304 U.S. 27 (1938), United States v. Bekins

Citation:304 U.S. 27, 58 S.Ct. 811, 82 L.Ed. 1137
Party Name:United States v. Bekins
Case Date:April 25, 1938
Court:United States Supreme Court

Page 27

304 U.S. 27 (1938)

58 S.Ct. 811, 82 L.Ed. 1137

United States

v.

Bekins

United States Supreme Court

April 25, 1938

[58 S.Ct. 812] APPEALS FROM THE DISTRICT COURT OF THE UNITED STATES

FOR THE SOUTHERN DISTRICT OF CALIFORNIA

Syllabus

1. Proceedings for voluntary composition of debts without adjudication of bankruptcy are within the scope of the bankruptcy power. P. 47.

2. California Law, 1934, Extra Sess., gave the State's consent to the application to state "taxing districts," of the Bankruptcy Act and amendments, including Chapter X, added to that Act Aug. 16, 1937. P. 47.

3. The omission from c. X of the Bankruptcy Act of a provision specifically requiring that the petition of a state taxing district under that chapter be approved by a governmental agency of the State held unimportant in determining the validity of the legislation where the State has actually consented. P. 49.

4. In conditioning the confirmation of a plan of composition upon proof that the petitioning taxing district is "authorized by law" to take all action necessary to carry out the plan, c. X of the Bankruptcy Act refers to the law of the State. P. 49.

5. Chapter X of the Bankruptcy Act, adopted Aug. 16 1937, empowers the courts of bankruptcy to entertain and pass upon petitions by state taxing agencies or instrumentalities, including irrigation districts, for the composition of their indebtedness payable out of assessments or taxes levied against and constituting liens upon property in their districts or out of income derived therefrom or from sale or water, etc. The plan of composition must be approved by creditors owning not less than 51% of the securities affected by the plan, and cannot be confirmed unless accepted by creditors holding 66 2/3% of the aggregate indebtedness of the district. There must be consent by the State, and the judge must be satisfied that the district is authorized by local law to carry out the plan. The statute aims to relieve serious distress existing in many such improvement districts where, because of economic conditions, property owners cannot pay assessments, and taxation is useless, so that the districts cannot meet

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their obligations and creditors are helpless. A remedy through composition of the debts of the district could not be afforded by state law unaided, because of the contract clause of the Federal Constitution. Held that the statute is a valid exercise of the bankruptcy power. Ashton v. Cameron County District, 298 U.S. 513, distinguished. P. 49.

6. The ability to contract and to give consents bearing upon the exertion of governmental power is of the essence of sovereignty. P. 51.

7. The reservation to the States by the Tenth Amendment, did not destroy, but protected, their right to make contracts and give consents where that action would not contravene the provisions of the Federal Constitution. P. 52.

8. Cooperation between Nation and State through the exercise of the powers of each, to the advantage of the people who are citizens of both, is consistent with an indestructible Union of indestructible States. P. 53.

9. Chapter X of the Bankruptcy Act held not violative of the Fifth Amendment, as applied to creditors of a state irrigation district, which sought a composition of its debts under that chapter. P. 54.

21 F.Supp. 129 reversed.

Appeals from a decree of the District Court dismissing a petition for confirmation of a plan of composition presented by the above-named Irrigation District under c. X of the Bankruptcy Act. The District and the United States, which had been notified and had intervened, took separate appeals.

Page 45

HUGHES, J., lead opinion

MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.

These are direct appeals from the judgment of the District Court for the Southern [58 S.Ct. 813] District of California under the Act of August 24, 1937, c. 754, 50 Stat. 751. They present the question of the constitutional validity of the Act of August 16, 1937, 50 Stat. 653, amending the Bankruptcy Act by adding chapter 10 providing for the composition of indebtedness of the taxing agencies or instrumentalities therein described. A certificate was issued to the Attorney General, and the United States intervened. The District Court held the statute invalid as applied to the appellant, and dismissed its petition for composition. The court considered itself bound by the decision in Ashton v. Cameron County District, 298 U.S. 513.

Appellant the Lindsay-Strathmore Irrigation District was organized in the year 1915 under the California Irrigation District Act of March 31, 1897, Stat.Cal. 1897, p. 254. It comprises about 15,260 acres in Tulare County. It is an irrigation district and taxing agency created for the purpose of constructing and operating irrigation projects and works devoted to the improvement of lands for

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agricultural purposes. On September 21, 1937, it presented its petition for the confirmation of a plan of composition. The petition alleged insolvency; that its indebtedness consisted of outstanding bonds aggregating $1,427,000 in principal, with unpaid interest of $439,085.15; that no interest or principal falling due since July 1, 1933, had been paid; that the low price of agricultural products had prevented the owners of land within the irrigation district from meeting their assessments; that, upon the assessment levied by the District in the year 1932, there was a delinquency of 47 percent, and that, since that year, there had been levied only an assessment of sufficient amount to maintain and operate its works; that the District's plan for the composition of its debts provided for the payment in cash of a sum equal to 59.978 cents for each dollar of the principal amount of its outstanding bonds in satisfaction of all amounts due; that creditors owning about 87 percent in the principal amount of the bonds had accepted the plan and consented to the filing of the petition, and that payment of the amount required was to be made from the proceeds of a loan which the Reconstruction Finance Corporation had agreed to make upon new refunding serial bonds equal to the amount borrowed and bearing interest at 4 percent

The District Court approved the petition as filed in good faith, and directed the creditors to show cause why an injunction should not issue staying the commencement of suits upon the securities affected by the plan. The appellees, as bondholders, appeared and moved to dismiss the petition upon the ground that chapter X of the Bankruptcy Act violated the Fifth and Tenth Amendments of the Federal Constitution. It appeared from the return to the order to show cause that these creditors had obtained an alternative writ of mandate from the state court directing the county board of supervisors to levy an assessment upon the lands within the District sufficient to pay

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the amounts due the complaining creditors, and that the proceedings in that court had been suspended pending the proceeding in the bankruptcy court.

First. Chapter X of the Bankruptcy Act is limited to voluntary proceedings for the composition of debts. Aside from the question as to the power of the Congress to provide this method of relief for the described taxing agencies, it is well settled that a proceeding for composition is in its nature within the federal bankruptcy power. Compositions were authorized by the Bankruptcy Act of 1867, § 43, 14 Stat. 538, as amended by the Act of 1874, c. 390, § 17, 18 Stat. 182. It is unnecessary to the validity of such a proceeding that it should result in an adjudication of bankruptcy. In re Reiman, 20 Fed.Cas. 490, 496, 497; Continental National Bank v. Chicago, R.I. & P. Ry. Co., 294 U.S. 648, 672-673. In the Continental Bank case, in the course of a full consideration of the scope of the federal bankruptcy power and of the evolution of its exercise, we said:

The constitutionality of the old provision for a composition is not open to doubt. In re Reiman, 20 Fed.Cas. pages 490, 496, 497, cited with approval in Hanover National Bank v. Moyses, supra, [186 U.S. at 187]. That provision was there sustained upon the broad ground that the "subject [58 S.Ct. 814] of bankruptcies" was nothing less than "the subject of the relations between an insolvent or nonpaying or fraudulent debtor, and his creditors, extending to his and their relief." That it was not necessary for the proceedings to be carried through in bankruptcy was held not to warrant the objection that the provision did not constitute a law on the subject of...

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