In re Merced Irr. Dist.

• Decision Date: 10 January 1939
• Docket Number: No. 4818.,4818.
• Court: U.S. District Court — Southern District of California
• Parties: In re MERCED IRR. DIST.

25 F. Supp. 981

In re MERCED IRR. DIST.

No. 4818.

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

January 10, 1939.

Downey, Brand & Seymour and Stephen W. Downey, all of Sacramento, Cal., and C. Ray Robinson and Hugh K. Landram, both of Merced, Cal., for petitioner.

W. Coburn Cook, of Turlock, Cal., for respondents Milo W. Bekins et al.

Chase, Barnes & Chase and Lucius F. Chase, all of Los Angeles, Cal., for respondents R. D. and Belle Crowell Clark, Nichols & Eltse and George Clark, all of Berkeley, Cal., for respondent Mary E. Morris.

Charles L. Childers, of El Centro, Cal., for respondent West Coast Life Ins. Co.

Peter tum Suden, of San Francisco, Cal., for respondents Minnie E. Rigby et al.

Hugh K. McKevitt and Newell J. Hooey, all of San Francisco, Cal., for respondent Pacific Nat. Bank of San Francisco.

Freidenrich & Selig and David Freidenrich, all of San Francisco, Cal., for respondent Claire S. Strauss.

Brobeck, Phleger & Harrison and Robert H. Walker, all of San Francisco, Cal., for respondents Florence Moore et al.

McCORMICK, District Judge.

Merced Irrigation District, hereinafter called "the District," pursuant to Chapter 9 of the Bankruptcy Act of 1938, section 81 et seq., 11 U.S.C.A. § 401 et seq., has filed its petition for confirmation of a plan of composition of bond indebtedness. The constitutionality of the provisions of the Bankruptcy Act that are invoked by the District is unquestionable. United States v. Bekins, 304 U.S. 27, 58 S.Ct. 811, 82 L.Ed. 1137.

The factual basis for the application to effect a composition of its bonded indebtedness of $16,190,000 principal and about $6,000,000 accrued and unpaid interest by scaling such debt structure to approximately $8,338,000 with interest at 4 per cent. from about October 1, 1935, is the utter inability of the District to service the outstanding bonds under applicable laws of the state of California, and it is clear from the record before us that if the debt structure of the District includes the original and uncancelled bonds, the District is hopelessly insolvent and the land owners within it will ultimately be in similar situations.

The primary question then to be determined is the status in this proceeding of the Reconstruction Finance Corporation, which for brevity will be designated as "R. F. C." This agency of the United States has acquired and now controls more than 90 per cent. of the bonds of the District, and its consent to the District's plan of debt reduction accompanies the petition. Is it a creditor of the District owning securities affected by the plan of debt composition? We think the question must be answered in the affirmative.

Section 82 of the Act under consideration, 50 Stat. 653, 11 U.S.C.A. § 402, defining various entities that are involved in the debt composition proceedings of irrigation districts, states that "The term `creditor' means the holder of a security or securities.", and that "Any agency of the United States holding securities acquired pursuant to contract with any petitioner under this chapter shall be deemed a creditor in the amount of the full face value thereof.", and further that "The term `security affected by the plan' means a security as to which the rights of its holder are proposed to be adjusted or modified materially by the consummation of a composition agreement."

The clear effect of the evidence justifies the conclusion that the R. F. C. is a creditor and bondholder to the principal amount of $14,702,000 and accumulated interest on such outstanding bonds of the District as the R. F. C. now has under its control. The record shows that the R. F. C. has paid to the former owners of the bonds $515.01 for each $1,000 bond. Unconditional bills of sale have been regularly executed by the former owners or agents of former owners to the R. F. C. upon the acquisition of $14,071,000 of the bonds, and of the remaining $631,000 of the bonds bought by the R. F. C. a formal bill of sale was waived by it on delivery to it of the bonds upon payment by it to the former owners of the agreed price.

All of the bonds that have been so acquired have been, subsequent to delivery, duly registered in the name of the Reconstruction Finance Corporation as owner thereof, and all of such bonds at all times since their delivery to the agent and designated depository of the purchaser have been subject to the sole control of the R. F. C.

