William H. Rehnquist: We'll hear argument next in Number 99-1792, the Director of Revenue of Missouri v. CoBank ACB. Mr. Layton.
James R. Layton: Mr. Chief Justice and may it please the Court: In 1933, when Congress authorized the organization of banks for cooperatives, it implicitly authorized the States to tax them. That authority became effective for each bank when it retired the Government shares. The National Bank for Cooperatives paid taxes to Missouri until 1995, but according to the Missouri supreme court the bank's tax liability ended in 1985. That court failed to recognize the bank's exemption from taxes is and always has been provided by statute, and that statute, now 12 U.S.C. 2134, exempts from taxation only the bank's notes, debentures, and other obligations, not its income. In deciding what section 2134 means, the Missouri supreme court erred in three respects. It transformed a technical and conforming amendment into a significant change in the Farm Credit Act, it made that transformation by adding to the plain language of the statute, and it turned the statute into something that is incongruous to the rest of the Farm Credit Act. Before 1985, the statute provided that CoBank and its predecessors would always pay taxes on real and tangible personal property and, at any time when the Government did not own shares, they would pay other taxes to State and local governments and perhaps even to the Federal Government. The question arises here as to what happened in 1985, and the position being taken by CoBank is that in 1985 suddenly they were freed from all taxes, and yet that is not what the statute said in 1985. There was a technical and conforming amendment that appeared in title 2 of the 1984... 5 act. Title 2 was the part of the act that was dedicated to making the Farm Credit Administration an arm's length regulator for the farm credit system, something more akin to what we see at the FDIC and other bank regulators in the Federal system. Title 1 of that act also included conforming amendments. Title 1 dealt with the credit corporation which CoBank cites here as a new vehicle for investment into the farm credit system. The second point that the Missouri court erred on is transforming the plain language by adding to it. The plain language of the statute is simply that this entity is exempt from taxation as to its notes, debentures and other obligations. Ever since 1933, the entire scope of the exemption given to the banks for cooperatives has been contained in statutes. The only thing that anyone can point to in the statute today that goes beyond notes, debentures, and obligations is the reference to this entity as a Federal instrumentality, but this Court has at various times suggested or, in fact, held that Federal instrumentality does not have the kind of meaning that CoBank ascribes to it.
David H. Souter: It has, I take it, been described as such by statute from the very beginning.
James R. Layton: From the very beginning, Your Honor, and that's significant, because even in 1933, what rights or abilities a Federal instrumentality had was unclear. Certainly--
Stephen G. Breyer: But don't we have... isn't the statute... as I understand the statute, it used to say, your bonds are exempt and your income is exempt as long as the stock's being held by the Board of Governors.
James R. Layton: --That's right.
Stephen G. Breyer: All right. Now, they get rid of the second part because nobody holds the stock any more.
James R. Layton: That's right.
Stephen G. Breyer: All right. So we're left with the first part.
James R. Layton: That's right.
Stephen G. Breyer: And what you rather brilliantly say is, ha ha, that means McCulloch clicks in.
James R. Layton: Well--
Stephen G. Breyer: And since McCulloch clicks in, since it doesn't say it doesn't, they're exempt anyway as a Federal instrumentality.
James R. Layton: --Well, I think that's what they say. That isn't what we would say.
Stephen G. Breyer: Right. That's what they say.
James R. Layton: We would say that they're not--
Stephen G. Breyer: Exactly, right.
James R. Layton: --That's right, and this Court, and in fact Congress has never suggested that there could be this kind of a hybrid provision for exemption. In each of the instances where we have a financial institution that seeks an exemption from taxes, Congress has either defined the whole scope of that exemption, or left it blank.
Stephen G. Breyer: All right. Now, given that's their argument, and given we're left with the remnant, why doesn't McCulloch click in?
James R. Layton: Well, first off that... the McCulloch... well, McCulloch holds that a Federal instrumentality cannot be taxed discriminatorily and in fact goes beyond that to say you can't import... impose certain kinds of taxes. McCulloch, however, does not suggest that anything that might be labeled a Federal instrumentality qualifies.
Stephen G. Breyer: One obvious reason... one obvious reason would be because they're not a Federal instrumentality. That's A.
James R. Layton: That's A.
Stephen G. Breyer: Now, is there a second argument lurking here, that--
James R. Layton: Yes.
Stephen G. Breyer: --That's what I'm--
James R. Layton: That McCulloch is restricted to an instrumentality of the type that this Court addressed in the New Mexico case, and we can see the comparison fairly bluntly here. The Second Bank of the United States was run by presidential appointees. The Federal Government owned 20 percent of the shares in that bank, and that bank performed governmental functions, not just functions in which the Government had an interest, but it actually issued currency. It did things that the Government itself must do. In that sense, the Second Bank of the United States was a little like the Red Cross that this Court addressed in the Department of Employment case. Again, presidential appointees run the Red Cross, and that entity fulfills treaty obligations that the United States assumed under the Geneva Convention. The... CoBank mentions the Rural Telephone Bank in their brief. Well, the Rural Telephone Bank has a 13-member board of directors. Seven of them are appointed by the President of the United States. The Governor of the Rural Telephone Bank is appointed by the Secretary of Agriculture, and there is a direct appropriation from Congress in a... over a 10-year period of... or 20-year period of $600 billion for the Rural Telephone Bank. By contrast, here we have an entity that from the beginning has been controlled by a board of directors that is appointed by its voting shareholders, which did not include the United States. That is, by the borrowers. It has always been a private entity, quite distinct from the things that we see in McCulloch. So what's the distinction from McCulloch? McCulloch holds that if you have something that is an instrumentality of the type that is the Second Bank of the United States, then in fact there is, absent any congressional language, immunity.
Sandra Day O'Connor: --Well, I guess on the side of your opponent is the fact that these banks were created to perform an important governmental function by extending reliable credit to farmers at the lowest possible cost.
James R. Layton: And that's certainly true.
Sandra Day O'Connor: Right? I mean, that was an important governmental interest.
James R. Layton: Yes.
Sandra Day O'Connor: And by subjecting them to taxation, it's going to drive up that cost.
James R. Layton: Well, it may or may not drive up that cost. It's interesting to look a little at the history of what happened here. In 1933--
Sandra Day O'Connor: Assuming it does--
James R. Layton: --Assuming it does, assuming that it does drive up the cost, then that would certainly affect the ability of these entities to fulfill that interest in which the Government has an interest, yes, it would.
Sandra Day O'Connor: --Is that enough, then, to exempt them from that interest?
James R. Layton: No, it is not. It is not. If that were enough, then anything that Congress creates within its power and says it has a governmental interest could be exempted, or inherently exempted from State tax.
Anthony M. Kennedy: Would you amend your answer to say, anything the Government calls an instrumentality?
James R. Layton: Well, no. I don't know that the Government has to call something an instrumentality in order to give it the exemption under that approach. Again, instrumentality doesn't have a meaning that is precise as CoBank wishes that it did.
Antonin Scalia: Did the statute in McCulloch say... use the term, instrumentality of the United States?
James R. Layton: No. There was no statute in McCulloch that referred to a tax exemption, and that is one of the distinctions.
Antonin Scalia: No, I mean, but the statute creating the Bank of the United States.
James R. Layton: As far as I know, it did not.
Antonin Scalia: Did it call it an instrumentality of the United States?
James R. Layton: No.
Antonin Scalia: My recollection is that it didn't.
James R. Layton: I... there's no mention in the case suggesting that it did, and that matters in the sense that... well, not just that it didn't use that phrase, but there's no exemption statute at issue in McCulloch. That is, Congress, when it created the Second Bank of the United States, didn't say, okay, you have the following exemptions from State and local taxes, but that's what Congress at least since 1916, when it started the farm credit system, has done consistently for the financial entities within the farm credit system.
Ruth Bader Ginsburg: Mr. Layton, there's a reason that the other side gives for the exemption of the debt obligations, because, they say, those obligations are held not in the hands of CoBank but in the hands of the lenders, so you need an exemption so that those lenders, who are private and not government instrumentalities, won't be taxed.
