In re Lindsay-Strathmore Irr. Dist., 4575.

• Citation: 21 F. Supp. 129
• Decision Date: 13 November 1937
• Docket Number: No. 4575.,4575.
• Court: United States District Courts. 9th Circuit. United States District Court (Southern District of California)
• Parties: In re LINDSAY-STRATHMORE IRR. DIST.

21 F. Supp. 129

In re LINDSAY-STRATHMORE IRR. DIST.^*

No. 4575.

District Court, S. D. California, N. D.

November 13, 1937.

Mitchell, Silberberg, Roth & Knupp, of Los Angeles, Cal., and James R. McBride, of Yuba City, Cal., for petitioner.

W. Coburn Cook, of Turlock, Cal., for respondents.

Ben Harrison, U. S. Atty., of Los Angeles, Cal., and Henry A. Julicher, Atty., Department of Justice, of Washington, D. C., for the United States.

YANKWICH, District Judge.

Lindsay-Strathmore Irrigation District, which we shall call "the district," is an irrigation district, organized under the "California Irrigation District Act," approved March 31, 1897 (St.Cal.1897, p. 254), and the acts amending and supplementing it. It comprises approximately 15,260 acres of land located in Tulare county, Cal., and is organized for the purpose of constructing, improving, maintaining, and operating improvement projects and works devoted chiefly to the improvement of lands within its boundaries for agricultural purposes. Alleging that it is a taxing agency and instrumentality within the meaning of chapter 10 of the Bankruptcy Act, approved August 16, 1937 (sections 81-84 11 U.S.C.A. §§ 401-404), it filed on September 21, 1937, a "petition for confirmation of a plan for composition or re-adjustment of its debt." The insolvency arises by reason of its inability to meet its obligations as to two bond issues issued by it under the provisions of the California Irrigation District Act. Attached to the petition is a plan of composition and readjustment, accepted by the petitioner and creditors owning approximately 87 per cent. in amount of the securities affected by the plan, who have consented to the filing of the petition. It is aimed to pay in cash to the holders of the bonds a sum equal to 59.978 cents for each dollar of the principal amount of each bond, in full payment, discharge, and satisfaction of all amounts of principal and interest due on such bond. The payment is to be made out of a loan which the Reconstruction Finance Corporation has authorized and agreed to make to the district. Upon the filing of the petition, I entered an order approving it as properly filed under chapter 10, and set December 3, 1937, as the time and place for the hearing on it. On September 30, 1937, Milo W. Bekins and Reed J. Bekins, as trustees appointed by the will of Martin Bekins, deceased, and of the will of Katherine Bekins, deceased, J. R. Mason, James Irvine, A. Heber Winder, trustee for Eva A. Parrington, trust, and C. A. Moss gave notice of motion to dismiss the petition, upon the ground, among others, that the court was without jurisdiction of the subject matter of the proceeding and that chapter 10 of the Bankruptcy Act — sections 81 to 84, inclusive — is unconstitutional and void. The matter coming up for hearing on October 11, 1937, I certified to the Attorney General the fact that the constitutionality of the act was drawn in question, under the provisions of the judiciary reform act approved August 24, 1937 (Public No. 352, 75th Congress, chapter 754, § 1 28 U.S.C. A. § 401), and allowed the government to intervene and defend the act's constitutionality.

Chapter 10, sections 81 to 84, of the Bankruptcy Act (11 U.S.C.A. §§ 401-404), under which the petition was filed, were intended to supplant section 80 of the act (as amended 11 U.S.C.A. § 303), which was stricken down by the decision of the Supreme Court in Ashton v. Cameron County Water District (1936) 298 U.S. 513, 56 S.Ct. 892, 80 L.Ed. 1309.

