In re Drainage Dist. No. 7
| Decision Date | 25 August 1938 |
| Citation | 25 F. Supp. 372 |
| Parties | In re DRAINAGE DIST. NO. 7 (LUEHRMANN et al., Interveners). |
| Court | U.S. District Court — Eastern District of Arkansas |
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Chas. D. Frierson, of Jonesboro, Ark., for petitioner.
Archer Wheatley and A. P. Patton, both of Jonesboro, Ark., for W. B. Chapman, trustee.
Chas. D. Long, of St. Louis, Mo., and J. B. Daggett, of Marianna, Ark., for objecting bondholders Luehrmann et al.
C. T. Carpenter, of Marked Tree, Ark., and J. T. Coston, of Osceola, Ark., for two objecting creditors.
The substance of this plan of debt composition is set out in my former opinion on the constitutionality of the Bankruptcy Act, Secs. 81-84, 11 U.S.C.A. §§ 401-404, reported D.C., 21 F.Supp. 798.
A group of bondholders and one judgment creditor have objected. Their objections cover the following points: That the district is not insolvent but has been made solvent through transactions of Reconstruction Finance Corporation because the form of those transactions wherein the majority of bonds and judgments were acquired by the trustee with funds from Reconstruction Finance Corporation amounts (1) to payment by the district or (2) is an accord and satisfaction, or (3) is a novation, or (4) at least that securities so acquired must be considered as "Owned or controlled by the petitioner" and therefore cannot be voted under the very terms of the statute. That as a result the present debt structure of the district equals only the aggregate monetary outlay of Reconstruction Finance Corporation plus the total of outstanding nonconsenting bonds (approximately $100,000), plus the Haverstick judgment ($20,000). Interest, of course, is claimed in favor of objecting creditors but it is argued that the transactions have waived all interest as to consenting creditors.
Exhibit "C" to the petition shows outstanding original bonds of $5,659,887.50 and judgments totaling $174,493. A balance of $210,000 advanced as an emergency loan by Reconstruction Finance Corporation for new outlet was due. The district's structures being damaged by floods the same agency advanced $120,000 for rehabilitation beginning about September 4, 1936, this loan being supplemented by an outright gift from the Public Works Administration of $100,000 for the same purpose.
All parties agree that the district was insolvent when the petition was filed if the foregoing amounts constitute its debt structure, regardless of interest. Interest was in arrears for years and would largely increase the total.
The interveners contend that in their effort to readjust the debts of the district the Reconstruction Finance Corporation, the trustee and the district and original bond and judgment holders have so acted as to reduce tremendously the outstanding debts of the district and that the result is that the district is not now insolvent but solvent and that the objecting creditors have been advanced into a preferred position so that the debts to all objecting creditors are now worth 100¢ on the dollar plus all interest, this situation having resulted from the loss of about 74¢ out of every dollar that has been sustained by the majority creditors.
Objectors also contend the plan is not fair but discriminates in favor of the emergency loans of Reconstruction Finance Corporation for new outlet and for rehabilitation for which it provides payment in full.
Certain bondholders holding bonds of the first issue contend that their bonds are entitled to priority in accordance with date and that therefore all bonds of the 1919 issue and interest should be paid in full before paying other bonds and so on throughout the list, according to date.
Haverstick, the only objecting judgment creditor, claims complete priority over all bonds and debts of whatsoever nature because, he alleges, his judgment was based on a taking of his land contrary to the Constitution of Arkansas and he attempts to distinguish in this regard between his own judgment and that of the twenty-four other majority judgment creditors. He also contends that the provision of the general bankruptcy act providing for upholding liens more than four months old should be applied under the present act and that his judgment should have priority for this reason.
The three Luehrmanns deposited $15,000 par value of bonds with the Bondholders Protective Committee and that committee sold those bonds to Ritter, Trustee, who received the money from the government agency therefor at 25.879¢ on the dollar of principal and those bonds passed to the trustee. The Luehrmanns claim that this deposit should be disregarded and that they should recover 100¢ on the dollar for these bonds.