James R. Layton: Well, it's curious that they make that claim in a brief where they also cite the Memphis case in section 742 of, I believe it's title 31, which, if this entity is part of the United States, that is, if this bank of cooperatives has the inherent authority that they ascribe to it, then 742 would cover them, and this provision would be superfluous in 2134. But it doesn't cover them, because they are not an instrumentality of this sort, and Congress has defined the scope of their authority. In 1928, this Court in the Shaw v. Gibson Zahniser Oil case, just a few years before the 1933 act that created the Bank for Cooperatives, pointed out that there are instrumentalities of the United States that do not have exemptions unless Congress gives them an exemption, and then 5 years later Congress in this instance defines what the exemption is, and what CoBank and what the Missouri supreme court have done is to say, well, that definition by Congress doesn't really matter. The third point that I mentioned was that it turns the statute into something in Congress with the rest of the Farm Credit Act. That is, in each instance in the Farm Credit Act, where Congress has created an entity that is even... that is analogous to this particular one, Congress has said, okay, here is the kind of exemption that you have from State and local taxes. It always is a comprehensive statement, and does not leave room for some kind of an argument that there is an additional exemption based on some kind of inherent immunity, and in each instance it permits taxation of real property and in many instances taxation of tangible personal property. And one of the differences that occurred in 1985, according to CoBank, is all of a sudden the statute changed from allowing State and local governments to tax tangible personal property to including only a real property exemption which they ascribe back to the dicta in McCulloch. In fact, there may be a problem with tangible personal property. I'm not sure how much of that CoBank would be likely to foreclose upon, but the same statutory language is used for the production credit associations, and it is easily understood that there would be tractors and other equipment that they would foreclose upon that would justify the need for a provision for taxation on tangible local... tangible personal property.
Anthony M. Kennedy: Do we have some cases that say that if you call it a technical amendment, then we can go back behind the intention of the Congress as, treat it as something of a different order than a straight out repealer?
James R. Layton: No. There are a couple of cases cited in our brief that stand for the proposition that we don't expect Congress to use technical amendments to make this kind of a change, but neither of them actually says, yes, we can then go back behind the language to determine what Congress did. But here you don't have to go behind the language to committee reports or something like that. Just look at what the language was. If Congress wanted to do what CoBank now says they did, all they had to do was eliminate the last sentence in the prior statute. That is, the sentence that said, okay, here's the point at which the State's authority to tax begins. If that had been the scope of the... of Congress' action, just eliminating that last sentence, then except for the tangible personal property question CoBank would have today exactly what they wanted, but that sentence says, okay, the exemption that we are giving you in the prior sentence... that is, you don't have one until we give it to you. The exemption we are giving you in the prior sentence is going to apply only to a certain point. And when Congress acted here, they took out not just the, okay, it applies at a certain point, but exemption that they had given, and so today there is no exemption in the statute, and the banks for cooperatives are responsible for paying taxes to State and local governments. If there are no further questions, I'll reserve the rest of my time for rebuttal.
William H. Rehnquist: We'll hear from you now, Mr. Frederick.
David C. Frederick: Thank you, Mr. Chief Justice, and may it please the Court: Our position is that banks for cooperatives under the Farm Credit Act are not exempt from State income taxes for two reasons. We think the Court should confine its decision to an analysis of the text of the Farm Credit Act, and not go beyond it to discuss or address the constitutional issues relating to Federal instrumentalities. Under the text of the act itself there are two reasons why banks for cooperatives are not exempt from State income taxes. First, as the State counsel noted, at section 2134, the first sentence itself just addresses an exemption for notes, debentures, and obligations. That provision contrasts with two other provisions of the Farm Credit Act that specifically give State income tax exemptions for other entities of the farm credit system. 12 U.S.C. 2023 provides an exemption from State income taxes for farm credit banks and provides expressly that Congress intended for those entities to be exempt from State income taxes. Moreover, 12 U.S.C. 2098 provides an express exemption from State income taxes for Federal land bank associations. It's clear, therefore, that when Congress enacted this statute, and it amended it over a 50-year period, it knew precisely how to give the kind of exemption from State income taxes being asserted by respondents in this case and chose not to do so. Secondly, the history behind this provision, as the State counsel made perfectly clear, does not support respondent's position. Between 1933 and 1985, the text itself provided for the exemption from State income taxes only in any part of a year in which the Government owned stock. That ended in 1968. From a period between 1965 and 1968, the Government retired all of its shares of stock in banks for cooperatives. So as of 1968, and this is reflected in the Farm Credit Administration's annual report, banks for cooperatives were not exempt from Federal and State income taxes. When Congress made its amendment nearly two decades later, in the 1985 Farm Credit Amendments Act, there was no Government ownership in any banks for cooperatives. These were completely privately owned for profit entities and, as such, would have been subject to State income taxes throughout the entire period. Now, the last point that I'd like to make is that the Court should not reach out to opine about instrumentality status generally. This... the Court consistently under the Farm Credit Act has looked at the text of the act to determine the scope of exemptions from taxation, and that's true in all of the cases that have been cited by the parties under the Farm Credit Act. It should not use this case to opine broadly about what instrumentality status means for several reasons. First, Congress uses the term, instrumentality, in a broader range of contexts, and even in this case and in this statute itself, has used it to describe not only the organizations that are being used to facilitate Congress' purpose, but also the financial instruments themselves. Section 2023, which is the Farm Credit Bank tax exemption provision, describes the notes themselves as the instrumentalities of the United States, and so by making a decision about what instrumentality status means, the Court could end up having... could create unintended consequences that would affect the taxable status of instrumentalities throughout the Government.
William H. Rehnquist: Well, maybe Congress has already created that confusion by using the term inconsistently.
David C. Frederick: Mr. Chief Justice, that is certainly an area that Congress would certainly want to address. The question, though, is, by using that term, and I would give a second reason, and that's that Congress imposes certain obligations on agencies and instrumentalities that are apart from tax questions, reporting obligations for data to the Secretary of Commerce, encouraging--
John Paul Stevens: Yes, but Mr. Frederick, isn't it true that for purposes of deciding this case, if we have to... if we rule in your favor and the favor of the petitioner, we must decide that the mere fact that it's labeled an instrumentality is not sufficient to give a tax exemption?
David C. Frederick: --No, Justice Stevens. What the Court would say is that use of the instrumentality language by itself would not render the rest of the tax exemption language in the Farm Credit Act surplusage, and the Court would say that Congress defined the scope of the tax exempt status of these particular instrumentalities by expressly dealing with tax exempt status, and that's how the court did it in the First Agricultural Bank case in 1968, when it addressed a very similar question for the national banks, and there the Court said, we're going to look at the text of the statute to determine the scope of the exemption and not reach--
John Paul Stevens: Well, we would at least have to say that the mere fact they have used the term instrumentality is not sufficient to overcome the statutory argument.
David C. Frederick: --That's correct, where there is express tax exempt language given by Congress. I mean, even in McCulloch itself the Court said that it was up to Congress to decide how it wanted to exercise its powers under the Necessary and Proper Clause.
Anthony M. Kennedy: So is it your principal submission that we should look at the act in its pre-1985 status?
David C. Frederick: Well, we think that the '85 language which is present here is, in and of itself, sufficient, but it is also supported by the history of the statutory evolution from 1933, which makes perfectly clear Congress did not intend for these entities to be tax exempt when the Government did not own shares in them. If the Court has no further questions, I have nothing further.
William H. Rehnquist: Thank you, Mr. Frederick. Mr. Hanson, we'll hear from you. Your opponent said that your client continued to pay taxes to the State of Missouri from, what, 1985 to 1995, is that correct?
Richard A. Hanson: Perhaps I could clear that up, Your Honor. In the first place, the bank was not formed until 1989, so that we obviously didn't have any liability prior to that date.
William H. Rehnquist: How about from 1989 to 1995?
Richard A. Hanson: The bank did, in fact, pay tax, and fairly promptly, beginning with the year 1991 filed refund claims to recover that tax. I would submit that to the extent that they were slow in making those claims, it might have had something to do with the fact that the entire farm credit system had more serious problems to worry about in the late 1980's which was, frankly, its survival. One point that all parties seem to agree upon, and certainly the Court's opinions make this clear, is that the question of whether or not an entity is entitled to immunity as a Federal instrumentality is up to Congress. The Court said that in the New Mexico, the... Missouri said that in their briefs, the Solicitor General, of course, said the same thing. What we now have here, we would submit, is a case where congressional designation as a Federal instrumentality somehow carries less weight than a judicial determination of Federal instrumentality.
