Faitoute Iron Steel Co v. City of Asbury Park, 896

Citation62 S.Ct. 1129,86 L.Ed. 1629,316 U.S. 502
Decision Date01 June 1942
Docket NumberNo. 896,896
PartiesFAITOUTE IRON & STEEL CO. et al. v. CITY OF ASBURY PARK, N.J
CourtUnited States Supreme Court

Mr. Arthur T. Vanderbilt, of Newark, N.J., for appellants.

Mr. Ward Kremer, of Asbury Park, N.J., for appellee.

Mr. Justice FRANKFURTER delivered the opinion of the Court.

A New Jersey statute, adopted in 1931, N.J.S.A. 52:27-1 et seq., authorized state control over insolvent municipalities. By a supplementary law, N.J.S.A. 52:27—34 et seq., enacted in 1933, a plan for adjustment of the claims of creditors of such an insolvent municipality could be made binding upon all creditors. The question is whether an adjustment so authorized by a state impairs righs in violation of the Constitution of the United States.

The City of Asbury Park is a seashore resort with a resident population of 15,000. It presents a familiar picture of optimistic and extravagant municipal expansion caught in the destructive grip of general economic depression: elaborate beachfront improvements, costs in excess of estimates, deficits not annually met by taxation, declining realestate values, inability to refinance a disproportionately heavy load of short-term obligations, and, inevitably, default. Accordingly, in January, 1935, availing themselves of the New Jersey Municipal Finance Act, creditors applied to the Supreme Court of New Jersey to place the state Municipal Finance Commission in control of the city's finances.

The legislation was enacted 'to meet the public emergency arising from a default in the payment of municipal obligations, and the resulting impairment of public credit', Laws of New Jersey 1931, c. 340, § 405, N.J.S.A. 52:27—65. In broad terms, the legislation, through combined administrative and judicial action, adapted the underlying principles of an equity receivership to the solution of the problem of insolvent municipalities. By a supplementing act, Laws of New Jersey 1933, c. 331, N.J.S.A. 52:27 34 to 52:27—39, a 'plan of adjustment or composition of the claims of all creditors' may be submitted on their behalf to the supreme court of the state. If approved by 85 per cent in amount of the creditors and by the municipality and the Commission, such plan of adjustment may be adopted 'if the court by its justice determines (1) that the municipality is unable to pay in full according to their terms the claims proposed to be adjusted or composed, and perform its public functions and preserve the value of property subject to taxation, (2) that the adjustment or composition is substantially measured by the capacity of the municipality to pay, (3) that it is in the interest of all the creditors affected thereby, and (4) that it is not detrimental to other creditors of the municipality.' The plan cannot be authorized, however, if it involves any reduction of the principal amount of any outstanding obligation. Any creditor is entitled to appear and to be heard, but a plan which is so authorized by the court is binding upon all creditors whether or not they appear, and the substitution of new obligations for old in carrying out the plan is made effective from the day fixed by judicial order. To effectuate such a plan, the Act provides further that the court shall retain jurisdiction and 'thereafter no creditor whose claim is included in such adjustment or composition shall be authorized to bring any action or proceeding of any kind or character for the enforcement of his claim except with the permission of the supreme court and then only to recover and enforce the rights given him by the adjustment or composition.' 1

Pursuant to this legislative scheme, the City of Asbury Park was on March 7, 1935, placed under the control of the Municipal Finance Commission; on February 1, 1936, a plan for the refunding of its bonded debt was filed in the state supreme court, and that court took jurisdiction of the proceedings; the plan, as amended, was approved by the court on July 21, 1937; on September 28, 1937, it was duly approved by the Municipal Finance Commission; on April 29, 1938, it was consented to by creditors representing '85 per cent in amount of the indebtedness affected' by the plan; and, on June 15, 1938, it was put into opera- tion. The plan provided for the refunding of $10,750,000 of outstanding bonds; these were to be exchanged by the consenting creditors for new bonds to be issued in accordance with the terms of the plan approved by the court.

