Source: https://m.openjurist.org/298/us/513/ashton-v-cameron-county-water-improvement-dist
Timestamp: 2019-06-24 18:07:14
Document Index: 40965294

Matched Legal Cases: ['§ 301', '§ 301', '§ 302', '§ 205', '§ 205', '§ 207', '§ 207', '§ 1113', '§ 303', '§ 303', 'art. 1024']

298 U.S. 513 - Ashton v. Cameron County Water Improvement Dist
Notwithstanding the broad grant of power 'to lay and collect taxes,' opinions here plainly show that Congress could not levy any tax on the bonds issued by the respondent or upon income derived therefrom. So to do would be an unwarranted interference with fiscal matters of the state—essentials to her existence. Many opinions explain and support this view. In United States v. Baltimore & Ohio Railroad Company, 17 Wall. 322, 329, 21 L.Ed. 597, this court said:
If federal bankruptcy laws can be extended to respondent, why not to the state? If voluntary proceedings may be permitted, so may involuntary ones, subject, of course, to any inhibition of the Eleventh Amendment. Matter of Quarles and Butler, 158 U.S. 532, 535, 15 S.Ct. 959, 39 L.Ed. 1080. If the state were proceeding under a statute like the present one, with terms broad enough to include her, apparently the problem would not be materially different. Our special concern is with the existence of the power claimed—not merely the immediate outcome of what has already been attempted. And it is of the first importance that due attention be given to the results which might be brought about by the exercise of such a power in the future.
The especial purpose of all bankruptcy legislation is to interfere with the relations between the parties concerned—to change, modify, or impair the obligation of their contracts. The statute before us expresses this design in plain terms. It undertakes to extend the supposed power of the federal government incident to bankruptcy over any embarrassed district which may apply to the court. See Perry v. United States, 294 U.S. 330, 353, 55 S.Ct. 432, 79 L.Ed. 912, 95 A.L.R. 1335.
Like any sovereignty, a state may voluntarily consent to be sued; may permit actions against her political subdivisions to enforce their obligations. Such proceedings against these subdivisions have often been entertained in federal courts. But nothing in this tends to support the view that the federal government, acting under the bankruptcy clause, may impose its will and impair state powers—pass laws inconsistent with the idea of sovereignty.
What is true of Cameron county water improvement district No. 1 is true in essentials of thousands of other public corporations in widely scattered areas. The hearings by committees of the Congress before the passage of the statute exhibit in vivid fashion the breadth and depth of the mischief which the statute was designed to remedy.1 In January, 1934, 2,019 municipalities, counties, and other governmental units were known to be in default.2 On the list, which was incomplete, were large cities as well as tiny districts. Many regions were included: 41 out of 48 states. Students of government have estimated that on January 1, 1933, out of securities to the extent of $14,000,000,000 issued by units smaller than the states, a billion were in default.3 The plight of the debtors was bad enough; that of the creditors was even worse. It is possible that in some instances the bonds did not charge the municipalities or other units with personal liability. Even when they did, however, execution could not issue against the property of the debtor held for public uses,4 and few of the debtors were the owners of anything else. In such circumstances the only remedy was a mandamus whereby the debtor was commanded to tax and tax again. Rees v. City of Watertown, 19 Wall. 107, 22 L.Ed. 72; Meriwether v. Garrett, 102 U.S. 472, 501, 26 L.Ed. 197.5 The command was mere futility when tax values were exhausted. Often the holders of the bonds, to the extent of 90 per cent. or more were ready to scale down the obligations and put the debtor on its feet. A recalcitrant minority had capacity to block the plan. Nor was there hope for relief from statutes to be enacted by the states. The Constitution prohibits the states from passing any law that will impair the obligation of existing contracts, and a state insolvency act is of no avail as to obligations of the debtor incurred before its passage. Sturges v. Crowninshield, 4 Wheat. 122, 4 L.Ed. 529. Relief must come from Congress if it is to come from any one.