Ruth Bader Ginsburg: Well, the question is was there really any congressional determination, considering that when one thing we know for sure from '68 to '85, Congress meant these entities to be subject to income tax, and they were. What happened in '85? What Congress meant is far from clear.
Richard A. Hanson: Well, let me go through the history briefly of the banks for cooperatives, because I think that answers your question. They were formed in 1933. At that time, if you look at decisions like James v. Dravo Corporation, to be a Federal instrumentality meant... and I don't think there would have been any dispute, that you were exempt from Federal income tax absent an affirmative authorization. The banks were, and the Farm Credit Act was then in 1971 completely recodified and Congress again affirmatively, not merely carry over, but affirmatively said, the banks for cooperatives are... continue to be federally chartered instrumentalities of the United States. That's 1971. They did that at a time when the Federal Government owned no stock in that entity, and they said the reason--
Ruth Bader Ginsburg: But there was still a provision for the Government to come back and use--
Richard A. Hanson: --To invest in the stock.
Ruth Bader Ginsburg: --Yes.
Richard A. Hanson: What changed in 1985 is that the form of potential Government investment changed, and it changed not because of some sense of a difference in the structure of these entities, it changed because Congress determined that a centralized entity, the Farm Credit Capital Corporation, could serve a number of warehousing and centralized financing functions, and it would then become the entry point for Federal investment. So what we have is, in effect, instead of the money going directly to the bank for cooperatives, it would go to the Capital Corporation, which would then provide it to the banks for cooperatives, and I would submit that that's--
Ruth Bader Ginsburg: The infusion would be a loan type--
Richard A. Hanson: --It would be a loan, and if you look at the statute, it's a subordinated loan. It's subordinated to all of the debt of the system. It's subordinated to the capital provided by the members.
Ruth Bader Ginsburg: --It's still not up--
Richard A. Hanson: It's still not equity, I would agree, but if you... I mean, if you were trying to value the debt versus the equity and compare their security and their claims on the assets, I think you would find that there very little distinction.
Stephen G. Breyer: --You only tax the income earned equity, don't you? I mean, basically the income of the bank is... the income goes to the equity holder, doesn't it?
Richard A. Hanson: The income goes... the income of the bank is used for four purposes, and these are provided in the statute. The first purpose is to... and I'll do this in the context of 1991, which is the first year before the Court. The first use is to rebuild the capital of the bank, because you can't function as a lender without capital to provide security to your bond holders. The second use... and this is all set out in section 2132 with respect to BC's. The second use is to rebuild loss reserves, or to make sure that loss reserves are adequate. These are both things that are necessary for the bank to function. The third use, of course, in these years is to pay back the Government loan and, as we indicated in our brief, the Bank for Cooperatives National Bank and its successor, CoBank, paid back something like $300 million. None of those things actually affect earnings.
Stephen G. Breyer: No, but I mean, my point is simply, if I own your bank... you might be very nice... I would expect the State to tax the income, but if the Government owns the bank, probably it wouldn't, and that's what the statute seemed to say. And then in '85 the Government doesn't own the bank any more. It lends money to the bank. Well, so, why would you expect the State not to be able to tax the income? It isn't the Government's any more.
Richard A. Hanson: But it's not the bank's income, either.
Stephen G. Breyer: Whose is it?
Richard A. Hanson: It is the members' income.
Stephen G. Breyer: All right.
Richard A. Hanson: That's the very nature of a cooperative. I mean, a cooperative is--
Antonin Scalia: What was the fourth purpose? You said there were four... four things that--
Richard A. Hanson: --The fourth would be, and this is because we are a cooperative, would be a distribution to our member borrowers according to the business they did with the bank, not according to their capital, and as this Court pointed out in Kiowa County, the purpose for that distribution is not a purpose to return an investment to the borrower. It's to reduce the cost of his loan, because one of the fundamental missions of the farm credit system, again as this Court has recognized, is to provide loans for farmers at the lowest possible cost.
William H. Rehnquist: --If your client had never been financed by the Federal Government, the fact that it had those priorities for distribution wouldn't entitle it to any sort of a tax exemption, would it?
Richard A. Hanson: No, but I think they make the point that the bank itself is not a for profit entity. It is a cooperative.
William H. Rehnquist: Why does that bear on its tax immunity?
Richard A. Hanson: Well, it bears on why Congress would give the bank a designation as a federally chartered instrumentality of the United States. The mission of the farm credit system... it's set out in the statute, it's been recognized in your cases, is to provide secure and adequate lending to agricultural borrowers at the lowest possible cost.
David H. Souter: All right, but the lowest possible cost argument would not have washed before the '85 amendment, because before the '85 amendment it was very... as I understand the statute it was very explicit. That even though you could reduce the cost by rendering the bank nontaxable, you would only... or the bank's income, you would only do that if the United States was in part an owner.
Richard A. Hanson: Right.
David H. Souter: And once the United States dropped out, we didn't care whether it made the loans more expensive. Why would there be a different policy in effect now from the policy in effect then? Why did we become... why did Congress become more sensitive to cheap loans after '85 than before?
Richard A. Hanson: Well, I don't think Congress was any less sensitive. If you go back to 1933, when the banks were formed, it was obviously the Depression, and Congress did what the Court acknowledges that it does. It balanced the interests of a Federal program to provide secure and adequate and inexpensive financing to farmers with the fact that the States were also suffering from the Depression, and so the compromise that was struck in Depression conditions was, you can't tax these entities as long as there's a Federal investment, but we will let you tax them when that investment is retired. As Missouri itself put it in its brief, they said, you know, if the Federal Government has an investment in the bank... an investment here cannot realistically turn on whether it is equity or debt. I mean, in either case, as I suggested earlier, the terms are such that it's a Federal claim. They said the States ought to be understood to have to stand aside until that's paid back. What changed in 1985 is, Congress recapitalized the system.
David H. Souter: Okay, but Congress was saying before 1985, as long as we are an owner, our interest comes before the State interest.
Richard A. Hanson: Yes.
David H. Souter: That isn't necessarily a cheap loan policy. It's a favor the United States policy.
Speaker: After 1985, the United States says, we're not going to be owners any more.
David H. Souter: Therefore, there's no need to favor the United States, and therefore there's no need to provide a nontaxable policy. At each time, before '85 and after '85, the United States' policy with respect to the effect of the cost of borrowing on borrowers, on this analysis, would be exactly the same.
Richard A. Hanson: Right.
David H. Souter: The only thing that's changed is, we don't have the United States in an equity position to favor any more, therefore there's no need to provide for nontaxability.
Richard A. Hanson: Well, I mean, certainly there's nothing in the legislative history that suggests that that analysis was undertaken. I'm not saying that Congress might not have thought it through that way, but going back to what Justice Breyer was asking me about the profits and income of a bank, there is no source to pay back the United States, except the income.
Stephen G. Breyer: No, my question is actually the same as Justice Souter's, that--
David H. Souter: --No, go ahead.
Stephen G. Breyer: I'm probably just going to put it in a slightly different way, but... you have three sentences in this statute.
Richard A. Hanson: Right.
Stephen G. Breyer: The first sentence that says no, no tax on bonds, all right. The second said, no tax on income, and the third one said, sentence 2 applies only when we're... the Government's an investor.
Richard A. Hanson: Right.
Stephen G. Breyer: All right. Now, just out of curiosity, let's suppose that was still the statute. We're back in '84. Why can the State tax a bank's income even where the Government doesn't have an investment?
Richard A. Hanson: They clearly could under the statute, because--
Stephen G. Breyer: No. What do you mean, it clearly could... wait--
Richard A. Hanson: --I apologize, Your Honor.
Stephen G. Breyer: --That's... the point is, the statute doesn't say, it can't. The statute nowhere says that it can or it can't. What the statute says is, it can't as long as the Government has an interest. It doesn't say what happens when the Government interest disappears. All it says is that the preceding sentence exemption doesn't apply when the Government interest disappears. That's what my version says. It says, the exemption provided in the preceding sentence shall apply only when the Government is an owner.
Richard A. Hanson: That's correct. That's what it says.
Stephen G. Breyer: All right. Now the Government isn't an owner. Therefore the preceding sentence doesn't apply. Why doesn't McCulloch apply?