The appellants were holders of defaulted bonds and interest coupons issued by the City of Asbury Park in 1929 and 1930—prior, therefore, to the legislation which authorized the proceedings resulting in the challenged refunding scheme. The bonds of the appellants were part of the $10,750,000 of refunded bonds which, under the adjustment decreed by the court, could only be converted into new bonds maturing in 1966 and bearing a lower rate of interest than the original bonds. Deeming the arrangement authorized under the New Jersey statute to be violative of the Constitution of the United States, the appellants brought this suit for the face value of the old bonds and coupons. The Supreme Court of New Jersey dismissed the suit, 19 A.2d 445, 19 N.J.Misc. 322; the Court of Errors and Appeals affirmed the dismissal, 127 N.J.L. 239, 21 A.2d 796; and the case is here on appeal under § 237(a) of the Judicial Code, as amended, 28 U.S.C. § 344(a), 28 U.S.C.A. § 344(a).

If the New Jersey legislation which is the foundation of the refunding plan for the City of Asbury Park is valid, appellants' claim on the old bonds was barred by law, and the judgment below must stand. The validity of that legislation is assailed on two grounds. It is contended, first, that the New Jersey laws constitute municipal bankruptcy legislation, that that field of lawmaking has been preempted by Congress, and that the New Jersey legislation is therefore inoperative. To this argument a few dates furnish a short answer. The present court proceedings began on February 1, 1936. The first federal Municipal Bankruptcy Act, 11 U.S.C.A. § 301 et seq. was declared unconstitutional on May 25, 1936. Ashton v. Cameron County Water Imp. Dist., 298 U.S. 513, 56 S.Ct. 892, 80 L.Ed. 1309. The refunding plan now assailed was approved, as we have seen, on July 21, 1937. It was thus authorized more than a year before the enactment of the only relevant federal statute, the Act of August 16, 1937, 50 Stat. 653, amending the Bankruptcy Act 11 U.S.C.A. § 401 et seq. to provide for the composition of indebtedness of taxing agencies. Assuming Congress had power to do so, this Act did not profess to terminate a pending state court proceeding like that now in question. It would offend the most settled habits in the relationship between the States and the nation to imply such a retroactive nullification of state authority over its subordinate organs of government.

We prefer, however, to dispose of this objection on a broader ground. Not until April 25, 1938, was the power of Congress to afford relief similar to that given by New Jersey for its municipalities clearly established, United States v. Bekins, 304 U.S. 27, 58 S.Ct. 811, 82 L.Ed. 1137, and then only because Congress had been 'especially solicitous to afford no ground' for the 'objection' that an exercise of federal bankruptcy over political subdivisions of the State 'might materially restrict (its) control over its fiscal affairs' whereby states would no longer be 'free to manage their own affairs'. The statute was 'carefully drawn so as not to impinge on the sovereignty of the State. The State retains control of its fiscal affairs. The bankruptcy power is exercised * * * only in a case where the action of the taxing agency in carrying out a plan of composition approved by the bankruptcy court is authorized by state law.' 304 U.S. at pages 50, 51, 58 S.Ct. at page 815, 82 L.Ed. 1137. New Jersey expressly prohibits any municipality to avail itself of a federal bankruptcy act 'unless the approval of the municipal finance commission * * * be first had and obtained'. Revised Statutes of New Jersey (1937), 52:27—40, N.J.S.A. 52:27—40. The City of Asbury Park has never attempted to resort to a federal bankruptcy court, and the New Jersey Municipal Finance Commission has not authorized it to do so. Can it be that a power that was not recognized until 1938, and when so recognized, was carefully circumscribed to reserve full freedom to the states, has now been completely absorbed by the federal government—that a state which, as in the case of New Jersey, has after long study devised elaborate machinery for the autonomous regulation of problems as peculiarly local as the fiscal management of its own household, is powerless in this field? We think not.

This brings us to the second and main contention, namely, that the appellants' claims in the form of the bonds and coupons issued by the City of Asbury Park, constituted contracts, the obligation of which is impaired by the denial of their right to recover thereon and by their transmutation, without their consent, into the securities authorized by the plan of adjustment.

The principal asset of a municipality is its taxing power and that, unlike an asset of a private corporation, can not be available for distribution. An unsecured municipal security is therefore merely a draft on the good faith of a municipality in exercising its taxing power. The notion that a city has unlimited taxing power is, of course, an illusion. A city cannot be taken over and operated for the benefit of its creditors, nor can its creditors take over the taxing power. Indeed, so far as the federal Constitution is concerned, the taxing power of a municipality is not even within its own control—it i wholly subordinate to the unrestrained power of the state over political subdivisions of its own creation. 'A municipal corporation * * * is a representative not only of the State, but is a portion of its...

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