The next step in the inquiry has to do with the power of the Congress to eradicate the mischief. Is the act in question, adopted May 24, 1934, to continue for two years (sections 78, 79 and 80 of the Bankruptcy Act of 1898, as amended by 48 Stat. 798, 11 U.S.C. §§ 301, 302, 303 (11 U.S.C.A. §§ 301—303)), and now extended to January 1, 1940 (P.L. 507, approved April 10, 1936 (11 U.S.C.A. § 302 ), a law 'on the subject of Bankruptcies' within article 1, section 8, cl. 4, of the Constitution of the United States? Recent opinions of this court have traced the origin and growth of the bankruptcy power. Continental Illinois National Bank & Trust Co. v. Chicago, Rock Island & Pacific Ry. Co., 294 U.S. 648, 668, 55 S.Ct. 595, 79 L.Ed. 1110; Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 588, 55 S.Ct. 854, 79 L.Ed. 1593, 97 A.L.R. 1106. The history is one of an expanding concept. It is, however, an expanding concept that has had to fight its way. Hanover National Bank v. Moyses, 186 U.S. 181, 184, 22 S.Ct. 857, 46 L.Ed. 1113; Charles Warren, Bankruptcy in United States History (1935) p. 9. Almost every change has been hotly denounced in its beginnings as a usurpation of power. Only time or judicial decision has had capacity to silence opposition. At the adoption of the Constitution, the English and Colonial bankruptcy laws were limited to traders and to involuntary proceedings. An act of Congress passed in 1800 (2 Stat. 19) added bankers, brokers, factors, and underwriters. Doubt was expressed as to the validity of the extension (Adams v. Storey, Fed.Cas.No. 66, 1 Paine, 79, 82), which established itself, however, with the passing of the years. Hanover National Bank v. Moyses, supra. Other classes were brought in later, through the Bankruptcy Act of 1841 (5 Stat. 440) and its successors, 'until now practically all classes of persons and corporations are included.' Continental Illinois National Bank & Trust Co. v. Chicago, Rock Island & Pacific Ry. Co., supra, 294 U.S. 648, at page 670, 55 S.Ct. 595, 604, 79 L.Ed. 1110. For nearly a century voluntary proceedings have been permitted at the instance of the debtor as well as involuntary proceedings on the petition of creditors. The amendment, however, was resisted. The debates in Congress bear witness to the intensity of the feeling aroused by its proposal. Warren, op. cit. supra, at page 72 et seq. For more than sixty years the debtor has been able to compel a minority of his creditors to accept a composition if the terms have been approved by a designated majority as well as by the judge. This change, like the others, had to meet a storm of criticism in Congress and the courts. Warren, op. cit. supra, at pages 44, 45, 118—120; In re Klein, reported in a note to Nelson v. Carland, 1 How. 265, 277, 11 L.Ed. 126, 130; Louisville Joint Stock Land Bank v. Radford, supra. Since the enactment of section 77 in March, 1933 (47 Stat. 1474, 11 U.S.C. § 205 (11 U.S.C.A. § 205)), a court of bankruptcy has been empowered to reorganize railroad corporations unable to pay their debts as they mature (Continental Illinois National Bank & Trust Co. v. Chicago, Rock Island & Pacific Ry. Co., supra), and, since the enactment of section 77 B in June, 1934 (48 Stat. 912, 11 U.S.C. § 207 (11 U.S.C.A. § 207)), a like jurisdiction has existed in respect of business corporations generally. The act for the relief of local governmental units is a stage in an evolutionary process which is likely to be misconceived unless regarded as a whole.6
Throughout that evolutionary process, the court has hewn a straight path.7 Disclaiming a willingness to bind itself by a cramping definition, it has been able none the less to indicate with clearness the main lines of its approach. In substance, it agrees with Cowen, J., who wrote: 'I read the constitution thus: 'Congress shall have power to establish uniform laws on the subject of any person's general inability to pay his debts throughout the United States" (Kunzler v. Kohaus, 5 Hill (N.Y.) 317, 321), and with Blatchford, J., writing in the Matter of Reiman, 20 Fed.Cas. 490, at page 496, No. 11,673, that the subject of bankruptcy cannot properly be defined as 'anything less than the subject of the relations between an insolvent or nonpaying * * * debtor, and his creditors, extending to his and their relief.' See Hanover National Bank v. Moyses, supra; Continental Illinois National Bank & Trust Co. v. Chicago, Rock Island & Pacific Ry. Co., supra; Louisville Joint Stock Land Bank v. Radford, supra. Such was Story's view also. 'A law on the subject of bankruptcies in the sense of the Constitution is a law making provision for persons failing to pay their debts.' Story, Commentaries on the Constitution, § 1113, n. 3. Cf. Warren, op. cit. supra, at page 68. It is not necessary that the debtor have any property to surrender. One may resort to a court of bankruptcy though one has used up all one's property or though what is left is exempt. Vulcan Sheet Metal Co. v. North Platte Valley Irrigation Co. (C.C.A.) 220 F. 106, 108; In re Hirsch (D.C.) 97 F. 571, 573; In re J. M. Ceballos & Co. (D.C.) 161 F. 445, 450. It is enough that, in an omnibus proceeding between a nonpaying debtor on the one side and the creditors on the other, the debtor-creditor relation is to be readjusted or extinguished. Cf. Warren, op. cit. supra, at pages 8, 144.