Richard A. Hanson: Well, and the answer is that the legislative history from 1933--
Stephen G. Breyer: Fine.
Richard A. Hanson: --makes it very clear.
Stephen G. Breyer: What you're saying, there's a negative implication.
Richard A. Hanson: That Congress was very clear about that.
Stephen G. Breyer: Fine. Now, once you say there was a negative implication before, why doesn't that same negative implication exist after '85, from the first sentence, unless there's something in that '85 history that shows that what they wanted to do was restore McCulloch, and my reading is there isn't a word on that, but you're prepared to say it wasn't the statute before that wiped out McCulloch. You're saying what wiped out McCulloch before was a negative implication from the statute, and so my question is simply, why isn't that negative implication still there, just as strong as it ever was, unless, of course, you can point to a reason? Now do you see my... you see where I'm going?
Richard A. Hanson: I understand where you're going.
Stephen G. Breyer: Yes. That's what I'd like the answer to.
Richard A. Hanson: Well, and let me qualify part of my answer, is that the statute has been understood by... it's never been construed by this Court, but it's been understood by a number of State courts and... consistent with what Congress said. They said, what we are writing with that third sentence is, not that we... we won't tell you what happens when there's no ownership, but we are telling you affirmatively that you become taxable. Now, was it artful language? Perhaps not. So I don't think it's fair to say that the exemption... that the taxability previously existed by negative implication. I think it was statutory and, of course, the answer, what happened in 1985 was, the statute was repealed. Now, both the exemption, I agree, and the negative implication. One thing here that I think the Court needs to focus on, and it's a major point made by the State and by the Solicitor General, is they... citing Rosello and cases like that, they say, well, the farm credit banks have an exemption, and the farm... the Federal land bank associations have an exemption, and you don't have an exemption therefore, and I grant that that's a perfectly valid rule of statutory construction. But I think it's fair to say that someone ought to at least offer a reason why it makes sense that Congress would discriminate against... differentiate. They're not discriminating... differentiate between a bank for cooperatives which makes loans to an agricultural cooperative or production credit association which makes a loan to a farmer. It's also a property, but it's otherwise identical, and a Federal land bank association makes the same loan, and they've clearly granted a statutory exemption in the one case but not the other. Now, you know--
Ruth Bader Ginsburg: Well, why doesn't that text take care of it? If you take the position that there's no inherent exemption for this kind of organization, that you have three organizations, and for two of them Congress has provided expressly your income is exempt, and for one of them it hasn't, so why isn't the assumption just from the text that two of them have it and one of them doesn't?
Richard A. Hanson: --Well, I mean, I think Congress is normally presumed to legislate on a rational basis and have a reason for what it's doing. My point is, and particularly from--
Ruth Bader Ginsburg: I thought in the tax area Congress could shed its grace where it will. [Laughter]
Richard A. Hanson: --Well, I certainly agree with Your Honor on that point, but 1985... and there is this change, and we pointed it out in our brief, that when the banks formed in 1933 and through 1971, in effect they were a stand alone element in the farm credit system. They issued their own bonds. They made their own loans. They were liable only for their own bonds and for their own operations. From 1975 through 1985 the entire system became interlocking in terms of issuance of bonds and liability therefore, and the operation of all the banks, so--
William H. Rehnquist: You say the entire system. What are you referring to?
Richard A. Hanson: --Well, I'm talking about the major legs of the farm credit system, the... what were originally the Federal land banks and are now the farm credit banks, the production credit associations, and the banks for cooperatives. Those have always been the three lenders. But in 1985 CoBank is... or, National Bank for Cooperatives... I'm sorry, 1989... is no longer simply liable for its own operations. It doesn't issue its own bonds. Its taxability doesn't affect only it. Now it affects everybody else, because if Missouri can tax it, it has less income to put into the pool to pay back the Government.
Stephen G. Breyer: That's all true, but are there some other kinds of banks that are very similar that Missouri can't tax? You're not saying there's some other very related kind of bank that Missouri cannot tax?
Richard A. Hanson: I don't believe so.
Stephen G. Breyer: No.
Richard A. Hanson: I mean, the national banks, which, of course, have always been viewed and designated as Federal instrumentalities, the statute now tells you what to do. The other types of lending institutions, you know, in the first place they're not designated as federally chartered instrumentalities. Again--
Stephen G. Breyer: Well, isn't the obvious answer to your question, what... you say, well, the Government's thought was, while we're the owner, Missouri can't tax us, but once we're no longer the owner, because we don't own stock, then it can, and if that raises the price of credit, so be it. I mean, isn't... that's what it seems to say.
Richard A. Hanson: --Well, then I guess I would... that's one way of looking at it, but it seems frankly implausible to me. I mean--
Antonin Scalia: What about the other two--
Richard A. Hanson: --because the Government... I'm sorry, Justice Scalia.
Antonin Scalia: --I thought you were done. Finish it.
Richard A. Hanson: The Government... and again, this... part of the problem that we have with this is, we recognize that there were distinctions made between the banks. The Federal land banks, which were originally capitalized--
Anthony M. Kennedy: It seems implausible... you were finishing your answer. It seems implausible to you because?
Richard A. Hanson: --That Congress would make that determination with respect to the banks for cooperatives, but it wouldn't make that determination with respect to the other banks.
Antonin Scalia: Are the other banks... this was my question. Does the Government own stock in the other ones?
Richard A. Hanson: It does not own stock in the other banks. It originally capitalized the Federal land banks, which had been before this Court numerous times. But--
Antonin Scalia: So you could not explain the difference on the ground that the Government is a participating investor in the others--
Richard A. Hanson: --No, and--
Antonin Scalia: --in a formal sense, whereas it is not here.
Richard A. Hanson: --Those statutes... their statutory exemption continued after the Government's stock was retired. It was not made conditional, as the banks for cooperatives exemption was, as it appears to us, because when the banks were formed in 1933, that was a political calculation that Congress made. They said, the States are desperate for revenue, and while we need to accomplish this program, we're willing to make this accommodation.
William H. Rehnquist: But the accommodation didn't kick in for 35 years.
Richard A. Hanson: That's right. It did not kick in until the late 1960's, and that accommodation--
William H. Rehnquist: Kind of one sided compromise.
Richard A. Hanson: --Well... I mean, partly that goes to the nature of farming. You offered to buy the bank, and I suspect I have members who would happily sell it to you. But--
Antonin Scalia: But it does show the Government was willing to treat CoBank differently then, and there's no reason to believe that Government isn't willing to treat it differently now, just as then you say the other instrumentalities, even though the Government was no longer a participating investor, would continue to have their exemption, that was not the case for CoBank.
Richard A. Hanson: --That's correct.
Antonin Scalia: So it's always been treated differently for--
Richard A. Hanson: There is that differentiation. But it comes... it all comes down to 1985, and did Congress change the rules, and we suggest that the law before 1985 was, we are exempt as long as the Federal Government has an investment, and technically in the stock of the bank, and I understand that. In 1985, Congress says, we have to provide a line of credit to this entire system to keep it from falling. It managed in 2 years to lose 40 percent of the capital it had accumulated over 7 years. And not only are we going to do that, but we're going to make the whole thing interlocking in terms of how it functions, and we're doing all of this because the bank is critical, because the commercial banks will not lend to agriculture in times of stress... Congress said that in 1633 in '87... and because the farmers are suffering from interest rates that they have to pay to the farm credit system, which in large part was a function of the cost of borrowing in the capital markets, because the capital markets had lost confidence in the banks, so we had--
Ruth Bader Ginsburg: --Congress said all this in a technical and conforming amendment, but nothing to suggest that they meant to do anything more than get rid of the obsolete provision that referred to the Government's ownership.
Richard A. Hanson: --Well, you know, the State has suggested that that is the reference in the committee report which describes this change, and we would submit that's not true for two reasons. First, as we pointed out in our brief, the committee report refers to a version of the bill which did not, in fact, establish... it did not, in fact, repeal the second sentence. It repealed only the third. I understand that's a two edged sword, but they say it's only a technical and conforming amendment when what Congress was doing was repealing only the third sentence of the act, which would leave us with a complete exemption, so I don't know that you can prove too much... I don't know if I'm being clear about that.
