Court Opinion

ID: 9418894
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:42:20.20797+00
Date Added: 2024-06-11T08:03:01.359153
License: Public Domain

Mr. Justice Cardozo,
dissenting.
The question is a narrow one: Is there power in the Congress under the Constitution of the United States to permit local governmental units generally, and irrigation or water improvement districts in particular, to become voluntary bankrupts with the consent of their respective states?
Cameron County Water Improvement District Number One is a public corporation created by the laws of Texas. It has issued bonds for the construction of a canal system, which bonds are outstanding in the amount of $802,000. Default has been suffered to the extent of $147,000, either *533for principal or for interest, upon its obligations now matured. But its own indebtedness is only a part of the financial burden that oppresses it. . The bonded debt of other municipalities is a superior lien upon the property in the Pistrict for $10,386,000, and accumulated interest. The population is mainly agricultural. The farmers have been unable by reason of the great depression to make a living from their farms, and unable to pay their taxes in appreciable amounts. The District has made diligent effort to enforce collections, but without success. When it has attempted to foreclose its liens, it has been compelled for lack of bidders' to buy the lands in and pay the court costs,. After buying the lands in, it has been unable to get rid of them, for théy have been subject to other tax liens prior to its own. The defaults are steadily mounting. For the year 1932, they were 63%; for the year 1933, 88.9%. The average market value of lands in the District does not exceed-$75 per acre; and the total bonded debt per acre, principal and interest, is approximately $100. In these circumstances little, good can come of levying more taxes to pyramid the existing structure. The remedies of bondholders are nominal, not real.
What is true of Cameron County Water Improvement District Number One 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, 2019 municipalities, counties and other governmental units were known to be in default.2 On the list, which was incomplete, were large *534cities 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. Watertown, 19 Wall. 107; Meriwether v. Garrett, 102 U. S. 472, 501.5 The command was mere futility when tax values were exhausted.’ Often the holders of the bonds to the extent of ninety 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. 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 (§§ 78, 79 and 80 of the Bankruptcy Act of 1898, as amended by 48 Stat. 798; 11 U. S. C. §§ 301, 302, 303), *535and now extended to January 1, 1940 (April 10, 1936, c. 186, 49 Stat. 1198), a law “on the subject of Bankruptcies” within Article I, Section VIII, Clause 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 v. Chicago, R. I. & P. Ry. Co., 294 U. S. 648, 668; Louisville Joint Stock Land Bank v. Radford, 295 U. S. 555, 588. 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; 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 added bankers, brokers, factors and-underwriters. Doubt was expressed as to the validity of the extension (Adams v. Storey, 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 and its successors, “until now practically all classes of persons and corporations are included.” Continental Illinois National Bank v. Chicago, R. I. & P. Ry. Co., supra, at p. 670. 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. dt. supra, at p. 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. *536This change like the others had to meet a storm of criticism in Congress and the courts. Warren, op. cit. supra, at pp. 44, 45, 118-120; In re Klein, reported in a note to Nelson v. Carland, 1 How. 265, 277; Louisville Joint Stock Land Bank v. Radford, supra. Since the enactment of § 77 in March, 1933 (47 Stat. 1474; 11 U. S. C. § 205), a court of bankruptcy has been empowered to reorganize railroad corporations, unable to pay their debts as they mature (Continental Illinois National Bank v. Chicago, R. I. & P. Ry. Co., supra), and since the enactment of § 77 B in June, 1934 (48 Stat. 912; 11 U. S. C. § 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 *537itself 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 317, 321), and with Blatchford, J., writing in the Matter of Reiman, Fed. Cas. No. 11,673, p. 496, 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 v. Chicago, R. I. & P. 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 p. 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., 220 Fed. 106, 108; In re Hirsch, 97 Fed. 571, 573; In re J. M. Ceballos & Co., 161; Fed. 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 pp. 8, 144.
Cameron Water Improvement District Number One 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 Number One is a debtor in an amount beyond its capacity for *538payment, 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% 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 mad,e 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 condition's 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 Assn. v. Cleary, 296 U. S. 315; United States v. California, 297 U. S. 175. 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. 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 off the state may not act under this statute except through the medium, of a voluntary *539petition which will evince their own consent, their own submission to the judicial power. Even that, however, is not enough. By subdivision (k), which is quotéd 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), 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), 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. The Peggy, 1 Cranch 103, 110; Danforth v. Groton Water *540Co., 178 Mass. 472, 475, 476; 59 N. E. 1033; Robinson v. Robins Dry Dock & Repair Co., 238 N. Y. 271, 281; 144 N. E. 579. There are like statutes in other states. Arizona, Laws 1935, c. 17; California, Laws (Extra Session) 1934, c. 4; Florida; Laws 1933, c. 15878; Ohio, Laws (2nd Special Session) 1934, No. 77. 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, ante, p. 226; Hatch v. Reardon, 204 U. S. 152, 160, 161.
