninth Circuit

136 F.2d 539 (1943)

WELLS FARGO BANK & UNION TRUST CO. v. IMPERIAL IRR. DIST. et al.

No. 9988.

Circuit Court of Appeals, Ninth Circuit.

April 28, 1943.

Rehearing Denied June 7, 1943.

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Clark, Nichols & Morton and George Clark, all of Berkeley, Cal., Call, Murphey & Davis and Robert B. Murphey, all of Los Angeles, Cal., and W. Coburn Cook, of Turlock, Cal., for appellants.

Harry W. Horton, of El Centro, Cal. (George R. Kirk, of El Centro, Cal., of counsel), for appellee Imperial Irr. Dist.

George Herrington, of San Francisco, Cal. (Orrick, Dahlquist, Neff & Herrington, of San Francisco, Cal., of counsel), for appellee Imperial Irr. Dist. Bondholders.

Before WILBUR, DENMAN, and HEALY, Circuit Judges.

WILBUR, Circuit Judge.

This is an appeal by certain bondholders from a decree of the District Court approving a plan for composition of indebtedness of the appellee District under Chapter 9 of the Bankruptcy Act, 11 U.S.C.A. §§ 401-404.

Appellee is a local taxing agency organized in 1911 under the California Irrigation District Act of 1897, Stats.1897, p. 254, as amended, Deering's Gen.Laws, Act 3854. As authorized by that act it issued four issues of bonds, as follows:

First issue, January 1, 1915, $3,500,000 bearing 5% interest and maturing serially from 1936 to 1955.

Second issue, July 1, 1917, $2,500,000 bearing 5% interest and maturing serially from 1938 to 1957.

Third issue, October 1, 1919, $2,500,000 bearing 5½% interest and maturing serially from 1925 to 1934.

Fourth issue, July 1, 1922, $7,500,000 bearing 6% interest and maturing serially from 1935 to 1956.

Interest on all four issues was payable semi-annually on January and July first.

Beginning in 1924, the District was without cash to meet its current operating expenses and issued warrants for that purpose. Funds being unavailable for payment of these warrants, they were registered on presentation. On December 16, 1932, registered warrants outstanding totaled $884,713.89. All payments of interest and principal on bonds, however, were met promptly until July 1, 1932, when the District defaulted. At that time $750,000 of the third issue bonds and all of the other issues remained outstanding. The District's financial difficulties were due in part to the general economic depression which began in 1929 and, in part, to circumstances peculiar to the District and of earlier origin.

After the default in 1932, a Bondholders' Committee was formed which cooperated with the officials of the District in working out a plan for composition of its bonded debt. This plan, known as the plan of 1932, was approved by the directors of the District on December 29, 1932. Under this plan old bonds were to be exchanged for refunding bonds of equal face value but later maturities, and interest payments coming due before 1937 were to be reduced. Old bonds were to be delivered to the Committee, which would declare the plan operative when, in its opinion, enough bonds had been deposited to make that desirable. In June 1934, a similar plan for composition of warrant indebtedness was proposed by the District. Both plans were approved by the California Districts Securities Commission¹ and by the voters within the District. By September 1934, approximately 90% of the creditors had accepted the plans, and the Committee declared them to be operative.

In May 1934, Congress enacted the original Chapter 9 of the Bankruptcy Act, 11 U.S.C.A. §§ 301-303, and in September following the District filed in the United States District Court its petition thereunder for approval of the combined plans. The District Court approved the plans. Pending an appeal to this court by some non-consenting bondholders, the Supreme Court held Chapter 9 to be unconstitutional. Ashton v. Cameron County Water Improvement District, 298 U.S. 513, 56 S.Ct. 892, 80 L.Ed. 1309. The order of the District Court was accordingly reversed and the District Court instructed to dismiss the petition (Southern Sierras Power Co. v. Imperial Irrigation District, 9 Cir., 85 F.2d 1019), which it did in February 1937, after rehearing by this court was denied. 9 Cir., 87 F.2d 355.

Shortly thereafter various bondholders who had resisted the 1932 plan began actions in the state court to compel such money as was in the District's bond fund to be applied to their claims and to forbid its application to claims of holders of refunding bonds issued under the 1932 plan.