Ruth Bader Ginsburg: But what puzzles me is if the tax, the State tax was on from '68 to '85. If Congress was saying, stop, States, you would expect that to be something that people would stand up and take notice of, and yet there's not anything explicit to suggest that Congress meant to take away from the States the tax authority that they had for this and the... what is it, the PCA's as well?
Richard A. Hanson: Yes, it was, basically.
Ruth Bader Ginsburg: That it meant to take that away from the States.
Richard A. Hanson: Well, I think there are two answers to that, and first is, as we've pointed out, you know, this legislation started out, as legislation does, with hearings and worrying about governmental regulation, and farmers complaining about the cost of borrowing, and by the time it got into the system in November, the question was whether or not you could save the farm credit system, because it turned out that it was basically hemorrhaging money. And Congress, the bill was introduced on, I think, the 20th of November, and it was signed by the President on the 18th of December. I mean, this went, bang, bang, bang. It was described in the Wall Street Journal as legislating on the fly. They were, you know, as the Wall Street Journal would be very offended by that. But... so you have... you have a lot of very high priority concerns that Congress was trying to deal with and articulate and explain, and then you've got this State tax exemption which I'm... and liability, which is clearly important to Missouri, I've no doubt about that, but on a list of priorities, I doubt that it was very high when Congress was concerned... as the comments on the floor indicate, they're worried about losing the entire system, and... but I think the second point, and again, in 19... I know I'm repeating about this point, but in 19... prior to the change, the statute said that the bank was exempt as long as the Federal Government owned stock in the bank. After 1985, if you accept our interpretation, we are saying that the bank is exempt because the Federal Government has reinfused capital, admittedly in a different form, but certainly not financially, economically different, and in a form for which the banks were liable, so that I would submit that the only difference between the circumstances in 1984 and 1986, if you will, is that in the first place Congress was being explicit, and in the second place Congress was relying upon--
David H. Souter: If you look at--
Richard A. Hanson: --that designation.
David H. Souter: --I mean, that's why... not everyone agrees, but I like to look at legislative history, and you would have expected, given... even cooperative banks at that time, they'd have lawyers who were doing this, and if they thought that in removing words that grant an exemption the intent was to give an even bigger exemption, I would certainly think somewhere somebody would have said something.
Richard A. Hanson: Well, I don't understand, and I've... we've never accepted this notion that somehow we have a bigger exemption.
David H. Souter: No, equal to.
Richard A. Hanson: I'm sorry, Your Honor, but... well, not even equal, because previously we were exempt from Federal income tax. Subsequently we're not exempt from Federal income taxes, and in... I mean, and that's fairly significant. Now, you can say, well, doesn't that undercut the notion of lending at the lowest possible cost? The answer is, I think the Government is sort of indifferent whether it gets its money... in paying back the loan whether it gets its money from taxes or gets a loan repayment, and in fact the banks were never truly exempt from Federal tax because they were... even when they were exempt from Federal income tax the statute imposed a franchise tax based on net earnings, which is functionally equivalent, so in that sense the status quo was maintained, and I think that's our argument. The status quo was maintained. The design was maintained. The facts changed, and under the circumstances, and given the pressure Congress was under, I think it's entirely rational that they would look at this... I mean, the bill came out of the House on the 6th of December. It was passed, completely changed and passed by both Houses on the 10th. I think it's... you know, it's asking a bit much to expect a nice, detailed explication of all the provisions.
David H. Souter: Could you go to the reason for the tax, the Federal income taxability? Is it taxable under a special statute that says, CoBank, pay Federal income taxes now, or is it taxable simply because there's no express exemption for CoBank?
Richard A. Hanson: It is... it's taxable because the Internal Revenue Code provides that it would be taxable absent an express exemption, and there is none, so it's... entities have always been subject to--
David H. Souter: Does the code refer specifically to this bank?
Richard A. Hanson: --No. The code refers to Federal instrumentalities and tells you how to--
David H. Souter: Okay.
Richard A. Hanson: --that they are exempt... I'm sorry, that they are taxable absent an express exemption in the income tax law. It's 501(c)(1). So... you know, so the presumption, the pattern is opposite for a Federal tax. You're taxable unless there's a statutory exemption. Here, and I'd like to simply conclude by where I started. If you look at the New Mexico decision which Missouri relies upon at length, and you go to page 736, and I pick this out... this is illustrative. You were talking about whether those particular Federal contractors were exempt from State tax, and you said, the Court's other cases describing the nature of a, quote, Federal instrumentality. That is a term of art. It's been a term of art since Justice Marshall first coined it in McCulloch v. Maryland, and the one attribute that's always been associated with a Federal instrumentality in this Court's cases is an exemption from State taxation absent a waiver. I mean, I've looked... I can't claim that I... this is complete. The Court has never held that an entity which is a Federal instrumentality is taxable in the absence of an affirmative congressional authorization, whether you're talking about the Department of Employment, you're talking about New Mexico, you're talking about Graves, you're talking about James v. Dravo, never, at least not that we can find. That term carries with it that attribute, and we submit that Congress, in designating us a federally chartered instrumentality, consistent with what we do... they didn't do it haphazardly... intended precisely the same designation, and we would suggest that that also fits with the overall goals of Congress in passing the 1985 act and rescuing the farm credit system and trying to give the agricultural borrowers some relief from high interest rates. It seems to us it all fits together, and what the State is literally saying is, well, we want to act like the law didn't change, that there was no repeal. Well, there was a repeal. The law did change, and the question is, did Congress intend that we become taxable without regard to the Federal investment, or did they intend that we become exempt under the McCulloch rule, and those are basically the choices facing the Court. If there are no further questions--
William H. Rehnquist: Thank you, Mr. Hanson.
Richard A. Hanson: --Thank you, Your Honor.
William H. Rehnquist: Mr. Layton, you have 7 minutes remaining.
James R. Layton: I'll note first that I believe that the banks for cooperatives were subject to Federal income tax prior to 1985, but I'd also note the franchise tax that counsel referred to. In the 1971 act in section 4 it sets out a franchise act that could be as high as 25 percent of net income for the banks, but interestingly, that franchise tax applied so long as the Government holds shares in the bank, and that the Government didn't hold any shares at that point, and there was obviously an incentive, given that franchise tax, not to allow the Government to pick up any shares in your particular bank. I should note also that although the National Bank for Cooperatives was formed in 1989, it was the merger of other banks for cooperatives, and there have been banks for cooperatives operating in Missouri for many, many years prior to 1989. Turning to the legislative history, if, indeed, we have to get to the legislative history, the history does talk about the reasons for the 1985 act, and one of the things that's there is a note that the banks for cooperatives themselves were healthy. This was not prompted by a problem with the banks for cooperatives. It was prompted, as Mr. Hanson accurately said, by a system wide problem. That is, there may have been... there were other entities within the bank, the farm credit system that were having enough problem that it was bringing down the ability of the entire system to sell bonds, and yet the argument being made here is that because some other entity had a problem and Congress created a system wide remedy, that is a remedy that would provide Federal financing to the system as a whole, and never to particular institutions, that somehow these banks for cooperatives attained a new exemption. Before, they only had an exemption when they had Federal investment. Afterward, according to CoBank, they all have an exemption even if no one has a Federal investment, and the most that's likely is that some production credit association or someone else would have an investment, and yet somehow they get this exemption back. They also... the--
Antonin Scalia: Mr. Frederick, what is the effect of Congress' calling an institution a Federal instrumentality? I'd always thought that the primary reason they do that is precisely to exempt it from State income tax.
James R. Layton: --Well--
Antonin Scalia: What other effect does it have? Why would you enact a statute that says, you know, the Red Cross, or whatever it is, is a Federal instrumentality?