Bradsher filed a claim for unliquidated damages resulting from overflow for which he had brought suit in the State Court. If the plan is upheld he asked that his claims be liquidated and judgment rendered by this court for something more than $200,000.
As a result of the floods of 1927 the district defaulted on August 1, 1927. A Bondholders Protective Committee was formed which attempted to arrange for a kind of moratorium by providing for the issuance of refunding bonds. However, tax payments decreased, land values became low and the inability to pay debts on maturity continued. A new Bondholders Protective Committee was created September 2, 1930 under which ultimately about 98.2% of the bonds were assembled or cooperated and all bonds controlled by the committee were sold under the readjustment plan to Ritter, Trustee, the first disbursement being made July 3, 1934, all at 25.879¢ on the dollar of principal. This committee, with the consent of the drainage district, and to avoid a receivership, placed its secretary, Gray, in the district's office and from 1931 or earlier until the first disbursement, Mr. Gray sat in all board meetings, held almost a veto power over all transactions, directed litigation and undertook to bring about a composition of the district's debts.
The Steepgut outlet proved unsatisfactory and the Committee, through Mr. Gray, planned the new outlet, which litigation delayed during 1931 but which was begun in 1932 and was completed in 1933, whereby the waters were cut off from the Steepgut Floodway and transferred far to the southwest into St. Francis Bay. The district having no money to pay either for right-of-way or construction, the committee, through Mr. Gray, arranged to acquire right-of-way within the district by the issuance of tax anticipation vouchers payable over a period of years and for construction consented to the diversion of tax money over a period of five years which was pledged to payment of bonds and coupons. This method of financing proving too slow because large amounts of taxes were delinquent, the Bondholders Committee and the district joined in applying for an emergency loan from Reconstruction Finance Corporation and procured authority to borrow $250,000 but only borrowed $235,000, of which $210,000 balance still is outstanding. The litigation which delayed completion of the new outlet is evidenced by the opinion in Drainage Dist. No. 7 v. Hutchins, 184 Ark. 521, 42 S.W.2d 996. After that opinion Mr. Gray and the district settled with all the Cross County landowners then objecting, but later, as hereafter set out, the district was sued by twenty-four other landowners of Cross County. The Reconstruction Finance Corporation would not authorize the outlet loan until the Bondholders Committee canceled $250,000 of interest coupons in order that the aggregate of the district's debts would not be increased by the loan.
When the Reconstruction Finance Corporation was given authority to grant loans to such district to readjust their finances, the Bondholders Committee through Mr. Gray and the secretary of the district immediately on approval of that act applied for such a loan. The matter dragged for months but on January 4, 1934 the Reconstruction Finance Corporation offered a loan to the district of 25.879¢ on the dollar of principal not including interest. The Bondholders Committee and Gray, as representing certain other bondholders, accepted but their bonds amounted then to only about 95% of the total issue and furthermore two judgment creditors objected, including Haverstick.
The original bankruptcy act of May 24, 1934 had not then been passed but was discussed. No disbursement was made to the consenting majority of creditors until after the bankruptcy act was passed.
Gray, Brigance, Dewey and all others who were familiar with the transaction who testify declare that it was the intention of all parties to the transaction to keep alive, outstanding and uncancelled all original securities for the very purpose of preventing objecting creditors from obtaining a preference. It had become evident that a minority were hanging back and seeking to obtain 100¢ on their minority debts as a result of the sacrifice of the majority, hoping that the district would become solvent as a result of the monies paid out by Reconstruction Finance Corporation to consenting creditors.
To prevent this kind of situation was the very purpose of the debt readjustment act and is the purpose of the 1937 debt composition act.
The clearest evidence of the intention is contained in the following letter from Mr. Emil Schram, Chief of the Drainage Division of the Reconstruction Finance Corporation to the district:
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