The presumption in favor of constitutionality calls for a ruling in favor of the validity of an act of the Congress and commands us to resolve all doubts in favor of validity unless the contrary is made to appear beyond a reasonable doubt. In effect, this means that we must sustain the new act unless the decision in Ashton v. Cameron County District, supra, compels a different conclusion. This is especially true when we consider an act passed to replace one invalidated by our highest court. See Wright v. Vinton Branch of Mountain Trust Bank (1937) 300 U.S. 440, 57 S.Ct. 556, 81 L.Ed. 736. It is not necessary to enter into a detailed comparison of the two acts. While the aim of the old act was "re-adjustment" of debts of insolvent public agencies named in it, the new act aims at "composition" of the debts of the agencies coming under it, insolvency existing. Both plans contemplate a voluntary petition containing a plan approved by a certain number of its creditors — 30 to 51 per cent. in the old act, 51 per cent. in the new act — the preliminary approval by the court of the petition, due notice of hearing for final confirmation of the plan of reorganization by the court, if approved by more than a majority of the creditors, the percentage varying in the old act from 51 upward and being fixed at two-thirds in all cases in the new act. The confirmation of the plan in both instances and the payment of the consideration, under both enactments, has the effect of discharging the debtor from all debts or liabilities covered by the plan. The new act disowns, as did the old one, any intention to interfere with the exercise of state governmental authority. Subdivision (i) of section 83 (11 U.S. C.A. § 403(i), reads:

"(i) Nothing contained in this chapter shall be construed to limit or impair the power of any State to control, by legislation or otherwise, any municipality or any political subdivision of or in such State in the exercise of its political or governmental powers, including expenditures therefor."

The agencies to which the old act applied included: "(a) Any municipality or other political subdivision of any State, including (but not hereby limiting the generality of the foregoing) any county, city, borough, village, parish, town, or township, unincorporated tax or special assessment district, and any school, drainage, irrigation, reclamation, levee, sewer, or paving, sanitary, port, improvement, or other districts (hereinafter referred to as a `taxing district')" Bankruptcy Act, § 80(a) as amended, 11 U.S.C.A. § 303(a).

The new statute is made to apply to "(1) Drainage, drainage and levee, levee, levee and drainage, reclamation, water, irrigation, or other similar districts, commonly designated as agricultural improvement districts or local improvement districts, organized or created for the purpose of constructing, improving, maintaining, and operating certain improvements or projects devoted chiefly to the improvement of lands therein for agricultural purposes; or (2) local improvement districts such as sewer, paving, sanitary, or other similar districts, organized or created for the purposes designated by their respective names; or (3) local improvement districts such as road, highway, or other similar districts, organized or created for the purpose of grading, paving, or otherwise improving public streets, roads, or highways; or (4) public-school districts or public-school authorities organized or created for the purpose of constructing, maintaining, and operating public schools or public-school facilities; or (5) local improvement districts such as port, navigation, or other similar districts, organized or created for the purpose of constructing, improving, maintaining, and operating ports and port facilities; or (6) any city, town, village, borough, township, or other municipality." Bankruptcy Act, chapter 10, § 81 (11 U.S.C.A. § 401).

The scope of both acts is limited as to time — the old act expiring on January 1, 1940 (section 79 as amended 11 U.S.C.A. § 302), the new act on June 30, 1940 (section 84 11 U.S.C.A. § 404). In the Report of the Committee on the Judiciary of the House of Representatives, on the act, its aim is stated:

"The Committee on the Judiciary is not unmindful of the sweeping character of the holding of the Supreme Court above referred to, and believes that H.R. 5969 is not invalid or contrary to the reasoning of the majority opinion in the 5-to-4 decision. The act which was declared unconstitutional designated the instrumentalities included in its provisions as political subdivisions of the State, and the Supreme Court determined that it was beyond the power reposed in Congress by article 1, section 8, clause 4, of the Federal Constitution, `To establish * * * uniform Laws on the subject of bankruptcies,' to pass an act to interfere with the States in the control of their fiscal affairs.

"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 affairs of a political subdivision is permitted. The taxing agency itself is the only instrumentality which can seek the benefits of the proposed legislation. No involuntary proceedings are allowable and no control or jurisdiction over that property and those revenues of the petitioning agency necessary for essential governmental purposes is conferred by the bill.

"As the statute which was declared unconstitutional was held to be within the subject of bankruptcies and uniform in its application, a fortiori, the present bill is adequately related to the general subject of bankruptcies, and does not conflict with the Fifth Amendment of the Federal Constitution as to due process of law." Report No. 517, 75th Congress, First Session.

It is evident that the committee assumed that the old statute had been declared unconstitutional merely because the Congress had used the generic phrase "any municipality or other political subdivision of any State." The new act seeks to overcome this infirmity by enumerating specifically certain tax instrumentalities without grouping them under a generic title.

But the old act included specifically irrigation districts, as does the new. And the new act includes specifically municipalities, as did the old.

The new act attempts to draw a distinction between taxing...