James R. Layton: --I think one reason is to ensure that that entity... in the tax context one reason is to ensure that that entity cannot be subjected to discriminatory taxation. Missouri, for example, could not pass a tax that was restricted to the income of federally charter... or, excuse me, of cooperative banks that serve cooperatives, farm cooperatives. Because the only one that exists is this instrumentality, that would be aimed at a Federal instrumentality and would be a discriminatory tax and it would be illegal, because that is a Federal instrumentality. There may be other reasons as well, but certainly that is one impact of use of that term. The change that is alleged to have come about in 1985 is not just to remove the connection between the Federal investment and the bank that is asserting the exemption, but also to remove the temporal aspect. That is, before, the exemption only was in place while the Federal investment was in place. At the time in 1985 there was 5-year sunset provision on the credit corporation through which the funds that Mr. Hanson spoke of would be channeled, and yet the exemption that he asserts is one that would exist indefinitely. That's inconsistent with the legislative history and with the language of the statute. CoBank poses the question as to why differentiate between production credit associations and banks for cooperatives on the one hand and other institutions such as land banks on the other, and we shouldn't have to ask that question, because Congress made that determination in 1933. There has always been a distinction. We're just discussing today what the distinction now is. But there are a couple of possible reasons for Congress to have made that distinction. One is simply temporal. In 1933 we were in the Depression era, and not only was there a problem with the farm credit, with credit for farmers, but there was a problem with banks generally, and so here Congress was setting up some institutions that would compete with commercial banks that themselves were failing throughout rural areas in the United States, and Congress set up a system that said, okay, for the time being, we will give you an advantage over your commercial competitors, but only for the time being. At some point it's going to go back to where you do not have that extent of commercial advantage. Sure, you can still issue obligations that will be tax free, but you won't be able to avoid tax entirely. Another reason that there may be a distinction is that the land banks that Mr. Hanson referred to lend, as I understand it, based on the farmer's land as collateral, and there has always been a feeling in Congress that we don't want to take the land away from the farmers. That is distinguishable from the question of lending based on their crops, which is what a production credit association would do, or based on the equipment and land that is held by a cooperative that may be producing or processing the crops or otherwise providing services for the farmers. There is a distinction. It's worth noting that today between two thirds and three quarters of agricultural lending in the United States is done by entities outside of the farm credit system, and those entities must compete on the grounds that Congress set forth, and not on the grounds that can be divined by some reference to past history. If there are no further questions, I thank the Court.
William H. Rehnquist: Thank you, Mr. Layton. The case is submitted.


Earl Warren: James Brookhart, Petitioner, versus Martin A. Janis, Director of the Ohio Department of Mental Hygiene and Corrections. Mr. Conway, you may continue your argument.
Leo J. Conway: Mr. Chief Justice, may it please the Court. At the termination of my argument yesterday, I believe that it had been established that this procedure that was followed in the trial in this case, the prima facie case in which the State was only required to prove beyond the reasonable doubt all of the charges that was made. But that the defendant in the case had waived his right to cross-examination and he was not going to present any evidence in his own defense was initiated to the Court or mentioned to the Court for the first time by defense counsel. And it is submitted by respondent that he also had the last word as to what procedure was going to be followed.
William J. Brennan, Jr.: Do you know something about this prima facie practice? Is that -- is this just something that is followed in some of Ohio counties?
Leo J. Conway: Mr. Justice Brennan, I can't say definitely how many counties this is followed in but I do know that it is followed in Stark County where this case was tried. The basis, as I understand it, for the allowance of this type of procedure arose as a result of traffic manslaughter cases wherein the defendant had no defense against the charge but if he were allowed or if he were required, the man had plead guilty to the charge then this plea of guilty could be entered against him or could be considered by the Court in a civil action against him. In another words, it practically met that when he went in to a civil action, he had confessed his guilt. Now, I believe that and I can only say this from what I've been told in Stark County because personally I'd never heard of that procedure before myself.
William J. Brennan, Jr.: But would the conviction under this procedure have any different effect in the civil action?
Leo J. Conway: The only effect is that he would not admit it. He would've not admitted that he had performed the act which had caused the death in the civil procedure.
William J. Brennan, Jr.: But would the conviction be admissible in the civil procedure?
Leo J. Conway: I think that the conviction itself might have been except -- and I'm not so sure of that but the fact is that he would not have admitted it by his own testimony in other words.
Earl Warren: Is this provided by statute?
Leo J. Conway: It is not, Your Honor.
Earl Warren: Is this provided by rules of the Supreme Court?
Leo J. Conway: It is not, Your Honor.
Earl Warren: Is it provided by rules of that -- of this trial court that we --
Leo J. Conway: It was only allowable by the trial court.
Earl Warren: No, I ask you the rules.
Leo J. Conway: And there are no rules that I know of that have provided and there are none indicated in Stark County that there would such a rule is evident.
Earl Warren: Did you expect the man to know what he was going up against when he ask for, when he consented to a prima facie trial? How would he know what his rights were and what his obligation were?
Leo J. Conway: He had been provided with counsel and the counsel had discussed this with him.
Earl Warren: How do you know?
Leo J. Conway: Because he has indicated in his own petition for certiorari in this case that he -- forth went the right of cross-examination and the confrontation of witnesses because he had reliance upon his trial counsel.
Earl Warren: But he told the Court he was not in any sense pleading guilty, didn't he?
Leo J. Conway: That's right, Your Honor. And the Court never considered this as a plea of guilty.
Earl Warren: Well, I understood some of the statements the judge made were tantamount to that.
Leo J. Conway: The judge indicated to him that the outset and I -- if I may for a minute or two review what happen --
Earl Warren: You review it in your own way, I want --
Leo J. Conway: Yes, yes sir.
Earl Warren: -- I just want to know about those rules whether it is -- whether was a -- it was just an improvised procedure in this county or whether it was done by rule of court (Voice Overlap) --
Leo J. Conway: No, it definitely was not done by rule of court.
Earl Warren: Yes.
Leo J. Conway: And that the situation is this, that the man came in and by his counsel said, “We are going to proceed by prima facie case.” The court immediately then said, “Well, in a prima facie case then you will not do any cross-examining.” I'm saying this in my own words. It is in the record exactly as the court said it. The court told them there would be no cross-examination. The defense counsel then said, “Well now if something comes up that may not implicate the defendant, I think I should be allowed to cross-examine.” At that point the court told him, “Well now, we want everybody to understand what procedure we're to follow and if you are not -- if you don't want to proceed by the case that you have already propose to this court, maybe we should just have a jury trial of it and let it go with that.” Then the court told them what he considered to be a prima facie case, a case in which not technically or legally. The defendant is admitting his guilt but requires the state to prove it. Now, in other words, in such a procedure the burden of proof does not shift. There are still is no presumption of guilt on the part of the defendant because the State still must prove beyond any reasonable doubt that this crime was committed. Now, at that time, it's when the defendant got up, he'd been listening to these proceedings and he said to the court under no circumstances, “Am I admitting guilt -- or pleading guilty?” Then the court said to him, “Well now, I would be happy to let you have a jury trial if you so desire even though you waived your retrial.” The defendant says, “No, I want to be tried by this court, I've been in jail for 18 months.” Now, as a matter of fact and this is born out by his petition that he had not been in jail for 18 months but only two months, 16 of the 18 months have been spent in another institution. The court said, “In all fairness to him then, well you make your mind whether you want a full trial or whether you want a prima facie case?” Now, it seems to me that the court was trying to give him every conceivable opportunity to have this case proceed in any way that he wanted it. At which point then, his counsel got up and said, “Your Honor, all we want is a prima facie case.” In other words, his counsel had the first and the last word in this proceeding. Now, counsel for petitioner has said that he didn't understand this proceeding himself. Well, this man is a lawyer, let's assume that he has passed the bar and --
Potter Stewart: I think in passing the bar wouldn't give him any knowledge of this procedure, you never heard it? The Supreme Courts never heard of it, I never heard of it, I lived many years in Ohio.
Leo J. Conway: Justice Potter the only -- Stewart, the only thing that I have in mind is that he was an intelligent man and was able to understand what the court was explaining to him and the defendant in the case.
Byron R. White: Mr. Conway, what in some conversation which isn't in the record between the defendant's lawyer and the prosecutor before they ever came to court.
Leo J. Conway: Justice White, I'm sure that that happened, otherwise it would never have them -- this case never would've been approached the way it was. In other words, this is an action that would've had to -- have been determined between the prosecuting attorney and defense counsel before it got into court.
Byron R. White: What he say --
Leo J. Conway: -- but that is not in the record.
Byron R. White: Do you say that court was willing to give him any kind of a trial he wanted but it really wasn't, was it? He gave him a choice between a prima facie -- prima facie trial and a jury trial?
Leo J. Conway: No sir, Your Honor, he did not.
Byron R. White: He didn't?
