Source: https://supreme.justia.com/cases/federal/us/304/27/
Timestamp: 2019-04-22 08:07:23+00:00

Document:
1. Proceedings for voluntary composition of debts without adjudication of bankruptcy are within the scope of the bankruptcy power. P. 304 U. S. 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. 304 U. S. 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. 304 U. S. 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. 304 U. S. 49.
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. 304 U. S. 49.
6. The ability to contract and to give consents bearing upon the exertion of governmental power is of the essence of sovereignty. P. 304 U. S. 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. 304 U. S. 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. 304 U. S. 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. 304 U. S. 54.
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.
These are direct appeals from the judgment of the District Court for the Southern 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.
the amounts due the complaining creditors, and that the proceedings in that court had been suspended pending the proceeding in the bankruptcy court.
"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 186 U. S. 187]. That provision was there sustained upon the broad ground that the 'subject 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 bankruptcies."
"There exist throughout the California economic conditions which make it impossible for property owners to pay their taxes and special assessments levied upon real or taxable property. The burden of such taxes and special assessments is so onerous in amount that great delinquencies have occurred in the collection thereof and seriously affect the ability of taxing districts to obtain the revenue necessary to conduct governmental functions and to pay obligations represented by bonds. It is essential that financial relief, as set forth in this act, be immediately afforded to such taxing districts in order to avoid serious impairment of their taxing systems, with consequent crippling of the local governmental functions of the State. This act will aid in accomplishing this necessary result and should therefore go into effect immediately."
Our attention has been called to the difference between § 80(k) of chapter IX and § 83(i) of Chapter X of the Bankruptcy Act in the omission from the latter of the provision requiring the approval of the petition by a governmental agency of the State whenever such approval is necessary by virtue of the local law. We attach no importance to this omission. It is immaterial, if the consent of the State is not required to make the federal plan effective, and it is equally immaterial if the consent of the State has been given, as we think it has in this case. It should also be observed that Chapter X, § 83(e), provides as a condition of confirmation of a plan of composition that it must appear that the petitioner "is authorized by law to take all action necessary to be taken by it to carry out the plan," and, if the judge is not satisfied on that point as well as on the others mentioned, he must enter an order dismissing the proceeding. The phrase "authorized by law" manifestly refers to the law of the state.
Third. We are thus brought to the inquiry whether the exercise of the federal bankruptcy power in dealing with a composition of the debts of the irrigation district, upon its voluntary application and with the State's consent, must be deemed to be an unconstitutional interference with the essential independence of the State as preserved by the Constitution.
the bankruptcy court to entertain proceedings for the "readjustment of the debts" of "political subdivisions" of a State "might materially restrict [its] control over its fiscal affairs," and was therefore invalid; that, if obligations of States or their political subdivisions might be subjected to the interference contemplated by chapter IX, they would no longer be "free to manage their own affairs."
"Compositions are approvable only when the districts or agencies file voluntary proceedings in courts of bankruptcy accompanied by plans approved by 51 percent of all the creditors of the district or agency, and by evidence of good faith. Each proceeding is subject to ample notice to creditors, thorough hearings, complete investigations, and appeals from interlocutory and final decrees. The plan of composition cannot be confirmed unless accepted in writing by creditors holding at least 66 2/3 percent of the aggregate amount of the indebtedness of the petitioning district or taxing agency, and unless the judge is satisfied that the taxing district is authorized by law to carry out the plan, and until a specific finding by the court that the plan of composition is fair, equitable, and for the best interests of the creditors. . . ."
that H.R. 5969 is not invalid or contrary to the reasoning of the majority opinion. . . ."
"The bill here recommended for passage expressly avoids any restriction on the powers of the States or their arms of government in the exercise of their sovereign rights and duties. No interference with the fiscal or governmental affairs of a political subdivision is permitted. The taxing agency itself is the only instrumentality which can seek the benefits of the proposed legislation. No involuntary proceedings are allowable, and no control or jurisdiction over that property and those revenues of the petitioning agency necessary for essential governmental purposes is conferred by the bill. . . ."
