Luehrmann v. Drainage Dist. No. 7

• Decision Date: 24 July 1939
• Docket Number: No. 11372-11374.,11372-11374.
• Citation: 104 F.2d 696
• Parties: LUEHRMANN et al. v. DRAINAGE DIST. NO. 7 OF POINSETT COUNTY, ARK. BRADSHER v. SAME. HAVERSTICK v. SAME.
• Court: U.S. Court of Appeals — Eighth Circuit

104 F.2d 696 (1939)

LUEHRMANN et al. v. DRAINAGE DIST. NO. 7 OF POINSETT COUNTY, ARK. BRADSHER v. SAME. HAVERSTICK v. SAME.

Nos. 11372-11374.

Circuit Court of Appeals, Eighth Circuit.

June 13, 1939.

Rehearing Denied July 24, 1939.

COPYRIGHT MATERIAL OMITTED

Norman C. Parker, of St. Louis, Mo., and J. B. Daggett, of Marianna, Ark., (Daggett & Daggett, of Marianna, Ark., and Rassieur, Long & Yawitz and Charles D. Long, all of St. Louis, Mo., on the brief), for appellants George E. W. Luehrmann, et al.

C. T. Carpenter, of Marked Tree, Ark., for appellants Fred Bradsher and J. G. Haverstick.

Charles D. Frierson, of Jonesboro, Ark., for appellee.

Before SANBORN, THOMAS, and VAN VALKENBURGH, Circuit Judges.

VAN VALKENBURGH, Circuit Judge.

September 15, 1937, Drainage District No. 7 of Poinsett County, Arkansas, filed a debt composition proceeding pursuant to the provisions of the Act of August 16, 1937 (50 Stat. 654, 11 U.S.C.A. §§ 401-404) entitled "Composition of Indebtedness of Local Taxing Agencies". By Section 403 it is provided that any qualified petitioner may file a petition under the Act, stating that the petitioner is insolvent or unable to meet its debts as they mature, and that it desires to effect a plan for the composition of its debts. It is further provided that any creditor of the petitioner affected by the plan may file an answer to the petition, controverting any of the material allegations therein, and setting up any objection he may have to the plan of composition. If the material allegations are sustained the creditors shall be classified according to the nature of their respective claims and interests, provided: "That the holders of all claims, regardless of the manner in which they are evidenced, which are payable without preference out of funds derived from the same source or sources or shall be of one class. The holders claims for the payment of which specific property or revenues are pledged, or which are otherwise given preference as provided by law, shall accordingly constitute a separate class or classes of creditors."

A former Act (May 24, 1934, 11 U.S. C.A. §§ 301-303) permitting municipal corporations and other political subdivisions of states, unable to pay their debts as they mature, to resort to the federal courts of bankruptcy to effect readjustment of obligations, was before the Supreme Court in Ashton v. Cameron County Water Improvement District No. 1, 298 U.S. 513, 56 S.Ct. 892, 80 L.Ed. 1309. It was there held that the power claimed in support of the Act, as applied to the district organized to permit water for irrigation and domestic purposes, having power to sue and be sued, issue bonds, and levy and collect taxes, was unconstitutional, as restricting the states in the control of their fiscal affairs. The appellant district there was held to be a political subdivision of the state.

The Act of August 16, 1937, under which this proceeding was brought, undertakes to meet the constitutional weakness of the former Act by the following provision: "That if any provision of this chapter, or the application thereof to any such taxing agency or district or class thereof or to any circumstance, is held invalid, the remainder of the chapter, or the application of such provision to any other or different taxing agency or district or class thereof or to any other or different circumstances, shall not be affected by such holding." 11 U.S.C.A. § 401.

In Drainage District No. 2 of Crittenden County, Arkansas v. Mercantile-Commerce Bank & Trust Company, 8 Cir., 69 F.2d 138, this court held that an Arkansas Drainage District is not a governmental agency as respects the question of whether the district is subject to equity jurisdiction. This ruling is based upon the decisions of the Supreme Court of Arkansas holding that drainage districts are quasi-public corporations which are not political or civil divisions of the state like counties and municipal corporations created to aid in the general administration of the government. They are not created for political purposes, nor for the administration of the government. Appellants do not contend that the petitioner falls within the limitation upon the power springing from this amendment to the Bankruptcy Act, which limitation was declared in the Ashton case.