Leo J. Conway: It is our contention that the last thing that court said to him, “Make up your mind whether you want a prima facie case or a full trial of it.” Now, on the State of Ohio, once a man has pleaded -- has waived jury trial and elected to be tried by the court, he has a right to be tried by the court. There are cases I believe and under federal law that that is something that is strictly within the province of the court is to whether he will allow. But in Ohio that is not the case. If a man waives trial by a jury, then the court must try him. So in other words, the trial court was not --
Byron R. White: Could you explain to me then why the defendant or the defendant's counsel would choose a prima facie case rather than a full trial by the court without a jury?
Leo J. Conway: I think really there were -- he had about three reasons for doing it this way and I think the one reason and probably the one that who was foremost in his mind at the time was that he hope that by not putting the State to the expense of a long and protected trial that he would be able to do something by a way of mitigation of the sentence of the -- of his client. In other words, if he had required the State to bring all this witnesses, handwriting experts perhaps to prove the signatures and all of that sort of thing, the court could've been inclined that it given the maximum sentence. In other words, you run all of the sentences consecutively.
Byron R. White: That's a pretty poor reasoning. Give him a total maximum sentence, I suppose.
Leo J. Conway: Well, I -- it may be but I don't know what was in the mind of defense counsel --
Byron R. White: Right.
Leo J. Conway: -- but certainly he had -- and another reason was that he had no defense. His man had told him that he had no defense. He couldn't afford him, the names of any witnesses or anything of that nature. And I believe that the court would've -- if he had said, “I want a trial by jury or a trial before this Court.” The court would've said, “Fine, then let it go with that.”
William J. Brennan, Jr.: Well, apparently it developed that he had not afford to win Jimmy Cox's, that he had, I gather, forged somebody else's but then in the middle of trial and the charge never made. You amend the indictment, that's all.
Leo J. Conway: Justice Brennan, that is another thing that I'd like to clear up at this point.
Byron R. White: And then while you're doing it they also dismissed to other accounts --
Leo J. Conway: Right.
Byron R. White: -- for failure of proof.
Leo J. Conway: That's right. In this particular case, a great number of checks had been forged. The one of the co-defendants had signed the name of Mr. Buchanan, Buchanan, I believe it was, who was the treasurer or allegedly the treasurer of the company on which in the checks were drawn. Now, that signature, L. J. Buchanan was the thing that constituted the crime of forgery. That is this thing which enabled or which directed the bank to pay these funds. Now, I'll admit that there was a very sloppy practice done by the stenographer who has working for the grand jury, instead of setting forth each one these checks -- four checks that were used in this particular case she copied the same check in each one. Now, the pay is named on three of these checks was Jimmy Cox. The pay is named on the fourth one was James Brookhart. Now, the record will show that at page 35 and again, I believe at page 42 that he had in his possession some identification papers that he had receive from some acquaintance of his by the name of Jimmy Cox. And those papers were at once that were used for the purpose of passing these checks that were made out to Jimmy Cox. On Exhibit C which was the basis for the fifth and sixth indictments, the named instead of Jimmy Cox was his own name. When they got into the trial of the case, the court allowed and actually after some consideration there, he at first, as far as the numbers of the checks was concern in a small amendment in the amount of some of them, he didn't consider any question at all but when it came to the question of allowing the amendment as to the name of the payee, he did have some concern about it and it took a recess and after he came in and had apparently have a chance to look up the law, he said that this was only an amendment as to a matter of form, in other words the name of the payee on the check is not a thing that constituted the crime of forgery and he allowed the amendment.
William J. Brennan, Jr.: I notice the judge of 35, at one point, at least, seem to indicate was situation for re-indictment, wasn't he?
Leo J. Conway: He had some concern about it, that's what I say, he did Mr. Justice Brennan --
William J. Brennan, Jr.: Is that normally the way this is done? If the indictment is that effective, would it not call for re-indictment?
Leo J. Conway: If the indictment is -- goes to amendment of substance, in other words -- in this particular case of -- if the indictment had shown instead of L. J. Buchanan and L. J. Buchanan as the maker of the check if it had been some other name, I believe that it might have been something that went to the substance --
William J. Brennan, Jr.: That that a --
Leo J. Conway: -- and under that circumstance he wouldn't have had to.
William J. Brennan, Jr.: That is your Ohio practice of it? Where it's -- goes to the substance?
Leo J. Conway: Where it goes to the substance --
William J. Brennan, Jr.: For the prior re-indictment?
Leo J. Conway: It prior -- or when discovered during the trial, that's another thing. If this thing is discovered during the trial, the Court must discharge the jury as of right now. And if this is only a matter of form incidentally, which catches the defendant so by in surprise that he is not able to combat it, he is entitled to a continuance of the case to enable him to get any other evidence that he may be able to dig up in order to defend against that particular amendment.
William J. Brennan, Jr.: Well, I gather from what you say Mr. Attorney General, you don't think this was a model of a criminal trial, do you?
Leo J. Conway: I agree with that Your Honor, but I also contend that looking over the record as a whole that no constitutional right of this defendant was violated.
Potter Stewart: It really comes down to, isn't it, here as whether or not there was a waiver because certainly you and I would agree I suppose that the right to plead not guilty and thereafter the right to confrontation. Those are very, very important constitutional rights. But on the other hand, I suppose we'd both agree that those rights can be waived. And they are waived by a voluntary plea of guilty. And I suppose they could be waived by an agreement between the prosecution and the defense of voluntary and free agreement and it doesn't this case falls down to the question of whether or not there was such a waiver?
Leo J. Conway: Well, Justice Stewart, that is exactly why I point. That if there was no waiver in this case, then I've shouldn't be here. I contend that there was a waiver. There was a waiver of right from the very beginning and that that waiver was understood by the defendant in the case and that at no time, did he object to this procedure as such either prior to or during the trial nor even at the time of sentencing?
Potter Stewart: Although -- wouldn't you further agree that the record, as one raise it, indicates that there was a -- it contains some ambiguity as to whether or not there was a real meeting of the minds between the defense counsel and the judge and the prosecutor, that is, each was using the shorthand term prima facie case but it isn't there are some indication from the record that the two parties meant different things by that shorthand expression?
Leo J. Conway: Well, at the outset, perhaps. But I -- reading the record myself, I believe that the Court made it adequately clear to defense counsel as to what his concept was. Now after all, he was a trial judge and he indicated what he believed it to be. And after he indicated what he believed it to be, defense counsel then said, prima facie case is what we urge (Voice Overlap) --
Potter Stewart: (Voice Overlap) defends counsel --
Leo J. Conway: I think he did know.
Potter Stewart: Well, but then he later tried to cross-examine a witness and indicating that he's understood, that his defense counsel's understanding of that shorthand expression included his right to cross-examine the prosecution's witnesses at least in some --
Leo J. Conway: I don't recall any place in the record where it was indicated that he made any effort to cross-examine the witness.
Potter Stewart: I thought I had seen --
Leo J. Conway: On page 23, which you may be referring to, 23 of the record. When the first witness was put on, Mr. Macioce (ph) and the prosecuting attorney offered him, states Exhibit A, for identification. Immediately, defense counsel objected to that. And the Court said, “Well, I thought that we're not going to have --” and why the Court said this, I'm not sure and I don't think as the Court could explain today what he meant by it, he said, “Well, I understood that you weren't going to try this case on the merits and so on.” But the first thing that was done was an objection by defense counsel to something before it was any objection was an order or whatsoever. In other words, he knew as the time what was -- what he contended to be wrong with that check. He knew that this check deviated or varied from the indictment and ultimately that (Voice Overlap) --
Abe Fortas: I'm sorry sir. Does this record look to you as if everybody was making up the rules as it went along, including the judge?
Leo J. Conway: Well, the only thing Mr. Justice Fortas and I can say in that regard is that the judge used every constitutional rule --
Abe Fortas: Well --
Leo J. Conway: -- to ensure that the man had a fair trial when --
Abe Fortas: But the words prima facie -- if you're talking about a prima facie case in ordinary lawyers' parlance, you are talking about the quantum of proof and not the method that making the proof, would you agree with that?
Leo J. Conway: I do, yes sir.
Abe Fortas: And there seem to be a, shall I say, slight ambiguities from time-to-time with the judge's mind on that concept. Mr. Conway, may I ask you this question? I note that the prisoner's statement, the accused statement on page 22. Prior to trial is a prisoner out there held in the county jail and then if he is convicted he is sent to a penitentiary, is that the way it works?