"There is no hope for relief through statutes enacted by the States, because the Constitution forbids the passing of State laws impairing the obligations of existing contracts. Therefore, relief must come from Congress, if at all. The committee are not prepared to admit that the situation presents a legislative no-man's land. . . . It is the opinion of the committee that the present bill removes the objections to the unconstitutional statute, and gives a forum to enable those distressed taxing agencies which desire to adjust their obligations and which are capable of reorganization, to meet their creditors under necessary judicial control and guidance and free from coercion, and to affect such adjustment on a plan determined to be mutually advantageous."
of sovereignty to be able to make contracts and give consents bearing upon the exertion of governmental power. This is constantly illustrated in treaties and conventions in the international field by which governments yield their freedom of action in particular matters in order to gain the benefits which accrue from international accord. Oppenheim, International Law, 4th Ed., vol. 1, §§ 493, 494; Hyde, International Law, vol. 2, § 489; Perry v. United States, 294 U. S. 330, 294 U. S. 353; Steward Machine Co. v. Davis, 301 U. S. 548, 301 U. S. 597. The reservation to the States by the Tenth Amendment protected, and did not destroy, their right to make contracts and give consents where that action would not contravene the provisions of the Federal Constitution. The States, with the consent of Congress, may enter into compacts with each other, and the provisions of such compacts may limit the agreeing States in the exercise of their respective powers. Const. art. 1, § 10, cl. 3; Poole v. Fleeger, 11 Pet. 185, 36 U. S. 209; Rhode Island v. Massachusetts, 12 Pet. 657, 37 U. S. 72; Hinderlider v. La Plata River Co., post, p. 304 U. S. 92 The State is free to make contracts with individuals and give consents upon which the other contracting party may rely with respect to a particular use of governmental authority. See Fletcher v. Peck, 6 Cranch 87, 10 U. S. 137; New Jersey v. Wilson, 7 Cranch 164; Dartmouth College v. Woodward, 4 Wheat. 518, 17 U. S. 643-644; Charles River Bridge v. Warren Bridge, 11 Pet. 420, 36 U. S. 549; Jefferson Branch Bank v. Skelly, 1 Black 436, 66 U. S. 446. While the instrumentalities of the national government are immune from taxation by a State, the State may tax them if the national government consents (Baltimore National Bank v. State Tax Comm'n, 297 U. S. 209, 297 U. S. 211-212) and, by a parity of reasoning, the consent of the State could remove the obstacle to the taxation by the federal government of state agencies to which the consent applied.
"Nowhere in our scheme of government -- in the limitations express or implied of our Federal Constitution -- do we find that she [the State] is prohibited from assenting to conditions that will assure a fair and just requital for benefits received."
taxation was useless. The creditors of the district were helpless. The natural and reasonable remedy through composition of the debts of the district was not available under state law by reason of the restriction imposed by the Federal Constitution upon the impairment of contracts by state legislation. The bankruptcy power is competent to give relief to debtors in such a plight and, if there is any obstacle to its exercise in the case of the districts organized under state law, it lies in the right of the State to oppose federal interference. The State steps in to remove that obstacle. The State acts in aid, and not in derogation, of its sovereign powers. It invites the intervention of the bankruptcy power to save its agency which the State itself is powerless to rescue. Through its cooperation with the national government, the needed relief is given. We see no ground for the conclusion that the Federal Constitution, in the interest of state sovereignty, has reduced both sovereigns to helplessness in such a case.
Fourth. As the bankruptcy power may be exerted to give effect to a plan for the composition of the debts of an insolvent debtor, we find no merit in appellant's objections under the Fifth Amendment. In re Reiman, supra; Continental National Bank v. Chicago, Rock Island & Pacific R. Co., supra.
The judgment of the District Court is reversed, and the cause is remanded for further proceedings in conformity with this opinion.
MR. JUSTICE McREYNOLDS and MR. JUSTICE BUTLER are of the opinion that the principle approved in Ashton v. Cameron County District, 298 U. S. 513, is controlling here, and requires affirmation of the questioned decree.
See Hearings before a Subcommittee of the Senate Committee on the Judiciary on S. 1868 and H.R. 5950, 1934, 73d Cong., 2d Sess.; Hearings before the House Committee on the Judiciary on H.R. 1670, etc., 1933, 73d Cong., 1st Sess.; Ashton v. Cameron County District, 298 U. S. 513, 298 U. S. 533-534.
H.Rep. No. 517, 75th Cong., 1st Sess.
Sen.Rep. No. 911, 75th Cong., 1st Sess.

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