It is true that concurrently with the transactions whereby the bonds were purchased, the R. F. C. agreed to loan and did conditionally loan for the benefit of the District approximately $7,600,000. This money, however, was disbursed not to the District but to the former bond owners. The financial arrangement was not merely a matter of the lender, upon the collateral security of outstanding bonds, advancing money to the borrower upon the promissory note of the borrower to repay with interest at the rate of 4 per cent. per annum, but the chief purpose and specific mutual intent of the agreement, as reflected in the writings, resolutions and transactions, was to effect a retirement of the outstanding bonds, and upon a situation being available whereby this could be done, to the satisfaction of the R. F. C., the District was to issue and deliver new refunding bonds to the R. F. C. for the amount of its cash outlay, with interest at 4 per cent. per annum, at which time the R. F. C. would surrender its presently possessed bonds for retirement, and the bond debt of the District would be reduced accordingly. No one can read the record of the negotiations between the governmental agency and the insolvent District and its security holders and fail to conclude that the paramount, imperative and essential feature of the contract was the ultimate and not the immediate retirement of the outstanding bonds which the R. F. C. acquired. This was the objective of the deal, and the failure to attain it renders the whole refinancing project that was agreed to, insecure and dubious. To adopt a contrary interpretation of the agreement would defeat the purpose which the parties who made it sought to accomplish. This must be avoided. If such is the intention of the parties to the contract, it is obvious that the R. F. C. is a creditor whose security is affected by the plan under consideration.

In other words, we think that the clear intent of the parties to the transaction whereby the advancement of money sufficient to retire the outstanding bonds, none of which were owned by the District, was that such bonds as were relinquished and sold to the R. F. C. in the debt readjustment project were to be kept alive and available for further protection of the lender until such time as the R. F. C. concedes that the contractual scheme of refinancing the District pursuant to the agreement is complete. This scheme is definitely predicated upon the ultimate merger of all affected outstanding obligations into the later and new security inuring to the R. F. C. under the various writings and documents that have been introduced into the evidence and which constitute the contract. See In re Drainage District No. 7, D.C.Ark., 25 F.Supp. 372; Slupsky v. Westinghouse Electric & Mfg. Co., 8 Cir., 78 F.2d 13, and compare Security-First National Bank v. Rindge Land & Navigation Co., 9 Cir., 85 F.2d 557, 107 A.L.R. 1240; Mowry v. Farmers' Loan & Trust Co., 7 Cir., 76 F. 38. The event, upon the happening of which the outstanding bonds would, under the contract, cease to be existing obligations of the District, has not yet occurred, and therefore all of such outstanding bonds constitute present obligations to the face value thereof and must be so regarded in evaluating the financial condition of the District in the plan of debt composition before this court.

And notwithstanding the time of acquisition of bonds by the R. F. C., the clear language of subparagraph (j) of Section 83 of the Bankruptcy Act of 1938, 11 U. S.C.A. § 403(j), conclusively determines the proprietary status of the R. F. C. over the bonds surrendered by consenting bondholders and delivered to the R. F. C., as well as the right of the R. F. C. to have the bonds that were acquired by the disbursement of its money included in the counting of the consenting creditors in determining the percentage of the securities affected by the plan of composition submitted by the District. Subparagraph (j) of Section 83 reads: "The partial completion or execution of any plan of composition as outlined in any petition filed under the terms of this Act title by the exchange of new evidences of indebtedness under the plan for evidences of indebtedness covered by the plan, whether such partial completion or execution of such plan of composition occurred before or after the filing of said petition, shall not be construed as limiting or prohibiting the effect of this Act title, and the written consent of the holders of any securities outstanding as the result of any such partial completion or execution of any plan of composition shall be included as consenting creditors to such plan of composition in determining the percentage of securities affected by such plan of composition."

Much of the argument advanced by the minority groups of objecting bondholders overlooks the chief governmental purpose of the Congress in enacting Chapter 9 of the new Bankruptcy Act, beside leaving out of consideration the manifest intent of the R. F. C. as shown by the documentary evidence in extending the loan with which it was made possible for the District to continue to function as an irrigation district under prevalent economic and agricultural conditions and the laws of the state of California. Both of these governmental agencies operated to forestall collapse of the District that was imminent under the record before this court. When the District went into default upon its bonds and before the R. F. C. approved the conditional loan to the District, its bonds were selling for eighteen cents on...