Leo J. Conway: In Ohio, he is supposed to be sent to the penitentiary -- well, in five days after conviction, unless he appeals.
Abe Fortas: Now before -- while he is there waiting for trial for these two months that he was in the county jail, he -- for two months, he was in the county jail, is that right?
Leo J. Conway: Yes, that's right, Your Honor.
Abe Fortas: Now, is a county jail a place of closed incarceration and is there a distinction between what happens to a prisoner of a county jail and what happens to him in the penitentiary? In other words, is a more liberty available in --
Leo J. Conway: Well, I would say less.
Abe Fortas: -- penitentiary within the prisoner category?
Leo J. Conway: I would say definitely less because --
Abe Fortas: Less independent --
Leo J. Conway: In the county jail.
Abe Fortas: In the county jail?
Leo J. Conway: That's right.
Abe Fortas: That's what I thought because as I read this, it seems to me -- on page 22, it seems to that what the prisoner said about the middle of the page. He says, he have been -- he first, he said he's been incarcerated now for less 18 months in the county jail. You said that's inaccurate. And then he says, “For over two months, my nerves have been -- I couldn't stand it out there any longer. I would like to be tried by this Court.” And as -- and the question it would seem to me perhaps of some relevance as to the whole background in this case, as shown by this colloquy that this man had been in mental institution for 16 months, was in for two months in the close quarters, I assume of the county jail, is that right?
Leo J. Conway: That's right.
Abe Fortas: Close quarters?
Leo J. Conway: That's right.
Abe Fortas: And -- but after conviction, he would have been within five days transferred to the penitentiary where at least there is more opportunity for physical mobility.
Leo J. Conway: Well, of course, that was the other reason that I felt that he was interested in getting this thing over with. I don't think he had any attention that he was going to be acquitted and that he want us to get back where he would be able to start serving (Voice Overlap) --
Abe Fortas: Well, I beg you pardon but there is a reference. The Court here says that under Ohio law, he would not get credit for the two months or the 18 months --
Leo J. Conway: He would not at that time, Your Honor, but he would today.
Abe Fortas: There's been an amendment of the statute?
Leo J. Conway: That's right. Thank you (Voice Overlap) --
Earl Warren: Mr. Conway, I understood you to say a few moments ago that you doubted it to this day, the judge knew what he meant at the time of a trial. And I wonder if in those circumstances, you feel that the defendant should be chargeable with knowing what the judge said.
Leo J. Conway: No, I don't know what the judge meant and why he said that (Voice Overlap) --
Earl Warren: I thought you said that you doubted to this day if the judge himself knew?
Leo J. Conway: That's possible.
Earl Warren: Well, I thought you said that I didn't make it up (Voice Overlap) --
Leo J. Conway: No I -- you're -- that's right Your Honor. I think -- what I'm trying to convey is that the judge said something, this came as a surprise to him as a result of the very first witness being on and before anything was done, the man objected and the judge said that made the statement, “Why -- I don't know and I'm not sure what the statement meant and I don't know what he had in mind when he made it.” That's what I tried to convey.
Earl Warren: Weren't that pretty ambiguous proceeding entitled when there are no rules, there'd no way either lawyer or clients could know what kind of a trial he was going to get and to have you here in the Supreme Court, the United States say that you don't know to this day what the judge meant what he said certain things and you doubt if the judge himself knew. But instead you say there was a clear waiver on the part of this man after he once told the judge that he was in no sense pleading guilty.
Leo J. Conway: I still think that he understood that the Court -- that the State was going to have to prove a case against him beyond any reasonable doubt and I think that the record as a whole indicates of the State did and this is a one count that was not proved by the State, the judge found him not guilty. I think that the judge throughout use the constitutional standard of innocence or guilt and acted accordingly. Thank you very much.
Byron R. White: Mr. Conway, one more question. How current is the docket in that county? Do you know? The criminal docket.
Leo J. Conway: It's generally is quite behind. As a matter of fact, I know that it's very much behind because I know one case where a man has been waiting trial for at least four or five months.
Byron R. White: But they are -- but if they had -- they are out on -- they are getting credit now --
Leo J. Conway: They are getting credit. I beg your pardon, no sir. They don't get credit until after the verdict.
Byron R. White: Well then, do you know whether there has been any noticeable follow up in the number of prima facie trials since you've change this rule?
Leo J. Conway: Well, I -- as I say Your Honor, I -- the only one that I know of is in this particular county because actually it's the only one I checked of. I didn't say -- I didn't have the opportunity to go to other counties to find out what they did.
Byron R. White: Does it -- prosecutor just let him sit there and until they're ready to agree to a prima facie?
Leo J. Conway: Oh I'm sure that he does not. No sir, Your Honor. I think that this is something that definitely was brought up between the prosecuting attorney and the defense counsel. Incidentally, he'd been appointed a month or so ahead of this time and we'd had ample opportunity to discuss this.
Potter Stewart: How long he had been at the bar, Mr. Conway?
Leo J. Conway: 10 years, Your Honor.
Earl Warren: Mr. Messerman.
Gerald A. Messerman: Mr. Chief Justice, may it please the Court. In the few minutes remaining, I should like to address myself to two questions propounded by members of the Court. Mr. Justice Stewart has asked whether or not the fundamental question involved in this case is whether there was a waiver of the basic fundamental constitutional rights which were admittedly denied. I submit that upon this record, it cannot be found that there was a waiver as a constitutional matter as this Court said as long ago as Johnson versus Zerbst, a waiver is ordinarily and intentional relinquishment or abandonment of a known right or privilege. Upon the circumstances of this case, there cannot be found an intentional relinquishment or abandonment of a known right or privilege for at least five reasons. One, it's quite obvious that the judge didn't know what kind of proceeding was involved in this case. Two, it's quite obvious that defense counsel did not understand the nature of the proceeding which was about to ensue. He did not understand for example that he could not reserve the right to cross-examination. Three, even today, the State doesn't understand the nature of the proceeding which did in fact ensue upon whom to the burden of proof rests and the State's own brief that suggest that perhaps it rested upon the defendant, perhaps not the standard of proof is unclear entirely too much confusion to assume that anyone knew what kind of right was being waived. Four, and perhaps most importantly, this is not a case whether the defendant remain silent. This is a case where the defendant specifically asserted an objection. And it's quite clear from the record that the objection was asserted in plain enough terms for the Court to understand what the objection was, and that is that this objection satisfied the requirement established by this Court for purposes of determining procedurally whether an objection is adequate. It brought to the attention of the Court the fact that a matter was being protested on page 22 of the record when the defendant, now petitioner did object, the Court responded, “Make up your mind, whether you require a prima facie case or a complete trial”, that court understood that an objection was being made. Part from the fact that there was a specific objection being made in this case, an additional factor which would indicate that the waiver was not voluntary and intentional as the fact that defendant had been incarcerated. Petitioner had been incarcerated and that this decision on his part to forego a jury trial was motivated at least in part by his reason to get this case over with. Now, Mr. Justice White has asked, what kind of choice the defendant or petitioner was confronted with and whether or not the offering by the Court of a choice between a nonjury trial -- I'm sorry, between a jury trial and a prima facie case presents a constitutional question. Of course, it doesn't. If in fact the choice of a prima facie case had been made, the requirement of Ohio law that the defendant be permitted to waive jury trial if he decides to do so is a not a constitutional requirement. But that is not the choice that confronted the petitioner in this case. The choice that confronted him was a choice between a trial and no trial. He chose a trial. He was denied a trial. For these reasons, petitioner urges that the judgment below be reversed.
Earl Warren: Mr. Messerman, on behalf of the Court, I should like to express its appreciation to you for having -- accepting -- accepted the assignment to represent this indigent defendant. We consider that to be a real public service and in the interest of the administration of justice.
Gerald A. Messerman: Thank you, Mr. Chief Justice. We thank you. And Mr. Conway, we of course appreciate your diligent representation of the State of Ohio.
Leo J. Conway: Thank you very much.
Gerald A. Messerman: Mr. Chief Justice, I should like to attribute at least half the work to my colleague, Mr. Herman.
Earl Warren: Yes of course, that we will extend to you also.