To overcome an Act of Congress invalidity must be proved beyond a reasonable doubt. Ogden v. Saunders, 12 Wheat. 213, 270; Sinking-Fund Cases, 99 U. S. 700, 718. Sufficient reasons do not appear for excluding political subdivisions from the bankruptcy jurisdiction if the jurisdiction is so exerted as to maintain the equilibrium between state and national power. Persuasive analogies tell us that consent will preserve a balance threatened with derangement. A state may not tax the instrumentalities of the central government. It may do so, however, if the central government consents. Baltimore National Bank v. State Tax Commission, 297. U. S. 209. Reciprocally, the central government, consent being given, may lay a tax upon the states. Cf. United States v. California, supra. So also, interference by a state with interstate or foreign commerce may be lawful or unlawful as consent is granted or withheld. In re Rahrer, 140 U. S. 545; Clark Distilling Co. v. Western Maryland Ry. Co., 242 U. S. 311; Whitfield v. Ohio, 297 U. S. 431. The prevailing opinion tells us in summing up its conclusions that the bankruptcy power and the taxing power are subject to like limitations when the interests of a state are affected by their action. Let that test be applied, and the Act must be upheld, for jurisdiction is withdrawn if the state does not approve.
*541Reasons of practical convenience conspire to the same conclusion. If voluntary bankruptcies are anathema for governmental units, municipalities and creditors have been caught in a vise from which it is impossible to let them out. Experience makes it certain that generally there will be at least a small minority of creditor's who will resist a composition, however fair and reasonable, if the law does not subject them to a pressure to obey the general will. This is the impasse from which the statute gives relief. “The controlling purpose of the bill is to provide a forum where distressed cities, counties and minor political subdivisions, désignated in the bill as 'taxing districts,’ of their own volition, free from all coercion, may meet with their creditors under the necessary judicial control and assistance in an effort to effect an adjustment of their financial matters upon a plan deemed mutually advantageous. If a plan is agreed upon by the taxing district and its creditors holding two-thirds [in some instances three-fourths] in amount of the claims of each class of indebtedness, and if the court is satisfied that the plan is workable and equitable,, it may confirm the plan, and the minority creditors are bound thereby.” Report No. 207, House Judiciary Committee, June .7, 1933. To hold that this purpose must be thwarted by the courts because of a supposed affront to the dignity of a state, though the state disclaims the affront and is doing all it can to keep the law alive, is to make dignity a doubtful blessing. Not by arguments so divorced from the realities of life has the bankruptcy power been brought to the present state of its development during the century and a half of our national existence.
• The Act does not authorize the states to impair through their own laws the obligation of existing contracts. Any interference by the states is remote and indirect. Cf. In re Imperial Irrigation District, 10 F. Supp. 832, 841. At most what they do is to waive a personal privilege that *542they would be at liberty to claim. Cf. Gunter v. Atlantic Coast Line R. Co., 200 U. S. 273, 284. If contracts are impaired, the tie is cut or loosened through the action of the court of bankruptcy approving a plan of composition under the authority of federal law. There,, and not beyond in an ascending train of antecedents, is the cause of the impairment to which the law will have regard. Cf. Howard Fire Insurance Co. v. Norwich & New York Transportation Co., 12 Wall. 194, 199; Southern Pacific Co. v. Darnell-Taenzer Co., 245 U. S. 531, 533. Impairment by the central government through laws concerning bankruptcies is not forbidden by the Constitution. Impairment is not forbidden unless effected by the states themselves. No change in obligation results from the filing of a petition by one seeking a discharge, whether a public or a private corporation invokes the. jurisdiction. The court, not the petitioner, is the efficient cause of the release.
'The Act is not lacking in uniformity because applicable only to such public corporations as have the requisite capacity under the law of the place of their creation. Hanover National Bank v. Moyses, supra, at p. 190. Stellwagen v. Clum, 245 U. S. 605, 613. Capacity existing, the rule is uniform for all. Ibid.
No question is before us now, and no opinion is intimated, as to the power of Congress to enlarge the privilege of bankruptcy by extending it to the states as well as to the local units. Even- if the power exists, there has been no attempt to exercise it. There is room at least for argument that within the meaning of the Constitution the bankruptcy concept.does not embrace the states themselves. In the public law of the United States a state is a sovereign or at least a quasi-sovereign. Not so, a local governmental unit, though the state may have invested it with governmental power. Such a governmental unit may be brought into.court against its will *543without violating the Eleventh Amendment. Lincoln County v. Luning, 133 U. S. 529; Hopkins v. Clemson College, 221 U. S. 636, 645. It may be subjected to mandamus or to equitable remedies. See, e. g., Norris v. Montezuma Valley Irrigation District, 248 Fed. 369, 372; Tyler County v. Town, 23 F. (2d) 371, 373. “Neither public corporations nor political subdivisions are clothed with that immunity from suit which belongs to the State alone by virtue of its sovereignty.” Hopkins v. Clemson College, supra.
No question as to the merits of any plan of composition is before us at this time. Abrams v. Van Schaick, 293 U. S. 188. Attention, however, may be directed to the fact that by the terms of the statute, subdivision c (11), the judge “shall not, by any order or decree, in the proceeding br otherwise, interfere with '(a) any of the political or governmental powers of the taxing district, or (b) any of the property or revenues of the taxing district necessary in the opinion of the judge for essential governmental purposes,- or - (c) any income-producing property, unless the plan of readjustment so provides,” and that “the taxing district shall be heard on all questions.” These restrictions upon remedies do not take from the statute its quality as one affecting the “subject of Bankruptcies,” which, as already pointed, out, includes. a readjustment of the terms of the debtor-creditor relation, though there are no- assets to be .distributed. On the other hand, the restrictions are important as indicating the care with which the governmental powers of the state and its subdivisions are maintained inviolate.
The statute is constitutional, and the decree should be affirmed.
The Chief Justice, Mr. Justice Brandéis and Mr. Justice Stone join in this opinion.