Cameron water improvement district No. 1 has no assets to surrender. If it shall turn out hereafter that there are any not exempt, the creditors may have them. Cameron water improvement district No. 1 is a debtor in an amount beyond its capacity for payment, and has creditors, the holders of its bonds, who are persuaded that a reduction of the debt will redound to their advantage. Thirty per cent. of the creditors had signified their approval of a proposed plan of composition before the filing of the petition, and 66 2/3 per cent. must give approval before the judge can act.8 Even then the plan will count for nothing unless the judge upon inquiry shall hold it fair and good. A situation such as this would call very clearly for the exercise by a court of bankruptcy of its distinctive jurisdiction if the debtor were a natural person or a private corporation. Is there anything in the position of a governmental unit that exacts a different conclusion?
The question is not here whether the statute would be valid if it made provision for involuntary bankruptcy, dispensing with the consent of the state and with that of the bankrupt subdivision. For present purposes one may assume that there would be in such conditions a dislocation of that balance between the powers of the states and the powers of the central government which is essential to our federal system. Cf. Hopkins Federal Savings & Loan Association v. Cleary, 296 U.S. 315, 56 S.Ct. 235, 80 L.Ed. 251, 100 A.L.R. 1403; United States v. California, 297 U.S. 175, 56 S.Ct. 421, 80 L.Ed. 567. To read into the bankruptcy clause an exception or proviso to the effect that there shall be no disturbance of the federal framework by any bankruptcy proceeding is to do no more than has been done already with reference to the power of taxation by decisions known of all men. McCulloch v. Maryland, 4 Wheat. 316, 4 L.Ed. 579. The statute now in question does not dislocate the balance. It has been framed with sedulous regard to the structure of the federal system. The governmental units of the state may not act under this statute except through the medium of a voluntary petition which will evince their own consent, their own submission to the judicial power. Even that, however, is not enough. By section 80, subdivision (k), 11 U.S.C.A. § 303(k), which is quoted in the margin,9 the petition must be accompanied by the written approval of the state, whenever such consent is necessary by virtue of the local law. There is still another safeguard. By subdivision (e)(6), 11 U.S.C.A. § 303(e)(6), the composition, though approved by the requisite majority, shall not be confirmed by the judge unless he is satisfied that 'the taxing district is authorized by law, upon confirmation of the plan, to take all action necessary to carry out the plan.' To cap the protective structure, Texas has a statute whereby all municipalities, political subdivisions, and taxing districts in the state are empowered to proceed under the challenged act of Congress, and to do anything appropriate to take advantage of its provisions. This statute became a law on April 27, 1935 (Texas, Laws 1935, c. 107 (Vernon's Ann.Civ.St.Tex. art. 1024a)), after the dismissal of the proceeding in the District Court, but before the reversal of that decision by the Court of Appeals. Being law at that time, it was to be considered and applied. United States v. Schooner Peggy, 1 Cranch, 103, 110, 2 L.Ed. 49; Danforth v. Groton Water Co., 178 Mass. 472, 475, 476, 59 N.E. 1033, 86 Am.St.Rep. 495; Robinson v. Robins Dry Dock & Repair Co., 238 N.Y. 271, 281, 144 N.E. 579, 36 A.L.R. 1310. There are like statutes in other states. Arizona, Laws 1935, c. 17; California, St. (Ex.Sess.) 1934, c. 4, p. 5; Florida, Laws 1933, c. 15878; Ohio, Laws (2d Special Session) 1934, No. 77, p. 348. In Texas, at all events, it is clear to the point of demonstration that the filing of a voluntary petition by a political subdivision does not violate the local law or any local public policy. Petitioners are not the champions of any rights except their own. Premier-Pabst Sales Co. v. Grosscup, 298 U.S. 226, 56 S.Ct. 754, 80 L.Ed. —-, May 18, 1936, New York ex rel. Hatch v. Reardon, 204 U.S. 152, 160, 161, 27 S.Ct. 188, 51 L.Ed. 415, 9 Ann.Cas. 736.
Rehearing denied 299 U.S. —-, 57 S.Ct. 5, 81 L.Ed. —-.
The Emergency Farm Mortgage Act of 1933 (48 Stat. 41) was condemned in Louisville Joint Stock Land Bank v. Radford, supra, because destructive of rights of property protected by the Fifth Amendment.