U.S. Supreme Court ASHTON v. CAMERON COUNTY WATER IMP. DIST. NO. 1, 298 U.S. 513 (1936)

[Page 298 U.S. 513, 533]

for 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 district 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 they have been subject to other tax liens prior to its own. The defaults are steadily mounting. For the year 1932, they were 63 per cent.; for the year 1933, 88.9 per cent. 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 No. 1 is true in essentials of thousands of other public corporations in widely scattered areas. The hearings by committees of the Congress before the passage of the statute exhibit in vivid fashion the breadth and depth of the mischief which the statute was designed to remedy. [Footnote 1] In January, 1934, 2,019 municipalities, counties, and other governmental units were known to be in default. [Footnote 2] On the list, which was incomplete, were large

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cities as well as tiny districts. Many regions were included: 41 out of 48 states. Students of government have estimated that on January 1, 1933, out of securities to the extent of $14,000,000,000 issued by units smaller than the states, a billion were in default. [Footnote 3] The plight of the debtors was bad enough; that of the creditors was even worse. It is possible that in some instances the bonds did not charge the municipalities or other units with personal liability. Even when they did, however, execution could not issue against the property of the debtor held for public uses,4 and few of the debtors were the owners of anything else. In such circumstances the only remedy was a mandamus whereby the debtor was commanded to tax and tax again. Rees v. City of Watertown, 19 Wall. 107; Meriwether v. Garrett, , 501. 5 The command was mere futility when tax values were exhausted. Often the holders of the bonds, to the extent of 90 per cent. or more were ready to scale down the obligations and put the debtor on its feet. A recalcitrant minority had capacity to block the plan. Nor was there hope for relief from statutes to be enacted by the states. The Constitution prohibits the states from passing any law that will impair the obligation of existing contracts, and a state insolvency act is of no avail as to obligations of the debtor incurred before its passage. Sturges v. Crowninshield, 4 Wheat. 122. Relief must come from Congress if it is to come from any one.

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This change, like the others, had to meet a storm of criticism in Congress and the courts. Warren, op. cit. supra, at pages 44, 45, 118-120; In re Klein, reported in a note to Nelson v. Carland, 1 How. 265, 277, 130; Louisville Joint Stock Land Bank v. Radford, supra. Since the enactment of section 77 in March, 1933 (47 Stat. 1474, 11 U.S.C. 205 (11 U.S.C.A. 205)), a court of bankruptcy has been empowered to reorganize railroad corporations unable to pay their debts as they mature ( Continental Illinois National Bank & Trust Co. v. Chicago, Rock Island & Pacific Ry. Co., supra), and, since the enactment of section 77 B in June, 1934 (48 Stat. 912, 11 U.S.C. 207 (11 U.S.C.A. 207)), a like jurisdiction has existed in respect of business corporations generally. The act for the relief of local governmental units is a stage in an evolutionary process which is likely to be misconceived unless regarded as a whole. [Footnote 6]

Throughout that evolutionary process, the court has hewn a straight path. [Footnote 7] Disclaiming a willingness to bind

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payment, and has creditors, the holders of its bonds, who are persuaded that a reduction of the debt will redound to their advantage. Thirty per cent. of the creditors had signified their approval of a proposed plan of composition before the filing of the petition, and 66 2/3 per cent. must give approval before the judge can act. [Footnote 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?

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without violating the Eleventh Amendment. County of Lincoln v. Luning, , 10 S.Ct. 363; Hopkins v. Clemson Agricultural College, 221 U.S. 636, 645, 31 S.Ct. 654, 657, 35 L.R.A.(N.S .) 243. It may be subjected to mandamus or to equitable remedies. See, e.g ., Norris v. Montezuma Valley Irrigation District (C.C.A.) 248 F. 369, 372; Tyler County v. Town (C.C.A.) 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 Agricultural College, supra.

No question as to the merits of any plan of composition is before us at this time. Abrams v. Van Schaick, , 55 S.Ct. 135. Attention, however, may be directed to the fact that by the terms of the statute (section 80, subdivision c(11), 11 U.S.C.A. 303(c)(11), the judge 'shall not, by any order or decree, in the proceeding or 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 question.' 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 BRANDEIS, and Mr. Justice STONE join in this opinion. Footnotes

[Footnote *] * Rehearing denied 299 U.S. --, 57 S.Ct. 5, 81 L.Ed. --.

[Footnote *] Originally, this was limited to two years. By Act approved April 10, 1936, P.L. 507 (11 U.S.C.A. 302) it was extended to January 1, 1940.

Footnote 1 See Hearings before a Subcommittee of the Senate Committee on the Judiciary on S. 1868 and H.R. 5950, 1934, 73d Cong., 2d Sess.; Hearings before the House Committee on the Judiciary on H.R. 1670, etc., 1933, 73d Cong., 1st Sess.

Footnote 2 See Senate Committee Hearings, supra, at page 12.

Footnote 3 See the statistics gathered in 46 Harvard Law Review, 1317.

Footnote 4 For a collection of the cases, see 3 McQuillin, Municipal Corporations (2d Ed.) 1262.

Footnote 5 The cases are collected in 33 Columbia Law Review, 28, 44.

Footnote 6 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 nonuniform 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.'

Footnote 7 The Emergency Farm Mortgage Act of 1933 (48 Stat. 41) was condemned in Louisville Joint Stock Land Bank v. Radford, supra, because destructive of rights of property protected by the Fifth Amendment.

Footnote 8 For taxing districts other than drainage, irrigation, reclamation, and levee districts, the requisite percentages are 51 per cent. and 75 per cent., respectively.

Footnote 9 '(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 its political 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.'