In August 1937 Congress enacted Chapter 10 of the Bankruptcy Act, 50 Stat. 654, now renumbered Chapter 9, 11 U.S.C.A. §§ 401-404, held valid in United States v. Bekins, 304 U.S. 27, 58 S.Ct. 811, 82 L.Ed. 1137, and in April 1939 the District filed its present petition thereunder. Through June 1936, interest was paid on refunding bonds but not on original bonds. Interest falling due on all bonds on January 1, 1937, was paid. No interest was paid on any bonds thereafter.

Because of the asserted inability of the District to comply with the plan of 1932, the petition herein presented a modification thereof called the plan of 1939. This plan made further reductions in interest and postponed maturities of some refunding bonds. It also set a limit on bond assessments and provided for further modification of the plan by consent of the District, the California Districts Securities Commission, and 75% of the creditors affected by the modification. The plan of 1939 was approved by the California Districts Securities Commission and by most or all of the holders of refunding bonds, but by relatively few of the holders of original bonds. The District Court approved the plan and enjoined further prosecution of the state court actions above referred to, except to permit the entry of findings, conclusions and judgments and filing of notices of appeal therein. Judgments were accordingly entered in the state court in favor of the plaintiff bondholders, and appeals by the District have been noticed therein. Many objections to the plan are raised by this appeal.

Certain appellants, in a separate brief, claiming priority for bonds issued prior to July 27, 1917 over later issues involved in the reorganization, state their points as follows:

"The plan of 1939 is discriminatory, unfair and inequitable as to holders of bonds of the district of the first issue, dated January 1, 1915, and also as to holders of bonds of the district of the second issue dated July 1, 1917, in this: The said plan treats such bonds as being on a parity as regards security and right to payment with bonds of said district of the third and fourth issues and also as being on a parity as regards security and right to payment with refunding bonds of said district. Under the California Irrigation District Act as it stood when said first two bond issues were issued, it was provided that an irrigation district could issue more than one bond issue, but that the issues must be numbered in the order of the issues, and under Section 40 of said law it was provided that the lien for bonds of any issue should be a preferred lien to that of any subsequent issue. The law conferred on the bonds of a given issue a priority of right to payment over bonds of subsequent issues. The plan of 1939 disregards these superior rights. So does the plan of 1932, and it was and it is invalid for the same reasons."

They state the question also in the following fashion:

"Are bonds which were issued by a California Irrigation District prior to July 27, 1917 preferred as to right of payment over bonds of subsequent issues?"

At the time the bonds referred to were issued, that is, on January 1, 1915 and July 1, 1917, the Irrigation District Act of 1897, then in effect, contained the following provision:

"Sec. 40. The assessment upon real property is a lien against the property assessed from and after the first Monday in March for any year, and the lien for the bonds of any issue shall be a preferred lien to that for any subsequent issue, and such lien is not removed until the assessments are paid, or the property sold for the payment thereof." § 40, Cal.Stats.1897, p. 267. (Italics ours.)

By reason of this provision of the statute italicised above in regard to priority of liens, which was repealed July 27, 1917, St. 1917, p. 768, it is claimed that the holders of the first and second issue of bonds of the district, which were issued prior to July 27, 1917, are entitled to preferential treatment in the payment of bonds over those issued subsequent to the repeal and that the plan which ignores this preferential right is unfair. The question is not without difficulty and has not been expressly determined by any decision of the California courts.

If the first and second bond issues as a whole were entitled to preference over any subsequent issue the contention of these appellants would have some validity, but the statute does not provide for a prior lien for the entire bond issue and interest, nor spread the lien over the entire area. The statute does not make the bonds issued a preferred lien on all the real estate in the District but makes the assessment levied on each piece of real estate to pay bonds and interest to mature in the following year a preferred lien to that levied on that property to pay matured principal and interest on subsequent issues. It is the lien of the annual assessment which is mentioned in § 40, supra, which is given priority. It is this distinction between the lien for an annual assessment and the lien for the entire bond issue which gives rise to confusion in dealing with the rights of the bondholders, although at first blush there would seem to be no difficulty.²

In determining the effect of the former provision of § 40 concerning priority with reference to the scheme for the payment of bonds from moneys derived from the assessments, it should be observed that the statute does not provide for separate assessment for each separate issue of bonds but that the...