Opinion ID: 1550675
Heading Depth: 1
Heading Rank: 7

Heading: Classification of Claims

Text: Appellants state as their Fifth Proposition, The Judge erroneously classified all of the claims as of the same class. The applicable part of Section 83, sub. b, of the Bankruptcy Act, 11 U.S.C.A. § 403, sub. b, is as follows:    the judge shall classify the creditors according to the nature of their respective claims and interests: Provided, however, That the holders of all claims, regardless of the manner in which they are evidenced, which are payable without preference out of funds derived from the same source or sources shall be of one class. The holders of claims for the payment of which specific property or revenues are pledged, or which are otherwise given preference as provided by law, shall accordingly constitute a separate class or classes of creditors. Appellants then proceed to state that Section 52 of the California Irrigation District Act provides that when matured bonds and due coupons on bonds are presented to the treasurer of the District he must pay the same if there is money in the proper fund or if not he must register the same. They then immediately arrive at the conclusion that: Whatever may be the actual order of presentation of matured bonds and coupons to the Treasurer for payment under § 52, this much is clear, that under California law a preference by law is given thereby and the bankruptcy court can only apply and use the bond funds and other trust funds and property belonging to the bondholders upon the payment thereof in the order of such presentation. Such application as between a bondholder having an unmatured bond and a bondholder having a matured bond would require payment in full of the matured bond, if presented, before any trust funds could be applied upon payment of the unmatured bond. This seems to be the positive injunction of Ch. IX    [Italics theirs.] It does not seem so to us. We are convinced that appellants have erred in their reasoning that the registration gives a preference by law to the due but unpaid obligations that is different in any manner from the obligation of the bond contract as to due dates. The error probably arises from the following statement in the opinion of Bates v. McHenry, 123 Cal.App. 81, 10 P.2d 1038, 1040: We do not need to set forth the method of procedure relating to the payment of warrants, further than to state that stamped and unpaid interest coupons or bonds follow the same procedure, and the holders thereof are entitled to payment immediately upon funds coming into the hands of the treasurer of the district, available for such purpose, and in the order in which they are registered. Bates v. McHenry, supra, to use the words of appellants, was a suit to compel payment of interest coupons at a time when there were not funds sufficient to pay all the matured interest coupons. The Court directly held that it was the duty of the Treasurer to do two things: `He must either pay the bond or interest coupon when presented, or register the same. The irrigation laws do not confer upon the treasurer of the district any authority to prorate payments.' Of course every bond of different maturing date and every interest coupon is in a sense in a class by itself, but no one would contend that this difference is within the meaning of the bankruptcy law a mark for classification. It is stated in 10 Remington on Bankruptcy, 1939, § 4361, p. 250, that    the fundamental classification must be in accordance with the source or fund out of which the payment is intended to be made. Registration effected no change in the source out of which the payment of the bonds and interest was intended to be made. Appellants cite a number of cases in support of their theory and emphasize the case of El Camino Irrig. Dist. v. El Camino Land Corp., 12 Cal.2d 378, 85 P.2d 123, and Provident Land Corp. v. Zumwalt, 12 Cal.2d 365, 85 P.2d 116. So far as these two cases may seem to touch the subject at hand, they decide that equitable principles may be applied to the payment of bonded indebtedness of irrigation districts which have become hopelessly insolvent and in which there is no longer a theoretical inexhaustible taxing power. The cases have nothing whatever to do with classification of debts in a bankruptcy proceeding. We have been cited no cases in which it is held that bonds issued under authority of the California Irrigation District Act have been divided into classes, and such cases as Selby v. Oakdale Irrig. Dist., 140 Cal.App. 171, 35 P.2d 125, and Shouse v. Quinley, 3 Cal.2d 357, 45 P.2d 701, are authority against such a conclusion. When § 52 of the California Irrigation District Act is related to § 61a of the same Act [both of which we place in the margin] [1] it may be seen that the two must be considered together as a plan for the orderly record of owners of defaulted obligations and for their notification when the fund permits of payment. Due dates are definite for all unmatured bonds and undue interest, but after presentation and default of payment, of course, no date is fixed for payment. Owners would be greatly inconvenienced if there were no machinery for notification when the funds became sufficient to meet the delinquencies. See Clough v. Baber, Cal.App., 100 P.2d 519. There would seem to be other reasons why appellants' theory is erroneous. We merely suggest certain principles that may be extended. That the power of Congress in the field of bankruptcy    is both unlimited and supreme is not questioned Sturges v. Crowninshield, 4 Wheat. 122, 192, 4 L.Ed. 529. Rights    must be decided by the Bankruptcy Act, since it is superior to all state laws upon the subject. Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133, 76 A.L.R. 1198; New York v. Irving Trust Co., 288 U.S. 329, 53 S.Ct. 389, 77 L.Ed. 815. We find nothing in the Act justifying the classification suggested by appellants. In referring to classification of certain claims under Section 77 B of the Bankruptcy Act, the Court said in Re Palisades-On-The-Desplaines, 7 Cir., 89 F.2d 214, 217: Such classification, of course, should not do substantial violence to any claimant's interest, nor should it uselessly increase the number of classifications unless there be substantial differences in the nature of the claims. We agree with the statement contained in the brief of Amici Curiae, It is obvious that if bankruptcy Courts are to recognize every conceivable claimed `priority' or `preference', the entire purpose of Chapter IX would fail. We are convinced that there is no phase of unfairness to a plan of composition under the Bankruptcy Act by reason of including in one class matured and registered and unpaid bond obligations with unmatured bond obligations all of which for payment in regular course depend upon the taxing power of a district. It places all such creditors whose claims are payable from the same source on a basis of absolute equality. See Luehrmann v. Drainage Dist., supra.