These three appeals were heard together upon the same transcript and the several appellants have specified different grounds upon which each relies for reversal of the decree which holds the proposed plan of composition fair, equitable and just, and in full compliance with the provisions of the Act under which it is offered, and authorizes the district, upon confirmation of the plan, to take all action necessary to carry out the terms thereof.

Before taking up the objections of appellants it is deemed best to outline very generally the nature of the proposed plan and the circumstances and conditions under which it was initiated. As a result of excessive floods in 1927, the district defaulted on its outstanding bonds in August of that year. A Bondholders Protective Committee was formed September 2, 1930, with which more than two-thirds in amount of the bonds co-operated. When the Reconstruction Finance Corporation was given authority to grant loans to such drainage districts to readjust their finances, this Bondholders Committee applied for such a loan. January 4, 1934, the Reconstruction Finance Corporation offered to the district a loan computed upon the basis of 25.879 cents on the dollar of principal indebtedness outstanding. At the time this offer was accepted by the committee the bonds under its control amounted only to 95% of the total issue. Also two judgment creditors refused to cooperate. For this reason, the Reconstruction Finance Corporation stipulated that the entire issue of bonds outstanding should not be cancelled, but should be held as security for the repayment of the loan to be made, which was intended to reduce the indebtedness, but only under conditions of safety to the lender. No money was paid out under this loan until July 3, 1934. Meantime, May 24, 1934, Congress passed the first readjustment or composition Act, afterwards held unconstitutional in the Ashton case. It is evident that the Reconstruction Finance Corporation, in the disposition of the funds loaned, acted in reliance upon the terms of that Act. It disbursed funds amounting to 25.879 cents upon each dollar of principal indebtedness held by the Bondholders Committee, which then amounted to 98.2% of bonds aggregating $5,659,887.50 in principal when the petition was filed, and to 88.5% of judgments and other indebtedness aggregating $154,493. Under the readjustment plan all the bonds controlled by the Committee of Bondholders were transferred to one Louis Ritter, Trustee, to be held until the plan of readjustment should be finally effected. Ritter was succeeded by W. B. Chapman as such trustee. When the Act of August 16, 1937, became a law, the district filed the present petition for composition. Chapman, holding as trustee 98.2% of such bonds, filed acceptance of the plan, as did 85.5% of all judgment creditors, and it is therefore claimed by appellee that more than two-thirds of the aggregate amount of all classes affected by the plan, excluding any owned, held or controlled by the petitioner, have accepted the plan in writing. With these preliminary statements it is felt that a more complete grasp of the situation may be gained by a consideration of the objections urged by appellants to the proposed plan of composition. Those relied upon in the Luehrmann appeal are:

1. District No. 7 is both solvent and able to meet its debts as they mature, because its assets exceed its actual indebtedness of approximately $1,750,000, and because its annual income is far greater than the cost of carrying this indebtedness.

2. The bondholders who have already scaled their debts before this petition was filed cannot be counted as preliminary acceptors of the plan, nor as part of the two-thirds ultimately necessary to the confirmation of the plan.

3. The plan to pay all bondholders 25.879 cents on the dollar is unfair and inequitable to non-assenting bondholders, because compelling them to relinquish their liens without compensation. Also it does not give certain bonds precedence according to dates, and proposes to repay the Reconstruction Finance Corporation dollar for dollar on its loan of January 1, 1934.

4. Bonds issued by the drainage district in 1918 are entitled to a lien prior to that of subsequent issues, because based upon a prior complete plan of drainage improvement.

Appellant Bradsher presents the single objection that the district is now solvent, and therefore cannot avail itself of the provisions of the Composition Act under which it is undertaking to proceed.

Appellant Haverstick, a judgment creditor, assigns and argues five points: (a) District No. 7 is solvent; (b) the plan has not been accepted by creditors holding two-thirds of the aggregate amount of claims; (c) the plan is neither fair nor equitable and discriminates unfairly against appellants; (d) appellant's judgment constitutes a first and paramount lien on all revenues and resources of the district and is entitled to immediate payment in full; (e) the lien of this judgment is not dissolved or affected by bankruptcy proceedings.

The contention that the district is solvent, and therefore ineligible to relief under this Act, is common to all objectors, and upon it greatest stress was placed at the hearing. Appellants concede that the indebtedness of the district is at least $1,750,000; and the secretary of the district testifies that, at the time the petition was filed, it amounted to $1,784,750, "Assuming now that the bonds come in and take up the entire loan". He says further that "the old outstanding bonds, as well as the judgments purchased from the Cross County claimants are being held by the Federal Reserve Bank in...