 See Senate Committee Hearings, supra, at p. 12.

 See the statistics gathered in 46 Harvard Law Review 1317.

 For a collection of the cases, see 3 McQuillin, Municipal Corporations, 2nd ed., § 1262.

 The cases are collected in 33 Columbia Law Review 28, 44.

 Warren, Bankruptcy in United States History (1935), p. 9: “The trail [of the bankruptcy clause] is strewn with a host of unsuccessful objections based on constitutional grounds against the enactment of various provisions, all of which are now regarded as perfectly orthodox features of a bankruptcy law. Thus, it was at first, contended that, constitutionally, such a law must be confined to the lines of the English statute; next, that it could not discharge prior contracts; next, that a purely voluntary law would be non-uniform and therefore unconstitutional; next, that-any voluntary bankruptcy-was unconstitutional; next, that there could be no discharge of debts of any class except traders; next; that a bankruptcy law could not apply to corporations; next, that allowance of State exemptions of property would make a bankruptcy law non-uniform; next, that any composition-was unconstitutional; next, that there could be no composition without an adjudication in bankruptcy; next, that there could be no sale of mortgaged property free from the mortgage. All these objections, so hotly and frequently asserted from period to period, were overcome either by public opinion or by the Court.”

 The Emergency Farm Mortgage Act of 1933 was condemned in Louisville Joint Stock Land Bank v. Radford, supra, because destructive of rights of property protected by the Fifth Amendment.

 For taxing districts other than drainage, irrigation, reclamation and levee districts, the requisite percentages are 51% and 75% respectively.

“(k) Nothing contained in this chapter shall be construed to limit Or impair the power of any State to control, by legislation or otherwise, any political subdivision thereof in the exercise of itpolitical or governmental powers, including expenditures therefor, and including the power to require the approval by any governmental agency of the State of the filing of any petition hereunder- and of any plan of readjustment, and whenever there shall exist or shall hereafter be created under the law of, any State any agency of such State authorized to exercise supervision or control over the fiscal affairs of all or any political subdivisions thereof, and whenever such agency has assumed such supervision or control over any political subdivision, then no petition of such political subdivision may be received hereunder unless accompanied by the written approval of such agency, and no plan of readjustment shall be put into temporary effect or finally confirmed without the written approval of such agency of such plans.”